Thursday, December 25, 2008

We need clearer price signals

In economic theory, price is supposed to act as a signal to consumers as to the relative scarcity or importance of some good or service. In a perfect capitalistic system, the price allows everybody to balance their values against the availability of various resources.

Unfortunately, the market in the real world falls short of the ideal in several important ways; I would like to address what I consider to be the biggest shortcoming of the market: its steep discount rate. To put it another way, the market doesn't take the future into account very well. 

An obvious example of this is the market for fossil fuels. Right now, lots of people are bidding for the earth's oil. But there are also lots of people who aren't participating in that marketplace: the unborn. Fifty years from now those people will need oil, too, but they don't get to put in their bid. Because they are not represented, the price of oil is cheaper than it would be if they were bidding, and so we consumers get a false price signal: burn up the oil now, it's cheap. Which means that fifty years from now those future folk won't get as much oil to use as we have. Not very fair, is it?

This problem should, theoretically, be handled by speculators. They should be buying up oil today and saving it for the future, figuring on making huge profits fifty years from now. But that's not happening, for two reasons.

First, nobody who has the money to buy up lots of oil today will be alive in fifty years. What's the point of investing money if you won't live to see the return on your investment? The life expectancy of a human being puts blinders on our investment strategies. It forces us to plan for the short term. If there were people with life expectancies of 900 years, you can bet they'd be investing in future oil. But since nobody will live that long, we just screw future generations.

The other factor that inhibits long-term investments is the uncertainty of the market. Hey, fifty years from now, civilization might be destroyed by thermonuclear war -- your ROI wouldn't be much in such a case. They might have gotten fusion energy working by then, in which case nobody would even want your stupid oil. Or the government might have confiscated your oil in a crisis. Who knows? There are so many uncertainties, it's just not safe planning that far ahead.

This innate economic short-sightedness also undercuts our efforts to stem environmental degradation. Who gives a damn about global warming -- it sure won't be a problem before I'm dead. It's a problem for future generations -- let them deal with it. Similar reasoning subverts all other efforts to protect the environment. Why should a 2008 person suffer in order to make life better for 2058 person?

What this really boils down to is a fundamental question that every society must answer: how much do we want to pass down to future generations? How much do we want to sacrifice to improve the lives of our descendants?

Here I will indulge myself in grand hypothesis-building. We all know that civilizations rise and fall, and theories as to what forces push a civilization through that arc are a dime a dozen. So here's my own $0.0083 worth:

I suggest that one of the factors driving the rise of any civilization is its sense of destiny. A civilization that considers itself to be on the cutting edge of growth into greatness will make lots of sacrifices for its children. I believe it was George Washington (well, it was certainly one of that crowd of tricorn hat wearers) who said, "I am a soldier today so that my children can be farmers and engineers, so that their children can be artists and poets." That's the spirit of sacrifice for the future. That Roman chap who stuck his right hand into the brazier just to show off to the Etruscan king just how tough he and his fellows were was doing the same thing. Societies on the rise are full of people who have seen too much suffering and want to build a better future.

But at some point, people in a society start to wonder why they should be making any sacrifices for the future. They undergo a fundamental shift in outlook: instead of seeing the world as a place of pain and suffering, they see it as a place of pleasure and leisure. That shift dooms a civilization; once people start thinking in terms of getting theirs while they can, they stop building for the future and start eating their capital.

I believe that America has crossed that point. You can see the shift in a thousand small places. Look at the response to oil shortages -- "Drill baby drill!" That's about as short-term as you can get. Or the response to global warming issues -- "Why should we have to suffer?" Or any of a thousand other problems. 

But the most compelling indicator, to me, is the expansion of the national debt. The national debt is our way of borrowing from our children, a negative bequest of wealth. The gigantic rise of the national debt in the Bush years proved beyond any doubt that this country has given up on its future and seeks only to enjoy life while it can.

It could be argued that we are already bequeathing a huge amount to our descendants. For example, kids today are much better off than when I was a kid. They have great toys to play with, cell phones of their own, and computers. Lots of high school and college kids have cars of their own -- in my generation, most people didn't get their own cars until sometime in college or after. Plenty of kids get to travel to foreign countries -- my first trip outside the country came when I was 31. And air travel -- I think I was 24 the first time I flew. So there's no question that kids today are better off than they were 40 years ago.

But that doesn't mean anything about how kids 40 years from now will do compared with kids today. Past success doesn't imply future success. You've got to keep working at it all the time. And I think Americans are losing their sense of dedication to the future.

Meanwhile, the Chinese are full of optimism and excitement about the future of their civilization. They're saving their money to help their country grow, and they're planning for their kids' futures. In fifty years, China will be the world superpower, and the USA will be like Britain is today.

1 comment:

Pat Jenkins said...

chris i hope you erd, pan, and sue all had a very merry christmas!!