Consideration of Intergenerational Equity

This social welfare function (and the second, see Chapter Six, Section 6.4) incorporates consideration of intergenerational equity (also see equations 1.1 and 1.2 Chapter One, Section 1.4). Within aggregate standard national accounts, intergenerational equity is not explicitly considered. Aggregated statistics such as GDP and national income, do not consider the rights, needs and welfare of future generations (or even the present generation one year hence). The failure to do so is a major limitation of aggregated standard national accounts as a measure of society’s welfare. Intergenerational equity is concerned with the distribution of costs and benefits and the implications of irreversible decisions over time (Johansson 1987; Page 1988; Rabl 1996). Economic and social decisions impact the present as well as the future. Determining the costs and benefits of future generations is just as important as determining the costs and

benefits for the present generation. ‘Current growth must be achieved without reducing the growth potential in the standard of living of future generations’ (Landau, Taylor and Wright 1996, p. 8).

Due to changes in tastes and preferences, the introduction of new commodities, changes in capacity to enjoy satisfaction and movements in income generation, ‘dealing with extended periods of time can complicate and obscure our ideas of equity and efficiency’ (Page 1988 p. 22).

Intergenerational equity is analogous to intra-generational equity issues but with longer time perspectives and a larger reference set (Smith 1988; also see Clayton and Radclifee 1996). It is also complicated by four other considerations. Firstly, the reference set is endogenous in the sense that the decisions made by the present generations will impact on whom future generations will actually be (i.e. decision a will cause generation A to be born, whilst decision b will cause generation B to be born instead). Secondly, as future generations are not present, their preferences and interests must be assumed by the present generation. This results in an unequal distribution of power in favour of the present generation. The third complication is the practical implementation of these concerns and fourth is trying to include time preferences and capital productivity into deciding the social rate of discount (Page 1988). As a result of the complicated nature of these considerations, ‘the basic issue of the choice of principles for intergenerational aggregation remains unresolved’ (Johansson 1987, p. 162). The use of social choice theory can be used in this determination. It is possible to make value judgements on the needs of those here in the present and those whom will be in the future (Sen 1995). Little consensus has been reached on the appropriate discount rate (see Broome 1991 for a survey of the issues), and numerous options are possible (Islam 2001; Winter-Nelson 1996).

One method which can be used to deal with the concept of intergenerational equity is to adopt a social discount rate (Rabl 1996; Winter-Nelson 1996). However, as with many aspects of welfare economics, little agreement exists as to what constitutes the “best”

social discount rate (Islam 2001). For financial valuation, the market rate of interest is considered the appropriate social discount rate (Johansson 1987). However, within social welfare considerations, such a discount rate renders the rights of future generations to almost zero within only a few decades.

A social discount rate based on market interest rates can lead to a dictatorial social welfare function as the preferences of the present generation are given precedence over future generations, whereas a social discount rate of zero may not address time preferences and uncertainty issues. Whilst under the utilitarian doctrine discount rates are not needed, they are required if it is considered that future generations are finite. The choice of which discount rate to employ (if any) can be linked to Rawls’ Theory of Justice where the discount rate is chosen not knowing if one belongs ‘to a relatively rich or poor generation’ (Johansson 1987, p.161). Perhaps Page’s each-way bet is the answer:

I believe that there is some ethical appeal in the idea that the present generation should pay some current costs for the later permanent benefits, but I am not saying that we should apply this idea all the time. To do so would result in the tyranny of the majority, in the intergenerational context. (Page 1988, p. 87)

In terms of this thesis, Page may have been suggesting that the present Thai economy suffer the costs of income redistribution to allow long-term benefits for future generations.

Within health economics literature and in particular quality adjusted life years (QALYs) methodology, the benefits of those not yet borne are not considered at all ‘because they seem not to represent a benefit to anyone’ (Broome 1999, p. 209). This approach overcomes the problem of intergenerational equity but does seem unacceptable when considering the social welfare of whole societies are not just individual welfare of those who may never be born.

Within this thesis, a pragmatic decision has been made to use a social discount rate equal to zero. This view is supported by Ramsey (1928), Harrod (1948) and others (see Cline 1992; Broome 1992 for the use of a zero discount rate with regard to global warming). Within the two social welfare functions developed in this thesis, the consequence of a zero discount rate is that the needs of the present generation are explicitly made equal to the needs of the future generations. The impacts of economic growth on social welfare is considered as equally important for both the present and future generations.