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A Path Through the Wilderness: Time Discounting in Growth Models

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  • Pedro Garcia Duarte

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Abstract

Although economists have recognized long ago that “time enters into all economic questions”, the ways they treated and modeled time has varied substantially in the last century. While in the 1930s there was a distinctive Cambridge tradition against discounting utilities of future generations, to which Frank Ramsey subscribed, postwar neoclassical growth economists (of the “Ramsey-Cass-Koopmans model”) applied the discount factor either to individual’s or to social planner’s decision-making as a technical requirement of dynamic general equilibrium models. My goal in this article is to shed some historical light on how a practice that was condemned as ethically indefensible when applied to intergenerational comparisons became a technical requirement in dynamic models of either a consumer or a planner deciding the intertemporal allocation of resources.

Suggested Citation

  • Pedro Garcia Duarte, 2013. "A Path Through the Wilderness: Time Discounting in Growth Models," Working Papers, Department of Economics 2013_18, University of São Paulo (FEA-USP).
  • Handle: RePEc:spa:wpaper:2013wpecon18
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    File URL: http://hope.dukejournals.org/content/48/2/265.abstract?sid=dafea58f-c100-48cf-bab0-9d73be553ec5
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    References listed on IDEAS

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    1. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, March.
    2. Robert J. Barro & Xavier Sala-i-Martin, 2003. "Economic Growth, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262025531, March.
    3. Brock, William A, 1973. "Some Results on the Uniqueness of Steady States in Multisector Models of Optimum Growth when Future Utilities are Discounted," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 14(3), pages 535-559, October.
    4. Michel De Vroey, 2004. "The History of Macroeconomics Viewed against the Background of the Marshall-Walras Divide," History of Political Economy, Duke University Press, vol. 36(5), pages 57-91, Supplemen.
    5. Collard, David, 1996. "Pigou and Future Generations: A Cambridge Tradition," Cambridge Journal of Economics, Oxford University Press, vol. 20(5), pages 585-597, September.
    6. Marcel Boyer, 1975. "An Optimal Growth Model with Stationary Non-Additive Utilities," Canadian Journal of Economics, Canadian Economics Association, vol. 8(2), pages 216-237, May.
    7. K. E. Boulding, 1935. "The Theory of a Single Investment," The Quarterly Journal of Economics, Oxford University Press, vol. 49(3), pages 475-494.
    8. Mario Pomini & Gianfranco Tusset, 2009. "Habits and Expectations: Dynamic General Equilibrium in the Italian Paretian School," History of Political Economy, Duke University Press, vol. 41(2), pages 311-342, Summer.
    9. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, March.
    10. Pedro Garcia Duarte, 2009. "Frank P. Ramsey: A Cambridge Economist," History of Political Economy, Duke University Press, vol. 41(3), pages 445-470, Fall.
    11. Brock, William A & Mirman, Leonard J, 1973. "Optimal Economic Growth and Uncertainty: The No Discounting Case," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 14(3), pages 560-573, October.
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. To discount or not to discount?
      by Economic Logician in Economic Logic on 2013-12-13 00:09:00

    More about this item

    Keywords

    time discount; growth models; Ramsey-Cass-Koopmans model; economic dynamics;

    JEL classification:

    • B22 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Macroeconomics
    • B23 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Econometrics; Quantitative and Mathematical Studies
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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