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Discounting Nordhaus

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  • Thomas R. Michl

Abstract

This paper evaluates Nordhaus’s neoclassical complaints about the Stern Review from the vantage point of classical growth theory. Nordhaus argues that the Stern Review exaggerates the effects of global warming because it uses a discount rate that is well below the market rate of return on capital. From the perspective of classical growth theory, Nordhaus’s belief in choosing preference parameters for the social planner based on observed market rates of return filtered through the Ramsey equation is equivalent to assigning the preferences of the capitalist agents to the social planner. This equivalence is an implication of the Cambridge Theorem, which interprets the Ramsey equation as the saving function of the capitalist agents. The classical theory of growth interprets the market return to capital as a reflection of the property relations of capitalist society that does not offer the social planner any information that would be useful in resolving the problem of global warming. Contrary to the viewpoint of neoclassical economic theory, the market return to capital offers no information about preferences for the social welfare function or about the putative “marginal product” of conventional capital.

Suggested Citation

  • Thomas R. Michl, 2008. "Discounting Nordhaus," Working Papers wp158, Political Economy Research Institute, University of Massachusetts at Amherst.
    • Handle: RePEc:uma:periwp:wp158
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    References listed on IDEAS

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    1. Thomas Michl, 1999. "Biased Technical Change and the Aggregate Production Function," International Review of Applied Economics, Taylor & Francis Journals, vol. 13(2), pages 193-206.
    2. Avi J. Cohen, 2003. "Retrospectives: Whatever Happened to the Cambridge Capital Theory Controversies?," Journal of Economic Perspectives, American Economic Association, vol. 17(1), pages 199-214, Winter.
    3. Stern,Nicholas, 2007. "The Economics of Climate Change," Cambridge Books, Cambridge University Press, number 9780521700801.
    4. Luigi L. Pasinetti, 1962. "Rate of Profit and Income Distribution in Relation to the Rate of Economic Growth," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 29(4), pages 267-279.
    5. Thomas R. Michl & Duncan K. Foley, 2004. "Social security in a Classical growth model," Cambridge Journal of Economics, Oxford University Press, vol. 28(1), pages 1-20, January.
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    Cited by:

    1. Leila Davis & Peter Skott, 2011. "Positional goods, climate change and the social returns to investment," UMASS Amherst Economics Working Papers 2011-24, University of Massachusetts Amherst, Department of Economics.

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    More about this item

    Keywords

    Global warming; Stern Review; Discounting; Ramsey equation; Cambridge equation; Cambridge Theorem;
    All these keywords.

    JEL classification:

    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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