Discounting in a world of limited growth

This paper explores the consequences fordiscounting of assuming limits to growth. One of the main determinants of the discount rate is the rate of economic growth. If growth rates decline in the future then the discount rate should not be constant but also decline over time. In fact, we would then need not a single discount rate but rather a variable discount schedule. This would imply higher present values for the distant future. The paper analyses how discount rates would vary with different assumptions about the patterns of growth and the pure rate of time preference.An earlier version of this paper was presented at the conference ECOLOGICAL ECONOMICS, Stockholm, August 1992. I am grateful for valuable comments from Partha Dasgupta, Gunnar Köhlin, Karl-Göran Mäler, Mike Young and two anonymous referees.     

Capital risk and consumption puzzles: A pedagogical note

A two-period consumption model with an ordinal certainty equivalent preference is developed to characterize the comparative static effect of an increase in uncertainty of investment returns on the riskfree interest rate, the equity premium, expected growth of consumption, and the marginal propensity to consume out of current income. The results reconcile a few often reported consumption-related anomalies.     

Will China’s population aging be a threat to its future consumption?

ABSTRACT

Based on the household level survey data, the paper makes a projection on China’s household consumption in 2049 with reasonable assumptions of disposable income, demographic structure, urbanization rate and total population in 2049. The results show that at annual income growth rates of 3%, 4% and 5%, China’s total household consumption in 2049 will be 71.0, 97.8 and 133.8 trillion CNY, respectively, 3.1~5.8 times of the total household consumption in 2015. Moreover, our projection shows that even excluding the income growth effect, the future consumption increased by rapid urbanization is much larger than the consumption depressed by the demographic change. The result highlights that as long as the Chinese government can successfully eliminate institutional constraints imposed on rural-urban migration, such as Hukou system or residency permits in the urban areas, population aging would not be a major threat to its future development.     

Measuring inequality change in an economy with income growth

This paper analyzes how to measure changes in inequality in an economy with income growth. The discussion distinguishes three stylized kinds of economic growth:

• 1.(1) high income sector enrichment,
• 2.(2) low income sector enrichment,
• 3.(3) high income sector enlargement, in which the high income sector expands and absorbs persons from the low income sector.

Th e two enrichment types pose no problem for assessing inequality change in the course of economic growth: for high income sector enrichment growth, inequality might reasonably be said to increase, whereas for low income sector enrichment, inequality might be said to decrease. These adjustments are non-controversial and non-problematical. Where problems arise is in the case of high income sector enlargement growth. In that case, the two alternative approaches have been shown in this paper to yield markedly results:

• 1.(1) The traditional inequality indices generate an inverted-U pattern of inequality. That is, inequality rises in the early stages of high income sector enlargement growth and falls thereafter.
• 2.(2) The new approach suggested here, based on axioms of gap inequality and numerical inequality, generates a U pattern of inequality. That is, inequality falls in the early stages of high income sector enlargement growth and rises thereafter.

The discrepancy between the familiar indices and the alternative approach based on axioms of gap inequality and numerical inequality bears further scrutiny. Two courses of action are possible. One might try to axiomatize inequality in ways that generate an inverted-U pattern in high income sector enlargement growth, thereby rationalizing the continued use of the usual inequality indices with the inverted-U property. Alternatively, one might retain the axioms proposed here, embed them into a more formal structure, and construct a family of inequality indices consistent with them. Others might wish to pursue the first course; I am at work on the second.     

Evolutionary economics and the case for a constitutional libertarian paternalism—a comment on Martin Binder, “should evolutionary economists embrace libertarian paternalism?”

In his article “Should evolutionary economists embrace libertarian paternalism?”(Journal of Evolutionary Economics 24(3), 2014, 515–539) Martin Binder discusses the pros and cons of “libertarian paternalism” (LP) from an explicitly evolutionary viewpoint, concluding that as a general rule, evolutionary economists should be cautious regarding this new and highly influential policy approach. In this comment I argue that Binder starts from an incomplete model of the institutional status quo and neglects an obvious alternative to the standard variant of LP, namely, a constitutionally constrained LP. Most of Binder’s objections do not apply with equal force to such a refined variant of LP.     

Comparing international consumption patterns

When attempting to identify empirical regularities in consumption patterns, their tremendous diversity across countries represents both a major opportunity and challenge. For example, consumers in rich countries devote less than 20% of their budget to food, while this rises to more than 50% in the poorest countries. This paper uses a major new database released in Selvanathan and Selvanathan (Selvanathan EA, Selvanathan S (2003) International Consumption Comparisons: OECD versus LDC. World Scientific, Singapore) to explore several related issues, including the extent to which the consumption basket is diversified and how this changes with income, whether a simple utility-maximising model is capable of explaining the diversity of consumption patterns internationally, the measurement of the extent to which tastes differ across countries, and how the world can be partitioned into groups of countries with minimal within-group heterogeneity of tastes on the basis of the revealed preference of consumers.

Deriving the Engel Curve: Pierre Bourdieu and the Social Critique of Maslow's Hierarchy of Needs

In Post Keynesian Economics, theorists have sought an alternative to neoclassical choice theory by turning to Maslow's hierarchy of needs (Pasinetti 1981 Pasinetti LL 1981 Structural Change and Economic Growth Cambridge: Cambridge University Press  , Lavoie 1992 Lavoie M 1992 Foundations of Post-Keynesian Economic Analysis London: Edward Elgar  ). Instead of each individual surveying a complete choice set, individuals prioritize (basic) physiological needs, moving with increasing incomes to satisfy safety and social needs, through to the higher needs associated with self-actualization. This framework provides a theoretical foundation for the Engel curve, since as incomes increase consumers become satiated when particular needs are satisfied. As an alternative to the neoclassical preoccupation with prices and substitution, a Post Keynesian theory of consumption has been formulated with income effects as the cornerstone. The main problem with Maslow's approach is that individual needs are innate, so that questions of social interaction and culture are seriously downgraded. In this article, the social theory of Pierre Bourdieu is offered as an alternative to the Maslow approach, providing the basis for a social critique of consumerism and an alternative evolutionary theory of consumption. In this approach, the structure of the social hierarchy both constrains the consumption of lower social strata and leads to subtle, less conspicuous consumption patterns at the top of the social hierarchy: a scenario that could provide a social foundation to the Engel curve.     

Tackling Keynes’ question: a look back on 15 years of Learning To Consume

Two centuries of continuous economic growth since the industrial revolution have fundamentally transformed consumer lifestyles. Here Keynes raised an important question: will consumption always continue to expand in the same manner as it has in the previous two centuries? If so, how? This paper critically reviews a body of work that has adopted the Learning To Consume (LTC) approach to study the long run growth of consumption (Witt 2001). By borrowing certain established insights from psychology and biology about how consumers learn and what motivates them to consume, it highlights how rising income, new technologies and market competition have combined to trigger important changes in both the underlying set of needs possessed by consumers and how they learn to satisfy these needs. Methodological issues and open questions are discussed.     

Geography, institutions, and the making of comparative development

While the direct impact of geographic endowments on prosperity is present in all countries, in former colonies, geography has also affected colonization policies and, therefore, institutional outcomes. Using non-colonized countries as a control group, I re-examine the theories put forward by La Porta et al. (J Law Econ Org 15(1):222–279, 1999 and Acemoglu et al. (Am Econ Rev 91(5), 1369–1401, 2001. I find strong support for both theories, but also evidence that the authors’ estimates of the impact of colonization on institutions and growth are biased, since they confound the effect of the historical determinants of institutions with the direct impact of geographic endowments on development. In a baseline estimation, I find that the approach of Acemoglu et al. (2001) overestimates the importance of institutions for economic growth by 28 %, as a country’s natural disease environment affected settler mortality during colonization and also has a direct impact on prosperity. The approach of La Porta et al. (1999) underestimates the importance of colonization-imposed legal origin for institutional development by 63 %, as Britain tended to colonize countries that are remote from Europe and thus suffer from low access to international markets.     

Group Selection and the Limits to Altruism

Several evolutionary mechanisms have been identified in the literature that would generate altruism in humans. The most powerful (except for kin selection) and most controversial is group selection, as recently analyzed by Sober & D.S. Wilson. I do not take a stand on the issue of the existence of group selection. Instead, I examine the level of human altruism that could exist if group selection were an engine of human evolution. For the Sober & Wilson mechanism to work, groups practicing altruism must grow faster than other groups. I call altruistic behavior that would lead to faster growth efficient altruism. This often consists of cooperation in a prisoner's dilemma. ltruistic acts such as helping a temporarily hungry or injured person would qualify as efficient altruism. Efficient altruism would also require monitoring recipients to avoid shirking. Utilitarianism would be an ethical system consistent with efficient altruism, but Marxism or the Rawlsian system would not. Discussions of efficient altruism also help understand intuitions about fairness. We perceive those behaviors as fair that are consistent with efficient altruism. It is important to understand that, even if humans are selected to be altruistic, the forms of altruism that might exist must be carefully considered and ircumscribed.     

On disequilibrium savings and public consumption

Conclusions A particular aspect of the present paper is the introduction of specific policy measures for the government, whose behavior on the goods market was described in earlier work as purely exogenous, like in Malinvaud. In our context, the government appears as an active economic agent, acting at absorbing any excess supply or reducing any excess demand on the goods market. Though this behavior may look somewhat arbitrary, it has the advantage to force the state of the economy towards a SME if combined with natural endogenous behavior of the other agents! Furthermore, it does not contradict observed policies through which governments stimulate or restrain economic activity via purchases or fiscal and monetary policies. Perhaps alternative policies, like direct actions on the labor market by supplying (non-productive) jobs or unemployment compensations, could have done as well: this remains an open door for further research. The preceding feature also contrasts with the recent work done by V. Böhm (1978) in a macroeconomic set up. In this paper, he studies the stability of stationary Keynesian unemployment or stationary repressed inflation states but without imposing a particular policy on the government. Comparing his work with ours, it is easily verified that if the government would keep its consumption at the levelg ^*, the SME would be stable if the economy starts out in Keynesian unemployment and unstable if the economy starts out in repressed inflation, confirming Böhm's result.Our analysis is related to an earlier work of Archibald and Lipsey (1958), dealing with the adjustment of the economy to a Stationary Equilibrium after a change in real balances. The Quantity Theory of Money postulates that along a SME, a change in the price and the wage rate from (p,w) to (p,w) leads to an adjustment in the level of stationary money holdings from m_i ^* to m_i ^*, m_i ^*=_i ^* (p,w). In this paper, Archibald and Lipsey suggest that the economy follows a sequence of temporary market equilibria: Starting from a change in real balances,prices adjust at each period through a tâtonnement process so as to match supply and demand. Our paper proposes an alternative path: At each period,quantities adjust through a tâtonnement process at constant prices.This paper is a revised version of CORE Discussion Paper 7701. We wish to thank Paul Champsaur, Jacques Drèze, Werner Hildenbrand and Reinhard John for stimulating discussions. We are grateful to Volker Böhm for valuable comments and criticisms.Research supported by the Fonds National Belge de la Recherche Scientifique.     

Aggregation and the existence of a social utility function

In a well-known paper Gorman (Econometrica21 (1953)) established that the necessary and sufficient condition for the existence of an aggregate, or social, utility function, independent of the distribution of income, is that all individuals' income consumption paths be parallel straight lines. Recently Chipman (J. Econ. Theory8 (1974)), building on the paper of Hurwicz and Uzawa (in “Preference Utility and Demand”) has shown that if the distribution of income is proportional and individual preferences are homothetic, aggregate consumption behavior obeys the necessary integrability conditions. It is shown here that the consistency of aggregate behavior can be derived from more general conditions than the ones used by Chipman and Gorman. Examples of demand systems from which aggregate behavior implies a social utility function are provided. It is then shown that if individual demand functions are linear in income—a form employed by both Gorman and Chipman—it is not necessary that the distribution of income be fixed.     

When expectations become aspirations: reference-dependent preferences and liquidity constraints

A large body of literature suggests that consumers derive utility from gains and losses relative to a reference point. This paper shows that such reference dependence can affect savings in opposite directions depending on whether people face liquidity constraints. Existing models for wealth and intertemporal choice predict that reference dependence reduces savings, but these models abstract from liquidity constraints. Introducing a liquidity constraint, I find that reference dependence can increase optimal savings for people without access to credit. Ex post, after reference points have been formed, liquidity constraints force consumers to take part of an income loss in early periods, inducing those who are reference dependent to concentrate the full loss in early periods and save in order to eliminate future losses. Further, anticipating a liquidity constraint raises the expected level of future consumption and thus the expectations-based reference point for future periods, creating an ex-ante savings motive. These findings underscore that it is important to account for financial market imperfections when applying or testing reference-dependent models in low-income settings, and potentially explain heterogeneity in how much the poor save when facing binding liquidity constraints.     

Consumer climate data in macroeconomic consumption functions

Zusammenfassung Die vorliegende Arbeit untersucht die Brauchbarkeit der IFES-Konsumentenbefragung für die Analyse des Konsumverhaltens in Österreich. Zu diesem Zweck wird geprüft, inwieweit die Verwendung von Daten aus Konsumentenbefragungen den Erklärungswert von Konsumfunktionen (für dauerhafte Konsumgüter) erhöhen können. Nach einer kritischen Würdigung der bisherigen Literatur zu diesem Thema werden sowohl in bekannten als auch in eigens dafür entwickelten Konsumfunktionen zusätzlich zu den üblichen erklärenden Variablen auch Variable miteinbezogen, die die Stimmung der Konsumenten widerspiegeln. Dadurch verbessern sich die Determinationskoeffizienten und die Standardfehler jedoch nur leicht. Stärker sind die Auswirkungen auf die zu schätzenden Parameter. Durch Berücksichtigung des Konsumklimas nehmen die Preis- und Einkommenselastizitäten plausiblere Werte an. Teilweise wird dadurch auch die Bedeutung des konstanten Gliedes und die Autokorrelation in den Residuen der Gleichungen verringert. Die Konsumklimavariablen dürften in den Konsumfunktionen die Rolle von Smart-dummy-Variablen spielen, die nicht nur die (aufgrund mehrfacher Änderungen der Mehrwertsteuersätze) häufigen Änderungen im Konsumentenverhalten signalisieren, sondern auch Verschiebungen in den Konsumentenpräferenzen widerspiegeln. Durch die Umwandlung qualitativer Aussagen (Konsumklimadaten) in quantitative wurde es möglich, Preissteigerungen in erwartete und unerwartete aufzuspalten und damit den Zinssatz theoriegerechter zu deflationieren. Erstmals ist es gelungen, die Keynessche Vermutung über die funktionale Abhängigkeit der Konsumneigung von psychologischen Faktoren mittels der Berücksichtigung von Konsumklimadaten in Konsumfunktionen zu bestätigen.

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List of variables (quarterly data) AN purchases of consumer goods: next year - AN _W share of those who want to buy less next year - CD consumer durables in real terms - D1 dummy for anticipation purchases - D2 dummy for purchase restraint; both (D1 andD2) caused by VAT changes - FIN financial situation of the own household: next year - FIN _B share of those who expect a better financial situation for the next year - GIG weighted Composite Leading Indicator 10, not trend and amplitude adjusted - GIU unweighted Composite Leading Indicator 10, not trend and amplitude adjusted - LD1 dummy for anticipation purchases 1977 - LD2 dummy for purchase restraint 1978; both (LD1 andLD2) due to luxury VAT increase in 1978 - LDX dummy for anticipation purchases, due to general VAT increases - PC actual deflator of private consumption - PCD relative price of consumer durables, standardized byYP - PCE expected deflator of private consumption - PCUE unexpected deflator of private consumption - PDH actual deflator of consumer durables - PDHE expected deflator of consumer durables - PDHR relative price of consumer durables - PDHUE unexpected deflator of consumer durables - RKEC real long-term interest rate (deflator of private consumption) - RKED real long-term interest rate (deflator of consumer durables) - RKEE expected long-term interest rate - Y disposable income in real terms - YP permanent real disposable income - YT transitory real disposable income     

Causal relationship between energy consumption and GDP growth revisited: A dynamic panel data approach

This paper uses the panel data of energy consumption and GDP for 82 countries from 1972 to 2002. Based on the income levels defined by the World Bank, the data are divided into four categories: low income group, lower middle income group, upper middle income group, and high income group. We employ the GMM-SYS approach for the estimation of the panel VAR model in each of the four groups. Afterwards, the causal relationship between energy consumption and economic growth is tested and ascertained. We discover: (a) in the low income group, there exists no causal relationship between energy consumption and economic growth; (b) in the middle income groups (lower and upper middle income groups), economic growth leads energy consumption positively; (c) in the high income group countries, economic growth leads energy consumption negatively. After further in-depth analysis of energy related data, the results indicate that, in the high income group, there is a great environmental improvement as a result of more efficient energy use and reduction in the release of CO₂. However, in the upper middle income group countries, after the energy crisis, the energy efficiency declines and the release of CO₂ rises. Since there is no evidence indicating that energy consumption leads economic growth in any of the four income groups, a stronger energy conservation policy should be pursued in all countries.     

Preferences in the Future

Environmental economics has been much occupied with the discount rate, which is the value of future costs and benefits relative to present costsor benefits. But at least as important is the question of whatshould be discounted, that is, what the value of those future environmentalbenefits is to future generations. This paper analyzes the role for futurepreferences and discusses the state of knowledge. I argue that theappropriate discount rate is the market one, and that the real problemis determining future willingness-to-pay. This approach makes clearerthe connection between discounting and the valuation debate.This paper focuses on two features that have been prominent in that debate:existence value and reference dependence. I argue that thereis a vital connection between the two constructs and that this link yieldsimportant implications for future willingness-to-pay.     

Growth promoting policies,distribution, and the balance of payments

This paper studies the consequences of growth promoting policies for income distribution, aggregate savings, and the balance of payments in a small open economy. We focus on the case of a reduction in capital income taxation. Then the traditional OLG model, which emphasizes the inter-generational distribution, predicts that both investment and consumption are boosted. It is obvious then that the trade balance deteriorates. However, we show that this result is no longer robust if one allows for heterogeneity of agents within each generation. Then the intra-generational distribution effect, which implies a negative relationship between the share of capital income and aggregate consumption, may cause consumption to decline, and the trade balance to improve. This effect concurs with the classical, or post-Keynesian view on the relationship between distribution and savings. This post-Keynesian effect is, however, important for the short run only; the long-term result for the trade balance is not essentially changed by allowing for intra-generational heterogeneity.     

Ein empirischer Test der Annahme der permanenten Einkommenshypothese von Milton Friedman

Summary We apply the Variate-Difference-Method to yearly Austrian data from 1956 to 1975 to test the permanent-income-hypothesis byM. Fiedman.First we determe the degree of the polynomial, which is sufficient to eliminate the trend (i.e. the permanent part) from time series of disposable income. Then the permanent income variable is constructed in two alternative ways: first, as a polynomial in time and second bySheppard's smoothing formulae. Transitory consumption is identified with the residuals of the consumption function. A correlation analysis shows that, transitory income and consumption are correlated, if permanent income is determined by a trend polynomial, while this is not the case ifSheppard's smoothing formulae is used to estimate permanent income.Consumption functions are specified for total consumption, durables and non-durables and eleven sub-groups of total private consumption. The results indicate that autocorrelation can considerably be reduced by usingSheppard's smoothing formulae.     

Consumption Effects of Foreign Remittances in Jamaica

The term remittances refers to proceeds from the migration of labor that are sent to aid individuals remaining in the migrants’ home communities. In this paper, we investigate whether remittances alter the consumption pattern of recipient households in Jamaica. We present results from an Engel curve estimation specifically using the Working (1943) approach and a two-part fractional response model with instrumental variables to account for selection bias and endogeneity of remittances. The dependent variables are a subsample of the categories of consumption as defined in the Jamaican Survey of Living Conditions and include expenditures on food, schooling, health, gambling, alcohol and donations. We find that receipt of remittances significantly alters the recipient households’ expenditure allocations relative to other sources of income, although this effect occurs more through the participation decision. Overall, total effects of remittances are largest in the areas of luxury expenditures and home production, and to a lesser extent for education and grocery store purchases. These findings have significant implications for those remitting, those receiving, and governments looking to understand this large flow and less documented source of income.