Discounting and Commodity Fetishism
Policy in our time is made by cost-benefit analysis. Finance ministers and independent fiscal authorities have to be convinced that an investment will save enough costs or bring enough benefits in the future to be worth paying for now.
Making these calculations involves discounting the future. Costs and benefits in the future count for less than present costs and benefits. The results can be extreme. Discounting at 7%, a future cost is halved if it’s incurred in around 10 years, quartered in around 20, cut to an eighth in around 30, etc. This is how it can not be worthwhile, e.g., to replace a coal-fired power station with genuinely renewable energy (genuinely meaning I don’t mean biomass), even taking into account the cost of supplying vast amounts of coal into the future (a 1000 MWe coal plant uses 9000 tonnes of coal per day, so over 50 years that’s 164 megatonnes).
Philosophers and economists seem, on the whole, to disagree on discounting. As John Broome puts it:
In cost-benefit analysis and other applications of welfare economics, economists typically do count future goods for less than present goods. To many philosophers this seems a reprehensible practice. How, they ask, can the mere date at which a good occurs make any difference to its value?
The good of burning coal is cheap energy now. The good of building renewable capacity is a more easily inhabitable planet in the future. The second good is vastly greater, but if it’s far in the future then discounting can level or tip the scale.
Broome proposes that philosophers and economists don’t really disagree. Philosophers are thinking about discounting wellbeing. To many philosophers, it makes no sense to think that the wellbeing of somebody in the distant future is worth less than mine. Joseph Heath argues that this might not be as unfair as it looks. If we discount at a consistent rate, everybody gets the same deal: their wellbeing counts for less than the people who came before but more than the people who come after. Ponder that if you like. Broome has better things to do and wants to consider what economists mostly think about, which is discounting commodities.
Generally, Broome thinks that it’s justifiable to discount commodities because, as he puts it, “technology is fertile”. A commodity today can produce more of itself in the future. A forest grows, so logging it next year might get you 5% more timber than logging it today. The “own interest rate” on the forest is 5%, and an efficient market will discount the price of next year’s wood accordingly.
Broome’s conclusion is that this sort of discounting shouldn’t be applied in the case of climate change, because the timescales are too long. Most climate economists don’t seem to have listened. But I want to point to another troubling feature of his account. Technology isn’t fertile without labour. A forest that grows still has to be logged. There is thus, I think, some commodity fetishism hiding within this understanding. The “own interest rate” is what Marx would call “a definite social relation between men, that assumes […] the fantastic form of a relation between things”.
To see how, think not of timber but of “corn”, in David Ricardo’s simplified model. If I have 10 bushels of corn, I can give them to some farm labourers, who (let’s say) plant 2 bushels and eat the other 8 over the course of a year. After a year, the harvest is (let’s say) 12 bushels. Thus I used “technology” to turn 10 bushels in Year 1 into 12 bushels in Year 2. Two extra bushels sprang into being for me, realising an “own interest rate” for corn of 20%. Out of my harvest of 12 bushels, I can put 10 into the next productive cycle, sell the other two, and spend the proceeds on luxuries for myself. I can repeat this each year and live large, all thanks to the “technological” fact that 10 bushels today turns into 12 next year.
Except it isn’t a technological fact, Marx would remind us. We have to think about all the social relations that determined this outcome. Suppose the farm labourers demand to eat 9 bushels over the year rather than 8. If I am willing to take a surplus of only 1 bushel, I can give them 9 to eat and 2 to plant out of my annual harvest of 12. Then the “own interest rate” on corn, for me, falls to around 9%: 11 bushels “turns into” 12. If they’ll only work for 10 bushels, the “technology” is no longer “fertile” at all. 12 bushels get consumed in the process of producing 12 bushels.
But suppose I refuse the demand. What alternative do the labourers have? If the answer is “starve”, then they will just have to accept my offer of 8. They get 8 because they can’t wait. If , however, their alternative is to find a more generous offer from somebody else, or to receive food aid from their community while they fight a pay dispute against me, then the answer changes. Competition from other offers or the outcome of a pay dispute might eventuate in them getting 10, 9.5, 9, 8.5, or a whole range of other outcomes, each determining a different ultimate “own rate” on corn for me, the investor. On the other side, if I can force the labourers to get by on 6 bushels, I can get 12 bushels next year for the price of 8 today: an “own rate” of 50%. It all depends on the underlying social relations.
The “own rate” on corn isn’t built into the essence of corn. To think so is commodity fetishism. Rather, the “own rate” depends on a complex system of social relations, which has only assumed the fantastic form of a relation between present and future corn in the eyes of an economist.
It’s harder to see with timber, because of course I don’t feed timber to the foresters who log it. I pay them money — or, if I am my own forester, I pay myself, drawing on savings that I’m in effect investing into my own forestry enterprise. We can convert this wage bill into timber if we like, using the current price of timber (supposing that the wage doesn’t get spend on timber and thus affect the current price). Then the situation is precisely the same as with corn. The “own rate” of timber depends on the value of the final timber-harvest minus the timber-cost of producing it, and this includes everything paid to the workers, all measured in terms of timber. The higher the wage, the lower the “own rate”, which is my rate of profit as a forestry investor. But the split between wages and profits, again, is determined by a complex set of social relations.
The idea that we can take some naturally-occurring “own rate” on commodities and use it as a discount rate is commodity fetishism. This “own rate” is not a property of the commodity; it emerges from the system of social relations. These determine the rate at which future commodities should be discounted against present commodities. To take current “own rates” as given is to take current social relations as given. But if we’re making policy, we should think about all the outcomes we want, and these — I hope — include changing current social relations.
