Discounting Nordhaus

Thomas Michl

Working Papers from Political Economy Research Institute, University of Massachusetts at Amherst

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.

Keywords: Global warming; Stern Review; Discounting; Ramsey equation; Cambridge equation; Cambridge Theorem (search for similar items in EconPapers)
JEL-codes: E6 Q5 (search for similar items in EconPapers)
Date: 2008
New Economics Papers: this item is included in nep-hpe and nep-pke
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Journal Article: Discounting Nordhaus (2010)
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