How the "Ramsey formula" came to define time discounting in economics (1950-2000)

Beatrice Cherrier (), Béatrice Cherrier () and Pedro Duarte
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Beatrice Cherrier: CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - X - École polytechnique - IP Paris - Institut Polytechnique de Paris - ENSAE Paris - École Nationale de la Statistique et de l'Administration Économique - IP Paris - Institut Polytechnique de Paris - CNRS - Centre National de la Recherche Scientifique
Béatrice Cherrier: CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - X - École polytechnique - IP Paris - Institut Polytechnique de Paris - ENSAE Paris - École Nationale de la Statistique et de l'Administration Économique - IP Paris - Institut Polytechnique de Paris - CNRS - Centre National de la Recherche Scientifique

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Abstract: This article investigates the emergence and stabilization of the Ramsey formula as a major framework for discounting in economics. Despite widespread belief, the formula did not originate in Frank Ramsey's 1928 paper. We track how policy and academic economists increasingly grappled with discounting in public investment decisions in the 1940s-1960s, with a few of them endorsing the ongoing work in optimal growth theory as the proper framework for deriving rates. This framework was further discussed in the 1970s and 1980s as the energy crisis made discounting for the distant future a salient issue. We show that it was only in the 1990s, as discounting in climate models was discussed in the context of IPCC reporting, that the Ramsey formula stabilized as a discounting framework. In the process, it transformed from an optimality condition to a definition, encompassing the debate between "descriptive" and "prescriptive" approaches to discounting. Our research highlights the pivotal role of Kenneth Arrow in spreading the Ramsey formula, as well as the persistent tension between theoretical consistency, ethical choices and tractability motives in deciding whether and how to discount in economic models.

Keywords: discounting; Ramsey formula; optimal growth; energy economics; climate economics; tractability; history of economics; environmental economics (search for similar items in EconPapers)
Date: 2024-09-01
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