Delta (and to a lesser extent Eta) fits these two preconditions pretty good. Which is why going through the “sensitivity analysis” is important here.
As far as corporate finance goes, I’d expect that 1) above would be harder to fudge while 2) would still hold. But I really don’t know much here.

Anyway, as I think Daniel said somewhere there’s no reason for the real world to be cooperative and allow us to reach any precise conclusions. In the end we’ve done well if we can settle on a modest range for some parameters and should shy away from overstating our case(s).

Why? There is enough literature on these issues already. And how exactly is that an argument against critics of the Stern report? Critics that have pointed out that it is not so clear what the right approach is?

“omeone comes into the room and says that you folk are saying to the Iraqis your country ain’t worth crap. I submit that is a better and clearer statement of the facts than all the academic blather. Sometimes you have to be direct. It tends to concentrate minds.”

You want to compare Dasgupta to some neocon warmonger?

As far as ad hominem arguments I differentiate between Sadaam was an odious person and should burn in Hell and Sadaam was an odious person who killed many people to come to and maintain power and should burn in hell. YMMV.

With Kling, Lomborg, Nordhaus and Dasgupta much the issue goes to motive. Clearly the first two have policy driven motives, essentially all of their economics grows from their policy views. Nordhaus is more of a pure economist, whatever that means. For Dasgupta, much of his economics comes from his policy view (which I am sympathetic to), but to a lesser degree than Kling and Lomborg. Dasgupta is quite open about this.

However, my argument with Nordhaus and Dasgupta is that of (a), they should be looking to the models not the predictions of the models as should Stern. It may be that economics has nothing to offer here. Knowing that would be important as it would take economics off the table in the argument until the models improve.

In another context, think of the sages talking about the fine point of how the US should handle Iraq. Someone comes into the room and says that you folk are saying to the Iraqis your country ain’t worth crap. I submit that is a better and clearer statement of the facts than all the academic blather. Sometimes you have to be direct. It tends to concentrate minds.

Well, Dasgupta and to some degree Nordhaus support doing more against global warming, so they are not really the issue. I think John Q was talking mainly about people like Arnold Kling and Bjørn Lomborg. Eli Rabett on the other hand does make such a cheap ad hominem attack.

I’m late to the discussion, but this last sentence troubles me. Shouldn’t it be: “If the results change a lot, the model justifies a closer look?”

That is, here we have a very simple model purporting to tell us something about future generations decades if not centuries away. Does anyone really believe that such a model could tell us something useful?

What annoyed me is that at the beginning was the moral condescension of the original post:

So, responses to a Stern Review provide another kind of sensitivity analysis. If you don’t care (much) about future generations, you shouldn’t do anything (much) about global warming.

This is pure and simple ad hominen attack implying that folks like Dasgupta or even Nordhaus who questioned a particular value of a particular parameter (on pretty solid economic and ethical grounds) should be viewed as morally suspect or at least not “sensitive”. This kind of response would make sense if this was a conversation involving some crazy-ass global warming deniers but in this particular case it is nothing more than a bit of a cheap shot.
I care (much) about future generations, and I think we should to (much) about global warming but I still think delta>0 and eta>1. As Nordhaus notes this might affect the magnitude of “how much” and and as Dasgupta should have pointed out it affects the question of “who should pay” but the sentiment is the same.
Once we get past that though, it gets better, to give credit.

Weighted utilitarianism does no treat all generations equally, so Stern may simply have chosen the wrong framework. I’m not an expert on extinction, but justifying Stern’s choices on treating all generations equally modulo extinction rates will probably not work. Why should extinction probability be equal in every period?

But as Radek mentioned, Dagupta wasn’t criticising the choice of delta:

I have little problem with the figure of 0.1% a year the authors have chosen for the rate of pure time/risk-of-extinction discount (delta) – although many economists would think otherwise. But the figure they have adopted for eta – the ethical parameter reflecting inequality and risk in human well-being – is deeply unsatisfactory to me. To assume that eta equals 1 is to say that the distribution of well-being among people doesn’t matter much, that we should spend huge amounts for later generations even if, adjusting for risk, they were expected to be much better off than us.

You still haven’t convinced me that Dasgupta’s message was really “Your kids ain’t worth crap.”.

This is true for delta, but Dasgupta was questioning the value of eta which is an economic parameter not an ethical one (though obviously its value has ethical implications)

with eta=1 and r=0 this just simplifies to
Growth of consumption = -2%
By the rule of seventy (http://en.wikipedia.org/wiki/Rule_of_70),
if something grows at rate x it halves/doubles in 70/x years. So 70/2=35 years. So if you’re starting at 30 then your consumption would half by the time you’re 65. The “zero real interest rate” is a bit of a fudge, because as you say where does your income come from? So yes, in this case I think it’s best to think of it as getting lump sum at age thirty and running it down.
However, any eta>0 (eta=0 would imply that consumption today and tomorrow are perfect substitutes and in the presence of pure time preference would mean PARTY NOW!) will tell you “don’t blow it all at once” – eta determines how fast you blow it. Note that delta and eta work in opposite directions here.

The strange thing is that a higher eta SLOWS down this fall inconsumption. If eta is say 2 then that equation above becomes
Growth of consumption = -1%
Which means consumption would half only in 70 years. So while that example illustrates the problem with (an individual’s) delta=2% it only does so by assuming eta=1.
You grant me an eta=2 and then delta=2% doesn’t look that crazy.
(I think that what an economist thinks eta is actually equal to depends on their area since there’s several different ways to estimate it as it plays different roles; inverse of substitutability over time, measure of declining marginal utility of wealth, and a measure of risk aversion – I think eta approx = 2, but that’s a whole another debate and another post)

If you wanna know why the optimal path for consumption is as given above then you can get some idea from the Wiki article on the Ramsey model which I started once and never finished:

http://en.wikipedia.org/wiki/Ramsey_growth_model

Also, just to finish, I don’t think that for an individual a delta=2% or even 3% is crazy. But that doesn’t mean that’s the right delta to use when looking at it from a social welfare perspective as then delta also represents the weight given to future generations. As it’s been pointed out above delta=0 is also problematic though. Personally I’m pretty willing to grant a low delta in this particular case (though Stern’s .001 feels “too low”). I do think eta’s higher though – and I think Dasgupta agrees with me on this.

Perforce any such choice is social and ethical, and to the extent that people, including try to hide these choices as arising from economic roots, they are not being ethical. To give Dasgupta credit, he is fairly up front about his choices and hides them less behind the thicket of economic certainty.

It is also a basic rule that when confronting hard cases, the first thing any good analyst does is to confront assumptions to see if they are valid.

http://johnquiggin.com/wp-content/uploads/2006/12/sternreviewed06121.pdf

Perhaps someone could tell me if I’ve interpreted this passage right:

“Nor is it sensible in terms of individual decisionmaking. For someone facing a zero real interest rate for savings (not an unreasonable assumption in many cases), the combination delta=2 per cent, eta =1 implies a consumption path that declines at about 2 per cent per year. To adapt Brad’s example, a person beginning such a plan at age 30 would plan to halve their consumption by age 65, and halve it again by age 90. Even allowing for the caution above about EU models and actual choices, this makes no sense.” (p13-14)

I think this says that if you hand me a lump of cash to live on forevermore at the age of 30 it makes no sense to blow it all straight away. Rather I should plan to spend a roughly constant amount each year to support myself over the rest of my life.

Did I understand this correctly?

If so, I don’t like the example. We have to be careful with these examples as many of them rely on checking plausibility by applying “intuition” to odd circumstances. With the particular example John has chosen I fear that intuition is “contaminated” by the common concern of planning pension provision, which the numbers make it superficially resemble. In that context it sounds terrible to contemplate the slow degeneration into poverty. But if I have understood the example correctly then this is nothing like a realistic comparison.

In plausible real life situations I rely on saving from an income each year until retirement. Assume in this case that I plan to retire at 60 until when I expect a constant income, have a life expectancy of 90, and want a constant expenditure. Consider the lump sum that I make as income in my 30th year, let us say 25000. I will spend half in the year it is recieved and save half of it. In my 65th year I will plan to spend 1/30 of the lump sum, that is 1/15 – much less than half – of the amount that I spent in my 30th year when I recieved it as income. Together with 1/30 of the income from each year up until retirement this will produce a constant income.

“I’ll stand by what I said. Dasgupta is too much of an academic economist to say this, but he is also too much of an academic economist to question his academic economics.”

So he should question his own economics but not the economics of Nicholas Stern? That doesn’t make any sense.

@Roy Belmont:

“But it’s taboo to talk about eternity in any practical sense, besides that it makes most of us feel silly to try, and the term itself doesn’t seem to have any real human component.”

The Stern Report does talk about eternity in a practical sense.