A Path Through the Wilderness: Time Discounting in Growth Models

Abstract

Although economists recognized long ago that “time enters into all economic questions,” as William Stanley Jevons wrote, the ways they treated and modeled time varied substantially in the last century. While in the 1920s there was a distinctive Cambridge tradition against discounting utilities of future generations, to which Frank Ramsey subscribed, postwar neoclassical growth economists (of the “Ramsey-Cass-Koopmans model”) applied the discount factor either to the individual's or the social planner's decision making as a technical requirement of dynamic general equilibrium models. My goal in this article is to analyze the different communities and their interpretative practices regarding discounting: the Cambridge economists in the 1920s, some American mathematicians in the 1920s and 1930s, a group of economists working on economic dynamics from the 1930s to the 1950s, the founders of the optimal growth model and those bringing recursive methods to macroeconomics in the 1950s and 1960s, and, finally, those who reacted against this utilitarian approach to social planning problems. With this I hope to shed some historical light on how a practice that was condemned as ethically indefensible when applied to intergenerational comparisons became a technical requirement in dynamic models of either a consumer or a planner deciding the intertemporal allocation of resources.