Avoiding extinction: the future of economics

Abstract

New physical constraints emerged in the 20th century and are changing the decision criteria used until now. Two optimisation problems are equivalent: (1) maximising discounted utility with a long-run survival constraint and (2) maximising a new type of utility that treats the present and future equally. The latter originates in normative axioms introduced by the author in Chichilnisky (1996a), which capture the essence of sustainable development. The article shows that in the economics of the future, normative and positive goals converge: the axioms representing what we would like merge with what will be observed. The 'weight' given to the long-run future is identified with the marginal utility of an environmental asset along a path that narrowly avoids extinction. No prior welfare criteria satisfy the axioms for sustainable development introduced by Chichilnisky (1996a; 1997). The implied decision criteria have practical implications for new forms of cost-benefit analysis, choices under uncertainty, optimal extraction of renewable resources and the optimisation of investment and trade. These preferences have been tested experimentally (Chanel and Chichilnisky, 2008) and identify the limits of nonparametric econometrics (Chichilnisky, 2009c).