The generation gap and optimal economic growth

Abstract

Among the problems confronting those who aspire to the development of a realistic and practicable optimal growth theory is that the human population is not homogeneous with respect to age. Those who are relatively young are apt to prefer a different pattern of capital accumulation from that preferred by those who are relatively old. This paper proposes a tentative solution to this particular problem. Essentially the proposal is that society should remain with what is an optimal private plan of an individual who is at the median age of the population at the beginning of the planning period, for one planning period, after which it revises the plan to switch to the optimal private plan of another individual (one planning period younger than the first) who is at the median age at the commencement of the new planning period. Thus the optimal social plan consists of a succession of one planning period implementations of the first periods of the optimal private plans of individuals who are at the median age at that time period. An example of the application of the method is given. An important sidelight of the paper is a critique of standard constant-rate exponential discounting in social planning of optimal capital accumulation, and the proposal that it be replaced by “mortality discounting.”