Showing papers by "Kenneth J. Arrow published in 2012"

Sustainability and the measurement of wealth

Abstract: We develop and apply a consistent and comprehensive theoretical frame- work for assessing whether economic growth is compatible with sustaining wellbeing over time. Our approach differs from earlier approaches by concentrating on wealth rather than income. Sustainability is demonstrated by showing that a properly defined comprehensive measure of wealth is maintained through time. Our wealth measure is unusually comprehensive, capturing not only reproducible and human capital but also natural capital, health improvements and technological change. We apply the framework to five countries: the United States, China, Brazil, India and Venezuela. We show that the often-neglected contributors to wealth - technological change, natural capital and health capital - fundamentally affect the conclusions one draws about whether given nations are achieving sustainability. Indeed, even countries that display sustainability differ considerably in the kinds of capital that contribute to it.

General Resilience to Cope with Extreme Events

Abstract: Resilience to specified kinds of disasters is an active area of research and practice. However, rare or unprecedented disturbances that are unusually intense or extensive require a more broad-spectrum type of resilience. General resilience is the capacity of social-ecological systems to adapt or transform in response to unfamiliar, unexpected and extreme shocks. Conditions that enable general resilience include diversity, modularity, openness, reserves, feedbacks, nestedness, monitoring, leadership, and trust. Processes for building general resilience are an emerging and crucially important area of research.

How Should Benefits and Costs Be Discounted in an Intergenerational Context? The Views of an Expert Panel

Abstract: In September 2011, the US Environmental Protection Agency asked 12 economists how the benefits and costs of regulations should be discounted for projects that affect future generations. This paper summarizes the views of the panel on three topics: the use of the Ramsey formula as an organizing principle for determining discount rates over long horizons, whether the discount rate should decline over time, and how intra- and intergenerational discounting practices can be made compatible. The panel members agree that the Ramsey formula provides a useful framework for thinking about intergenerational discounting. We also agree that theory provides compelling arguments for a declining certainty-equivalent discount rate. In the Ramsey formula, uncertainty about the future rate of growth in per capita consumption can lead to a declining consumption rate of discount, assuming that shocks to consumption are positively correlated. This uncertainty in future consumption growth rates may be estimated econometrically based on historic observations, or it can be derived from subjective uncertainty about the mean rate of growth in mean consumption or its volatility. Determining the remaining parameters of the Ramsey formula is, however, challenging.

How Should Benefits and Costs Be Discounted in an Intergenerational Context? The Views of an Expert Panel

Abstract: In September 2011, the US Environmental Protection Agency asked 12 economists how the benefits and costs of regulations should be discounted for projects that affect future generations. This paper summarizes the views of the panel on three topics -- the use of the Ramsey formula as an organizing principle for determining discount rates over long horizons, whether the discount rate should decline over time, and how intra- and intergenerational discounting practices can be made compatible. The panel members agree that the Ramsey formula provides a useful framework for thinking about intergenerational discounting. We also agree that theory provides compelling arguments for a declining certainty-equivalent discount rate. In the Ramsey formula, uncertainty about the future rate of growth in per capita consumption can lead to a declining consumption rate of discount, assuming that shocks to consumption are positively correlated. This uncertainty in future consumption growth rates may be estimated econometrically based on historic observations, or it can be derived from subjective uncertainty about the mean rate of growth in mean consumption or its volatility. Determining the remaining parameters of the Ramsey formula is, however, challenging.

How Should Benefits and Costs Be Discounted in an Intergenerational Context

Abstract: Should governments, in discounting the future benefits and costs of public projects, use a discount rate that declines over time? The argument for a declining discount rate is a simple one: if the discount rates that will be applied in the future are persistent, and if the analyst can assign probabilities to these discount rates, this will result in a declining schedule of certainty-equivalent discount rates. A growing empirical literature estimates models of long-term interest rates and uses them to forecast the declining discount rate schedule. I briefly review this literature, focusing on models for the United States. This literature has, however, been criticized for a lack of connection to the theory of project evaluation. In cost-benefit analysis, the net benefits of a project in year t (in consumption units) are to be discounted to the present at the rate at which society would trade consumption in year t for consumption in the present. With simplifying assumptions, this leads to the Ramsey discounting formula. The Ramsey formula results in a declining certainty-equivalent discount rate if the rate of growth in consumption is uncertain and if shocks to consumption are correlated over time. Using the extended Ramsey formula to estimate a numerical schedule of certainty-equivalent discount rates is, however, challenging.

Information as an Economic Commodity

Abstract: The role of information as a commodity in economic system is studied. It is shown that the information can influence the economic models consequences as well as the behavior of economic agents. The role of information on the markets is studied, in particular, the influence of information on the crises. The problems of information acquisition are considered and mechanisms of economic decision making under asymmetry of information are discussed.

Elinor Ostrom: An uncommon woman for the commons

Abstract: On June 12, 2012, Elinor Awan Ostrom died of pancreatic cancer after an illness of about 6 months. Lin Ostrom, one of the few political scientists to win the Nobel Prize in Economic Sciences, showed that solutions to common resource problems worked out by individuals directly involved are often more successful and enduring than regimens imposed by central political authorities. Under specified conditions, common resources—forests, fisheries, oil fields, or grazing lands—can be managed successfully by the people who use them. She showed creatively and rigorously that participatory decision-making can work: as she said the day her Nobel Prize was announced, “What we have ignored is what citizens can do and the importance of real involvement of the people involved.” Ostrom’s pioneering work influenced and inspired researchers across many fields, and she has scores of disciples around the world, including innumerable young people who she touched with her work or personally. She loved to welcome visitors, but especially young scientists, into her Indiana workshop and made each one feel special.

From Financing to Fevers: Lessons of an Antimalarial Subsidy Program

Abstract: In 2001, the World Health Organization (WHO) recommended that countries use artemisinin-based combination therapies (ACTs) to treat malaria patients ( 1 ), as continued use of artemisinin monotherapies and substandard drugs had the potential to lead to widespread resistance to artemisinin, the most effective drug for malaria. But ACTs were unaffordable for most people in malaria-endemic countries, particularly in the private for-profit sector where most people seek treatment. Artemisinin monotherapies and the threat of resistance remain a problem. Resistance has now emerged in Cambodia and is spreading to Myanmar and Vietnam ( 2 ). Despite WHO's efforts, monotherapies are produced by 37 pharmaceutical companies and marketed in 29 countries ( 3 ). Although resistance to artemisinin had not been detected at the time of the Institute of Medicine (IOM) report in 2004 ( 4 ), an IOM committee proposed a global subsidy high in the distribution chain, both to make ACTs inexpensive and to displace artemisinin monotherapy and other ineffective drugs.

Economic theory and the financial crisis

Abstract: I want to probe in the role of the market in allocating resources in this very preliminary essay. One does not have to see study deeply to that the failure of markets for various kinds of derivative securities to perform properly is an essential element of the current financial crisis. Actually, financial crises are not a new phenomenon. The history of capitalism has been marked by repeated collapses of the financial system, situations in which the "markets" for loans disappear for extensive periods of time. The 18th century saw some bubbles, but these might not be quite modern. But from 1819 on, there have a succession of failures of banks and other financial institutions. These have typically been unpredicted and did not correspond in time to any particular exogenous event (e.g., wars). Economists from Joho Stuart Mill (1848) on did recognize the phenomenon. But the discussion was and is not at all integrated with the general exposition of classical economics. No one could be a more vigorous advocate of unrestrained markets than Milton Friedman; yet, to my reading, the account that he and Anna Schwartz gave of monetary developments in the United States and particularly with regard to the Great Depression emphasizes, not prices, not even interest rates, but the supply of money, and, by inference, of liquidity. (Friedman and Schwartz (1963)). I start with the neoclassical general equilibrium framework, to which I have given a good deal of attention and effort. I seek to identify a possible point at which it fails to supply a coherent theory of securities markets and so might possibly lead to some understanding of the repeated crises of the financial system underlying the development of capitalism.