climate-change – The Sense of Fairness blog

Interest rates are lurching upwards globally. In part, this is a good thing, a reversion to more normal times after money having been essentially free for too long – something that has been dangerously distorting. But rising interest rates have significant negative consequences for how we perceive the future. They mean we discount future money and value more too, making the future seem less important. Given that humans have in any case a tendency to be excessively short-term and favour the present, that’s unhelpful.

Research shows that rising interest rates also make sharing scarce resources harder.

There’s a strong band of thought that humans aren’t great at sharing. If they have shared access to resources – often called a resource held in common – they are likely to over-exploit it to the extent that becomes depleted and so of decreasing value over time. Often, it may simply be destroyed, and so unavailable to future generations.

This band of thought is usually called the tragedy of the commons, after a seminal 1968 article in Science. The naming of the concept arises from the shared commons to which all in a village had access for grazing animals, which were at risk of being overgrazed and damaged; there are other very real examples of the tragedy happening, perhaps the most renowned being the collapse of the Atlantic cod fishery. Overexploitation can mean the common resource is lost to the future altogether. The usual asserted solutions to this challenge are either regulation or narrow private ownership of resources.

But commons need not be tragic. That was the conclusion of the first female economics Nobel Prize winner, Elinor Ostrom (referenced in my last blog). Ostrom won the award for demonstrating that it is entirely possible for human societies to develop approaches that avoid the tragedy of the commons – without needing to turn the commons over to private ownership or subject them to heavy regulation. Ostrom analyses cases of successful management of shared resources (ranging, among others, from irrigation in Spain and the Philippines to grazing in Switzerland and Japan, to fisheries off Nova Scotia and Indonesia) – what she calls common pool resource (CPR) problems. She shows that there are in fact multiple ways in which people have successfully addressed these problems and so shared the commons effectively over time.

Indeed, the evidence is that commons can be shared in such ways over extraordinary periods of time. The remarkable Dark Emu shows that Australia’s aboriginal peoples farmed the land and exploited other resources so lightly over centuries and perhaps millennia that arriving Europeans allowed themselves to believe that the entire land was tabula rasa and entirely untouched. There was of course a prejudiced and convenient colonial mindset that assisted this thinking, but the Aboriginal footprint on the land, and its exploitation of a range of shared commons, was so slight even after so long as to be deniable.

Ostrom sets out six variables she suggests make it most likely that a common pool resource problem can be addressed through the efforts of those involved in exploiting the shared resource (whom she calls the ‘appropriators’). The six variables are:

Most appropriators share a common judgment that they will be harmed if they do not adopt an alternative rule.
Most appropriators will be affected in similar ways by the proposed rule changes.
Most appropriators highly value the continuation activities from this CPR; in other words, they have low discount rates.
Appropriators face relatively low information, transformation, and enforcement costs.
Most appropriators share generalized norms of reciprocity and trust that can be used as initial social capital.
The group appropriating from the CPR is relatively small and stable.

Ostrom states that these variables are “weakly ordered” from most important to least, and she has significant doubts about whether the last matters at all, though others believe it is extremely important. As an aside, whatever weight is put on the various variables, when considering the list as a whole it isn’t hard to see why the world is so struggling with its current most severe common resource problem: overuse of the shared common of the atmosphere through excess carbon dioxide pollution.

The third of Ostrom’s variables is relevant when considering rising interest rates. In finance, the term discount rate is used synonymously for interest rate: it is the rate at which the future is discounted back to the present, i.e. the extent to which the present is preferred over the future. The synonymity with interest rates largely makes sense, though the extent to which interest rates are driven by narrow supply and demand considerations (in a current UK sense, the unwinding of the heavy investment in gilts by pension funds eager to manage the risk of apparent deficits as those pension schemes increasing sell out to insurers, which tend to invest in long-term assets other than gilts; and the overhang of Covid acquisitions of gilts still held by the Bank of England) rather than longer-term factors should be less relevant for discounting – so there may be a little distortion if we discount using the current interest rate without thinking.

One of the most striking things I found in my researches for my (shortly forthcoming) book was evidence that humans are more likely to place a steep discount on the future if they face conditions of inequality, as, of course, we all do at present. To the extent that this is based on logical reasoning, the future matters less to those who may not survive to reach it, and who may not have sufficient financial resources to enjoy it. However, the researchers suggest that this discounting of the future is much less of a logically reasoned approach and much more deeply embedded in human psychology. Since the same researchers have identified other ways in which the psychology around discount rates can be manipulated – perhaps most strikingly that men tend to discount the future more and rate the present more highly when in the presence of pretty women – I suspect we should accept their view that this impact of inequality on discounting isn’t a wholly logical phenomenon.

Its impact is real though: in conditions of inequality, people discount the future more. In a fairer world, the future matters more to all. As global interest rates rise and in our unequal world, we’ll need to lean still more heavily against the tendency to discount the future – our own and that of future generations. Future generations who need future commons to enjoy rely on us not to exploit them excessively in our present.

I’m happy to confirm as ever that the Sense of Fairness blog is a purely personal endeavour

The Tragedy of the Commons, Garrett Hardin. Science, 162, 1968

Governing the Commons: The Evolution of Institutions for Collective Action, Elinor Ostrom. Cambridge University Press, 1990

Dark Emu: Aboriginal Australia and the Birth of Agriculture, Bruce Pascoe. Scribe, 2018

Carpe Diem: Adaptation and Devaluing the Future, Martin Daly and Margo Wilson. The Quarterly Review of Biology, Vol 80, No. 1, March 2005

Do pretty women inspire men to discount the future? Margo Wilson and Martin Daly. Biology Letters 271(S4):177-179, 2004

Business as usual is where – for the time-being at least – the money is, and in our world that means it is where the power is. That power gives business-as-usual a gravitational force even when good sense and science call out for change, and even when in the long-term it’s a losing game financially. Power leads us astray, and fairness requires that we find some counterbalance to this force. Only then will change come.

We see this gravitational force of business-as-usual most powerfully in the world’s climate negotiations. The vast majority of the world’s scientists tell us that we have no time to lose and that economies and business must change. The Pacific island nations and developing economies more generally (without the money that might pad them from the increasing physical impacts of climate change) are increasingly urging change. Unusual and devastating weather patterns are being felt worldwide. We cannot continue to pump the same levels of CO2 and other climate-changing gases into our atmosphere.

A carbon-constrained future will look economically very different, and the companies that prosper in its business-as-usual will differ from those that look good now. Yet the status quo predominates in the political process. Most strikingly, governments of the world have been content to allow petrostates to co-opt the climate COP process. The last two Conferences of the Parties Serving as the Meeting of Parties to the Kyoto Protocol (no wonder the COP abbreviation is preferred) have been held in the UAE and Azerbaijan, respectively the world’s 9th and 25th largest oil producers and perhaps more importantly with at least two-thirds of their economies dependent on fossil fuel industries. The chair of each conference was a senior executive in that country’s oil industry. It can be little surprise that agreements for rapid change to our fossil fuel-dependent economies have not been forthcoming.

The greatest thought experiment in fairness is John Rawls’s idea of the veil of ignorance. Those designing a just society must sit behind a veil of ignorance so that they are unaware of where they will fit in that society: this makes it most likely to be fair to all, Rawls argues. In our unveiled world, those with power, meaning those with money, continue to set the rules – and knowing that they will benefit, they continue to skew the world towards the status quo, which means in their own favour.

This favouring of the rich and powerful is of course nothing new. My latest secondhand bookshop purchase was a collection of three plays by the deeply unfashionable JB Priestley. Published in 1945, it is eager to make clear its obedience to wartime strictures. “This book is produced in complete conformity with the authorised economy standards” it reads. Like his most famous play, An Inspector Calls, there’s an undercurrent of class resentment and frustration with a status quo that keeps power in the hands of the old and frustrates youthful ambition and opportunity. We don’t always see those tensions in modern depictions of the interwar years, not least because they and we know all too well the changes that were to come as the war swept away past structures and strictures.

All three plays are terribly dated, displaying the careless heavy misogyny of that age, and an odd metropolitan superiority. But one still has interesting elements. Called The Golden Fleece, it is set in the eponymous hotel in Cheltingate Spa, a scarcely disguised Cheltenham. The title also has a second meaning, referring to the wealth generated from taking advantage of others (the play’s original title, Bull Market, at least to modern ears carries some of the same connotations of trickery). The Golden Fleece centres around a debate between those who feel justified in taking such advantage because that’s how the world works and those who are unwilling to do so because it would be better if it didn’t. It involves some stock market manoeuvrings that are certainly no longer legal, and seem barely credible even at the time (though that may simply be failures in the playwright’s understanding, or elisions in his story-telling).

Youth’s frustrations at age and tradition in the 1930s come out clearly from the ambitious young doctor, railing at a gouging tendency in private health (this was, of course, before the creation of the National Health Service). Talking about his doctor boss, Alec says: “He may look like a harmless old pussycat, but really he’s a pest and a menace. Instead of being a man of science, which he pretends to be, he’s something between an old charlatan and a rich old woman’s butler. He doesn’t speak or even think the truth. He doesn’t care about anything but fat fees and fat dinners. He’s an example of what’s wrong with this pussy-footed, rich old man’s country.”

But the core of the play’s arguments come from the mouth of a different character, who calls himself William Lotless. “Money! Money! It’s a servant that’s become a master,” says the scoundrel trader, for once using his skills for good – though rather tempted by the excitement to act just for the joy of it. Tongue loosened by alcohol but with his thoughts made staccato, he goes on:

“Money – was intended to be simply a sign, a token, a convenience – something like a – well a railway ticket. That’s all. But what’s happened to it? Got all out of hand. Become a source of power. The way we allow people to handle money as power, it’s just as if we let ‘em handle battleships and bombing squadrons for their own private benefit.”

Military images abound in a play written in the first months of the war. It’s impossible to read it now without thinking of the coming destruction of all that is established. It feels like, and is, a wholly different world from our own.

We know that the 1950s and 1960s brought strong economic growth that was broadly shared across the population. It may not have been entirely fairly shared (certainly not, for example, between the sexes), but economies operated largely to the benefit of all, not the few. The existing order was overturned by the war. Let us hope it doesn’t take such a destructive dislocation to shift the pull of the current business as usual; we need a veil of ignorance, or some other way to escape our ready tendency to listen harder to those who already have power through money, as that traps us in a business as usual that isn’t working.

I am grateful to my colleague Nick for the conversation where we linked COP to Rawls.

I am happy to confirm as ever that the Sense of Fairness blog is a purely personal endeavour.

The Golden Fleece, JB Priestley, 1940

A Theory of Justice, John Rawls, 1971

Justice as Fairness: A Restatement, John Rawls, 2004

Tag: climate-change

Unveiled: fleeced by power and business as usual