Sun, 25 May 2008

Seven Generations

Many people who believe that we should be thinking less of ourselves, and more about the future, cite the Iroquois maxim of thinking "Seven Generations" ahead. Why seven? Why not eight? Economists who have studied this issue call that number the result of the discount rate.

People discount the future. Not entirely, and not all at once. Life is uncertain, and with the passage of every bit of time, your plans have a chance of being disrupted. After enough bits of time, the chances of being disrupted add up to a probability of one. Beyond this time, you cannot plan, and you SHOULD NOT plan.

How do you determine the discount rate? As it turns out, the discount rate is proportional to the (natural) interest rate. That rate is what people charge to lend money. Getting paid back is a plan, and those plans could be disrupted because of unforseeable future events, so people insist on being paid back more than they have loaned.

People's discount rate is roughly equivalent to the level of civilization in which they find themselves. Every sane person wants the discount to be as low as possible. Political action increases the discount, because it makes people's plans less likely to come to fruition. That's why, when economists say that they want a small government, what they really are saying is that they want a prosperous society.

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