Front Page Titles (by Subject) II.: The Social Discount Rate - The Collected Works of James M. Buchanan, Vol. 10 (The Reason of Rules: Constitutional Political Economy)
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II.: The Social Discount Rate - Geoffrey Brennan, The Collected Works of James M. Buchanan, Vol. 10 (The Reason of Rules: Constitutional Political Economy) 
The Collected Works of James M. Buchanan, Vol. 10 (The Reason of Rules: Constitutional Political Economy) Foreword by Robert D. Tollison (Indianapolis: Liberty Fund, 1999).
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The Social Discount Rate
The discussion in this chapter is related to a long-continuing topic in the theory of economic policy, often treated under the rubric of “social discount rate.” Traditionally, and especially since Pigou’s Economics of Welfare, published early in this century,1 economists have concerned themselves with the normative question, At what rate “should” society discount the future? How “should” the utility of future generations be weighted in the making of present-period decisions? More particularly, economists have asked, Is the interest of future generations sufficiently weighted by discounting at the market-determined rate of return on capital investment, the rate that market institutions install as a parameter for private-investment decisions? Should the collectivity as such make its own investment decisions on the basis of the market-determined rate of discount, and if the market rate is “too high,” should the collectivity, as a unit, replace the market behavior of individuals in all or in part of the investment or capital accumulation activity of the society?
These questions are intrinsically interesting, but for our purposes the implicit assumptions that prompted economists to ask them are more revealing. Almost without exception, the economists who asked these questions assumed that once a satisfactory normative solution could be agreed on, a benevolent government could, and presumably would, implement this solution. Never once did these economists pause to ask themselves whether government, as it is actually observed to operate, could or would implement the “optimal” discount rate that emerges from the careful exercise in normative prescription. In other words, the welfare theorists worked without a positive theory or model of governmental-political behavior, either implicit or explicit.
“Public choice,” the area of research with which we have long been associated, emerged in the 1950s, 1960s, and 1970s to fill this truly awesome gap in normative analysis. Within properly defined limits and appropriately qualified, public choice does offer a positive theory of how politics works or, stated somewhat differently, offers a panoply of theories about the working of politics under different sets of postulated rules and institutions. It is on this analytic structure that our conclusion about the political discount rate is grounded. The “social discount rate” generated in the operation of modern political decision-making institutions will be higher than that rate of time preference exhibited by persons in their private behavior. This statement takes the form of a testable hypothesis; it is not a normative proposition. It may well be that persons exhibit personal time preferences in market behavior that are “too high” when judged against some extraindividual criterion. To make such an argument one must resort to value norms that are not necessary in making the positive statement about relative discount rates in market and political behavior. We can say that the discount rate embodied in the political process is higher than that embodied in the operation of the competitive market without invoking our own private variant of a social welfare function.
[1. ]A. C. Pigou, The Economics of Welfare, 4th ed. (London: Macmillan, 1932).