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Jeremy Grantham: This Time is Different

March 20, 2012

by Michael Edesess

Grantham’s position

Grantham’s position in this debate can be easily inferred, given his argument for a zero discount rate when comparing the value of a child now and one 50 years from now, and given the fact that Professor Stern currently chairs the London School of Economics’ Grantham Research Institute on Climate Change and the Environment, which is funded by Grantham’s Foundation for the Protection of the Environment.

Grantham deserves substantial praise for funding this work. The potential warming effects of greenhouse gases have been known for more than 100 years. It is only in the last several decades, however, that greenhouse gas concentrations in the atmosphere have climbed to levels unprecedented for hundreds of thousands – if not many millions – of years. The last time such a transformation took place in our atmosphere was when photosynthesizers, such as phytoplankton, arose, absorbing carbon dioxide and charging the Earth’s atmosphere with large quantities of free oxygen for the first time. These revolutionary photosynthesizers seem to have experienced a population bubble and crash, leaving behind the gigantic deposits of organic matter – we now know them as fossil fuels – that we were so lucky to discover a short 200 years ago.

Increasing greenhouse gas concentrations pose potential dangers that we need to take very seriously and research carefully, and we need to be prepared to take action as necessary. We do, for example, research, take seriously, and prepare for the possibility of a comet or asteroid someday colliding with the Earth. We monitor the skies, and we formulate, test, and refine possible means to deflect it – such as setting off nuclear explosions in its vicinity in space. Equally – though it is a much more difficult and complex task – we need to research, take seriously, and prepare action against the potential danger of climate change. Grantham is appropriately appalled at the obliviousness of many people in business to the threat.

Is short-term thinking the problem with capitalism?

It is a separate question, however, to ask if capitalism necessarily causes the kind of short-term thinking problem that Grantham blames for our inattentiveness to environmental change – and I don’t believe it does.

What does cause the problem is something else that Grantham identified in his February quarterly letter: “In the last 20 years, corporate ownership began to look odd. The nominal owners [had]… little or no interest in corporate affairs, with the result that corporate officers appeared to own the companies and behaved accordingly.” Corporate officers are playing with other peoples’ money. They have an incentive to maximize not the company’s long-term value but their own short-term material gain. In other words, it’s an agency problem, not the result of myopic capitalism run amok.

Long-term capitalist investors like Grantham, Warren Buffett, and many others do think long term. I do believe there is a problem – let us hope, temporary – with capitalism, but it is not that its discount rate on future welfare is too high. It is that certain individuals within the capitalist structure currently have big incentives to ignore the future, and – for now – they are at the controls.