Background
Having finished the first series that I plan to publish on quantum economics (others are planned), it became clear that explaining the use of this thinking was important before moving on to further ideas. The result is a new series, called The Quantum Essays, of which the fourth (and last, for the time being) is below. Previous posts are listed at the end of the post.
Like many of the essays in this series, this one was written in response to a comment on this blog, this time by someone called Roger. I take responsibility for the reaction.
A list of essays in this series, which explore ideas flowing from my first series on quantum economics, is to be found at the end of this essay.
Quantum economics, discounting, and the cost of inaction
Economics has long had a problem with time. Its preferred solution has been to eliminate time altogether. The mechanism for doing so is discounting. This technical term conceals an extraordinary act of erasure.
Discounting rests on the claim that money today is worth more than money tomorrow. The logic is dressed up in the language of opportunity cost: people could invest their money elsewhere and get a return, so any future stream of income or benefit must be reduced in value to take account of this alternative. The higher the discount rate, the less weight is given to the future. At sufficiently high rates the future is discounted to nothing.
This is not a marginal detail. It is foundational to mainstream economics. Cost–benefit analyses of public investment apply discount rates as a matter of course. Infrastructure, education, health, or climate policies are all filtered through this lens. The outcome is predictable: the further away the benefits are, the less they count. In the language of the models, they vanish.
The intention is clear. Economics finds time messy. Different projects have different durations and unpredictable consequences. To produce neat models, economists want to eliminate that complexity. Discounting does the job. It compresses everything into the present, tidying the equations, but at the cost of turning the future into an irrelevance.
The consequence is disastrous. Discounting means that projects with benefits extending across decades or centuries – schools, sewer systems, clean water, public health, renewable energy, or action on climate change – are treated as if they have little or no value. Rules about “fiscal prudence” and “sound money” are, in truth, rules about ignoring time. They are mechanisms for making sure governments do not see the worth of long-term investment.
That is why it has become easy for governments to cut capital spending. In their own frameworks, the benefits of such spending disappear quickly, but the costs are always immediate. This bias towards short-termism is not an accident of political convenience. It is baked into the very economics that guides decision-making.
Contrast this with physics. Quantum mechanics treats time as a parameter, a fundamental backdrop against which probabilities unfold. Relativity, on the other hand, shows us that time bends, stretching and contracting depending on an object's speed and gravitational field. Neither perspective eliminates time. Both accept that it is central. Economics, however, has tried to wish it away.
The truth is that time cannot be eliminated. It is the medium in which all human activity occurs. That is why ignoring it in economics is such a profound mistake. And that is where the concept of sustainable cost accounting matters.
What sustainable cost accounting does is reverse the logic of discounting. Instead of writing down the value of future costs and benefits to nothing, it insists that we must recognise the compounded costs of inaction at the moment decisions are made.
Think of climate change. If a government decides not to invest today in decarbonisation, the cost of that inaction does not drift away into a discounted future. It grows. Every year of delay makes the problem bigger and more expensive to resolve. The compounding effect is relentless.
Sustainable cost accounting says we must account for those costs now. When the decision not to act is made, the liability is created. It should be recognised immediately. That liability is not some theoretical future loss. It is the real consequence of inaction. The economy will bear it, and society will suffer it, whether we acknowledge it or not.
This changes everything. Instead of discounting the future to zero, we bring the future into the present. We insist that inaction today carries a price that must be reported today. The balance sheet of government, business, and society is altered. Decisions that look cheap under the discounting model are revealed as ruinously expensive when their compounded costs are made explicit.
Take public health. Spending on preventive care is often cut because the benefits lie far in the future, while the costs are immediate. Discounting reinforces this choice. But sustainable cost accounting shows that every pound not spent now creates a liability – in the form of increased illness, lost productivity, and greater treatment costs – that compounds over time. The failure to act generates costs that are far larger than the initial saving.
The same is true of education. Investment today equips generations with skills, resilience, and capacity. Failure to invest stores up deficits in knowledge, productivity, and social cohesion. Under discounting, these benefits are written down and ignored. Under sustainable cost accounting, the liability of inaction is carried forward and recognised.
Infrastructure provides another example. Victorians who built sewers were not thinking in terms of discounted future benefits. They acted out of necessity. But their decision delivered continuing returns across centuries. Had they not acted, the compounded cost of inaction – in disease, lost labour, and social breakdown – would have been catastrophic. That liability should always have been recognised the moment the decision was taken not to build.
This is not just an accounting technicality. It is about the way we see the world. Discounting tells us the future does not matter. Sustainable cost accounting tells us that the future is the measure of all we do. One erases time; the other insists that time is always present.
And this is where the idea links back to quantum economics. In quantum theory, outcomes are uncertain, but time remains the essential backdrop against which probabilities evolve.
The lesson for economics is that time must be treated in the same way. It cannot be ignored. It must be recognised as the dimension in which all value is created, and all costs accumulate.
The irony is that, when seen in this light, investment today is cheap. Education, health, renewable energy, infrastructure: all deliver benefits so large and so long-lasting that their cost now is trivial by comparison. The real expense lies in not acting. That is the liability that compounds beyond measure.
So the challenge is clear. We need an economics that bends time back into our view, that refuses to discount the future, and that recognises the cost of inaction as a liability at the moment the choice is made. We need accounting frameworks that reveal, rather than conceal, the truth.
Because in the end, this is not about abstractions. It is about survival. If we continue to discount the future, we discount our own existence. If we continue to ignore the costs of inaction, we compound them until they overwhelm us.
The task is therefore urgent. We must move beyond discounting and embrace sustainable cost accounting. We must see time as essential, not incidental. And we must fund the future in ways that recognise that the value of investment today is not only real – it is infinite.
That, surely, is what Funding the Future must mean.
Other essays in this series:
- The Quantum Economics series (this link opens a tab with them all in it)
- The Quantum Essays: Observing and Engaging
- The Quantum Essays: Quantum MMT: The wave function of sovereign spending
- The Quantum Essays: Is equilibrium only possible in death?
- The Quantum essays: Economics, the Big Bang and Rachel Reeves
Comments
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Dear Richard, I read a previous post of yours about sustainable cost accounting. That post was in relation to net zero and carbon costs. The approach you explained seems vital to me. The question I have is how would a company, especially a smaller one, come up with the “cost”? Is there a relatively simple way for a company to establish this? This would be needed to head off the “it’s too difficult” argument. And thank you for the great work btw.
First, let me be clear that this does not apply to smaller companies because unless bigger companies do this then smaller companies cannot because the option of going net zero would not then be available to a smaller company in that case: the means to do so would not exist. Almost all large emitters are large companies, so it is they that this applies to.
Likewise, individuals do not have the option of net zero until large business commits to it. They would in most cases not have the option unless big business comlies. That is why SCA is targeted at public interest entities (PIEs).
So, for asmaller company right now honesty might be the answer, including admitting the constraints.
That said, the method is not hard. It is acknowledging what it can do and costing that, and saying how it is planning to do it. Beyond that it has to say what it cannot do, and what it expects others to do to make that possible.
Does that make sense?
I am suggesting what is appropriate for scale in other words.
Thanks, makes sense.
Interesting of course that the Swiss whose Victorian Forebears hadnt done what ours did ended up with a Typhoid outbreak in Zermatt in 1963
Since then they have done as much as we have not …………
Where will all this work be published?
By us, maybe. We will eventually aggregate it.
Richard, help me out here. Is it the concept, in general, or the value of the rate that leads to short term thinking using the discounting approach?
Where is the error in my understanding?
Discounting approach: applying a (compounded) multiplier on future costs and benefits assuming that the value of a pound next year is less than today.
Sustainable Cost Accounting: recognising that failure to act/invest now (at a price), has a consequence on less productivity etc, in the future (where each pound is worth less than it is today).
In a sense, are both approaches not trying to evaluate the integrated costs and benefits over a period of time? Given that, can they be made equivalent by adjusting the value of the discount rates assumed?
What am I missing?
Discounting reflects a financial view of the world when we live in a real one.
SCA recognises compounding only because that is happening in the real world.
The problem is with the disconnect with reality in discounting, not the rate.
Ok … So is it fair to say that SCA is a way of reflecting reality (particularly when it comes to (govt) investment choices) – even if they can be mathematically/arithmetically equivalent?
Is it also fair to say that typically businesses prefer a discounting / NPR view as they are more focussed on the value of potential future income – even if arithmetically equivalent?
It is not equivalent
Discounting ≠ compounding if the underpinning logic is entirely different.
And the only businesses who like discounting are those who want to understate their liabilities.
Maths really does not come into this. It is a tool. Look out of the window at the real world to find reasons.
Are you, in effect, talking about hyperbolic discounting? Or some other discounting formula that rapidly bottoms out and remains flat thereafter? So anything after, I don’t know, a week say, the dscount rate is the same?
I am talking about the discounting used in virtually all financial modelling.
DCF is also used to help get dodgy PFI projects over the line.
Correct
Is the following a valid interpretation of what you’re saying?
The Economics 101 examples of discounting I’ve seen are, characteristically, toy ones. I.e. nvolving one actor making an isolated, marginal, even reversible, decision. In other words, an inconsequential one. E,g. whether or not to blow half next month’s rent on a video game. The type of decisions you are talking are extremely consequential, involving and affecting thousands of actors in fundamental, complex, sometimes irreversible ways. Now one might or might not accept that hyperbolic (or even linear) discounting accurately reflect the values underlying “inconsequential” individual human decisions. But whatever discounting is used, for “consequential” decisions it must be scaled vastly. Which means in practice that timeframes are very short and the effect of discounting is minimal.
Wrong.
The effect of discounting is vast. It denies the reality of what needs to be done by literally discounting it to understate its cost.
And it pretends there is an outcome when in reality outcomes are usually unknown. In quantum terms, it crashes the wave when the wave has not been crashed as yet.
It takes a few readings to get the SCA idea, especially if you are used to thinking of Discounted Cash Flow and Net Present Value, but it was worthwhile. Those measures are purely about money measurement and opportunity cost in the light of how money itself has a variable value over time. We all know of the Economists Big Mac index showing the price of this staple over time and in various locations. Useful for comparison purposes, but inappropriate for looking at future benefits of useful investments made today with an eye to long term benefits to society. I get it. The penny has dropped.
Thanks
100% agree with this and this is linked to the ridiculous methods used in the national accounts that don’t recognise the full value of previous infrastructure assets or human capital investment
It’s almost as if it’s rigged to just highlight a government debt number to minimise the role of the state 😉
Some examples of projects with up-front costs, to gain future long term benefits.
Prison Reform
Public infrastructure construction and preventive maintenance (schools, hospitals, sewers, water supply and storage, gas, electricity generation and grid, renewable energy projects, mass transit systems, flood defences, forestry), preventive medicine and dentistry, pharmecutical and medical research, developing and administering vaccines such as MMR, regulation of a whole host of activities, phasing out fossil fuel extraction and use, buildings for child and adult education. The list is endless.
Discounting helps me understand why governments and other organisations, private and public, repeatedly suffer from short-termism, in the face of what ought to be irrefutable arguments demonstrating the absolute folly of present penny-pinching at the expense of our long term welfare, or even, survival.
Discounting is all about encouraging shirt termism
T-shirt termism
Hair shirt termism
Night-shirt termism
I love the typos.
(Sorry)
🙂