Most people, I suspect, believe there's little connection between the music of Steely Dan and the economics of optimal consumption over time. But two things I've seen today suggests there is a link.
Simon points out an inconsistency between the Ramsey model and overlapping generations models.In the former, he says, people are impatient and discount their children’s utility as they do their own. But in OLG models, each generation is assumed to be selfish. Simon says:
If macroeconomists want to be consistent they need to do one of two things. If they want to continue to insist that a benevolent social planner should use the personal rate of time preference of the current generation to discount future generations, then they should also make the social planner ignore the utility of the unborn in OLG models...Alternatively, if they do not want to adopt this ethical position, they need to allow the rate at which the social planner discounts future generations (if any) to differ from individuals impatience in the Ramsey set-up.
I prefer the latter. This is where Steely Dan enter. David Hepworth says he can't love Donald Fagen's new record as much as his work of 30 years ago, even though the untutored listener might not be able to distinguish between them. This is simply because he has lived with Fagen's earlier work for years and come to love it.
In this, David gives us a reason why an individual should discount his own future consumption. It's not because of "impatience", as the economic literature claims - a view which Ramsey himself scorned (pdf) as arising "from the weakness of the imagination." Instead, it's because the marginal utility of consumption declines as we age. The pleasure we get from the music we buy in our 20s is generally greater than that we get from the music we buy in our 50s, except in the rare cases when a Hollandesque genius emerges.
And I think this point generalizes beyond music and cultural goods. The utility of going on a binge diminishes with age because hangovers become more painful. When was your best holiday - was it last year, or the one you went on with your teenage mates? And Amy Finkelstein and Erzo Luttmer have found (pdf) that the marginal utility of consumption falls when people fall into ill-health, as the older are more likely to do.
We should, therefore, discount our future spending simply because we'll get less pleasure from £10 spent in 30 years' time than we will from £10 now because the marginal utility of consumption falls with age.
But of course, this reasoning cannot apply to different generations. Quite the opposite. If we put aside our quibbles about interpersonal comparisons of utility aside, this thinking implies that - ceteris paribus - it is better that 20-year-olds have high consumption than that 60-year-olds do. This implies that there's a case for a negative discount rate across generations even though there's a (high) one within any individual. It might be optimal to reduce today's pensioners' spending so that we increase the spending of future generations of young folk (ignoring many other considerations!).
Insofar as this is correct, it makes David Willetts' complaint that oldsters are living high at the expense of youngsters even more worrying - because this is not merely unjust, but undesirable in narrowly utilitarian terms.
Another thing: It is a paradox that Frank Ramsey, who pioneered thinking about intertemporal choice, should have died aged just 26. I reckon there's a moral here.