Monetary Compensation for Future Generations

[Cross-posted on the parent blog] 

I've been talking a lot about whether or not we could have obligations to future people, and it occurred to me that I should say something about what it would mean for us to have those obligations, if we did have them. For example, let's say (as I discussed here) that it is wrong to act in such a way that a person comes into existence, upon whom the consequences of your actions will impose costs, but who will not have been provided with proper compensation for those costs. It should be obvious that one way to act permissibly would be to avoid that sort of action. But another way to act permissibly would be to provide compensation to the person your actions bring into existence.

What kind of compensation would this be? The obvious answer seems to be that we should leave them some amount of money which would sufficiently make up for the costs they'll have to endure as a result of our actions. But I wanted to point out an interesting feature of monetary compensation across time periods which might be significant to the way we think about the issue.

Let's say I harm you today, and give you money to compensate you for it. Basically, what I've done is give you power for directing the allocation of social resources which formerly belonged to me. As Hayek wrote in his essay, "The Use of Knowledge in Society," "...in a system where the knowledge of the relevant facts is dispersed among many people, prices can act to coordinate the separate actions of different people in the same way as subjective values help the individual to coordinate the parts of his plan." Providing someone with compensation has the effect of removing power to direct the market from one person, and giving it to another. It seems fair to say that this is exactly what we want to do when we make someone compensate someone else.

But something very different happens when someone leaves compensation for someone in the distant future. There are two steps in this process which occur at significantly different times. The first step is that someone loses their purchasing power. Influence on the market is lost by the compensating individual, and is essentially given to the rest of the actors in the economy. Basically, money is taken out of the economy, and therefore the rest of the money becomes more valuable: it gains more power for coordinating the market.

The second step is that in the future, an individual comes into existence and is given the money that had previously been taken out of the economy. This has the effect of increasing the money supply. Predictably, the rest of the money in the economy becomes less valuable. In other words, power for market coordination is transferred from the rest of the economy to the individual who is being compensated.

It should be clear that this is fundamentally different from monetary compensation which occurs instantaneously. But the significance of this difference might not be immediately apparent. Purchasing power is released into the economy in the first step, and then essentially recaptured in the second; it might seem like things ultimately balance out. But the problem comes into focus when we recognize that the economy is populated by different people when the purchasing power is released than it is when the purchasing power is recaptured.

Essentially the problem is this. When we compensate someone instantaneously, purchasing power is transferred directly from us to them. But when we compensate someone in the distant future, we transfer purchasing power from ourselves to the other members of our generation, and then in the future, purchasing power is transferred from the other members of the future person's generation to the future person. The purchasing power is not transferred directly from us to the person to whom we are obligated.

What does this mean? I'm not sure. I just thought it might be worth pointing out.