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Sustainability and the future

Scan Magazine met with Norway’s Nobel Prize-awarded economist Finn Kydland to discuss sustainability and how to make world leaders commit to long-term change.

What does a sustainable future look like? That is a big question for any person to answer on a Tuesday morning at 9.30.

But it is a particularly peculiar question to pose to a Nobel laureate whose timeinconsistency theory essentially presumes that everything is unpredictable.

“I’m the last person you should ask to predict the future,” smiles Finn Kydland, a Norwegian economist and the receiver of the 2004 Nobel Prize in Economics.

Scan Magazine met Kydland in early November in London, where he was invited to take part in the Nobel Perspectives Live event series.

Hosted by UBS, the events bring together Nobel laureates in economics to share their prize-winning

work and insights, and discuss some of the toughest challenges facing the world.

On today’s agenda: sustainability and the future.

The time-inconsistency challenge The essence of Kydland’s award-winning theory is that governments’

economic policies are often plagued by problems of time inconsistency,

because they are subject to change in the long run. On the face of it, the theory may sound a bit arcane,

Sustainability and the future but Kydland’s down-to-earth explanation makes it clear why it is extremely relevant for today’s conversation.

Kydland gives an example of why it is so hard for policy-makers to achieve long-term success when tackling issues

around sustainability and the environment: a tax on carbon emission that would rise exponentially over time would give businesses an incentive to change their production processes.

“I am a great believer in incentives.

That’s what economics is all about,” he says.

“But there is a potential credibility problem with that solution, as with all good economic policy, and that goes back to one of the things for which I got the Nobel Prize: the finding that optimal government policy is time inconsistent.

It means there will always be an incentive for future governments to reverse the original policy,

especially if they find themselves in an emergency situation, such as a financial crisis.

Then the important question is, is that something businesses would have anticipated from the get-go, in which case the policy wouldn’t have been as effective?

So an important issue is how to make such policy credible for the longrun, because only then would it have the intended effect.”

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