Are long-term investments a good way to help the future?

by Dacyn 2y30th Apr 20183 min read50 comments

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[Epistemic status: I am very confused, possibly about very basic Econ 101 things. Probably there is more research I could do to resolve my confusion but I don't have the time or motivation for that right now.]

[Update: Paul Christiano's comment resolved a reasonable part of my confusion, and gjm's comment seems to indicate this is probably the wrong discussion to be having.]

Recently there has been some discussion regarding the question of whether the fact that most people don't make long-term investments to help the future means that people don't care much about the future. To me this argument seems kind of silly: EAs have a hard enough time already getting people interested in ideas of how to help other people without one more weird idea in the mix. But I am more interested in the object-level question: is long-term investment actually a good way to help the future?

The basic argument in favor is simple. The power of compound interest means that if you invest, you will end up with more money (inflation-adjusted) than you started with, which in turn means that you can help more people. If we value all people equally, then this means a higher utility.

There are many possible objections but to me, the most obvious one is that it's not clear making $1000 by investing in the stock market means that you have added $1000 worth of value to the world, it could just mean that you have taken it from someone else. I do know enough Econ 101 to know the obvious counterargument: if you assume rational decision-making together with no negative externalities, then you have to have added $1000 worth of value to the world, because every deal that happens as a result of your investment was rationally consented to by the parties making the deal, and so can be assumed not to hurt them (according to the rationality assumption) nor anyone else (according to the assumption of no negative externalities). So everyone else is better off or at least not worse off than they were before, and you are $1000 better off. So $1000 of value has been added to the world. [Edit to clarify: The point of this argument is not supposed to be that the assumptions are always satisfied (they aren't), but that maybe they are satisfied often enough that we can expect a generic investment that makes $1000 to have added close to $1000 of real value to the world.]

Those seem like pretty strong assumptions to me though, and the conclusion seems pretty weird if you think about it. Namely, you are saying that just by making some trades that at the time don't make anyone better off or worse off, you end up creating something of real value. But the trade itself clearly isn't what's creating the real value, so it must be being created in some hidden way. What is the causal mechanism linking the trade to the creation of value? I can't see it.

As an example, suppose someone sells you a stock, which you intend to keep for a long time, whereas otherwise you would have just kept the money for a long time. If we assume that the person you are buying the stock was also going to hold on to it, and will hold onto the money as well, then the trade actually does not create value. Now this scenario contradicts the rational decision-making assumption because if the other guy is just going to keep the money, then it would be better for him not to sell the stock. So he is going to spend it instead, and that will cause some sort of ripple effects throughout the economy. Somewhere in these ripple effects, it seems, we are to believe that the real value is created. But the longer the ripple, it seems, the more chance there is for irrational action, so that in the end maybe you are just taking money from someone stupid. How can we estimate the chance of this versus the chance that the ripple effect will cause real value?

Here is another way that I tried to wrap my mind around it. Consider a simplified model where everyone has to choose whether to consume resources or create resources. Then maybe by doing this trade, you are moving the incentive structure in the direction of incentivizing resource creation. People "could have" created resources anyway, but they didn't want to. So in the end you are basically paying people to create resources, which is an action that doesn't help them but helps the future. But its effect on them is essentially the same as if you had paid them to do something else.

So, am I thinking about this the right way? Is there any good way to empirically estimate how much value is created by an investment? Or am I concentrating on the wrong objection and other objections are actually more important? (Another possible objection is that maybe mitigating X-risk now is more important, or equivalently maybe our ability to use resources to mitigate X-risk is decreasing at a rate comparable or faster to the growth rate of investments. How fast is our ability to mitigate X-risk decreasing? Is it decreasing?)

(Note: The comment threads of the two posts I linked to in the first paragraph contain some valuable discussion I won't reproduce here; so does the comment thread of this old post. Also, this post summarizes some discussion on the related question of whether short-term investment (by which I mean years or decades rather than centuries or millenia) is worthwhile from an EA perspective.)

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