The choice of an overall discount rate for climate change investments depends critically on how different components of investment payoffs are discounted at differing rates reflecting their underlying risk characteristics. Such underlying rates can vary enormously, from ≈ 1 percent for idiosyncratic diversifiable risk to ≈ 7 percent for systematic nondiversifiable risk. Which risk-adjusted rate is chosen can have a huge impact on cost-benefit analysis. In this expository paper, I attempt to set forth in accessible language with a simple linear model what I think are some of the basic issues involved in discounting climate risks. The paper introduces a new concept that may be relevant for climate-change discounting: the degree to which an investment hedges against the bad tail of catastrophic damages by insuring positive expected payoffs even under the worst circumstances. The prototype application is calculating the social cost of carbon.

Christopher L. Foote of Federal Reserve Bank of Boston reviews, “The Redistribution Recession: How Labor Market Distortions Contracted the Economy” by Casey B. Mulligan. The Econlit abstract of this book begins: “Explores the decline of employment in the United States after the financial crisis and its failure to recover and considers the role of economic activity and public policy. Discusses the rise of labor productivity; the expanding social safety net; supply and demand—labor market consequences of safety net expansions; means-tested subsidies and economic dynamics since 2007; cross-sectional patterns of employment and hours changes; Keynesian and other models of safety net stimulus; recession-era effects of factor supply and demand—evidence from the seasonal cycle, the construction market, and minimum wage hikes; incentives and compliance under the federal mortgage modification guidelines; and uncertainty, redistribution, and the labor market. Mulligan is Professor of Economics at the University of Chicago.”

The Stern Review calls for immediate decisive action to stabilize greenhouse gases because “the benefits of strong, early action on climate change outweighs the costs.” The economic analysis supporting this conclusion consists mostly of two basic strands. The first strand is a formal aggregative model that relies for its conclusions primarily upon imposing a very low discount rate. Concerning this discount-rate aspect, I am skeptical of the Review's formal analysis, but this essay points out that we are actually a lot less sure about what interest rate should be used for discounting climate change than is commonly acknowledged. The Review's second basic strand is a more intuitive argument that it might be very important to avoid possibly large uncertainties that are difficult to quantify. Concerning this uncertainty aspect, I argue that it might be recast into sound analytical reasoning that might justify some of the Review's conclusions. The basic issue here is that spending money to slow global warming should perhaps not be conceptualized primarily as being about consumption smoothing as much as being about how much insurance to buy to offset the small change of a ruinous catastrophe that is difficult to compensate by ordinary savings.

dominate modern economic history, taking that phrase to refer to the 50-year period from 1939 to 1989. One is the increasing strain on, and eventual structural failure of, centralized planning in virtually all of the self-styled socialist world. The other, less dramatic, but of no less historical significance, is the continued success of capitalism in its major strongholds. In both cases, I use as the crucial but not sole indicator of success or failure the political fortunes of the two social orders. There have been economic successes for socialism-above all, the initial industrialization of the USSR and the early modernization of China; there have been economic failures of capitalisminstability, uneven growth, unsatisfactory income distributions, dangerous international imbalances. From the perspective of the present, however, the half century is remarkable for the political verdict that has finally been passed on the two systems. With few exceptions, socialism has experienced a public delegitimization without precedent in modern, perhaps in all, history; whereas despite its failures, capitalism has enjoyed an uncontestable, and probably rising degree of internal political support. In this paper I shall be concerned only indirectly with these historical developments, for my purpose is neither to describe nor to explain the contrasting fates of the two great social orders. Rather, I wish to review and interpret the manner in which modern developments have been perceived by economists. Thus, as my title indicates, this is an essay in the history of economic thought, not in economic history. But it would be disingenuous not to admit to a more pointed purpose of my investigation. It is to inquire into the successes and failures of economic thought in anticipating the march of actual events. It will come as no surprise that failures have considerably outweighed successes in this endeavor, even excluding the momentous, and utterly unforeseen happenings at the conclusion of the period in 1989. A few observers have offered prognoses of history's long line that were subsequently vindi-

IN The general theory of employment, interest and money we can discover what gives a book eternal youth. It is the quality of imperishable relevance to the essential, insoluble problems of time-bound humanity. A problem solved, a situation resolved into its ultimate constituents, a veil finally and irrevocably withdrawn, is the end of a matter. can salute the author who did these things, but we can no longer look into a living face and see our own enigmas and perplexities reflected there. Keynes's book, however, is a great enigma; it is the image of the vaster enigma of conduct, decision, and history itself. It is doubtless paradoxical to say that Keynes's book achieves its triumph by pointing out that the problems it is concerned with are essentially beyond solution. The business of scholars, scientists and philosophers is to gain and give understanding. But only the best of them tell us that they can describe only the shadows in the mouth of the cave. All problems are solvable, the characteristic stance of our civilization, afflicts us with a terrible myopia. If all problems are to be solvable, we must be very careful what kinds of thing we admit to the category of problems. They must be carefully tailored to fit our selfassumed omni-competence. The task which suits us, which we can do with astounding ingenuity and surprising effect, is that of analysis, the application of reason to the dismemberment of a body of information declared or assumed to be self-sufficient, and its re-constitution into a prescription for conduct. It is the selfsufficiency of such supposed bodies of information which removes them so immeasurably far from the harsh truth of things. Why was not Keynes satisfied with the Treatise? It had the Keynesian touch. It knotted up a mass of perplexities and cut them with one Alexandrine stroke. The Fundamental Equations were extremely concise and ostensibly simple. Had Myrdal been at Keynes's elbow to interpret the dream, they would have done the trick, thrown back the bolt and enabled the gates to swing open upon an undiscovered country. What was wanted was some clue to the nature of the inducement to invest. Keynes in the Treatise sought for it in a WicksellianAustrian theory of the nature of capital. (If one draws a diagram of what Keynes says about capital in the Treatise, there will appear a Hayekian triangle of the stages of production.) But this did not seem to go quite to the heart of the matter. What, in its essential nature, was the Natural Rate of Interest? This was the difficulty, the source of dissatisfaction, that led to a fresh attempt as soon as the Treatise was published. The General theory devotes a whole Book to the Inducement to Invest. The apparatus is the confrontation with each other of the Marginal Efficiency of Capital and the rate of interest. What is the M.E.C.? learn its real nature in Section V of Chapter 11. It depends on expectation. And what does expectation depend on? To find that stated, with full uncompromising explicitness, we have to look in a part of the canon which few economists seem able to endure the sight of-or else they have never heard of it. It is his reply to his critics. It appeared in the Quarterly Journal of Economics for February 1937, and it declares unequivocally that expectations do not rest on anything solid, determinable, demonstrable. We simply do not know. The General theory is a detour. (Is everything in economics a detour?) It is a detour from a path which might have led direct from the Treatise to the Q.J.E. article. Keynes and many of the readers of the Treatise were worried about how investment and saving could differ from each other. The dilemma needed only the same liberating insight that can ex-