The Contradiction between the Time Value of Money and Sustainability

Abstract Purpose The “time value of money principle,” a building block of finance theory and practice, states that money today is worth more than money in the future. In this chapter, we argue that this principle is not consistent with intergenerational equity or sustainability. Methodology/approach We demonstrate that standard capital budgeting negatively affects sustainability by presenting two numerical examples and by discussing the role of financial markets in the time value of money and the discount rate. We then discuss Silvio Gesell’s (1862–1930) concept of Freigeld as a possible alternative framework for a “socially optimal” discount rate. Findings We show that the time value of money principle, as employed in standard capital budgeting techniques, tends to reject sustainable projects (that only break even in the long run) and accept unsustainable projects (that break even in the short term but entail significant long-term negative externalities). We find that fiat currencies offer interesting perspectives in the context of sustainability. Research implications We show that money, interest rates and investment valuation techniques are not merely technical tools, but have important institutional, social, and political attributes. Taken together with current global demands for sustainability, this observation could justify a new research agenda seeking to redefine current capital budgeting techniques. Practical/social implications We stress that the “time value of money principle” should not be viewed as a technical tool, but rather, as a social and political construct. We argue that the principle needs to be reconsidered given the current global sustainability crisis. Originality/value The economics literature considers that externalities indicate a market failure, to which policy makers should respond by introducing optimal tax incentives and regulation. At the same time, the management studies literature has proposed a set of initiatives to align corporate governance with sustainability principles. This chapter examines an issue that concerns both these literatures, that is, the relationship between sustainability and the time value of money.