Discounting the Future: The Ascendancy of a Political Technology
Liliana Doganova
Zone Books, $28 (cloth)
A terse telegram from Dar es Salaam first alerted Barclays Bank in London of the unexpected and immediate nationalization of its local subsidiary in Tanzania. “We are advised full compensation will be paid,” said the message, and “government wishes all branches to continue normal business under present management.” Yet this was anything but business as usual.
A day earlier, on February 5, 1967, Tanzania’s president, Julius Nyerere, had announced the takeover of all “major means of production.” This was a cornerstone of his Arusha Declaration, a transformative project of creating ujamaa na kujitegemea, or African socialism and self-reliance. Important manufacturing and agricultural industries, as well as land and larger trading firms, were to be placed “under the control and ownership of the Peasants and Workers themselves through their Government and their Co-operatives.” So too were the three British banks that had dominated the country’s economy since colonial times: National & Grindlays, Standard Bank, and Barclays Bank D.C.O. (previously, Dominion, Colonial & Overseas).
“Our independence is not yet complete,” Nyerere told crowds. Though the country had won independence in 1961, British banks in Tanzania still operated as mere branches of their London offices. Little effort was expended on providing savings accounts to Africans, and lending concentrated on a few agricultural products destined for export. Moreover, the banks shuttled their profits to British shareholders and invested customer deposits and other surplus in London’s capital markets. In other words, Tanzania was actually lending Britain money. Prior to nationalization in 1967, foreign banks exported an estimated $4 million annually. In their place a new, government-owned National Bank of Commerce was tasked with using finance in service of national development.
Tanzanians celebrated the Arusha Declaration with patriotic marches across the country. Letters to the editor in the main newspaper, The Nationalist, predicted the end of foreign exploitation. Elderly citizens appeared at bank branches to open savings accounts. Within three months of nationalization, bank deposits had increased 30 percent over the previous year.
The expropriations in Tanzania were part of a global wave. Some midcentury nationalization efforts reflected the rise of social democratic parties in Europe: banks and energy companies in France, railways and the Bank of England in Britain. Others were aspects of decolonization. As Christopher Dietrich and Idriss Fofana have shown, postcolonial lawyers, diplomats, and economists successfully justified the expansion of sovereign power into the domain of production, finance, and natural resources. In 1962 the UN General Assembly resolved in favor of the right to expropriate property as long as “appropriate compensation” was paid, declaring that “grounds or reasons of public utility, security or the national interest” were to be recognized as “overriding purely individual or private interests, both domestic and foreign.”
After Gamal Abdel Nasser began nationalizing Egyptian banks in 1960, Barclays understood that political independence set the stage for changes in property, ownership, and wealth. As a Financial Times columnist wrote after Tanzania’s actions, expropriation was an “occupational hazard” but not an existential one. Despite nationalizations in Syria, Burma, and Tanzania, Barclays still had nearly 50 percent more overseas branches in 1967 than it did a decade prior. The bank resented the expropriation of its profitable business, of course, but it begrudgingly accepted its legality. So when Nyerere promised “full and fair compensation,” telling journalists that “we must pay the price for our policies,” bankers and bureaucrats turned to the question of price. Tanzania could hardly afford to pay very much, yet the British banks held an enormous bargaining chip: Barclays and Standard together held more than £1.5 million of depositors’ money in London. British diplomats called it a “ransom,” and the bankers refused to remit it until a settlement was reached—a fraught negotiation that took more than two years to resolve.
Accounting is rarely considered the stuff of socialist revolutions, but the case of socialist Tanzania shows how decolonizing the economy quite literally boiled down to correctly calculating prices. At a moment when price controls, inflation, and even nationalization are again at the forefront of public debate, the history of Tanzania’s bank nationalization demonstrates why the arcane technicalities of valuation should not be left to managerial elites alone. Today, advocacy groups like Groundwork Collaborative have made corporate pricing decisions a political issue, and economists like Isabella Weber are exploring how systematically significant prices might be calculated and regulated.
Similar insights emerge in sociologist Liliana Doganova’s recent, wide-ranging exploration of financial accounting, Discounting the Future. As she sharply demonstrates, valuation is a “political technology.” Neither a private affair nor an objective lens, it is a tool that produces inequalities of wealth, shapes how property is owned, and determines where investments are made. “No value exists independently from the instrument through which it is measured,” she writes. The routing of Tanzanian socialism and self-reliance through arcane debates about accounting techniques is a case in point.
What is a bank worth? Barclays initially proposed a compensation of nearly £2.5 million. It arrived at the bulk of this figure by projecting past annual profits forward in perpetuity—in particular, by averaging the past two years of profit and dividing that number by an estimate of the so-called capitalization rate (“cap rate”), a valuation technique most often used in real estate.
Barclays argued this was the proper and uncontroversial method for assessing the bank’s present value, equivalent to what a “willing buyer” would offer a “willing seller” in an acquisition and “well understood and accepted in business circles throughout the world.” In the bank’s depiction, such accounting methods were apolitical tools that produced objective facts. The bankers also knew the cap rate valuation did Tanzania no favors. By insisting the formula set the price, they tried to immunize their claims against accusations of self-interest.
The country’s negotiators dissented. On what basis could past profits be presumed to continue indefinitely into the future, and how many years of profits should be averaged to account for the past? Barclays chose two years because they had been especially lucrative, but the Tanzanians insisted that such opportunistic enumerations be amended. At best, they argued, the cap rate technique was a rule of thumb. Rather than imbuing it with objectivity, they rightly saw the calculations as political, reminding Barclays that its prior profits were facilitated by the colonial “cartel” agreement that allowed banks to “impose on the public what charges it liked.” Moreover, the idea that a compulsory nationalization should be judged by the standard of a market transaction belied the categorical difference: there was no “willing” buyer or seller in the 1967 expropriation.
Tanzania suggested that what it owed all nine nationalized banks, including Barclays, amounted to £900,000. Instead of using the cap rate method, government negotiators relied on a protocol called “net asset value.” Also known as “book value,” this approach uses the balance sheet of a business to subtract liabilities from assets. Within a matter of months, Tanzania made deals with most of the affected banks, but the big three balked at this approach and refused to fully open their books (perhaps to avoid revealing a history of tax avoidance).
The 1967 nationalization law had made net asset value the law of the land, and the country could honestly say it was a common enough accounting standard around the world. But Barclays held very few assets in Tanzania, in part due to continually exporting profits to London, and by some accounts its assets were actually less than its liabilities. It thus rightly fretted that “compensation received on a net asset basis will be small,” limited to items like furniture, vehicles, and stationary. As the bank’s chairman put it, “this meant that our 50 years of development and profitable operations were virtually valueless from the point of view of compensation.”
Barclays hoped to use financial accounting as an inviolable law of value, but Tanzania’s insistence turned the presumed fixity of accounting into a proliferation of discretionary choices. Instead of using either cap rate or book value, Barclays proposed they simply multiply an average of past profits by some fixed number of years. Yet how many years of prior profit should be averaged, and exactly how many years into the future should those historical numbers be expected to prevail? Any formula seemed to contain controversial variables.
While negotiations stalled, Tanzania’s new National Bank of Commerce got busy remaking finance anyway. It closed duplicate branches, eliminated the expensive salaries paid to British managers, and stopped capital from leaking out of the country. In its first six months of operation, NBC reported making £300,000—not bad for an entity widely expected to collapse immediately. In the longer term, NBC worked to end a history of credit discrimination, expand banking to citizens, and balance short-run profitability against developmental goals.
When negotiations finally resumed in mid-1968, the parties agreed to focus on finding a suitable final price to be paid instead of fighting over the minutiae of financial formulas. As Tanzania’s lead negotiator, J. D. Namfua, acknowledged, if each side was simply changing their variables “to achieve a pre-determined result, we are not engaged in a process of valuation, but in the vulgar business of bargaining.” By early 1969, the sides settled near £1 million, far below Barclays’ opening proposal. For Tanzania it was still a large number, but it could seem like a rather good deal combined with the return of nearly £700,000 held hostage in London. Nyerere was delighted to sign the agreement in June 1969, fulfilling the promises he made to both citizens and foreigners on that February day two years prior.
By the time Tanzania turned political authority into economic sovereignty, similar examples of large-scale nationalization had peppered the globe, from Guatemala and Argentina to Egypt, Iran, and Indonesia. As Quinn Slobodian and Adom Getachew have both traced, the threat national liberation posed to multinational ownership was a key motivation for the neoliberal counterrevolution of the late twentieth century. Against the rights of citizens to reshape markets, neoliberals asserted the rights of owners to constrain citizens, and in doing so they transformed the law surrounding nationalization. What was once managed politically through case-by-case negotiations—as in Tanzania—is now routed through depoliticized forums and dominated by financial methods that are insulated from scrutiny.
Among the most significant such moves are the investment treaties that move compensation claims out of national jurisdiction and into international arbitration panels. Since 1966, the World Bank has taken the leading role in promoting and overseeing this form of parallel justice, in the process sidelining what might have been more equitable alternatives like investor insurance. By the 1980s, the World Bank and International Monetary Fund were demanding acquiescence to international arbitration as part of structural adjustment programs. Legal scholar Nicolás Perrone reports that over 1,500 international investment treaties were signed in the heady days of capitalist globalization: four per day between 1994 and 1996. This regime of so-called investor-state dispute settlement (ISDS) emerged from the frustrations of expropriated banks, oil companies, and other multinationals. Today, it works to further their interests and constrain national sovereignty.
During the Barclays negotiations in Tanzania, domestic law prevailed over international law—most notably in grounding the government’s use of net asset value—and both political and ethical arguments shaped how accounting was used. In contrast, international arbitration now heightens the influence of financial models and limits the latitude of national governments by expanding the types of behavior that triggers compensation. Even legitimate regulation, such as legislating the phaseout of coal power plants or some types of taxation, might be seen as “indirect expropriation” or a violation of the obligation of “fair and equitable treatment.” The arbitration tribunals are staffed by technocrats who are meant to be independent, but in practice their work protects investors (especially in extractive industries).
One way it does so is through the promotion of certain valuation techniques, which have wildly inflated the cost governments must pay for nationalizations. The amounts awarded in recent years have been staggering: $5.8 billion against Pakistan and $8.7 billion against Venezuela in 2019, for instance. Instead of funding schools or hospitals, Pakistan pays foreign mining companies (including Canada’s Barrick Gold) and Venezuela owes oil extractors (like Houston’s ConocoPhillips).
Legal scholar Toni Marzal has detailed this rise of a theory of compensation that is equal parts peculiar and aggressive. Since the 1990s, arbitration tribunals have not only come to embrace the belief that compensation must be full and at the “fair market value.” They also now insist on establishing this value through a financial model known as “discounted cash flow” (DCF), which totally ignores mitigating factors—such as historical harms, or a government’s ability to pay, or next year’s shift in interest rates. Despite the patina of objectivity, DCF accounting is riven by uncertainties and artifice. While it claims to replicate what an expropriated business would sell for in a real market, its models do not capture the risks, volatility, and imperfections of the real world. In some cases, the compensation paid is more money than the business could sell for in a private transaction. In Pakistan, the enormous sum was awarded to a mining consortium, Tethyan Copper, even though it had not yet obtained necessary authorization, let alone begun operations.
Tanzania had the good fortune of negotiating before the neoliberal transformation, when discretion was allowed to prevail on both sides. (It mattered that Barclays did not wish to sully its reputation or bankrupt Tanzania by pushing for too much.) Today that discretion has been outsourced to arbitrators who disavow their own subjective power. States may still legally nationalize property, but doing so comes with financial costs few wish to shoulder. The result, Marzal argues, is a widespread disregard for other legal principles, including justice and equity. Instead, valuation is “governed entirely by economic and financial logic.”
DCF is at the core of Doganova’s book, which might be read as a biography of discounting. Raised in the scientific forestry of nineteenth-century Germany, discounting matured as a method of twentieth-century managerialism, and today it quietly dominates a huge range of domains, from climate policy to pharmaceutical pipelines and government regulations. While it has critics—on the left, to be sure, but also in business schools—they have largely failed to check its influence. More than just a financial instrument, discounting is now a worldview.
Doganova details the manifold problems of discounting but also emphasizes its mutability. “It can be and do many different, even opposite, things,” she writes. Yet the lesson is not that we need merely to revise its protean calculations in hopes of guiding more decent behavior. We need both to rework valuation formulas and to subordinate them to more justifiable principles.
But just what is discounting? With compound interest, a dollar today can multiply to considerably more in the course of ten, twenty, or more years. Discounting turns this idea around, advising that if you know you are going to bear a certain cost in the future—like building a wall in 2050 to rebuff higher sea levels—you should only be willing to pay considerably less to deal with it in the present. After all, you could use your money today for other purposes, presumably getting richer and more sophisticated before you must deal with that future problem. As Doganova explains, “money expected in the future is equivalent to ‘less money today,’ because this ‘less money today’ is supposed to be able to produce that ‘more money in the future.”
For discounting’s adherents, this logic means that you may see an expensive looming problem—due to climate change, for instance, or carcinogenic waste—as unworthy of investment today because its “discounted present value” is too high. These calculations depend not only on the time horizon and the estimated future cost. What matters most of all is the discount rate—the factor by which future costs should be diminished to get present value—and there is simply no objective way of determining what the “right” rate should be. In practice, the rate chosen varies hugely from analyst to analyst. Rather than a hard and fast science, a discount rate is a political and moral choice, and whatever number is selected takes on magnified significance when compounded across the years.
Along with related methods like “net present value,” DCF is among the most influential means of deciding how investments are made. Confronted with a range of options—from buying back stock to opening a new factory—corporate managers will calculate how much they can comparatively expect to earn over a given timeline. Some critics argue that discounting encourages a short-term outlook. Harvard Business School professors in the 1980s, for instance, claimed that discounting’s widespread use was encouraging insufficient capital investment, trading long-term productivity for short-term returns. Indeed, the evolution of discounting in those decades was a key driver of financialization and industrial outsourcing—a large obstacle to today’s effort to rebuild U.S. manufacturing.
Governments, too, have adopted discounting to guide their actions. Foucault was among the first to notice. His 1978–79 lectures depicted accounting principles as an “economic grid” used to judge the worthiness of government actions and “object to activities of the public authorities on the grounds of their abuses, excesses, futility, and wasteful expenditure.” On this logic, what counts as wasteful or abusive is routed through the discount rate. Sometimes, the result is shocking: in the early 1980s, the U.S. Office of Management and Budget (OMB) followed the discounting math to argue against regulating asbestos because the resulting cancer would only emerge in forty years, significantly lowering the cost to the present. The scandal wasn’t only that the OMB used discounting against the Environmental Protection Agency’s preferences; it was that the OMB chose a high discount rate without meaningful justification. The result is emblematic of what many critics decry as a disregard for the future.
For proponents, however, the tool is useful precisely to account for the future. After all, its key insight is that value must be a temporal judgment of money. As Doganova traces, the early formulations of discounting arose in commercial forestry to balance present output with the future viability of the forest. Rather than judging a forest through the current price of wood, the new science of forestry emphasized the future flows of costs and revenues, appropriately discounted for the present. In practice, this encouraged earlier felling, but it kept an eye on the forest as future trees, as well.
Yet getting too hung up on the question of the future risks obscuring the consequences for the present. In nineteenth-century Germany, discounting pitted the poor who depended on collecting wood against the forest owners and their state allies who criminalized gleaning. Doganova reports that in the Spessart region, “one out of ten inhabitants stood trial every year for committing a forest offense.” A young Karl Marx observed in 1842 that commercial and government foresters worked together to expel the commoners in order to maintain present and future capitalist value. The poor’s need for fuel became illegitimate as the “forest as wood” was refigured as “forest as capital.” As Doganova explains, the present profitability of forestry as well as its future viability led to expulsion of the poor in that moment.
In other words, it would be misleading to see discounting as a straightforward economization of the state. Its impact is more unexpected than that, and it often depends on the alliance between accommodating states and large firms.
Consider Chile, where DCF was legally enshrined as part of Augusto Pinochet’s counterrevolution against socialist Salvador Allende. As Doganova details, it took a shift in sovereign power and constitutional law to make discounting the raison d’être. The key figure is economist José Piñera, one of the Chicago Boys, who served as mining minister after Pinochet’s 1973 coup.
Copper mines had been at the center of Allende’s economic transformation, and when he nationalized them in 1971, he shared the view of Tanzania’s government that foreign firms should be compensated through “book value.” But he went further, deducting their “excess profits” as a matter of justice and sovereignty. The result was a compensation payment of zero. When Richard Nixon learned of Allende’s math, he told Henry Kissinger, “Allende . . . is really screwing us now. . . . I’m goin’ to kick ’em. And I want to make something out of it.”
Not two years later, Pinochet had seized power, undoing many of Allende’s policies and brutally repressing resistance. But Piñera believed that privatizing the mines would unleash more resistance than even Pinochet could manage. His still aimed to liberalize the country’s mining economy, but instead of forcing a change of ownership, he turned to the depoliticized realm of contracts and discounting. First, mining corporations were granted an indefinite concessionary contract to exploit the country’s resources. Second, a 1981 law required that any expropriation involve compensation according to DCF—effectively an insurance policy guaranteeing future revenue, even if the concessionary contract might be ended. Piñera thus “granted investors not ownership of the present,” Doganova writes, “but control over the future.” Expropriation could even be seen as a relief: in the event a company was nationalized, it would get paid without having to do any digging at all.
Chile appears to be the first case where discounting was legally established to protect foreign investors, and it remains on the books in Chile today. Even if the government wanted to capture the future revenue of its mines through nationalization—a right enshrined by the UN in 1962—it would immediately have to pay out those earnings in compensation. Marzal calls such a straightjacket a “mockery”—but it became the standard way of compensating companies after nationalization.
The history of discounting makes clear not only how consequential accounting standards can be—bankrupting some, enriching others—and how power inheres in mundane, technical protocols masquerading as value-neutral. It also exposes the critical role of the state in imposing some accounting standards over alternatives. Barclays was unable to enforce its own enrichment at the hands of Tanzanians precisely because the nation had become politically independent in 1961. Pinochet’s government was able to secure the profitability of mining corporations precisely because the neoliberals wielded state law. Arbitration panels, too, operate through treaties, acts, and other legal instruments. In each case, law combined with accountancy works to leverage ownership, turning assets into revenue.
What does this merger of law and accounting mean for politics? Doganova argues that discounting’s significance lies less in the truth value of accounting than the specific consequences of a calculation being deemed persuasive. After all, financial practitioners are among the most alert to the basic uncertainty surrounding the value of a new drug or factory; it is partly because of this uncertainty that future revenue is discounted in the present. What really matters, in other words, is not so much that the formula produces “truth.” What financiers want is for the formula to be accepted. We should therefore see financial arithmetic as something like an act of rhetoric: marshaling certain evidence for the means of argumentation and persuasion. When two companies deploy various valuation methods in a commercial acquisition, with their accounts open as part of due diligence, both sides know there is no ironclad set of variables and formulas that would yield an uncontroversial price. Compelled by this result or that, they negotiate before being persuaded and coming to a deal.
The trouble arises when discounting methodologies are deployed with political consequences without inviting the public to the negotiating table. As a style of argumentation, this is a far cry from an ideal of public deliberation, where public opinion and moral values work to legitimate state action. Today, the use of discounting interferes with public reasoning, short-circuiting democratic governance. The privatization of so much of political consequence means that accounting decisions with wider importance never reach the public arena. Drug discovery is a case in point: when pharmaceutical executives decide to invest in profitable interventions for the wealthy, they sacrifice the health of the global poor. Pharma executives may not be fooled by the ultimately speculative nature of the formulas they use, but guided by discounted cash flows—and not the right to health or global justice—their own persuasion undermines public purpose.
Even in cases where democratic mechanisms are ostensibly at play, the resort to accounting can obscure just how arbitrary the formulas are. Pseudo-objective valuation techniques not only establish worth; they justify it. In concert with what Elizabeth Popp Berman calls the “economic style of reasoning,” discounting turns questions of justice into calculations of costs. Climate change is perhaps the preeminent example, where the use of questionable discount rates has encouraged policymakers to underplay the contemporary costs of spewing carbon—part of what Geoff Mann dubs the “new denialism.” In a host of other arenas, the deference to technocrats and their financial models means discretionary parameters take on outsized influence. This state of affairs calls for more progressive ways of assessing worth and establishing value—financial value, yes, but also the sorts of values so often colonized by finance.
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