24 November, 2015 1 Comment
Adapted from a Swedish blog post.
Everything else equal, poor people have a higher time preference and – which is to say the same thing – a lower degree of future orientation than rich people. Take a homeless person, for example: he has to try to survive the day or the week; he is not in a position to set money aside for long-range projects or for his retirement. At the other end of the spectrum, take a multi-billionaire such as Bill Gates or George Soros: he does not have to worry about surviving the next day, week, month, year or even decade; he can plan ahead for the future without having to concern himself too much with the present. He can even plan ahead for the time after his death and for securing the future of his children and grandchildren.
In between there are the rest of us: people with a moderate or fairly high income. We are in a position to set some of our money aside for the future: for buying a new house or a new car, providing for our children’s education, planning vacations, providing for our retirement.
But everything else is not always equal, so there are exceptions. A poor person may be struggling hard to get out of his poverty; and a very rich person may be squandering his wealth and end up poor.
If you are familiar with The Fountainhead, you may remember that Gail Wynand was sleeping on a couch in his office while building up The Banner and only later used his money to buy a yacht, create an art gallery, and commission a house from Howard Roark. – And for an example of rich people squandering their wealth, read Bernard de Mandeville’s The Fable of the Bees.
A change in the time preference of very poor people does little for the economy as a whole. Neither does such a change in the time preference of the few “squandering rich”. It is the time preference of the well-to-do and the industrious rich that makes a difference. As long as those people have a low time preference and a correspondingly high degree of future orientation, they will invest their money, and it is those investments that move the economy forwards.
According to George Reisman’s theory, the level of profit in the economy as a whole is equal to the net consumption of the capitalists (I leave net investment aside, because I don’t think it changes my point). As long as the capitalists have a low time preference, net consumption stay at this low level; the greater part of their wealth goes to productive investments. And the richer they become, the lower becomes their time preference, the more gets invested, the more gets produced, the more workers get employed and the higher their wages become.
But assume that the capitalists’ time preference would increase (and their future orientation would correspondingly diminish); this could happen if there were to be a serious threat of confiscation of their wealth by a socialist government (or if there were certain indications that doomsday was approaching and the world would come to an end). Then the opposite would happen: they would consume their wealth instead of investing it; production would diminish or cease altogether; unemployment would rise; and so would the general level of profit and interest.
And this is why time preference is not a direct but an indirect cause of the level of profit and interest. It works through the net consumption of the capitalists.
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The honor of having discovered the role of time preference goes to Eugen von Böhm-Bawerk. Later “Austrian” economists, such as Mises, have considered his explanation of the causes of time preference as not quite satisfactory. But the one who nails it is, once again, George Reisman:
The nature of human life implies time preference, because life cannot be interrupted. To be alive two years from now, one must be alive one year from now. To be alive tomorrow, one must be alive today. Whatever value or importance one attaches to being alive in the present, because being alive in the present is the indispensable precondition to being alive in the future. The value of life in the present thus carries with it whatever value one attaches to life in the future, plus whatever value one attaches to life in the present for its own sake. In the nature of being alive, it is thus more important to be alive now than at any other, succeeding time, and more important to be alive in each moment of the nearer future than in each moment of the more remote future. If, for example, a person can project being alive for the next thirty years, say, then the value he attaches to being alive in the coming years carries with it whatever value he attaches to being alive in the following twenty-nine years, plus whatever value he attaches in the coming year for its own sake. This is necessarily a greater value than he attaches to being alive in the year starting next year. Similarly, the value he attaches to being alive from next year on is greater than the value he attaches to being alive starting two years from now, for it subsumes the latter value and represents that of an additional year besides.
The greater importance of life in the nearer future is what underlies the greater importance of goods in the nearer future and the perspective-like diminution in the value we attach to goods available in successively more remote periods of the future. (Capitalism: A Treatise on Economics, p. 56.)
To put it in shorter words: To be alive today and this year is the necessary pre-condition of being alive tomorrow or in fifty or a hundred years. Everything else equal, we have to value life in the present over life in the future, for if we don’t, there will be no life in the future. Thus we have to have goods or money to survive the day before we can start thinking about saving for the future.
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I originally wrote this some years ago, when I was pulled into a discussion with an idiot not too well-informed person, who claimed that George Reisman could not be a real “Austrian”, since he does not share the conventional “Austrian” view om time preference.
(Other schools than the “Austrian” have no inkling of the role of time preference.)
) Mandeville claimed that this squandering would be a boon to the economy; but this is simply a version of the “broken windows” fallacy and has been refuted time and again by better economists.