Austrian Economics and Time Preference
G. Stolyarov II
A Journal for Western Man-- Issue XLII-- October 5, 2005
Many Austrian School economists—especially Ludwig von Mises—have espoused a universal insight into human action: the existence of positive time preference—the desire, other things equal, for a given satisfaction sooner rather than later. Every acting human being has positive time preference and, as a corollary, will value a present good more highly than the same good in the future.
How does Mises arrive at the universality of positive time preference? First, he postulates the absurdity of the contrary supposition, that of negative time preference. If an individual valued a future good more than the same present good, he would never consume, since delaying consumption is more valuable to him than undertaking it. Furthermore, an actor who always delays all of today’s prospective consumption until tomorrow will never consume tomorrow, either, since, tomorrow, he will be faced with the same alternative of consuming now or delaying consumption until the next day. A negative time preference is impossible to the goal-pursuing acting man, since it implies that none of the acting man’s goals are ever ultimately attainable. According to economist Gene Callahan, writing in Economics for Real People, “Saving in the interest of infinitely postponed consumption is not saving at all—it is pure loss” (51). Rather, the acting man will always prefer for his goals to be fulfilled sooner instead of later. Indeed, inherent in the existence of present human consumption is its higher valuation over future consumption of the same nature.
Time Preference and the Market Rate of Interest
Although all individual time preference is positive, some individuals have higher degrees of positive time preference than others. These individuals are, in proportion to their time preference, more willing to consume in the present and less willing to defer consumption to the future in the form of savings. In a market filled with both more patient individuals of a low time preference and less patient individuals with a high time preference, lending and borrowing of money will occur.
Low time preference people value present use of their money less than a certain higher future quantity of money. High time preference people, in contrast, are willing to forego higher future quantities of money for sake of enjoying a certain lower present quantity of money. The low time preference people will therefore be inclined to lend to the high time preference people. The lender will continue to lend until the marginal utility of the future return he expects from lending out the next unit of money declines enough to be outstripped by the marginal utility of the present use of that unit of money—a utility that must exist given that the lender still has positive time preference. In the meantime, the borrower will continue to borrow until the marginal utility of the next unit of money in the present will decline enough to be outstripped by the marginal utility of having a higher quantity of money in the future. As a result of these transactions, the market rate of time preference will eventually equalize so that no further lending and borrowing will occur—provided that all other things remain equal. The rate of time preference at which this equalization occurs is the pure market rate of interest—arrived at despite the varying time preferences of individuals at the start of the process.
In a real market, of course, other things seldom, if ever, remain equal, and new information and valuations are constantly introduced to shape the behavior of economic actors. Thus, the real market, though it tends toward an equilibrium rate of interest, never quite reaches it. Lending and borrowing, therefore, continue.
Challenges to Time Preference
The universality of positive time preference might be challenged via the following argument. During the present winter, a given individual is offered the choice of having an ice cream cone now or an ice cream come next summer. He prefers and chooses the ice cream next summer. This, however, does not indicate that the individual has a negative time preference. Rather, the ice cream cone during the summer offers a fundamentally different enjoyment from the ice cream cone during the winter. It might, for example, relieve the heat of the summer whereas its counterpart would only augment the winter cold. Since Austrian Economics views economic goods not according to their material properties but according to the values individual actors assign to them, the “ice cream cone in the summer” is a fundamentally different good from “the ice cream cone in the winter.” The concept of time preference only applies to a desire for the present good over the same quantity of the same future good. Since the two types of ice cream are fundamentally different goods, the selection of one over the other cannot refute the universality of positive time preference.
Another objection to the Austrian view of time preference invokes the case of a miser who prefers to starve to death instead of spending money on present consumption. The miser is claimed to thereby prefer future satisfactions to present ones. Economist Walter Block refutes this challenge in “The Negative Interest Rate: A Taxonomic Critique.” However psychologically flawed the suicidal miser might be, his actions are still consistent with universal positive time preference. For the miser, abstaining from the purchase of food is a value; it sates his conscience, which, for him, overrules his stomach. Thus, the miser is consistent in preferring present abstinence from food to future abstinence from food. If he indeed values abstinence from food above all, then eating in the present would indicate a negative time preference. Furthermore, if the miser dies as a result of his choice not to eat, he cannot be said to be future-oriented. His death arising from his choice implies that he will have no future which he favors over the present. One certainly does not favor future consumption by dying. According to Block, the miser’s suicide “is purely an intratemporal choice, irrelevant to time preference” (2).
Suicide is beyond doubt objectively immoral and imprudent, but this consideration is beyond the scope of pure economic analysis and the theory of time preference.
Extending its analysis to both widely prevalent trends—such as market interest rates—and to extreme and highly abnormal instances of human action, Austrian Economics capably demonstrates the universal applicability of positive time preference.
Note: This essay was approved as an accurate representation of Austrian School economic ideas by Dr. Robert P. Murphy of Hillsdale College, one of the leading contemporary scholars of Austrian Economics.
G. Stolyarov II is a science fiction novelist, independent filosofical essayist, poet, amateur mathematician and composer, contributor to organizations such as Le Quebecois Libre, Enter Stage Right, the Autonomist, and The Liberal Institute. Mr. Stolyarov is the Editor-in-Chief of The Rational Argumentator. He can be contacted at firstname.lastname@example.org.
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