Ludwig von Mises Institute

Time preference

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Time preference is the assumption that, all else being equal, people prefer a given end to be achieved sooner rather than later. In the Misesian school it is derived from the assumption about human action. If people did not prefer to attain their ends sooner rather than later they would never act. The further in the future the attainment of the end appears to be, the less preferable it is. The less waiting time, the more preferable is the end.

It may be called the preference for present satisfaction over future satisfaction or present good over future good, provided the same satisfaction (or good) is compared over periods of time.[1]

Preference for future goods[edit]

It is sometimes objected that goods in the future may be preferred to the same good in the present. For example, in winter, a man will care little for ice, but would prefer it in the summer. But a good is not an item with certain material properties; this is merely a convenient description for goods under most circumstances. However, a good is identified by its function and extent of the satisfaction it provides. As the good "ice-in-the-summer" provides different (and greater) satisfactions than "ice-in-the-winter", they are different goods. In this case, different goods are being compared, even though ice has the same physical composition whether in winter or summer. [1]

Savings and Time preference[edit]

To enjoy greater consumption, man must extend his productivity first. Since acquiring the increased productivity comes with a cost — namely, time spent away from using the old method of production and consumption — there must be some means of paying that cost. This is the role of savings. Some people have refrained from consumption in the past so that others can be sustained and create the new structure.

Savings remain key to this process of capital construction, and it is the time preference, that manifests itself in savings. Time preference is the extent to which people value current consumption over future consumption. If people enjoy current consumption so much, that the promise of an increased future consumption cannot bring them to save (and sacrifice the current level of consumption), the production will not be improved.

The thrust of the Austrian Business Cycle Theory is that credit inflation distorts this process, by making it appear that more means exist for current production than are actually sustainable. Since this is in fact an illusion, the endeavors of entrepreneurs to create a structure of production not reflecting actual consumer time preferences (as manifested in available savings for the purchase of producer goods) must end in failure.[2]

Time Preference and the Process of Civilization[edit]

Hans-Hermann Hoppe states in his 2001 Democracy: The God That Failed that a time preference low enough to allow for production of capital goods initiates the “process of civilization” - a positive feedback loop where time preferences perpetually decrease due to the accumulation of capital, the increase of the relative value of future goods, the further division of labor, and lengthening of life expectancies.[3] This process will continue indefinitely, as long as private property is respected.[4] State violations of property rights are continuous and perpetual, therefore the state acts as a de-civilizing force upon society.[5]

References[edit]

  1. 1.0 1.1 Murray N. Rothbard. "4. Further Implications: Time", Chapter 1-Fundamentals of Human Action, Man, Economy and State, online edition, referenced 2010-01-10
  2. Dan Mahoney. "Austrian Business Cycle Theory: A Brief Explanation", Mises Daily, May 07 2001, referenced 2010-01-10.
  3. Hoppe, Hans-Hermann. Democracy: The God that Failed: The Economics and Politics of Monarchy, Democracy, and Natural Order (Transaction Publishers, 2001), 6-7.
  4. Hoppe, Democracy: The God that Failed, 10.
  5. Hoppe, Democracy: The God that Failed, 13.

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