mark took a job offer to paint a house his employer offered him one thousand dollars
for his work when mark painted the house he went to his employer and asked for the money
of course mark he replied i'll give you the money in two years i never said i'd give it to
you immediately we can expect that mark would not be very happy with the employer's reply
even if he was absolutely sure that he would get the money in two years and that the money would be
worth the same mark would rather have it now not later people are not indifferent as to when their
needs are satisfied they would rather satisfy them sooner than later as ludwig von mises writes there
is no man for whom the difference between sooner and later does not count the phenomenon that
people prefer to achieve the same satisfaction sooner rather than later is called time preference
time preference is always positive people always want to achieve the same satisfaction
sooner rather than later what would happen if the time preference was negative one would postpone
his consumption indefinitely this situation is impossible because people need to consume to live
with negative time preference people would only accumulate goods and never consume them this shows
us that time preference must be positive the fact that a human being is limited by time preference
influences his production choices let's use the example presented by hans harman hapa
let's imagine robinson crusoe on the desert island he has to get food so he decides to fish
if the only thing he would have to consider was the amount of fish he could get no matter how
much time it would take he would start building a big fishing boat right away it would take years
but surely the fishing trawler would be a much more effective fishing tool than his bare hands
fishing net or a fishing spear it is quite obvious however that robinson wouldn't survive the boat
production time as he would starve before it would be finished the fact that he is limited
by the time preference will cause him to use hands or primitive tools because although less
effective than a fishing boat it will enable him to satisfy his needs sooner time preference is
always positive but it can be high or low to better understand high and low time preference
let's imagine a society with infinite time preference in this society all consumer goods
would be consumed immediately there wouldn't be any saving whatsoever and for that reason
there wouldn't be any investments in better more effective ways of production
this kind of society would function on a primitive level we can also imagine modern
society where there are plenty of capital goods in which people's time preference would suddenly
become infinitely high this kind of society wouldn't exist on a primitive level at first
because it would use previously accumulated capital but in time with immediate consumption
of every produced good without any savings which would allow even to maintain the capital
such as society would regress in development and eventually reach existence on a primitive level
so if a human being always prefers to get the same satisfaction sooner than later what can
encourage them to delay the consumption in time a perspective of higher satisfaction in the future
a man with low time preference will save and invest to have more profits in the future as
mises wrote the cine qua none of any lengthening of the process of production adopted is saving i.e
an excess of current production over current consumption saving is the first step on the
way toward improvement of material well-being and toward every further progress on the way
what is this lengthening of the process of production mises is writing about it's simply a
production of the capital goods which will allow to produce more consumer goods in the future
let's use an example from paul samuelson and william nordhaus
investment in capital goods involves indirect or roundabout production
instead of catching fish with our hands we find it ultimately more worthwhile to first build boats
and make nets and then to use the boats and nets to catch many more fish than we could by hand put
differently investment in capital goods involves foregoing present consumption to increase future
consumption consuming less today frees labor for making nets to catch many more fish tomorrow
in the most general sense capital is productive because by foregoing consumption today
we get more consumption in the future to see this imagine two islands that are exactly alike each
has the same amount of labor and natural resources island a uses these primary factors directly to
produce consumption goods like food and clothing it uses no produced capital goods at all
by contrast thrifty island b sacrifices current consumption and uses its resources and labor to
produce capital goods such as plows shovels and looms after this temporary sacrifice of current
consumption bee ends up with a large stock of capital goods because of its thrift island b using
roundabout capital intensive methods of production will enjoy more future consumption than island a
by sacrificing current consumption and building capital goods today
society can increase their consumption in the future the same process although more complex
is happening when a modern company invests parts of its profits in new capital goods
or the machines its savings allow them to pay salary to the employers who construct the machine
before this machine would begin to bring any profits without savings either the savings of
the company itself or the people from which the company is lended money from it wouldn't
be possible in fact there are two conditions necessary for the investment to be possible
the first condition is met when people know that the investment would bring them higher
satisfaction in the future with the same amount of work let's get back to the island example
if the islanders from island b wouldn't know or wouldn't believe that the tools would allow them
to consume more in the future they would still do everything with their own hands
the second condition is met when people gather by saving enough consumer goods
to allow them to satisfy all the primary needs during the time of production of capital goods
let's get back to our robinson crusoe example even if robinson has materials and knowledge
to build a fishing trawler and he knows that this boat would increase his productivity he
wouldn't build one because he didn't gather enough food to stay alive during the production process
but when both conditions are met capital can be created and accumulated we can say that
time preference is one of the biggest factors that allows the development of civilization
all the investments that elevated our living standards to the current high level were possible
due to sufficiently low time preference of our ancestors mises wrote we favorite children of the
age of electricity still derive advantage from the original saving of the primitive fishermen
who in producing the first nets and canoes devoted a part of their working time to provision for
a remoter future if the sons of these legendary fishermen had worn out these intermediary products
nets and canoes without replacing them by new ones they would have consumed
capital and the process of saving in capital accumulation would have had to start afresh
we are better off than earlier generations because we are equipped with the capital goods
they have accumulated for us of course not every member of society has the same time preference
there are people with higher and lower time preference the level of individual
time preference depends on a few factors also external factors and it can change in time
undoubtedly however a large role is played by individual psychological factors as hans hermann
hopper writes one man may not care about anything but the present and the most immediate future like
a child he may only be interested in instant or minimally delayed gratification in accordance with
his high time preference he may want to be a vega bond a drifter a drunkard a junkie a day dreamer
or simply a happy-go-lucky kind of guy who likes to work as little as possible in order to enjoy
each and every day to the fullest another man may worry about his and his offspring's futures
constantly and by means of savings may want to build up a steadily growing stock of capital
and durable consumer goods in order to provide for an increasingly larger supply of future goods and
an even longer period of provision a third person may feel a degree of time preference somewhere in
between these extremes or he may feel different degrees at different times and therefore choose
still another lifestyle career nevertheless people with low time preference contribute not only to
further decrease their own time preference but also a decrease of non-savers time preference rate
their own time preference rate is decreased because savings and investments give them
higher income in the future as hapa explains with a higher income the marginal utility of
present money falls relative to future money the savings proportion rises and future monetary
income will be even higher to put this plainly the more money you have the easier it is to save
people with low time preference also decrease other people's time preference
by investing they created higher demand for work this leads to with other things equal higher wages
and higher wages means more goods for those who didn't save before in this way a person with low
time preference who saves and invests becomes the initiator of a process of civilization
who lifts himself and others from barbarism to civilization