So you proved that all people must prefer one good A sooner to one good A later.
But what does that mean? What it means is that (a) some people prefer one good A sooner to two goods A later but three or more goods A later to one good A sooner, (b) some people prefer one good A sooner to two or three goods A later but four or more goods A later to one or two goods A sooner, (c) and so on.
So how are those two propositions connected? How do you derive one from the other? How are they related?
No, the way how the good relates to you, and your surroundings, also must be the same at both of the times. The point of the example about “ice in the winter” and “ice in the summer” is that the good itself is the same at both of the times, but the way how the good relates to you, and your surroundings, is different. If I get ice in the winter, it is ice. And, if I get ice in the summer, it is ice. Neither is a puddle.
In addition to Hulsmann’s work, you might also be interested in Bob Murphy’s development of a non-time-preference theory of interst.
I haven’t studied Hulsmann’s or Bob’s theory yet, but the way time preference makes sense to me is as the inverse of a “disutility of waiting”. (Note that I don’t mean “psychological pain of waiting”, just as labor theory involves the disutility of labor, but not the psychological pain of labor.) The disutility of waiting is a factor that tends to depress any good’s position in an actor’s value scale. To analyze the effect of time preference in a decision, one need not be comparing two identical goods. But one must compare two items that ARE goods. So with the ice in the winter vs. ice in the summer thought experiment, you might not even be able to think about the situation in terms of time preference, if ice in the winter is not desired at all. But let’s assume that it is (I’m sure many people use ice in their drinks even in the winter). Even though, if forced to choose one or the other, a person may ultimately choose ice in the future summer over ice in the present winter, the disutility of waiting is still a factor in the decision; it’s just not a factor that wins out in the end. The fact that choosing the ice in the future summer would entail waiting IS a factor that hampers the attractiveness of that choice. But that factor is simply ultimately outweighed by other factors.
Time preference refers to a factor that effects our decision making, it is ALWAYS there. However that does not mean we can predict someone will choose to have a good now vs later every time. Because sometimes we derive different amounts of satisfaction from the same good or sometimes it’s a different good.
Pretty much welcome to Austrian economics: we can identify forces in play but we cannot make any concrete predictions because none of these forces exist in a vacuum.
the ‘pure’ part of the name, is from the fact that it will not disappear through arbitrage, i.e. it is not entrepeneurial. it is the ‘originary interest’ which would exist even in an ERE (at least in real terms, since it can;t in nominal terms, since there can be no money in an ERE… ERE is so weird)
alternatively it may refer to frank fetters critique of BohmBawerk 3 explanations for interest, in which he discarded the psychological explanations, thus leaving a ‘pure’ (praxeological) theory.
I don’t know for sure which is the best explanation. anyone else got an opinion?
The goal of science is to explain and predict phenomena.
I like to think of science as the search for regularity in phenomena.
There is quantitative regularity in nature so we can use quantitative observations to make quantitative predictions.
Human decision making is far removed from the quantitative regularity of nature.
So we instead search for qualitative regularity in the rationale by which humans decide.
No particular values, ideas, morals etc. can be shown to be universal in the human decision making rationale.
So we are left searching for qualitative properties that must exist by virtue of humans acting.
Humans exist in time therefore it is inconceivable for someone to make decisions completely independent of temporal considerations.
We can best describe this qualitative property of the rationale of human decision making as time preference and I can think of no finer example of the praxeological process of deducing these properties from the fact that humans act.
Have you read it, Ryan? You have hit on something very similar to Hulsmann’s critique of Mises. I find his case for originary interest emerging from the means-ends value spread that exists in all human labor, very persuasive.
I had a feeling there was something not quite right about this when I typed it…
Let’s make sure we’re not attacking a straw man. It should be noted that Mises and Rothbard, at least in the sections of their treatises where they introduce the theory, do not say that “people prefer present goods to future ones.”
Mises says, “Satisfaction of a want in the nearer future is, other things being equal, preferred to that in the farther distant future.”
And Rothbard says, “Given the specific satisfaction, the sooner it arrives, the better.”
This is an important distinction, because while a block of ice may be considered the same good whether it is used in the winter or in the summer, it can not be said to provide the same satisfaction in winter conditions and in summer conditions. To say such a thing would be akin to saying that on the same hot day, the satisfaction provided by a paper fan is the same as the satisfaction provided by an electric fan.
Hulsmann’s piece was excellent, especially the review/intro part. Do you have a link (pdf?) for Bob Murphy’s angle?
A common thread in all theories of interest seems to be the sooner/later, cause/effect, means/end paradigms, which are merely different aspects of one and same thing: before/after location on the time axis. My (layman) intuition on the source of interest comes from experience and also involves time but from an uncertainty, opportunity angle. Having control over $100 now is always preferable to having such control a year from now because my freedom to use (control, allocate, invest, etc.) the $100 in combination with the opportunities that may come my way over that year is always worth a non-zero amount to me. There’s a saying that: “Success is when opportunity meets preparation.” My control over the $100 (vs lacking it) is an essential part of the “preparation”. If the opportunity came, and I didn’t have the $100, the opportunity is lost.
In this light, to me, interest is inextricably related to opportunity cost. When you ask me to lend you $100 for a year, I will price the loan (interest) to match (or exceed) my perception of potential opportunity lost (in addition to pricing in your credit risk, of course). The more volatile the environment (markets), the larger the number and intensity of potential opportunities over the year (distressed sellers of goods/assets, IBM shares drop 50%, etc.) and/or the higher the probability I’ll need them to cover my own potential losses/risks, hence the costlier the loan. The longer the period I’m denied my control over the $100, the larger the number of opportunities potentially missed (or potential losses/risks), the larger the uncertainty span of all possible outcomes that may affect me (positively or negatively) hence the larger amount of total interest I would demand in proportion to the length of the loan. These uncertainty forces are considered when pricing bonds and are reflected in the shapes of the bond yield curves (typically, higher annual yields for longer maturities, all other things being equal.)
I would conceive that “choosing between ice now and ice later” is an act. “Choosing” (in the sense of trying to make a decision between two alternatives) is an act.
By now “choosing” between: ice now/ice later, I make this choice now rather than later.
Obviously, it is physically impossible to make this choice later (5pm) rather than now (2pm), as you can’t go back from ‘later’ (5pm) to choose ‘ice now’ (‘ice at 2pm’). But you may be saying the same thing as I was from my ‘opportunity cost’ angle above. As time goes by, it is always better to have the option (choice) to control, consume, employ, put to work, or utilize a good, service, or capital now rather than later. The opportunities to better one’s situation (i.e. to act) between now and later are forever lost to someone who has that option from point later and beyond, and he is at an axiomatic disadvantage to someone who has that option now. Hence, the time preference as a fundamental (axiomatic) source of interest.
something is a good because an individual expects it will allow them to indulge in an act of consumption. higher order goods do this more indirectly than lower order goods, but all goods are such because they ‘point to’ an expectation of a future performance of consumption.
for such consumption to not be indefinitely delayed onwards into infinite time (under ceteris parabis assumptions) there must be a positive rate of time preference. (an ‘item’ whose consumption was infinitely delayed, i.e. consumption in a sooner time was never preferred over a later time (under ceteris parabis conditions) would not be an item who is evaluated as being worth something because of an expectation of a future performance of consumption, and so would cease to be regarded as a good (by the earlier definition))
It would be most gratifying to have a penetrating analysis of apparent ‘time preference paradoxes’, that would illuminate and solidify the understanding (of at least laymen in this tradition). Can anyone offer candidates to play this role? I have a memory that walter block did some kind of ‘taxonomy’ but I haven’t yet searched my files for it…
I’m trying to indicate to I.Ryan a way to think about time preference that avoids the reference to “everything else being constant.”
We can construct a formal model of action in which every action I take is in the present. This seems accurate to me, since I have never experienced myself to act in the future; every action I take seems to be taken in the present. (my, subjective present)
Any good I have then, is a present good. I cannot have a future good, by definition.
The notion that people always “prefer” present goods to future goods, can be seen as deriving from our theory in which present goods are the only kind that can be goods. Future goods are not “goods” of the same categorical nature as present goods, rather they are that which is sought in contrast to the goods which are now present. Future goods are a kind of null set, not a different kind of present goods.
In this conception, and precisely speaking, there are not goods over here (“present” ones) versus goods over there (“future” ones). There are not two kinds of goods.
There are rather goods now present to me (“present goods”), versus that which I seek, which is not a good, but a want or desire for something different than what is present. The category of future good is here fundamentally and epistemologically indeterminate. On principle, no content can enter this category. Therefore (in the theory of action) no goods can be future goods, and an actor always “prefers” (always only has) only present goods.
(note: “goods” which are present to no consciousness or the object of no individual’s action are not the subject matter of the theory of action. Planets and cities that exist objectively, independent of an actor’s awareness or actions, are the subject matter of natural science, at least in a consistent rendering of Misesian praxeology.)
“A bird in your hand is better than two in the bush?” The spatio-temporal (you need time to get to them) distance between you and the two birds in the bush is placing them safely into the future good category, according to your definition above. Looks like folklore has nailed the theory of interest way ahead of us.
“A bird in thought is a present good, since thinking is an action.” : - )
“Man’s inability to accomplish this makes thinking itself an action, proceeding step by step from the less satisfactory state of insufficient cognition to the more satisfactory state of better insight.” (HA, 3rd rev. p.99)
Looks like the theory of action and all its implications is still very much a work in progress. : - )