Whenever I try to read Austrian theory I get hung up early on because of the claim about time preference that present goods are, without exception, more valuable than future goods. For example on p.484 of Human Action: “No mode of action can be thought of in which satisfaction within a nearer period of the future is not—other things being equal—preferred to that of a later period.” I immediately think of what appear to be obvious counterexamples, although I suspect the issue is that “other things” are not equal for some reason I don’t see.
Example 1: I just finished dinner and am very full. I’m then offered the choice between consuming a big juicy steak either now, or tomorrow evening.
Example 2: (to show the time period can be lengthened in example 1) I’m offered four cooked juicy steaks now, or in a month’s time when I have a dinner party planned.
Example 3: When I retire in twenty years, I plan to buy a boat and sail the world. I can choose between buying this boat now, or waiting for twenty years.
Now, I can see that some practical reasons why I might wish to wait are obvious examples of “other things” not being equal: e.g. storage costs for the boat over the twenty years, or the opportunity to buy something else I would prefer in the interim. But there are other reasons, where it seems that everything else is still equal. I can think of three types: (1) depreciation of the product over the time period when I don’t plan to use it; (2) the expectation that e.g. better boats will be available in twenty years; (3) uncertainty as to whether or not I might change my mind about wanting to sail the world when I retire. (Maybe 1 and 2 are essentially the same thing.) Perhaps the issue is simply that it is my current and future circumstances which are the unequal other things; but if that’s it, then the time preference claim hardly says anything at all (and could never be usefully applied?) as people’s circumstances invariably change with time.
I’d appreciate it if someone can clarify this for me. I’m no economist but the Austrian theory has a definite ring of truth to it. However, with this confusion, I’m never entirely certain of any time-related claim the theory goes on to make.
It refers to homogeneous goods, i.e. goods of equal serviceability, so dinner once you’re full for instance is not a homogeneous good when compared to dinner when you’re starving. When the counterexamples are so obvious and yet have not been noticed by highly intelligent individuals, it’s always good to question whether you’re understanding what they’re saying.
Example 1: I just finished dinner and am very full. I’m then offered the choice between consuming a big juicy steak either now, or tomorrow evening.
a hungry person would rather have the steak sooner than later.
a full person would also prefer to schedule his next steak sooner than later but he would like to at least be hungry.
so i think it gives away that ceteris parabis, the difference for the two is the hunger.
so for the hungry man would you like the steak that you want now, sooner or later? answer:sooner
for the full man, would you want the steak that you want to have a short time later (i.e. 8hour from now when you feel hunger) , in the short time later, or longer than the short time later ? answer the shorter time later. (and not the longer time later)
im not sure i quite understand the way example 3 is posed. perhaps you could rephrase it. It doesnt even seem like a question of time preference. more like lots of unstated preferences . i .e. the fellow doesnt seem to know whether he wants to a) continue present life, enjoy boat sailing later) b) enjoy boat saling now, forgoe present life. i.e. it seems to hang on what the fellow actually would deem to be satisfying. then you can merely judge that given the choice between havign the satisfactory outcome sooner than later, with no other costs involved he would want it sooner.
To make this really other things being equal, your example needs to be, “Would you rather a big juicy steak after eating until you couldn’t eat anymore tonight or after eating until you couldn’t eat anymore tomorrow night?” In order for all other things to be equal, the same circumstances must exist in the present and in the future (i.e. you have to be equally hungry or full on both occasions in order to make any reasonable comparison).
I could go through your other examples and do the same thing, but I think you get the idea… In each instance you have identified a scenario in the future that is substantially different than the present scenario and so all other things are not equal… you’re comparing apples and oranges in all three examples.
Right. So the difference is indeed that in each example it is the circumstances that are different now versus in the future, and so the time preference claim is inapplicable. But then I don’t see how it can be usefully applied or says very much at all, for one’s future circumstances tend to be unknown and different. For example one gets older, and satisfies other wants in the meantime.
It just seems to be rather common to prefer to delay rewards for the future. To try to construct an example with as little difference in circumstance as possible, suppose someone desires an expensive watch, a necklace, and a bracelet as Christmas presents. She has two choices: (1) receive one at each of the next three Christmases, (2) receive all three next Christmas, and nothing at all the following two Christmases.
Many people would prefer choice 1 which, on the face of it, contradicts time preference. Now, one can claim correctly that there is a difference in circumstances (what she already possesses, and for how long) between the two choices after the first Christmas. If that is indeed the issue, it seems that the time preference claim only applies when, in the case of satisfying your want in the future, you satisfy absolutely no other wants in the interim. That is, the claim of time preference says nothing more than simply that no one with an attainable, unsatisfied want would ever choose to wait, doing absolutely nothing, before satisfying it. And I guess that is true, albeit not obviously useful. (Presumably it’s useful, but not obviously so.) Let me know if there’s an example where it says any more than this.
Anyway, thanks for the replies. I didn’t mean to imply I thought I’d found a hole in the Austrian theory, as opposed to sorting out my confusions.
Here again though, I think we’re evading what it is people really want for christmas… which is a surprise or some kind of present “each Christmas” to keep with the Christmas spirit or something like that.
Perhaps you’d understand time preferences better if you focused on something that was truely homogenous and indeed entirely fungible and for which there were very few possible alterior motives for desiring it at a particular time or whatever - i.e. money.
Let me paint a scenario. I offer to lend you some money. For the moment, ignore any risk that I won’t get my money back. Let’s imagine that risk is slim to none and doesn’t enter into my calculations. Also imagine that I don’t know you. I don’t know your circumstances, whether you really need the money or not or anything about you - I have no personal attachment to you. Also presume that inflation/deflation is precisely zero.
Now let’s say you promise to pay me back the money in 3 years time, with absolutely no interest whatsoever… you just give back to me exactly what I am giving you now. Why on earth would I enter into such a deal? All it would achieve is to forfeit control of something for 3 years and thus narrow my options over that period of time. There has to be some interest paid to people to encourage them to lend - otherwise they’re obviously going to prefer to keep control of that money (and keep their options open… maybe I can’t think of anything to spend it on this week but next week I see a nice suit I’d really like).
Or to put the shoe on the other foot (which is really how you understand what’s going on) imainge the borrower who wants to buy a house. Would they rather save up for 60 years until they can pay in cash (just before they die) or would they rather borrow and take control of the house immediately… living in it for their whole life and paying it off gradually as they go? Surely the later would usually be the case and indeed they are so keen to own a house and live in it as some stage well before their death that they will be willing to pay interest on the loan that they take out to purchase the house… Why are they willing to pay this interest? If it is not time preferences that explain their decision to borrow and pay a higher overall cost for the house, what else could it be?
You’re misapplying time preference and then claiming that the concept is invalid.
Time preference is useful for explaining the phenomena of human action.
Like the poster above said. Money in your hand right now, is more valuable than the same amount of money some time in the future. This is where interest comes in. Time preference is also useful for understanding actions like drug taking, sky diving, etc. Those with high time preferences value their current situation greater than they value their future situation. The drug user trades his long term health and future dependency for an hour of entertainment now. Similarly, the sky diver risks his ENTIRE future for a few minutes of adrenaline rush.
I think the concept of time preference is needed in order to explain why people differentiate purely on the basis of time. Or to put it another way, time preference is the time factor that enters into our decision making process when considering choices.
According to Austrian theory, man cannot be indifferent to the outcomes of two options and still make a choice. There must be a factor that differentiates the choices (in terms of preference) if a choice is made. Mises stated that if someone had a time preference of zero (i.e. time was not a factor in someone’s decision making), one would be indifferent as to whether they consumed something now or later and therefore one would not consume attall. One cannot choose to consume something now without expressing a preference of now verses later.
Thanks again. Applied to money, time preference seems to make perfect sense, and also shows why it’s a useful idea.
But one could argue that even in your two examples, your future circumstances will be very different due to the passage of time, and so it shouldn’t apply there either. It seems a little unfair and circular to identify change of circumstance as a cause of misapplication only in those examples where the time preference appears to be for the future. However, I think one can get around my nitpicking here simply by allowing those changes in circumstance that appear to have no effect on the time choice in question. i.e. so that the “other things equal” part of the axiom is really shorthand for “other things equal, except of course for those things for which one expects it will make no difference to the future desirability of the good”.
The books I was reading were using all sorts of examples (ham sandwiches, ice,… ) in introducing time preference, so I think it’s okay to ask about examples besides just money.
A person with negative time preference would always be willing to forfeit what he possessed today, in order to receive the same item tomorrow. And tomorrow, he would always be willing to forfeit what he possesses, in order to receive the same item the following day. Surely, he would starve to death in very short order.
So, it seems axiomatic or nearly so, that we can assume all individuals have some positive time preference, however each individuals preference for present satisfaction in favor of future satisfaction varies to some extent. This is the basis of savings, of investment, etc.: one postpones consumption in the present in order that he may enjoy a greater satisfaction in the future.
Now, of course circumstances change in the future, and the economizing individual must always make some estimation of his future circumstances when making decisions regarding intertemporal tradeoffs. Sometimes, he’s right (he got the big raise after all, and has no trouble servicing his student loan debts) and sometimes he’s wrong (he lost his job, and has to default on his car payment).
As you noted, it works best with durable goods and especially money, and is less concrete especially with perishable items like apples or ham sandwiches. Unless you can find a market willing to absorb your supply of apples, you’d rather not have 1,000 apples today. Instead, you’d prefer 1 or 2 apples a day for the next few hundred days. But again, this makes an assumption with regards to future circumstances, which are always uncertain. It’s entirely possible that after you pass up the offer for 1,000 apples, someone might say to you, “I’d really like to make 100 apple pies for my bakery, know where I can get 1,000 apples?”