I fell into this conundrum when thinking about the Demand aspect of the loanable funds market. I know that when people lower their Time Preference there generally are more loanable funds which means a lower interest rate. The opposite means a higher interest rate. So when a businessman goes to a bank (or some other institution he can acquire real savings) and takes out a loan, is he lowering or raising his Time preference? One half of me says lowered because they are investing the present money for future goods. The other half of me however says raised because he is not sacrificing anything and demanding more “present goods” (money) right now.
I would think his time preference would be higher, since he demands liquidity now for capital, in order to satisfy the future desires of the potential consumers. The people’s time preferences fell, which allows the producers time preferences to rise. I’m not entirely sure though.
Hmmm it seems like there should be a definitive answer out there. maybe its both, because he borrows the money but invests it in future goods so he raises his T.P by borrowing but lowers it by investing. Seems perplexing.
He is investing the money he borrowed, what is he expecting?
If he borrowed money for a large piece of land for development and lease, then he lowered his time preference, as he is taking on payments now for a return in the future…
If he borrowed money to purchase an existing business that records profits above his loan payment, then he raised his time preference…
Time preference is basically when one seeks to enjoy the results of his actions, for immediate benefit or future gains, of course immediate benefit can equate to future gains in the LR, but future gains does not always work out to immediate benefit…
The loan is irrelevant to time preference, it is the destiny of that loan that is relevant…
I still seem confused by your two answers and how one lowers T.P while the other raises it.
If true for some borrowed loans to decrease T.P, it still seems problematic because then that means some normal assumptions about Time Preferences could technically be proven false. Lets say that society lowers their time preference only through increasing their demand for loans for this particular investment you spoke of(not by increasing the supply of loanable funds). Like any other good, an increase in demand means an increase in price, or the interest rate. So in the end a decrease in Time Preference means an increase in the interest rate? The same thing could be said of the opposite, decrease in investment and businessmen consume more means a decrease in the interest rate. Something doesn’t add up.
Patch, when I’m taking a loan I’m neither raising nor lowering my time preference. All I’m doing is demonstrating my preference for present goods in terms of future goods is higher than the market rate of interest.
So how is preference for present goods in terms of future goods different than the “degree to which they prefer present to future satisfactions” (an agreeable definition of T.P)?
Each individual, on the basis of his time-preference schedule,
decides between the amount of his money income to be
devoted to saving and the amount to be devoted to consumption.
The aggregate time-market schedules (determined by time preferences)
determine the aggregate social proportions between (gross)
savings and consumption. It is clear that the higher the time-preference
schedules are, the greater will be the proportion of consumption
to savings, while lower time-preference schedules will
lower this proportion. At the same time, as we have seen, higher time-preference schedules in the economy lead to higher rates of interest, and lower schedules lead to lower rates of interest.
This is taken from Man, Economy, and State p400. I’m a little confused about your reply and the “actions thereafter”, so this is what I mean by the typical Austrian response of lower T.P, lower I.R; higher T.P, higher I.R.
Just using a typical supply and demand curve that Rothbard uses throughout his works.
What “society is doing with these loans” is the particular investment you spoke of which I needed clarification on. I don’t see how the one investment (listed above) constitutes a lowered time preference when someone borrows money for it while the other( the one you listed) raises Time Preference.
I think this is where your misunderstanding is, I am in the middle of MES so I am unfamiliar with the surrounding text, if it is relevant…
You are ignoring Praxeology
What Rothbard is saying is that what people do with their income (not loans) determines time preference, and if they have a high time preference there is less available to loan, and if they have a low time preference there is more money to loan, and simple supply/demand axiom states if there is more money to loan the interest rates are lower to attract borrowers and if there is less interest rates rise, as would happen with any scarce resource (Capital is a resource)
The loans are irrelevant to the time preference of society, the TP is a cause, not an effect…
You are not applying the thought of Methodological Individualism, Human Action by Mises, a society comprises of individual actors, the aggregate is not everyone does X as a mindless group, it is individuals save or consume, the majority is what determines the aggregate time preference.
The aggregate lowering of time preference is in savings, not taking loans, the aggregate raising of time preference is in consumption, this is a cause, among many factors, of changing interest rates, the loan the businessman is taking is not effecting aggregate time preference, what he does with said loan does.
Time preference is really related to when the person expects gains from money…
Yes, but if the loan is for the sake of personal consumption as in consumers loans, e.g. buyin a car, this should indicate a higher time preference on the part of the individual. Since you are currently reading MES, would you agree?
Yes, but if the loan is destined to purchase land between two towns with good authority that in a year’s time there will be a road between them, it indicates a lower time preference as he is banking on the future increase in the property value…
In relation to the question posted, it is a businessman, so I want to know if he is purchasing an established business that will profit over the loan payment or if he is purchasing an investment that will pay off in the long run, this will determine more his time preference (at least I think)…
I am quite willing to admit I am wrong in my thoughts, but I would like an understanding as to why if someone comes around to refute them…
Until then, IMO, it is the destiny of the loan that determines the time preference of the businessman, not taking the loan in and of itself…
The interest of the loan is determined by the factors involved (though I may miss some) these are primary
Time Preference of the lenders depositors (Bank’s Customers), or supply of loanable funds
Demand for loans at the time
Ability to pay, record of good faith on repayment of loans on the part of the borrower
If the assets to be purchased by the loan can replace the loan if it is defaulted
So the time preference of the borrower is not a factor at all in the interest of the loan…
His time preference is not effected by taking the loan, it is the ultimate destination of the loan in his hands that determines his time preference, the people (the bank customers I will assume you are talking about) have to have a low time preference for the money to be in the lender’s hands for the businessman to take the loan in the first place. In taking the loan the businessman does not effect the aggregate time preference of the community at large, only what he does with such money has an effect, he could be looking to have a cash reserve his business does not have, in which case he takes the loan and saves it, lowering his time preference in a community of low time preference, he is adding a factor to lower loan interest rates. If, however he were looking to spend this money on equipment to expand his business, he would be raising his time preference, he is incurring the cost out of profit in advance for the material gain now.
If we take a businessman who purchases a plot of land that he will develop in the future as compared to a man that purchases an existing business and a man that purchases capital goods we can look at the difference clearly..
A purchases land between Hereville and Theretown with his loan, with the knowledge that the state government has a road project about to be approved to place a commuter road between the two towns, right past his newly aquired property. He assumes (knows) the property value will rise once the road is completed, and makes the investment knowing that he will gain far more in the future, either by developing, leasing or reselling the property after the road is completed. He is lowering his time preference…
B purchases a gas station on the road leaving Hereville to Free City with his loan, knowing that the gas station profits well over the loan payment, he has secured a business with a developed revenue stream, this business pays off, what he then does with the money determines his time preference…
C purchases forklifts for his widget factory with his loan, to replace the faulty equipment, he gains a little from the purchase over his current production, but he is not concerned about equipment failure, he has raised his time preference…
What he does with the loan determines the time preference of the individual, and other than businesses encouragement of spending on their goods and services, they do little to effect the time preference of the aggregate society…
This does happen, sometimes businesses do not have reserve capital, lets take the businessman who bought the forklifts…
If he paid out of his reserve account for the forklifts and thought, well now I have no money just in case I need extra raw materials or a potential equipment failure, he may, having the option, take a loan out to save it, this way he has the bulk cash in an account and uses profit to pay off the loan, if there is no such issue in the term of the loan, no harm no foul, if there is he is covered, it is self insurance…
What chapter are you on in MES? I must admit that I am not done with the book as well. When I origingally posted the question, I was about halfway through “Chapter 6 Production: The Rate of Interest and Its Determination”. Upon writing this I have justed finished the chapter with no real solution to my question.
We can all agree on Time Preference influencing the proportion of savings/investment to consumption. If someone’s Time Preference is higher, he consumes more. If it is lower, he saves/invests more. The question I’m trying to ask is that IF Rothbard considers a businessman taking out a loan for a productive investment as saving, and in order to save you must have a low Time Preference, then doesn’t that mean in certain scenarios (such as this) that Lower Time Preferences, and “more savings”, mean a rise in the interest rate? More people save by taking out loans, greater demand, higher interest rate price.
Throughout the chapter Rothbard talks about Time Preferences “aggregating” to form the market rate of interest. Remember, he considers both sides (Demand and Supply) to be determined Time Preferences. In my opinion either I am missing something or something does not add up.