Time preference
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Time preference is the economist's assumption that a consumer will place a premium on enjoyment nearer in time over more remote enjoyment. A high time preference means a person wants to spend their money now and not save it, whereas a low time preference means a person might want to save their money as well.
The time preference that an individual exhibits at any given moment is determined by both their personal values and external circumstances. Thus, if one "prefers" to save his money but cannot do so in the present, he is still considered to have a high time preference. One of the factors that may determine an individual's time preference is how long that individual has lived. An older individual will generally have a lower time preference (relative to what he had earlier in life) due to a higher income and to the fact that he has had more time to acquire durable commodities (such as a college education or a house), though this trend may reverse upon retirement.
The time preference theory of interest is an attempt to explain interest through the demand for accelerated satisfaction. This is particularly important in microeconomics.
In the neoclassical theory of interest due to Irving Fisher, the interest rate determines the relative price of present and future consumption. Time preference, in conjunction with relative levels of present and future consumption, determines the marginal rate of substitution between present and future consumption. These two rates must necessarily be equal, and this equilibrium is brought about by the relative prices of present and future consumption.
[edit] Austrian School views
The Austrian School sees time as the root of uncertainty within economics.
In his book Capital and Interest, the Austrian economist Eugen von Böhm-Bawerk built upon the time-preference ideas of Carl Menger, insisting that there is always a difference in value between present goods and future goods of equal quality, quantity, and form. Furthermore, the value of future goods diminishes as the length of time necessary for their completion increases.
Böhm-Bawerk cited three reasons for this difference in value. First of all, in a growing economy, the supply of goods will always be larger in the future than it is in the present. Secondly, people have a tendency to underestimate their future needs due to carelessness and shortsightedness. Finally entrepreneurs would rather initiate production with goods presently available, instead of waiting for future goods and delaying production.
Hans-Hermann Hoppe elaborates on time-preference as a gauge of the degree of civilization of a given society in his book Democracy: The God That Failed. Laws in a society in violation of property rights increase time-preference, whereas a tradition of respect for property rights decreases time-preference.
[edit] See also
[edit] External links
- Hoppe, Hans-Hermann, Democracy: The God That Failed (Transaction, 2001).
- Hoppe, Hans-Hermann, Marxist and Austrian Class Analysis p. 81ff, The Journal of Libertarian Studies, Vol, IX, No. 2 (Høst 1990).
