The pure theory of time preference holds that, if everything else is constant, people prefer present goods to future ones. But, if a teacher were telling that to a student hearing it for the first time, the student might start thinking of some of the obvious counter-examples, like the classic one, that, if someone were able to choose between just two things, ice right now, in the winter, and ice later, in the summer, he might choose the latter over the former, the future good over the present one. But, if he were to then voice that counter-example, the teacher probably would quickly respond that “ice in the winter” and “ice in the summer” are two different goods, which of course violates the important stipulation “if everything else is constant”.
I understand that defense, and I think that I understand the at least the gist of the proof for the pure theory of time preference, but my problem is that it leaves me wondering what the point of it is. Isn’t the stipulation “if everything else is constant” a bit too strong? When would you ever encounter a situation where a present good and a future one aren’t different goods because of the different situations? Basically every case that I can think of, if I were choosing between something now and that the same thing later, things probably would be different, and that probably would affect how much I want it or not. So what is the point of the pure theory of time preference? What use is it? When, if ever, does the stipulation “if everything else is constant” hold up?
If I wrote it more than a few weeks ago, I probably hate it by now.
Isn't PTTP one of the subsidiary axioms?
We mentally hold variables constant because controlled laboratory experiments aren't valid for economics. There's all sorts of "imaginary constructions" used to identify causal laws. This is just a foundational technique of AE to arrive at ceteris paribus laws.
Democracy means the opportunity to be everyone's slave.—Karl Kraus.
E. R. Olovetto: Isn't PTTP one of the subsidiary axioms?
I have no idea.
E. R. Olovetto: We mentally hold variables constant because controlled laboratory experiments aren't valid for economics. There's all sorts of "imaginary constructions" used to identify causal laws. This is just a foundational technique of AE to arrive at ceteris paribus laws.
Are you saying that the pure theory of time preference is an imaginary construction?
Time-preference is implied by the action axiom, since if people did not prefer present goods to future goods, they would not act. Think of Crusoe deciding whether to catch fish with his bare hands, to build a net, or to construct a trawler. Since greater productivity comes from the longer production processes, the fact that he acts implies there must be some reason why he prefers less goods sooner, rather than more goods later.
Every individual has a personal time-preference rate; the extent to which he prefers consumption now, to consumption in the future. The combined time-preferences of the individuals in society is the ultimate determinant of interest rates.
Government Explained 2: The Special Piece of Paper
Law without Government
I. Ryan:When, if ever, does the stipulation "if everything else is constant" hold up?
How about when receiving a gift? That's pretty much a straight gain with the only variable being time.
As to its value, I think it is useful because it is true. It's how we work and understanding it is a valuable stepping stone to understanding things like savings, investment and interest. The fact that a pure "everything is equal" situation of time preference doesn't come up often in the real world doesn't diminish that. It's like learning how to solve a certain set of math problems to give greater understanding of a more complicated equation that has better practical application.
I think it is, along with "always preferring more to less" and some other ones. I thought I just saved some bookmark on this but can't find it. Mises said everything can be deduced from the fact that we act. Rothbard said that a few subsidiary axioms were needed and I tend to side with Rothbard on this.
Where did you get this "pure theory" terminology from? It sounds like Menger. I really don't spend much time on economics so I am not sure I can help.
PTTP sounds like a subsidiary axiom. Otherwise, it would be a law deduced from another axiom.
I assume you are familiar with Mises' imaginary constructions like the "evenly rotating economy" (I didn't read that article).
This should help a lot on methodology too.
edit:
trulib:Time-preference is implied by the action axiom, since if people did not prefer present goods to future goods, they would not act.
That makes sense too. I guess we could then say that ice on the Arctic Circle wouldn't be sought after, therefore it would not be called a "good".
Holding "everything else constant" is the only way to isolate the effects of economic phenomena.
Mainstream economics has not realized this, and as a result relies far too much on empirical historical economic data which cannot be interpreted without the aid of a priori reasoning (and even then, only to a limited extent) because they represent an inseparable mix of changing and indefinite conditions.
E. R. Olovetto: I think it is, along with "always preferring more to less" and some other ones.
I think it is, along with "always preferring more to less" and some other ones.
I never understood the thing "always preferring more to less". An obvious counter-example: I prefer less sickness to more.
E. R. Olovetto: Mises said everything can be deduced from the fact that we act. Rothbard said that a few subsidiary axioms were needed and I tend to side with Rothbard on this.
Mises said everything can be deduced from the fact that we act. Rothbard said that a few subsidiary axioms were needed and I tend to side with Rothbard on this.
I don't think that Mises said that. He admitted a lot of "subsidiary axioms" into his work. But he didn't use that term. Here is an example:
From Human Action by Ludwig von Mises: Experience teaches man that cooperative action is more efficient and productive than isolated action of self-sufficient individuals. The natural conditions determining man’s life and effort are such that the division of labor increases output per unit of labor expended.
Experience teaches man that cooperative action is more efficient and productive than isolated action of self-sufficient individuals. The natural conditions determining man’s life and effort are such that the division of labor increases output per unit of labor expended.
sickness is not usually considered a good.
Where there is no property there is no justice; a proposition as certain as any demonstration in Euclid
Fools! not to see that what they madly desire would be a calamity to them as no hands but their own could bring
E. R. Olovetto: Where did you get this "pure theory" terminology from?
Where did you get this "pure theory" terminology from?
I don't know who coined it. But it is a pretty common term at least for the LvMI guys.
E. R. Olovetto: PTTP sounds like a subsidiary axiom.
PTTP sounds like a subsidiary axiom.
The reason why they call it the "pure theory" of time preference actually is precisely because they don't think that it is a "subsidiary axiom". They think that it is "a categorial requisite of human action", that it comes straight from the "action axiom".
I don't like the term "subsidiary axioms" very much. There is only axiom: humans act.
But in order to get anywhere with the study of praxeology, we have to think about humans acting within an environment. So we posit the following conditions: 1) humans exist, 2) there is diversity among individuals and the environment, 3) humans prefer leisure to labor, etc. Then we posit further conditions to get further in our study: 4) humans have recognised the benefits of trade and the division of labor, 5) humans have established a general medium of exchange, etc.
We can do praxeology by reversing these assumptions, but it wouldn't be terribly interesting. These conditions direct our study to the actual world we live in. Praxeology becomes economics (or "catallactics") when we posit that humans trade.
trulib: Time-preference is implied by the action axiom, since if people did not prefer present goods to future goods, they would not act. Think of Crusoe deciding whether to catch fish with his bare hands, to build a net, or to construct a trawler. Since greater productivity comes from the longer production processes, the fact that he acts implies there must be some reason why he prefers less goods sooner, rather than more goods later. Every individual has a personal time-preference rate; the extent to which he prefers consumption now, to consumption in the future. The combined time-preferences of the individuals in society is the ultimate determinant of interest rates.
How did you jump from "people[...] prefer present goods to future goods" to "[e]very individual has a personal time-preference rate"? How did you jump from saying that everyone prefers A to B to saying that some people prefer one A to two B, some people prefer one A to three B, and so on? The problem that I see with that is that it seems that you jumped from talking about "abstract classes", like water, diamonds, present goods, or future goods, to talking about "concrete things", like a certain amount of water, a certain amount of diamonds, a certain amount of a certain present good, or a certain amount of a certain future good.
You're right on "subsidiary". I have no clue why I even used that word. I think people usually call those "supporting axioms". "Subsidiary" implies some sort of dependence (different than "being deduced from", which doesn't make sense). There is some information on this stuff, I just can't find it offhand.
cporter: How about when receiving a gift?
How about when receiving a gift?
But the gift could be something like ice, like in the classic example. So, if the guy could choose when to get the gift, he might choose to get it later, in the summer, instead of now, in the winter.
Mises says the pure-time-preference explains why consumption exists as a phenomenon. for any good (all things being equal), if you do not prefer its consumption now to its consumption later, you will never perform an act of consumption. e.g. for a sandwich-when-you-are-hungry, if you prefer its consumption later, then when later comes around, you still prefer consuming it later...
How did you jump from "people[...] prefer present goods to future goods" to "[e]very individual has a personal time-preference rate"?
Humans act implies humans have time-preference. So if an individual did not have time-preference, he would not act. All humans act therefore all humans have time-preference. Part of assuming diversity among humans is assuming diversity between individuals' time-preference rates. It is clear that, while we all prefer present goods to future goods, some of us are more future-oriented than others.
How did you jump from saying that everyone prefers A to B to saying that some people prefer one A to two B, some people prefer one A to three B, and so on?
Where did I say this?
The problem that I see with that is that it seems that you jumped from talking about "abstract classes", like water, diamonds, present goods, or future goods, to talking about "concrete things", like a certain amount of water, a certain amount of diamonds, a certain amount of a certain present good, or a certain amount of a certain future good.
Everyone prefers having 1 fish now to 1 fish in the future, assuming that 1 fish now and 1 fish in the future are considered equally serviceable goods (i.e. the same good), except with respect to time. (This is obviously not true, of course, in the ice cream in winter/summer example). I don't see the problem.
I. Ryan: cporter: How about when receiving a gift? But the gift could be something like ice, like in the classic example. So, if the guy could choose when to get the gift, he might choose to get it later, in the summer, instead of now, in the winter.
Well sure, but it could also be, say, a keyboard. I may not need a keyboard now, but when mine fails it would be handy to have another in the house already. The ice example adds its own peculiarities because storing ice takes work, and so the assumption is the other person stores the ice for you between now and whenever. If your ice example happened at a research outpost in Antarctica I doubt they'd care if it's summer or winter when they get the ice, and therefore their time preference would shift towards the sooner rather than later naturally because there's no apparent downside to getting it now and that's the "default" preference.
My point isn't that an example of everything being constant is easy to find, my point is just that it's a foundational principle that sheds light on other, more complicated behaviors that are easy to find in the real world and so it is still quite useful.
I wrote about this recently but forgot about the thread. See #4 from this part of Mises' Theory and History.
Sometimes the utterance of a judgment of value is elliptical and makes sense only if appropriately completed by the hearer. "I don't like measles" means "I prefer the absence of measles to its presence. Such incompleteness is the mark of all references to freedom. Freedom invariably means freedom from (absence of) something referred to expressly or implicitly. The grammatical form of such judgments may be qualified as negative. But it is vain to deduce from this idiomatic attire of a class of judgments of value any statements about their content and to blame them for an alleged negativism. Every judgment of value allows of a formulation in which the more highly valued thing or state is logically expressed in both a positive and a negative way, although sometimes a language may not have developed the appropriate term. Freedom of the press implies the rejection or negation of censorship. But, stated explicitly, it means a state of affairs in which the author alone determines the content of his publication as distinct from a state in which the police has a right to interfere in the matter. Action necessarily involves the renunciation of something to which a lower value is assigned in order to attain or to preserve something to which a higher value is assigned. Thus, for instance, a definite amount of leisure is renounced in order to reap the product of a definite amount of labor. The renunciation of leisure is the means to attain a more highly valued thing or state.
Sometimes the utterance of a judgment of value is elliptical and makes sense only if appropriately completed by the hearer. "I don't like measles" means "I prefer the absence of measles to its presence. Such incompleteness is the mark of all references to freedom. Freedom invariably means freedom from (absence of) something referred to expressly or implicitly. The grammatical form of such judgments may be qualified as negative. But it is vain to deduce from this idiomatic attire of a class of judgments of value any statements about their content and to blame them for an alleged negativism. Every judgment of value allows of a formulation in which the more highly valued thing or state is logically expressed in both a positive and a negative way, although sometimes a language may not have developed the appropriate term. Freedom of the press implies the rejection or negation of censorship. But, stated explicitly, it means a state of affairs in which the author alone determines the content of his publication as distinct from a state in which the police has a right to interfere in the matter.
Action necessarily involves the renunciation of something to which a lower value is assigned in order to attain or to preserve something to which a higher value is assigned. Thus, for instance, a definite amount of leisure is renounced in order to reap the product of a definite amount of labor. The renunciation of leisure is the means to attain a more highly valued thing or state.
You prefer more being healthy to less, at the same time as less being sick to more. The "good" is health not sickness, nonetheless.
I don't think that Mises said that. He admitted a lot of "subsidiary axioms" into his work. But he didn't use that term.
He didn't use that term, it was my mistake. Still there is a difference on what axioms apply in the opinion of Mises vs. Rothbard. Read from page 10 here:
Smith:An argument such as this helps to make intelligible why logicist philosophers of mathematics sought so strenuously to prove that all propositions of mathematics were analytic by showing how they could all be derived from axioms governing the single non-logical primitive concept of set. But the same argument serves also to make intelligible one peculiarly controversial feature of Austrian economics in the formulation that was given to it by Mises, the leading figure in the twentieth-century renaissance of Austrian economics in the United States. For Mises held that there is but one single non-logical concept (or ‘category’ or ‘essence’) of that general theory of human action which he calls ‘praxeology’: All that is needed for the deduction of all praxeological theorems is knowledge of the essence of human action ... The only way to a cognition of these theorems is logical analysis of our inherent knowledge of the category of action ... Like logic and mathematics, praxeological knowledge is in us; it does not come from without. (1966, p. 64; see also Rothbard 1957) Mises, as we shall see shortly, has here drawn together in illegitimate fashion the two concepts of the a priori and the analytic. Even a discipline whose axioms are constructed on the basis of only one non-logical primitive need not be analytic however. Consider, for example, the case of mereology, the theory of part and whole, which we can assume to have been built up from the single primitive concept part. The latter is a formal concept, in the sense that it can be applied, in principle, to all matters without restriction. But it is not treated as a logical concept in the standard textbooks, and nor can it be defined in terms of the logical concepts which are standardly recognized as such. Thus it seems that the concept part is a non-logical primitive. Consider the proposition If a is part of b, and b is part of c, then a is part of c, which asserts that the corresponding relation is transitive. This is, to be sure, a ‘trifling proposition’ in the sense of Locke. Yet it is not analytic, for there is no law of logic to which, when defined terms are removed, it would correspond as a substitution instance. But it is surely also a priori. Kantians and positivists conceive the a priori as a matter of relations between concepts which enjoy a purely mental existence and as being in some sense a contribution of the knowing subject. The Husserlian, in contrast, conceives the a priori as a matter of intrinsically intelligible relations between species or structures of objects in the world, relations which would obtain even if there were no minds to apprehend them. And where Kantians and positivists hold that a priori knowledge is either empty (‘analytic’) or a reflection of the fact that we see the world through ‘conceptual spectacles’ which somehow allow us to make sense of that world, the Husserlian holds that a priori knowledge is read off the world, reflecting the fact that certain structures in reality are intrinsically intelligible. When once they are properly understood, however, the two conceptions of a priori judgments or propositions need not be irresolvably in conflict. It may very well be that, even in a world which manifests structures of an intrinsically intelligible sort, there might still be room for certain dimensions of noncontingent (conventional?) structures that are read into the world in the way the Kantian would require. Moreover, it may be that the Kantian notion of an epistemological a priori itself requires a foundation in an ontological a priori of the sort here defined. For if Kantian a priori formings and shapings are read into reality, then we know at least that reality must be dispositionally such that it can bear such forms, and the fundamenta of the relevant dispositional properties would then constitute something like the a priori in re that is admitted by Husserl and Reinach. Moreover, even if the world in itself were infinitely elastic in the sense that it would be capable of bearing any and every sort of forming and shaping, then it seems that there must still be some residual a priori structure in the Husserlian sense on the side of the mind that is responsible for this forming and shaping. For if the latter is not itself entirely random, then the mind itself must possess some structures of its own, and these cannot themselves be the result of forming and shaping in the Kantian sense, on pain of vicious regress.
All that is needed for the deduction of all praxeological theorems is knowledge of the essence of human action ... The only way to a cognition of these theorems is logical analysis of our inherent knowledge of the category of action ... Like logic and mathematics, praxeological knowledge is in us; it does not come from without. (1966, p. 64; see also Rothbard 1957)
Mises, as we shall see shortly, has here drawn together in illegitimate fashion the two concepts of the a priori and the analytic.
Even a discipline whose axioms are constructed on the basis of only one non-logical primitive need not be analytic however. Consider, for example, the case of mereology, the theory of part and whole, which we can assume to have been built up from the single primitive concept part. The latter is a formal concept, in the sense that it can be applied, in principle, to all matters without restriction. But it is not treated as a logical concept in the standard textbooks, and nor can it be defined in terms of the logical concepts which are standardly recognized as such. Thus it seems that the concept part is a non-logical primitive. Consider the proposition
If a is part of b, and b is part of c, then a is part of c,
which asserts that the corresponding relation is transitive. This is, to be sure, a ‘trifling proposition’ in the sense of Locke. Yet it is not analytic, for there is no law of logic to which, when defined terms are removed, it would correspond as a substitution instance. But it is surely also a priori.
Kantians and positivists conceive the a priori as a matter of relations between concepts which enjoy a purely mental existence and as being in some sense a contribution of the knowing subject. The Husserlian, in contrast, conceives the a priori as a matter of intrinsically intelligible relations between species or structures of objects in the world, relations which would obtain even if there were no minds to apprehend them. And where Kantians and positivists hold that a priori knowledge is either empty (‘analytic’) or a reflection of the fact that we see the world through ‘conceptual spectacles’ which somehow allow us to make sense of that world, the Husserlian holds that a priori knowledge is read off the world, reflecting the fact that certain structures in reality are intrinsically intelligible.
When once they are properly understood, however, the two conceptions of a priori judgments or propositions need not be irresolvably in conflict. It may very well be that, even in a world which manifests structures of an intrinsically intelligible sort, there might still be room for certain dimensions of noncontingent (conventional?) structures that are read into the world in the way the Kantian would require. Moreover, it may be that the Kantian notion of an epistemological a priori itself requires a foundation in an ontological a priori of the sort here defined. For if Kantian a priori formings and shapings are read into reality, then we know at least that reality must be dispositionally such that it can bear such forms, and the fundamenta of the relevant dispositional properties would then constitute something like the a priori in re that is admitted by Husserl and Reinach. Moreover, even if the world in itself were infinitely elastic in the sense that it would be capable of bearing any and every sort of forming and shaping, then it seems that there must still be some residual a priori structure in the Husserlian sense on the side of the mind that is responsible for this forming and shaping. For if the latter is not itself entirely random, then the mind itself must possess some structures of its own, and these cannot themselves be the result of forming and shaping in the Kantian sense, on pain of vicious regress.
For a critique of the time preference origin of pure interest and an alterantive theory based in means ends analysis read Hulsmann's excellent Theory of Interest.
The atoms tell the atoms so, for I never was or will but atoms forevermore be.
Yours sincerely,
Physiocrat
This is the hook. The item must be the same at both times. Otherwise you are comparing a block of ice now to a puddle later.
trulib: Where did I say this?
Here:
trulib: Time-preference is implied by the action axiom, since if people did not prefer present goods to future goods, they would not act.
Time-preference is implied by the action axiom, since if people did not prefer present goods to future goods, they would not act.
So you proved that all people must prefer one good A sooner to one good A later.
trulib: Every individual has a personal time-preference rate; the extent to which he prefers consumption now, to consumption in the future.
Every individual has a personal time-preference rate; the extent to which he prefers consumption now, to consumption in the future.
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.
I. Ryan: So you proved that all people must prefer one good A sooner to one good A later. I. Ryan: 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.
I. Ryan: So you proved that all people must prefer one good A sooner to one good A later.
I. Ryan: 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?
Caley McKibbin: This is the hook. The item must be the same at both times. Otherwise you are comparing a block of ice now to a puddle later.
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.
Ryan,
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.
I. Ryan: E. R. Olovetto: Where did you get this "pure theory" terminology from? I don't know who coined it. But it is a pretty common term at least for the LvMI guys. The reason why they call it the "pure theory" of time preference actually is precisely because they don't think that it is a "subsidiary axiom". They think that it is "a categorial requisite of human action", that it comes straight from the "action axiom". 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) Where there is no property there is no justice; a proposition as certain as any demonstration in Euclid Fools! not to see that what they madly desire would be a calamity to them as no hands but their own could bring | Post Points: 5
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.
Thanks Physiocrat. That is a brilliant paper.
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...
Everyone prefers having 1 fish now to 1 fish in the future, assuming that 1 fish now and 1 fish in the future are considered equally serviceable goods (i.e. the same good), except with respect to time.
As Hulsmann says in his note:
In any case, one could argue that two physically equal goods existing at different points of time are also equal from an economic point of view, except for their position in time. There are three problems with this argument. First, it does not explain why future goods should not be preferred to present goods. Second, it is not really an argument but a stipulation. It “demonstrates” the existence of time preference by postulating that the relative position in time is the only factor that could prevent two physically equal goods from having the same economic significance. But this is clearly not the case because even two physically equal goods that exist at the same point of time and are owned by the same person also have different values (see Mises 1998, p. 119f.). Third, the argument seems to presume that, except for their different position in time, two physically equal goods would have equal values. But this contradicts the standard Austrian case against the existence of indifference in human action (see, for example, Rothbard 1956 and Hülsmann 1999). Pellengahr seemed to have this point in mind when he stated that "it is left entirely unclear how the evaluating agent is to separate his decision with respect to the equality of the satisfactions from the decision as to which satisfaction he prefers. The task is simply too difficult for anyone to perform: either two satisfactions, one present, one future, are considered equal or not. They cannot, qua satisfactions, be considered equal in one respect and unequal in another. A concept of time preference defined with respect to equal present and future satisfactions, however alluring it may seem to subjectivists at first glance because of its apparent subjectivism, is thus simply a contradiction in terms." (Pellengahr 1996, p. 26–27)
"it is left entirely unclear how the evaluating agent is to separate his decision with respect to the equality of the satisfactions from the decision as to which satisfaction he prefers. The task is simply too difficult for anyone to perform: either two satisfactions, one present, one future, are considered equal or not. They cannot, qua satisfactions, be considered equal in one respect and unequal in another. A concept of time preference defined with respect to equal present and future satisfactions, however alluring it may seem to subjectivists at first glance because of its apparent subjectivism, is thus simply a contradiction in terms." (Pellengahr 1996, p. 26–27)
Ryian and trulib,
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.
Grayson Lilburne:In addition to Hulsmann's work, you might also be interested in Bob Murphy's development of a non-time-preference theory of interst.
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.)
Z.
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."
In the very next sentence, Mises says "Present goods are more valuable than future goods."
I. Ryan:
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.
There is your time preference.
Adam
"It would be preposterous to assert apodictically that science will never succeed in developing a praxeological aprioristic doctrine of political organization..." (Mises, UF, p.98)
Adam Knott: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....
z1235:
We may be speaking about different theories.
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.)
Adam,
"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.
Z:
"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. : - )