One of the more fruitful observations made by the Austrian school of economics is the role played by time preference in the market. As Wikipedia puts it: " Someone with a high time preference is focused substantially on his well-being in the present and the immediate future relative to the average person, while someone with low time preference places more emphasis than average on their well-being in the further future."
Time preference intersects in economics in this fashion: a high time preference economy will have few savers, hence, interest rates will be higher than in a low time preference economy. This is because borrowers compete to obtain loans at the lowest possible rate of interest, while lenders try to obtain the highest rate of interest for their money. True, in our economy, the Federal Reserve tries to set the interest rate, but in a free economy, the rate of interest would be coordinated like any other good and service, through competition. And even in the mismanaged economy in which we live, the market rate of interest emerges eventually.
Ludwig von Mises covers the topic in much more detail for those interested. But I'd like to borrow the Austrian terminology to examine the role played by time preference in civilization, a point I first considered while reading Democracy: The God That Failed by the Austrian economist Hans-Hermann Hoppe.
In general civilization tends to be characterized by low time preference. Indeed, the ability to even consider future well-being may mark the transition to civilization; whereas the prehistoric hunter-gatherer tribes were entirely preoccupied with seeking food and shelter--and trying to avoid death at the paws of wild creatures-- the advent of farming ensured that at least some members of the tribe could concern themselves with other matters. Only then was low time preference a possibility.
Here's Carroll Quigley in Tragedy in Hope:
"It has been said that in 1700 the agricultural labor of twenty persons was required in order to produce enough food for twenty-one persons, while in some areas, by 1900, three persons could produce enough food for twenty-one persons, thus releasing seventeen persons for nonagricultural activities." (p. 16)
What was true of what Quigley calls the Agricultural Revolution was true, albeit to a much lesser extent, of earlier Agrarian societies. The meager advances of primitive peoples, and the technological innovations of later times, to say nothing of its art and science, were made possible by a surplus of food; but it was only when societies began to value future time periods that such developments took place.
Now then, how stands are time preference today, in American society? We have become a high time preference society, characterized by massive indebtedness and other present-oriented behavior. Taking on any debt is probably evidence of high time preference, but much of our behavior is indicative of something beyond this, for which the Austrian school has provided no such terminology.
There is a chasm between a young person who buys a house on credit and an older person who retires without having paid off his mortgage. The former may be acting with his future in mind; he desires to build equity quickly so that he may devote future income to saving for his retirement. The latter is simply foolish, and far too common among the soon to be retired boomers. In fact, high teen unemployment has much to do with the fact that boomers are not retiring, because they are still in debt. Hence the time preference of the boomers has led to the prospect of a generational breakdown.
That our government rewards such foolishness is another indication of the time preference of our society. Since savings provide the liquidity for capital advancement, and, therefore, increased productivity and technological advancement, savers should be rewarded, i.e. through higher rates of interest. Instead, because our own government is in such massive debt, it seeks to keep interest rates low so as to allow it to borrow money less expensively. This debt is evidence that, sometime in the last century, we shifted from a society that saved money so as to care for its elderly, to one which went into debt to care for all and sundry. Although the motives are similar, the end result is very much different. The former is the mark of a stable and functioning society, the latter marks one which is only delaying defaulting on its profligate promises.
In a future post, I'd like to examine the role played by time preference when it comes to dating, (not?) marrying, and (not?) having children, but for now, I'll just leave you with this and this.