WEBVTT NOTE A Note on Two Erroneous Ways of Defending the Pure Time Preference Theory of Interest 1 00:00:00.000 --> 00:00:06.640 It's my second time here, but I'm nevertheless excited and a bit nervous. 2 00:00:06.640 --> 00:00:11.400 I would like, of course, to thank Professor Salerno, the director of this event and the 3 00:00:11.400 --> 00:00:14.680 Mises Institute for providing me with this opportunity. 4 00:00:14.680 --> 00:00:19.400 It's a great experience. 5 00:00:19.400 --> 00:00:27.560 Browsing my presentation the other night, I said to myself, it looked better before. 6 00:00:27.560 --> 00:00:33.400 But nevertheless, after having traveled for 20 hours or so to get to this point, you will 7 00:00:33.400 --> 00:00:41.720 not be spared. 8 00:00:41.720 --> 00:00:47.520 So my paper is entitled A Note on Two Ironious Ways of Defending the Pure Time Preference 9 00:00:47.520 --> 00:00:52.920 Theory of Interest. 10 00:00:52.920 --> 00:00:59.480 And the plan of my presentation is the following, after a few introductory remarks, I will just 11 00:00:59.480 --> 00:01:10.080 go straight into those defenses that I previously thought were good, I used them quite a lot, 12 00:01:10.080 --> 00:01:15.400 and now I am not so sure. 13 00:01:15.400 --> 00:01:19.920 I would like to confess from the very beginning that I am a supporter of the pure time preference 14 00:01:19.920 --> 00:01:26.840 of Interest, and of the time preference theory as such, as a praxeological theory. 15 00:01:26.840 --> 00:01:34.240 So I'm very much interested in the toughest arguments to defend this theory. 16 00:01:34.240 --> 00:01:43.080 And I think that lately, in the last decade, more or less, we have a track of papers that 17 00:01:43.080 --> 00:01:49.720 might suggest papers that might suggest that we are in another round, so to speak, of this 18 00:01:49.720 --> 00:01:59.760 debate on interest. How substantial, I don't know, we will just have to see. I might add 19 00:01:59.760 --> 00:02:09.000 to that list of papers some recent papers by Professor Hulsman, which is, as opposed 20 00:02:09.000 --> 00:02:35.000 He goes to his first article on interest in 2002, he's attacking, so to speak, the pure-time preference theory from the other end by judging the structure of production and showing that it can be thought in ways incompatible or at odds with the pure-time preference theory of interest, so the list is even longer than that. 21 00:02:35.000 --> 00:02:53.000 And to my mind, the issue has tremendous consequences, because as I see things, one of the victims of, let's say, of a possible conclusion that the pure time preference theory of interest is wrong, 22 00:02:53.000 --> 00:03:00.000 apart from capital, Austrian capital theory in general, would be the Austrian business cycle theory in its standard version, so to speak. 23 00:03:00.000 --> 00:03:15.000 The temporal distortion, inter-temporal distortion of production, becomes way less significant if interest is underscored by other fundamentals. 24 00:03:17.000 --> 00:03:19.000 So, the consequences are important. 25 00:03:19.000 --> 00:03:27.000 You can even see some of these consequences in various ways of laying out the theory of the crisis, 26 00:03:27.000 --> 00:03:33.000 crisis either in terms of inter-temporal distortion or in terms of moral hazard. 27 00:03:33.000 --> 00:03:41.120 But more on that maybe in the question section, if it is the case. 28 00:03:41.120 --> 00:03:48.800 A quick reminder, although that might not be necessary here, I'm sure it's not necessary 29 00:03:48.800 --> 00:03:53.880 for time preference and I'm relying on Mises. 30 00:03:53.880 --> 00:03:58.840 So first, Mises defines time preference as other things being equal satisfaction in a 31 00:03:58.840 --> 00:04:06.040 nearer period of the future is preferred to satisfaction in a more distant future. 32 00:04:06.040 --> 00:04:10.540 And he also defines time preference in terms of goods, present goods are more valuable 33 00:04:10.540 --> 00:04:16.600 than future goods, so both satisfaction and goods, and he links directly with no problems 34 00:04:16.600 --> 00:04:22.440 whatsoever interest to, time preference to interest, saying that time preference manifests 35 00:04:22.440 --> 00:04:27.400 presents itself in the phenomenon of originary interest, which right on is the discount of 36 00:04:27.400 --> 00:04:31.240 future goods as against present goods. 37 00:04:31.240 --> 00:04:39.380 And he says that always and everywhere, all instances of interest are underspinned by 38 00:04:39.380 --> 00:04:47.480 this fundamental aspect. 39 00:04:47.480 --> 00:04:53.360 There would be one important issue, very important issue, but it is not crucial to my specific 40 00:04:53.360 --> 00:05:02.360 argument today. Do we obtain significant differences if we judge the time preference in terms of 41 00:05:02.360 --> 00:05:09.720 goods, future goods versus present goods, as opposed to satisfactions, future satisfactions 42 00:05:09.720 --> 00:05:14.040 versus present satisfactions, because this seems to be quite an issue in a few of the 43 00:05:14.040 --> 00:05:36.040 I will not get into this here, but after thinking a bit about it, my opinion, my take on it is that it's a fake issue, because at least for consumption goods, in the end it is the actual satisfaction that they provide that really counts. 44 00:05:36.040 --> 00:05:42.880 So, making a distinction, a tough distinction between satisfactions and goods would push 45 00:05:42.880 --> 00:05:47.320 us into some sort of a materialistic view of things. 46 00:05:47.320 --> 00:05:55.600 So I think if we stick to the setter disparibus, to the other things equal assumption or way 47 00:05:55.600 --> 00:06:01.040 of thinking, there is no difference between the two ways of laying out the theory of interest. 48 00:06:01.040 --> 00:06:05.000 Although I know we could have quite a lot of debates here. 49 00:06:06.360 --> 00:06:10.320 So let me proceed right on to the first defense 50 00:06:10.320 --> 00:06:12.560 of the pure time preference theory of interest, 51 00:06:12.560 --> 00:06:15.200 which I very much liked previously. 52 00:06:15.200 --> 00:06:17.600 I thought this is the toughest way of defending 53 00:06:18.760 --> 00:06:21.400 time preference as a praxeological category, 54 00:06:21.400 --> 00:06:25.320 not just as a contingent element in human action. 55 00:06:25.320 --> 00:06:45.320 And briefly put, the argument is a reductio ad absurdum, so let's suppose that we have the opposite of time preference, let's suppose we do not prefer always the present to the future. 56 00:06:45.320 --> 00:06:55.320 And the immediate conclusion of this type of defense of the pure time preference theory of interest says, 57 00:06:55.320 --> 00:07:09.320 well, then consumption would disappear, men would never consume, or in another variety, action altogether would just disappear. 58 00:07:09.320 --> 00:07:16.520 Appear, so if you do not always prefer the present, it means you always prefer the future, 59 00:07:16.520 --> 00:07:24.280 so therefore indefinite postponement, so just a standstill of a freezing of things. 60 00:07:24.280 --> 00:07:31.160 And this would be the way I would defend it while presenting the problem to my students 61 00:07:31.160 --> 00:07:34.640 and when I would debate with friends. 62 00:07:34.640 --> 00:07:44.280 A very smart friend of mine, which is also my son-in-law, a bright mathematician, and 63 00:07:44.280 --> 00:07:55.640 keen on these logical aspects, once said to me, you're not reasoning right, but first 64 00:07:55.640 --> 00:07:59.880 let me show you some instances in which this argument is present. 65 00:07:59.880 --> 00:08:03.760 First, the standard fragment from Mises. 66 00:08:03.760 --> 00:08:11.200 I will just go to the main points, so Mises is trying to convey the idea that time preference 67 00:08:11.200 --> 00:08:18.360 is a categorical requisite of human action, so it's always present in every action. 68 00:08:18.360 --> 00:08:21.840 And the crux of the matter is he says not to prefer satisfaction in a nearer period 69 00:08:21.840 --> 00:08:30.920 of the future, to that in a remote period he would never consume and so satisfy ones. 70 00:08:30.920 --> 00:08:38.800 And he says in about three versions this in Human Action. 71 00:08:38.800 --> 00:08:45.360 I also search from some equivalent assertions in terms of interest, not in terms of type 72 00:08:45.360 --> 00:08:46.360 preference. 73 00:08:46.360 --> 00:08:51.720 But I will not get into them here because they will take quite some time. 74 00:08:51.720 --> 00:09:02.720 Rothbard also takes over this type of argument in defense, this deduction at absurdity. 75 00:09:02.720 --> 00:09:07.200 If other things being equal, man did not prefer satisfaction in the present to that in the 76 00:09:07.200 --> 00:09:09.880 future, he would never consume. 77 00:09:09.880 --> 00:09:14.960 But never consuming is an absurdity, so on and so forth. 78 00:09:14.960 --> 00:09:23.040 Professor de Soto also uses this argument, but then he uses it sticking with the broader 79 00:09:23.040 --> 00:09:29.080 category of action, not only of consumption, this being an issue in itself, whether we 80 00:09:29.080 --> 00:09:33.960 look at time preference in terms of consumption as a consumption-based principle or as an 81 00:09:33.960 --> 00:09:44.360 action-based principle, important issue again, again I think not crucial to my specific argument. 82 00:09:44.360 --> 00:09:53.160 And of course, Professor Block's way of conveying this same defense. 83 00:09:53.160 --> 00:09:57.800 The only way to illustrate a lack or the opposite of time preference is never to act at all. 84 00:09:57.800 --> 00:10:03.560 This would be the sharpest and more general way of putting it. 85 00:10:03.560 --> 00:10:10.840 And of course, this possible topic of discussion, I will not get into it here. 86 00:10:10.840 --> 00:10:24.840 Again, I think the defensible view of the pure time preference theory of action is the one who considers time preference as a category of action, not only of consumption, of all action. 87 00:10:24.840 --> 00:10:34.840 And in this sense, Mises is a little bit misleading. It uses both concepts. 88 00:10:34.840 --> 00:10:41.400 Now, my main problem with this is the following, as pointed by my bright son-in-law. 89 00:10:41.400 --> 00:10:50.920 He said, let me try to put it more simply, you say you always prefer the present. 90 00:10:50.920 --> 00:10:55.120 And when I ask you why, you try to make a reduction at absurdum. 91 00:10:55.120 --> 00:10:58.320 If that were not so, then I would always prefer the future. 92 00:10:58.320 --> 00:11:00.920 But he says this is just not right. 93 00:11:00.920 --> 00:11:12.580 Because the negation of a universal proposition is not the other universal. 94 00:11:12.580 --> 00:11:19.220 So if the negation of the proposition that all A's are B's is not that therefore if 95 00:11:19.220 --> 00:11:24.600 this is not true all the B's should not be A, but just the particular sum, you have to 96 00:11:24.600 --> 00:11:27.360 find some of the A's which are not the B's. 97 00:11:27.360 --> 00:11:40.780 So, if we try to apply this to the time preference principle, the ever postponing of action is 98 00:11:40.780 --> 00:11:44.260 not the expression of the opposite of time preference. 99 00:11:44.260 --> 00:11:50.220 The opposite of time preference has to look somewhat different. 100 00:11:50.220 --> 00:11:58.540 And I kept thinking about it, what is the opposite of time preference actually, okay? 101 00:11:58.540 --> 00:12:01.380 Can we conceive what would it look like? 102 00:12:01.380 --> 00:12:09.940 And okay, I'm on shaky grounds here, I just proposed to you this experiment in thinking. 103 00:12:09.940 --> 00:12:18.260 I think that the logical opposite would be to try to think this to the end, other things 104 00:12:18.260 --> 00:12:30.260 If things equal, present satisfaction is at least once or sometimes less valuable than future satisfaction. 105 00:12:30.260 --> 00:12:43.260 If at least one time, for one small slot in time, we could think and then see in practice that men, for five minutes or for three minutes, 106 00:12:43.260 --> 00:12:53.260 So, we could conceive men as preferring other things to equal the future satisfaction to the present one, 107 00:12:53.260 --> 00:13:01.260 then we would have a falsification of the pure time preference, of the time preference principle. 108 00:13:01.260 --> 00:13:09.260 But what, again, let's push the matter as far as possible. 109 00:13:09.260 --> 00:13:18.260 If we try to think the opposite of time preference through the final logical conclusion, what does it look like? 110 00:13:18.260 --> 00:13:25.260 And the only way I can think of it is we would have to devise a concept of conscious non-action, 111 00:13:25.260 --> 00:13:31.260 which I think in the end can be argued that is contradictory. 112 00:13:31.260 --> 00:13:39.260 It's self-contradictory if we judge it praxeologically. 113 00:13:39.260 --> 00:13:47.260 And when I first thought of this idea, I would say, ah, that would be easy. 114 00:13:47.260 --> 00:13:51.260 I think I will find textual evidence in Mises in no time. 115 00:13:51.260 --> 00:14:00.540 Because my first impression was that Mises actually defines action as purposeful and 116 00:14:00.540 --> 00:14:06.200 conscious behavior. 117 00:14:06.200 --> 00:14:11.140 And that would just be it, if by definition, actions is conscious behavior, so you cannot 118 00:14:11.140 --> 00:14:16.820 have conscious non-action. 119 00:14:16.820 --> 00:14:23.900 Why do I say that we must have an interval, a small, at least a small interval of conscious 120 00:14:23.900 --> 00:14:25.240 not action? 121 00:14:25.240 --> 00:14:30.740 You would have to be conscious because your state would have to express preference, the 122 00:14:30.740 --> 00:14:33.940 opposite of time preference, so you would have to be conscious. 123 00:14:33.940 --> 00:14:39.260 But again, you would have to not be acting in that time interval because if you would 124 00:14:39.260 --> 00:14:49.820 Act, like, so I want to eat the egg, the egg is my, one egg is my first need, and I just 125 00:14:49.820 --> 00:14:55.260 want to postpone it, if I were to express the opposite of time preference, I cannot do 126 00:14:55.260 --> 00:14:59.140 something else in the meantime, otherwise I would contradict the assumption that the 127 00:14:59.140 --> 00:15:01.740 egg is my most important need, okay? 128 00:15:01.740 --> 00:15:06.380 So I have to be conscious because it has to be preference, but I must not do anything 129 00:15:06.380 --> 00:15:11.300 which will be qualified as action, because then what would be the purpose of that action 130 00:15:11.300 --> 00:15:18.540 done in the meantime, so time preference would be still present there, in that instance of 131 00:15:18.540 --> 00:15:21.260 action. 132 00:15:21.260 --> 00:15:30.180 But Mises is not necessarily and straightforwardly helpful in this matter. 133 00:15:30.180 --> 00:15:34.940 He seems to consider and define even action as conscious behavior, although he doesn't 134 00:15:34.940 --> 00:15:41.780 do it directly, he considers action as purposeful behavior and he considers that conscious and 135 00:15:41.780 --> 00:15:46.820 purposeful are pretty much one and the same. 136 00:15:46.820 --> 00:15:57.080 But again, in some places he seems to allow for the existence of moments of conscious non-action. 137 00:15:57.080 --> 00:16:03.680 Not straightforwardly of course, but when he says for instance that action is not simply 138 00:16:03.680 --> 00:16:07.320 giving preference. 139 00:16:07.320 --> 00:16:16.560 If you just say and think that you prefer sunshine instead of rain, that's not action. 140 00:16:16.560 --> 00:16:20.960 He sometimes says the absence of action is not only the result of full satisfaction. 141 00:16:20.960 --> 00:16:26.720 It can no less be the corollary of the inability to render things more satisfactory, like hopelessness. 142 00:16:26.720 --> 00:16:31.920 So you could imagine a state of hopelessness which is not conscious, non-action, let's 143 00:16:31.920 --> 00:16:32.920 say. 144 00:16:32.920 --> 00:16:38.720 He sometimes speaks as if action is preceded by thinking. 145 00:16:38.720 --> 00:16:43.960 So thinking is to deliberate beforehand over future action as if, 146 00:16:43.960 --> 00:16:48.800 okay, maybe I'm too picky on him, I agree, 147 00:16:48.800 --> 00:16:52.440 but he might suggest that first you think and then you act, 148 00:16:52.440 --> 00:16:56.000 and then you have a previous period of thinking in which you're conscious 149 00:16:56.000 --> 00:17:00.880 because you're thinking, but you might not be acting. 150 00:17:00.880 --> 00:17:11.640 Nevertheless, he again has strong assertions pushing in the direction that man always acts. 151 00:17:11.640 --> 00:17:22.640 So if the opposite of time preference never appears, then man must always act. 152 00:17:22.640 --> 00:17:29.040 We have to have continuous action, continuous action. 153 00:17:29.040 --> 00:17:38.720 And he has this sort of suggestions that the most passive type of behavior is still action 154 00:17:38.720 --> 00:17:44.640 because you could at least interfere with the following course of events and you don't 155 00:17:44.640 --> 00:17:45.640 do it. 156 00:17:45.640 --> 00:17:49.920 Indulgence in a routine which could possibly be changed is action. 157 00:17:49.920 --> 00:18:03.920 So then, to my mind, it's not clear what could not, what realistic state of a man could be qualified, of a conscious man, could be qualified as non-action. 158 00:18:03.920 --> 00:18:13.920 Rothbard is way more straightforward on this. He's from the very beginning of the opinion that man must always act. 159 00:18:13.920 --> 00:18:17.920 Okay, he's always in a position to improve his lot. 160 00:18:17.920 --> 00:18:31.920 So, if I'm right then, admitting the possibility of the opposite of time preference, 161 00:18:31.920 --> 00:18:42.920 we would have to admit the idea of conscious non-action which is contradictory. 162 00:18:42.920 --> 00:18:55.920 and if OTP, if the opposite of time preference is indeed contradictory, then time preference is, let's say, praxeologically, logically established. 163 00:18:55.920 --> 00:19:04.920 May I obtain two or three more minutes just to... okay, thank you, thank you very much. 164 00:19:04.920 --> 00:19:13.920 The second erroneous defense, and I won't do justice to it in two minutes, but I will try just to present it, 165 00:19:13.920 --> 00:19:22.920 is this idea, which I also used quite a lot, that in a sense, money interest proves or demonstrates or isolates time, pure time preference. 166 00:19:22.920 --> 00:19:34.920 and the great book edited by Professor Herberner recently brings many good, 167 00:19:34.920 --> 00:19:39.920 a treasure of good arguments in favor of the pure time preference of interest, 168 00:19:39.920 --> 00:19:45.920 but I'm not convinced by this main, main, main point. 169 00:19:45.920 --> 00:19:56.160 The crux of it is that the discount of future money relative to present money is interest 170 00:19:56.160 --> 00:20:02.440 and determines the pure or time preference rate of interest. 171 00:20:02.440 --> 00:20:07.920 The rate of interest reflecting pure time preference emerges in the exchange of present 172 00:20:07.920 --> 00:20:13.000 money for future money. 173 00:20:13.000 --> 00:20:21.640 The most complete way of conveying the argument is the second quote here because the moment 174 00:20:21.640 --> 00:20:25.000 in time that a unit of money is held does not affect its usefulness. 175 00:20:25.000 --> 00:20:29.240 Money serves as a common denominator in inter-temporal as well as present exchanges. 176 00:20:29.240 --> 00:20:32.760 And then the exchange of present money for future money therefore isolates the time discount 177 00:20:32.760 --> 00:20:37.480 of pure time preference factor and permits the emergence of a pure rate of interest. 178 00:20:37.480 --> 00:20:40.480 And why I am not convinced. 179 00:20:40.480 --> 00:20:46.660 The crux of the matter is that the argument implies that non-money goods always suffer 180 00:20:46.660 --> 00:20:56.080 from the problem of timing, and money never suffers from the problem of timing, as I see 181 00:20:56.080 --> 00:20:57.080 things. 182 00:20:57.080 --> 00:21:06.760 And I will not get more into it, but to my mind, the main argument in favor of the idea 183 00:21:06.760 --> 00:21:13.580 that money never suffers from the problem of timing is that that particular usefulness, 184 00:21:13.580 --> 00:21:17.380 the use of as media of exchange is preserved through time. 185 00:21:17.380 --> 00:21:24.320 And I think this is not satisfactory because I think I can think of this difference. 186 00:21:24.320 --> 00:21:32.440 When do I need to have exchanges now or around my wife's birthday? 187 00:21:32.440 --> 00:21:36.360 and I see that we might have a timing problem there too. 188 00:21:38.960 --> 00:21:41.720 I stop here even though I didn't do justice 189 00:21:41.720 --> 00:21:43.160 to this particular point. 190 00:21:43.160 --> 00:21:44.300 Thank you very much. 191 00:21:44.300 --> 00:21:46.300 Thank you very much.