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NOTE 6.10. Forces Affecting Time Preferences

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10. Forces Affecting Time Preferences

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Praxeology can never furnish an ultimate explanation for a man's time preferences.

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These are psychologically determined by each person

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and must therefore be taken in the final analysis as data by economists.

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However, praxeological analysis can supply some truths about time preferences,

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using Ceteris Paribus assumptions.

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Thus, as we have seen,

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each person has a time preference schedule

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relating to his money stock.

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A lower money stock will cause a higher time preference rate

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for any unit of money remaining in his possession

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until finally his time preference rate will rise to infinity

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when the money stock or rather the money for consumption

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is low enough.

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Here one element, a man's money stock, is varied, and his value scale is otherwise assumed

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to remain constant.

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Hence we can in this way gauge the effects of a change in one determinant, the money

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stock.

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Actually it is not his money stock that is relevant to his time preferences, but the

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real value of his money stock.

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And the ERE, of course, where the purchasing power of the money unit remains unchanged,

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the two are identical.

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Ceteris Paribus, an increase in his real income, real additions to his money stock, will lower

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the time preference rate on his schedule.

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Of course, historically, there is no reason why his time preference schedule should remain

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unchanged.

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It is important to know, however, that given an unchanged schedule, his relevant time preference

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rate will fall.

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There are other elements that enter into the determination of the time preference schedules.

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Suppose, for example, that people were certain that the world would end on a definite date

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in the near future.

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What would happen to time preferences and to the rate of interest?

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Men would then stop providing for future needs, and stop investing in all processes of production

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longer than the shortest.

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Future goods would become almost valueless compared to present goods, time preferences

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for present goods would zoom, and the pure interest rate would rise almost to infinity.

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On the other hand, if people all became immortal and healthy as a result of the discovery of

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of Some New Drug, time preferences would tend to be very much lower, there would be a great

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increase in investment, and the pure rate of interest would fall sharply.