6.10. Forces Affecting Time Preferences

0:0010. Forces Affecting Time Preferences Praxeology can never furnish an ultimate explanation for a man's time preferences. These are psychologically determined by each person and must therefore be taken in the final analysis as data by economists. However, praxeological analysis can supply some truths about time preferences, using Ceteris Paribus assumptions. Thus, as we have seen, each person has a time preference schedule relating to his money stock. A lower money stock will cause a higher time preference rate for any unit of money remaining in his possession until finally his time preference rate will rise to infinity when the money stock or rather the money for consumption is low enough.

0:57Here one element, a man's money stock, is varied, and his value scale is otherwise assumed to remain constant. Hence we can in this way gauge the effects of a change in one determinant, the money stock. Actually it is not his money stock that is relevant to his time preferences, but the real value of his money stock. And the ERE, of course, where the purchasing power of the money unit remains unchanged, the two are identical. Ceteris Paribus, an increase in his real income, real additions to his money stock, will lower the time preference rate on his schedule.

1:43Of course, historically, there is no reason why his time preference schedule should remain unchanged. It is important to know, however, that given an unchanged schedule, his relevant time preference rate will fall. There are other elements that enter into the determination of the time preference schedules. Suppose, for example, that people were certain that the world would end on a definite date in the near future. What would happen to time preferences and to the rate of interest? Men would then stop providing for future needs, and stop investing in all processes of production longer than the shortest. Future goods would become almost valueless compared to present goods, time preferences for present goods would zoom, and the pure interest rate would rise almost to infinity.

2:37On the other hand, if people all became immortal and healthy as a result of the discovery of of Some New Drug, time preferences would tend to be very much lower, there would be a great increase in investment, and the pure rate of interest would fall sharply.