March 9, 2013 at 7:10 pm #17688negligible91Member
From what I’ve read in MES and understood from your lectures, time preference is a concept that only has significance when we are talking about a given satisfaction. However, let me pose a scenario where this is not the case for clarification.
Phil is given a choice between ice cream in hot weather and ice cream in cold weather. He prefers ice cream in hot weather, all else equal.
Of course, he also values given satisfactions sooner rather than later, as the fact of time preference tells us.
On December 31,2012 Phil is given an option between getting free (he doesn’t have to give anything in exchange) ice cream now and free ice cream on July 31 in the coming year, 2013.
If he chooses the later good over the earlier good, it is precisely because they are different goods that time preference is not relevant.
However, let’s say he chooses the earlier(Dec.31) good over the later(Jul.31) good because even though ice cream during hot weather gives him more satisfaction than ice cream during cold weather, it is only a little bit more satisfaction, and his preference of having it sooner rather than later “overwhelms” this alternative preference.
This preference of sooner over later is not time preference correct? If it is, why? We are talking about two different goods with two different satisfactions. If not, would we call it something else? What exactly is it?
BharatMarch 11, 2013 at 11:30 am #17689jmherbenerParticipant
Time preference refers to the universal preference every person has for a given satisfaction sooner instead of later. It operates in every inter-temporal choice, regardless of the goods involved. Whether or not a particular good renders the same or a different satisfaction when used at one moment in time instead of another is a separate question. But, as Rothbard puts it, the value scale is unitary. The human mind is able to compare all considerations relevant to choice when deciding to act. A person discounts, according to his time preference, the different future satisfaction to make it comparable to the present satisfaction.
Thus, in your example, it is time preference that dominates the choice between a greater satisfaction later and a lesser satisfaction sooner. After discounting the future satisfaction to take account of his time preference, the person prefers the present satisfaction.
This basic consideration of discounting future valuations is the ground for calculating the present value in money of future revenues to be earned from an investment in the market. If the discount is large enough and the future revenue small enough, then a person will not invest money today into such a project.
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