My chosen brand of beer was priced at a modest $16.95 a dozen today, but it was pointed out to me that it will be on special Tuesday for a very tempting $13.95 a dozen. The dilemma was resolved in a moment: far preferable to get outside a few beers now, I reasoned, than to sit around until Tuesday with only a dry old promissory note for a cheaper dozen to keep me company.
As I quite happily paid over the odds in order to begin consuming beer now instead of days later (without of course ruling out consuming it on Tuesday as well) I reflected that this is clearly an example of 'time preference' -- a phenomenon first identified by WS Jevons and Eugen von Bohm-Bawerk, and one seen every night in nightclubs across the globe, wherein people happily empty their pockets for a drink NOW rather than wait for satisfation on a later night.
It is a phenomenon that Ludwig von Mises called a universal (a 'categorial,' or a priori) element in human action; put simply, the theory of time preference reflects the overwhelming preference to have two drinks this moment rather than three drinks next week, and it is this universal desire, argues Mises, that explains the phenomeon of interest.
If, for example I borrow money from you today in order to buy a car this afternoon, I'm quite willing to pay extra in order to have the car now rather than next year; thus $1o,000 for that purpose put into my account now is worth more to me than my promise to pay, say, $12,000 over the course of the next two years. As Mises explains it in Human Action:
Time preference is a categorial requisite of human action. No mode of action can be thought of in which satisfaction within a nearer period of the future is not--other things being equal--preferred to that in a later period. The very act of gratifying a desire implies that gratification at the present instant is preferred to that at a later instant. He who consumes a nonperishable good instead of postponing consumption for an indefinite later moment thereby reveals a higher valuation of present satisfaction as compared with later satisfaction.The theory is not without its critics, of course. Some critics still insist that interest simply reflects the productivity of capital, a notion that both Bohm-Bawerk and Mises effectively dismissed -- there is no evidence, Mises pointed out, of a "time-structure" in the capital stock of a society; further, the present valuation of income-producing capital will already have anticipated the future income stream. Brian Caplan rejects Mises' time-prefence theory for a different reason, in that he puts the origin of interest down to diminishing marginal utility:
You don't need time preference to get people to divide their consumption between today and tomorrow; all you need is diminishing marginal utility. If you are stuck on an island with two bananas for two days, a perfectly patient person would still want to eat one banana per day. Even though he disvalues hunger today and hunger tomorrow equally, eating one banana today assuages his hunger more effectively than saving that banana for tomorrow.Lawrence White however argues that Caplan's criticism doesn't stack up. First off, Caplan talks about perishable rather than imperishable goods (contra Mises) and assumes too an ever-expanding economy; for another, diminishing marginal utility "doesn’t explain why, even when today and tomorrow are equally provisioned, the market characteristically values a dollar today higher than a dollar tomorrow. That’s a fact that we need time preference to explain." I'm with White on this one.
Israel Kirzner has another beef with Mises' theory, one I'm inclined to agree with; says Kirzner:
The pure-time-preference theory [that Kirzner has] written about is not based on a priori reasoning. I've merely concluded that time preference is a reasonably universal empirical phenomenon. I ask my students: do you know anybody who is indifferent between receiving a paycheck now and receiving it in ten years? The answer is no. To me, that is enough to provide the basis of the theory.As I drank my beer, I reflected that he's probably correct. And if true, it means that bankers and nightclub owners have more in common than might otherwise be thought, for they both earn their money by trading on the basis of this universal phenomeon of time preference.