Deep Stuff About Time Preference.

Gentle reader, this post assumes a little background knowledge of basic AE.

I finally understood the concepts presented here after listening to part of Jeffrey Herbener’s excellent lecture. Link is here: https://mises.org/library/time-preference-theory-interest-and-its-critics-2013.

Devil’s Advocate: You know Dave, I can disprove the whole originary interest thing, the whole time preference thing.

SD: Oh?

DA: Easy. You claim people prefer things today rather than tomorrow? And will pay less if they have to wait to get the thing tomorrow?

SD: Yep.

DA: How about this scenario. My daughter is getting married next month. I call up the bakery and ask about prices. They tell me the price, and then add that they have a special one day only sale, and if I get the cake today, right now this minute, they will give me a 10% discount. You think I’ll take the cake today? Ha!

SD: Anything else?

DA: Yes, the whole ice in the summer, ice in the winter thing. I don’t agree that they are two different things. Ice is ice.

SD: You’re certainly on a roll today, Devil.

DA: And I have one more, directed at Human Action itself. I’m going for the jugular now. Mises writes:

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 nonperish-
able good instead of postponing consumption for an indefinite later moment
thereby reveals a higher valuation of present satisfaction as compared with
later satisfaction. If he were not to prefer satisfaction in a nearer period of the future to that in a remoter period, he would never consume and so satisfy wants. He would always accumulate, he would never consume and enjoy. He would not consume today, but he would not consume tomorrow either, as the morrow would confront him with the same alternative.

SD: Sounds OK to me. What do you find wrong there?

DA: Are you kidding me? Mises is saying the only reason people eat is because they would rather eat now than later. Time preference. Well I think that is absurd. Use your common sense, Dave. Let’s say we have some kind of person born with a certain kind of brain damage. He has no concept of time, no time preference ingrained in him, nothing. Are you saying he will never eat? That’s ridiculous. He will get hungry, grab a sandwich, and eat it.

SD: Yeah, Herbener had some struggle with that one, too.

DA: Well, then. I’m calling up my good buddy, Lord Keynes the blogger, and tell him about this. Boy, are you Austrians gonna have egg on your faces. Three solid refutations of the very heart of Austrian theory. So there!

SD: Actually, they are three versions of the same misunderstanding of Austrian theory.

To understand the wedding cake story, let’s look at two neighbors, Smith and Jones. Smith’s daughter is getting married today. Jones doesn’t have a daughter. Smith wants a wedding cake today, Jones doesn’t. How do you explain that?

DA: What even needs explaining? They are in different situations, and thus their needs are different.

SD: How about this one? We have identical twins, exactly the same in every way, except that one is at the cold, cold, North Pole and the other is in sunny Florida. The one at the North Pole is sick of ice, the one in Florida craves ice. How do you explain that?

DA: Same thing. Their needs are different because they are in different situations.

SD: How about this one. Smith hasn’t eaten for days, Jones has just finished a huge meal. Offered a sandwich, Smith takes it hungrily, Jones declines.

DA: Again, different situations, different needs. I’m surprised you don’t grasp this simple idea, Dave. People value things differently depending on their situations.

Why, even the same person will value things differently in different situations. Today, his daughter is not getting married, so he has no need for wedding cake. Next month is her wedding day, and then he will need cake. Today in the summer, he wants ice. In the winter, he is in a different situation and does not want ice. Today he is not hungry, and tomorrow he will be famished. Different situations.

SD: So when Austrians talk about time preference, how people would rather have something today than tomorrow, are they talking about the same situation today as tomorrow, or about today and tomorrow being different situations?

DA: Obviously the concept of time preference assumes all other things unchanged. That other than the passage of time, the situations today and tomorrow are identical. We can compare ice today and ice in the future only if the future is the same situation as today, both hot days or both cold days. Same with the wedding cake. And that quote from HA was not talking about eating, because with the passage of time, ones body changes, and thus he is in a different situation. First he is not hungry, then he is.

SD: If you mix your situations, you are like a physicist measuring gravity on Earth, and assuming it will be the same in outer space.

DA: So all my refutations are as naught.

SD: Not only yours, Piero Sraffa’s as well. He takes different situations and conflates them indiscriminately, as explained in my humble article here.

DA: Where’s that wedding cake?