Austrian Economics and Time Preference

Many Austrian School economists-especially Ludwig von Mises-have espoused a universal insight into human action: the existence of positive time preference-the desire, other things equal, for a given satisfaction sooner rather than later. Every acting human being has positive time preference and, as a corollary, will value a present good more highly than the same good in the future.

How does Mises arrive at the universality of positive time preference? First, he postulates the absurdity of the contrary supposition, that of negative time preference. If an individual valued a future good more than the same present good, he would never consume, since delaying consumption is more valuable to him than undertaking it. Furthermore, an actor who always delays all of today's prospective consumption until tomorrow will never consume tomorrow, either, since, tomorrow, he will be faced with the same alternative of consuming now or delaying consumption until the next day. A negative time preference is impossible to the goal-pursuing acting man, since it implies that none of the acting man's goals are ever ultimately attainable. According to economist Gene Callahan, writing in Economics for Real People, "Saving in the interest of infinitely postponed consumption is not saving at all-it is pure loss" (51). Rather, the acting man will always prefer for his goals to be fulfilled sooner instead of later. Indeed, inherent in the existence of present human consumption is its higher valuation over future consumption of the same nature.

Time Preference and the Market Rate of Interest

Although all individual time preference is positive, some individuals have higher degrees of positive time preference than others. These individuals are, in proportion to their time preference, more willing to consume in the present and less willing to defer consumption to the future in the form of savings. In a market filled with both more patient individuals of a low time preference and less patient individuals with a high time preference, lending and borrowing of money will occur.