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I fell into this conundrum when thinking about the Demand aspect of the loanable funds market. I know that when people lower their Time Preference there generally are more loanable funds which means a lower interest rate. The opposite means a higher interest rate. So when a businessman goes to a bank (or some other institution he can acquire real savings) and takes out a loan, is he lowering or raising his Time preference? One half of me says lowered because they are investing the present money for future goods. The other half of me however says raised because he is not sacrificing anything and demanding more “present goods” (money) right now.
Any help with an explanation? thanks
I would think his time preference would be higher, since he demands liquidity now for capital, in order to satisfy the future desires of the potential consumers. The people's time preferences fell, which allows the producers time preferences to rise. I'm not entirely sure though.
Neither, would he not be merely demonstrating his time preference through action?
Hmmm it seems like there should be a definitive answer out there. maybe its both, because he borrows the money but invests it in future goods so he raises his T.P by borrowing but lowers it by investing. Seems perplexing.
There is a definitive answer....
He is investing the money he borrowed, what is he expecting?
If he borrowed money for a large piece of land for development and lease, then he lowered his time preference, as he is taking on payments now for a return in the future...
If he borrowed money to purchase an existing business that records profits above his loan payment, then he raised his time preference...
Time preference is basically when one seeks to enjoy the results of his actions, for immediate benefit or future gains, of course immediate benefit can equate to future gains in the LR, but future gains does not always work out to immediate benefit...
The loan is irrelevant to time preference, it is the destiny of that loan that is relevant....
It sounds like the ocean, smells like fresh mountain air, and tastes like the union of peanut butter and chocolate. ~Liberty Student
Adam Frost: Neither, would he not be merely demonstrating his time preference through action?
Ultimately this is correct....
Esuric: I would think his time preference would be higher, since he demands liquidity now for capital, in order to satisfy the future desires of the potential consumers. The people's time preferences fell, which allows the producers time preferences to rise. I'm not entirely sure though.
This is not how this works at all.....
Harry Felker: There is a definitive answer.... He is investing the money he borrowed, what is he expecting? If he borrowed money for a large piece of land for development and lease, then he lowered his time preference, as he is taking on payments now for a return in the future... If he borrowed money to purchase an existing business that records profits above his loan payment, then he raised his time preference... Time preference is basically when one seeks to enjoy the results of his actions, for immediate benefit or future gains, of course immediate benefit can equate to future gains in the LR, but future gains does not always work out to immediate benefit... The loan is irrelevant to time preference, it is the destiny of that loan that is relevant....
I still seem confused by your two answers and how one lowers T.P while the other raises it.
If true for some borrowed loans to decrease T.P, it still seems problematic because then that means some normal assumptions about Time Preferences could technically be proven false. Lets say that society lowers their time preference only through increasing their demand for loans for this particular investment you spoke of(not by increasing the supply of loanable funds). Like any other good, an increase in demand means an increase in price, or the interest rate. So in the end a decrease in Time Preference means an increase in the interest rate? The same thing could be said of the opposite, decrease in investment and businessmen consume more means a decrease in the interest rate. Something doesn't add up.
Patch, when I'm taking a loan I'm neither raising nor lowering my time preference. All I'm doing is demonstrating my preference for present goods in terms of future goods is higher than the market rate of interest.
"You don't need a weatherman to know which way the wind blows"
Bob Dylan
So how is preference for present goods in terms of future goods different than the "degree to which they prefer present to future satisfactions" (an agreeable definition of T.P)?
Patch:If true for some borrowed loans to decrease T.P, it still seems problematic because then that means some normal assumptions about Time Preferences could technically be proven false.
You are emphasizing on the borrowing, not on the actions thereafter...
Patch:Lets say that society lowers their time preference only through increasing their demand for loans for this particular investment you spoke of(not by increasing the supply of loanable funds).
Are you talking about aggregate s&d?
What is "society" doing with these loans?
Harry Felker: Patch:If true for some borrowed loans to decrease T.P, it still seems problematic because then that means some normal assumptions about Time Preferences could technically be proven false. You are emphasizing on the borrowing, not on the actions thereafter...
Each individual, on the basis of his time-preference schedule,decides between the amount of his money income to bedevoted to saving and the amount to be devoted to consumption.The aggregate time-market schedules (determined by time preferences)determine the aggregate social proportions between (gross)savings and consumption. It is clear that the higher the time-preferenceschedules are, the greater will be the proportion of consumptionto savings, while lower time-preference schedules willlower this proportion. At the same time, as we have seen, highertime-preference schedules in the economy lead to higher ratesof interest, and lower schedules lead to lower rates of interest.
This is taken from Man, Economy, and State p400. I'm a little confused about your reply and the "actions thereafter", so this is what I mean by the typical Austrian response of lower T.P, lower I.R; higher T.P, higher I.R.
Harry Felker:Are you talking about aggregate s&d?
Just using a typical supply and demand curve that Rothbard uses throughout his works.
Harry Felker: Patch:Lets say that society lowers their time preference only through increasing their demand for loans for this particular investment you spoke of(not by increasing the supply of loanable funds). What is "society" doing with these loans?
Harry Felker: If he borrowed money for a large piece of land for development and lease, then he lowered his time preference, as he is taking on payments now for a return in the future...
What "society is doing with these loans" is the particular investment you spoke of which I needed clarification on. I don't see how the one investment (listed above) constitutes a lowered time preference when someone borrows money for it while the other( the one you listed) raises Time Preference.
Rothbard:highertime-preference schedules in the economy lead to higher ratesof interest, and lower schedules lead to lower rates of interest.
Ok...
Rothbard:Each individual, on the basis of his time-preference schedule,decides between the amount of his money income to bedevoted to saving and the amount to be devoted to consumption.The aggregate time-market schedules (determined by time preferences)determine the aggregate social proportions between (gross)savings and consumption. It is clear that the higher the time-preferenceschedules are, the greater will be the proportion of consumptionto savings, while lower time-preference schedules willlower this proportion.
I think this is where your misunderstanding is, I am in the middle of MES so I am unfamiliar with the surrounding text, if it is relevant...
You are ignoring Praxeology
What Rothbard is saying is that what people do with their income (not loans) determines time preference, and if they have a high time preference there is less available to loan, and if they have a low time preference there is more money to loan, and simple supply/demand axiom states if there is more money to loan the interest rates are lower to attract borrowers and if there is less interest rates rise, as would happen with any scarce resource (Capital is a resource)
The loans are irrelevant to the time preference of society, the TP is a cause, not an effect...
Patch:What "society is doing with these loans" is the particular investment you spoke of which I needed clarification on. I don't see how the one investment (listed above) constitutes a lowered time preference when someone borrows money for it while the other( the one you listed) raises Time Preference.
You are not applying the thought of Methodological Individualism, Human Action by Mises, a society comprises of individual actors, the aggregate is not everyone does X as a mindless group, it is individuals save or consume, the majority is what determines the aggregate time preference.
The aggregate lowering of time preference is in savings, not taking loans, the aggregate raising of time preference is in consumption, this is a cause, among many factors, of changing interest rates, the loan the businessman is taking is not effecting aggregate time preference, what he does with said loan does.
Time preference is really related to when the person expects gains from money...
Harry Felker: The aggregate lowering of time preference is in savings, not taking loans, the aggregate raising of time preference is in consumption, this is a cause, among many factors, of changing interest rates, the loan the businessman is taking is not effecting aggregate time preference, what he does with said loan does. Time preference is really related to when the person expects gains from money...
Yes, but if the loan is for the sake of personal consumption as in consumers loans, e.g. buyin a car, this should indicate a higher time preference on the part of the individual. Since you are currently reading MES, would you agree?
DD5:Yes, but if the loan is for the sake of personal consumption as in consumers loans, e.g. buyin a car, this should indicate a higher time preference on the part of the individual. Since you are currently reading MES, would you agree?
Yes, but if the loan is destined to purchase land between two towns with good authority that in a year's time there will be a road between them, it indicates a lower time preference as he is banking on the future increase in the property value...
In relation to the question posted, it is a businessman, so I want to know if he is purchasing an established business that will profit over the loan payment or if he is purchasing an investment that will pay off in the long run, this will determine more his time preference (at least I think)...
I am quite willing to admit I am wrong in my thoughts, but I would like an understanding as to why if someone comes around to refute them...
Until then, IMO, it is the destiny of the loan that determines the time preference of the businessman, not taking the loan in and of itself...
The interest of the loan is determined by the factors involved (though I may miss some) these are primary
So the time preference of the borrower is not a factor at all in the interest of the loan...
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