Economics Questions

Re: When a businessman takes out a loan for a investment, is he raising his Time Preference?

nirgrahamUK — Thu, 09 Jul 2009 02:05:13 GMT

The guy who he got the loan from is the one that saved, the guy who he got the loan from is the one who converted the prior savings into an investment by the act of loaning it to the businessman.

Re: When a businessman takes out a loan for a investment, is he raising his Time Preference?

BlackNumero — Thu, 09 Jul 2009 02:01:14 GMT

But if he is dissaving, then how can he be investing? I thought in order to have invested, then one must have saved.

Re: When a businessman takes out a loan for a investment, is he raising his Time Preference?

nirgrahamUK — Thu, 09 Jul 2009 01:49:33 GMT

BlackNumero:
So how is a higher time preference expressed by a businessmen taking out a loan for a productive investment.

the businessman that takes the loan has shown a higher time preference than one that hasnt because he is foregoing the rights to some quantity of future money to have some money *now*. so he is dissaving, he is not putting more away for later, he is taking from later to have now.

Re: When a businessman takes out a loan for a investment, is he raising his Time Preference?

Harry Felker — Thu, 09 Jul 2009 01:47:48 GMT

BlackNumero:
Throughout the chapter Rothbard talks about Time Preferences "aggregating" to form the market rate of interest. Remember, he considers both sides (Demand and Supply) to be determined Time Preferences. In my opinion either I am missing something or something does not add up.

Aggregate low TP = low interest rates

BlackNumero:
The question I'm trying to ask is that IF Rothbard considers a businessman taking out a loan for a productive investment as saving, and in order to save you must have a low Time Preference, then doesn't that mean in certain scenarios (such as this) that Lower Time Preferences, and "more savings", mean a rise in the interest rate?

Except that saved loan is available for lending (FRB), so it is a wash to the interest rate...

Re: When a businessman takes out a loan for a investment, is he raising his Time Preference?

BlackNumero — Thu, 09 Jul 2009 00:57:24 GMT

Okay, so a higher time preference can only be expressed by a greater proportion of consumption to savings. So how is a higher time preference expressed by a businessmen taking out a loan for a productive investment.

Re: When a businessman takes out a loan for a investment, is he raising his Time Preference?

nirgrahamUK — Thu, 09 Jul 2009 00:53:09 GMT

BlackNumero:
? A higher time preference can only come about when

when never...

highter time preferences are not things that 'come about' in the way you say, they are things that are supposed as being praxeologically necessary for acting individuals, so we can talk about them being expressed, and we can talk about them changing for a person or people, but they are changed by will/passions (whole debate there!), it is misleading to say that they come about because you observe some change in proportions of economic goods, that confuses cause and effect, its the other way around, any change in propotions between a persons allocation between present and future goods would be explained by peoples change in time preferences.

Re: When a businessman takes out a loan for a investment, is he raising his Time Preference?

BlackNumero — Thu, 09 Jul 2009 00:43:28 GMT

So how does a businessman taking out a loan for production mean a greater proportion of consumption to saving? A higher time preference can only come about when there is a greater proportion of consumption to saving. Just trying to sort this in my head.

Re: When a businessman takes out a loan for a investment, is he raising his Time Preference?

nirgrahamUK — Thu, 09 Jul 2009 00:32:31 GMT

a businessman that takes out a loan so that he can buy capital goods to increase his production is expressing a higher time preference than any businessman in an identical position to him who chooses not take take out the loan. a 3rd businessman in an identical predicament to the first two who chooses a 3rd course; he reduces his own consumption and uses this to buy capital goods to increase his production, is expressing a lower time preference. than the other two.

if someone takes out a loan, they are not themselves saving by so doing.unless there is some bizarre arbitage going on.

Re: When a businessman takes out a loan for a investment, is he raising his Time Preference?

BlackNumero — Thu, 09 Jul 2009 00:25:20 GMT

Harry Felker:

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...

What chapter are you on in MES? I must admit that I am not done with the book as well. When I origingally posted the question, I was about halfway through "Chapter 6 Production: The Rate of Interest and Its Determination". Upon writing this I have justed finished the chapter with no real solution to my question.

We can all agree on Time Preference influencing the proportion of savings/investment to consumption. If someone's Time Preference is higher, he consumes more. If it is lower, he saves/invests more. The question I'm trying to ask is that IF Rothbard considers a businessman taking out a loan for a productive investment as saving, and in order to save you must have a low Time Preference, then doesn't that mean in certain scenarios (such as this) that Lower Time Preferences, and "more savings", mean a rise in the interest rate? More people save by taking out loans, greater demand, higher interest rate price.

Throughout the chapter Rothbard talks about Time Preferences "aggregating" to form the market rate of interest. Remember, he considers both sides (Demand and Supply) to be determined Time Preferences. In my opinion either I am missing something or something does not add up.

Re: When a businessman takes out a loan for a investment, is he raising his Time Preference?

Harry Felker — Wed, 08 Jul 2009 20:39:49 GMT

Esuric:
Why would a businessman demand a loan if he was planning to save it?

This does happen, sometimes businesses do not have reserve capital, lets take the businessman who bought the forklifts....

If he paid out of his reserve account for the forklifts and thought, well now I have no money just in case I need extra raw materials or a potential equipment failure, he may, having the option, take a loan out to save it, this way he has the bulk cash in an account and uses profit to pay off the loan, if there is no such issue in the term of the loan, no harm no foul, if there is he is covered, it is self insurance...

Re: When a businessman takes out a loan for a investment, is he raising his Time Preference?

Esuric — Wed, 08 Jul 2009 20:31:07 GMT

Harry Felker:
His time preference is not effected by taking the loan, it is the ultimate destination of the loan in his hands that determines his time preference, the people (the bank customers I will assume you are talking about) have to have a low time preference for the money to be in the lender's hands for the businessman to take the loan in the first place.

Okay, thanks.

Harry Felker:
he could be looking to have a cash reserve his business does not have, in which case he takes the loan and saves it

Why would a businessman demand a loan if he was planning to save it?

Re: When a businessman takes out a loan for a investment, is he raising his Time Preference?

Harry Felker — Wed, 08 Jul 2009 20:15:34 GMT

Esuric:

Harry Felker:
This is not how this works at all.....

Can you just explain why?

Sure...

You said this:

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.

His time preference is not effected by taking the loan, it is the ultimate destination of the loan in his hands that determines his time preference, the people (the bank customers I will assume you are talking about) have to have a low time preference for the money to be in the lender's hands for the businessman to take the loan in the first place. In taking the loan the businessman does not effect the aggregate time preference of the community at large, only what he does with such money has an effect, he could be looking to have a cash reserve his business does not have, in which case he takes the loan and saves it, lowering his time preference in a community of low time preference, he is adding a factor to lower loan interest rates. If, however he were looking to spend this money on equipment to expand his business, he would be raising his time preference, he is incurring the cost out of profit in advance for the material gain now.

If we take a businessman who purchases a plot of land that he will develop in the future as compared to a man that purchases an existing business and a man that purchases capital goods we can look at the difference clearly..

A purchases land between Hereville and Theretown with his loan, with the knowledge that the state government has a road project about to be approved to place a commuter road between the two towns, right past his newly aquired property. He assumes (knows) the property value will rise once the road is completed, and makes the investment knowing that he will gain far more in the future, either by developing, leasing or reselling the property after the road is completed. He is lowering his time preference...

B purchases a gas station on the road leaving Hereville to Free City with his loan, knowing that the gas station profits well over the loan payment, he has secured a business with a developed revenue stream, this business pays off, what he then does with the money determines his time preference...

C purchases forklifts for his widget factory with his loan, to replace the faulty equipment, he gains a little from the purchase over his current production, but he is not concerned about equipment failure, he has raised his time preference...

What he does with the loan determines the time preference of the individual, and other than businesses encouragement of spending on their goods and services, they do little to effect the time preference of the aggregate society...

Re: When a businessman takes out a loan for a investment, is he raising his Time Preference?

Esuric — Wed, 08 Jul 2009 17:41:24 GMT

Harry Felker:
This is not how this works at all.....

Can you just explain why?

Re: When a businessman takes out a loan for a investment, is he raising his Time Preference?

Harry Felker — Tue, 07 Jul 2009 16:06:49 GMT

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

Time Preference of the lenders depositors (Bank's Customers), or supply of loanable funds
Demand for loans at the time
Ability to pay, record of good faith on repayment of loans on the part of the borrower
If the assets to be purchased by the loan can replace the loan if it is defaulted

So the time preference of the borrower is not a factor at all in the interest of the loan...

Re: When a businessman takes out a loan for a investment, is he raising his Time Preference?

DD5 — Tue, 07 Jul 2009 15:50:47 GMT

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?