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6. Production: The Rate of Interest and Its Determination

10. Forces Affecting Time Preferences

Praxeology can never furnish an ultimate explanation for a man's time preferences. These are psychologically determined by each person and must therefore be taken, in the final analysis, as data by economists. However, praxeological analysis can supply some truths about time preferences, using ceteris paribus assumptions. Thus, as we have seen above, each person has a time-preference schedule relating to his money stock. A lower money stock will cause a higher time-preference rate for any unit of money remaining in his possession, until finally his time-preference rate will rise to infinity when the money stock—or rather, the money for consumption—is low enough. Here, one element, a man's money stock, is varied and his value scale is otherwise assumed to remain constant. Hence, we can in this way gauge the effects of a change in one determinant, the money stock.

Actually, it is not his money stock that is relevant to his time preferences, but the real value of his money stock. In the ERE, of course, where the purchasing power of the money unit remains unchanged, the two are identical. Ceteris paribus, an increase in his real income—real additions to his money stock—will lower the time-preference rate on his schedule. Of course, historically, there is no reason why his time-preference schedule should remain unchanged. It is important to know, however, that, given an unchanged schedule, his relevant time-preference rate will fall.

There are other elements that enter into the determination of the time-preference schedules. Suppose, for example, that people were certain that the world would end on a definite date in the near future. What would happen to time preferences and to the rate of interest? Men would then stop providing for future needs and stop investing in all processes of production longer than the shortest. Future goods would become almost valueless compared to present goods, time preferences for present goods would zoom, and the pure interest rate would rise almost to infinity. On the other hand, if people all became immortal and healthy as a result of the discovery of some new drug, time preferences would tend to be very much lower, there would be a great increase in investment, and the pure rate of interest would fall sharply.

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