*Originally written 08/09/2015*
We are finite beings; therefore, we prefer more of a good over less of a good. We are mortal beings; therefore, we prefer the use of a good sooner over the use of the good later. This latter phenomenon is known as time preference. Affected by time preference as he is, man will exchange present goods for future goods only if he expects the sum of future goods he will gain to be greater than the sum of present goods he will give up. The surplus of future goods necessary to induce the exchange of present goods represents the rate of time preference, which is different for every person and for the same people at different points in their life. Conditioned by time preference, acting individuals will choose the shortest production process to obtain a given satisfaction. Moreover, even if he knows of a longer production process that will lead to a greater satisfaction, an acting individual will only choose this longer production process if his rate of time-preference is sufficiently low enough for him to forsake present consumption and invest in the aggrandizement of future consumption.
It is quite possible, even likely, that one will know of multiple possible solutions to a problem before him. Which solution he chooses will depend on his preferences, including his rate of time preference. Because these preferences are subjective, we are not in a position, as scientists of human action, to judge his choices as “right” or “wrong.” Choosing to consume a smaller amount today rather than a larger amount tomorrow is not a “bad” choice if one genuinely prefers less now over more later. However, we are not just scientists, and we can say, as human beings in a world of scarcity, that investment in more productive production processes is a generally desirable trend for those of us who wish for rising standards of living. That is, long-term solutions should be generally favored over short-term solutions. This principle is manifested in action only if people have rates of time preference that are sufficiently low. Therefore, the advancement of civilization depends on the lowering of time preference rates.
There are many factors that influence the rates of time preference in society. For the sake of brevity, I will discuss only one: the government. The existence of government limits the decline of time preference rates by institutionalizing the practices of theft (the confiscation of property) and regulation (the limit of control over property). This introduces a measure of risk and uncertainty into the valuations of acting individuals. The government may currently allow them to use 75% of their property as they wish. They may either consume or invest these owned resources. Due to the continued existence of government, however, individuals are less likely to invest in the future because (a) they have less resources to invest, and (b) they are uncertain of how much of their future product they’ll be allowed to keep control of. The growth of government increases the intensity of these effects. It is unsurprising, then, to find Americans’ savings rates at all-time lows with the size of their government at an all-time high.
Furthermore, government has also contributed to the decline in farsightedness by taking responsibility for many farsighted projects, such as building and maintaining national transportation systems, exploring space, and tackling climate change. These are all sectors that the free market is more than capable of working in successfully, but the government activities too-often crowd out the private investments and innovations. This is bad for two reasons. First, the government doesn’t know what’s important and valuable and what’s not. Was it cool that we put a man on the moon? Of course. Was it worth $200 billion? We don’t know, and, in fact, we have no way of knowing because government operates outside of the profit and loss system of the market. It therefore is incapable of economic calculation, and cannot know if and when it has chosen the right projects/solutions to pursue. Second, and this is especially true of a democratic government, government officials are by their very nature short-term thinkers. Their goal is everywhere and always to get re-elected, and so they aim to create some tangible benefit for their constituents sometime before the next election, in order to gain their votes. This is not to say that politicians don’t talk about and occasionally enact a long-term project, but they are predominantly focused on quick-fixes that will make them look good next election season.
Finally, another big factor contributing to the decline of farsightedness is a change in attitude among people. Perhaps it is because of the improper study of history, as I discussed in my last post, or because of the indoctrination received in government schools, but people seem to believe now that progress just happens. Their parents were better off than their grandparents, and their grandparents were better off than their great-grandparents. Everyday new inventions and technologies and software is released to make the world a new and better place. People have lived their lives watching the world change all around them, and have come to assume that this change is automatic. They have lost sight of the fact that the world only changes through the actions of real individuals, and that, had those individuals made other choices, the world would have turned out much differently. So, in considering long-term problems, too many people mistakenly assume that they will take care of themselves, or that the government will solve them. Too many people shrug responsibility for crafting long-term solutions to persistent problems and put their faith in a “path of history” that is totally fallacious.
There are, of course, other reasons for the shortsightedness of the current generation. Some part of it is purposeful, such as when the Federal Reserve institutes quantitative easing rather than allowing the malinvestments in the economy to liquidate by means of recession because “in the long run, we are all dead.” But other factors, like the ones listed above, do not receive the attention they deserve. Indeed, the decline in farsightedness (and savings rates) itself does not receive the attention it deserves. Realizing this current trend is important, but it is only the first step. The future of civilization is at stake, and only a proper understanding of economics and the long-term effects of every action can save it.
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