Bitcoin & Time Preference: How Sound Money Contributes to a Prosperous Society
What is Time Preference
Time preference simply means the extent to which an individual is inclined to favor his/her present well-being or current consumption over future well-being and consumption. This means that someone with a high time preference is more concerned about catering to his present needs than those of the future. On the other hand, an individual with low time preference or the ability to delay gratification places more priority on needs of the future.
The uncertainty of the future, the mortality of man and the need for consumption for survival mean that rational humans naturally prefer their present well-being. However, the extent of this preference varies from one individual to the other. For instance, the compensation or discount necessary to convince an individual to receive a product or service in the future instead of the present determines how low or high the individual’s time preference is.
Lower Time Preference Leads to Better Outcomes
The well-known Stanford Marshmallow experiment carried out by Walter Mischel and Ebbe B. Ebbesen in 1960 showed that children who were more capable of delaying gratification had better life outcomes decades later. In the follow-up studies in 1988, the children with low time preference had better academic performance and were without addiction or weight problems.
It is important to note that the fact that more recent replications of the experiment found the economic background to be the strongest link to the better life outcomes does not rule out the assertion that low time preference leads to better life outcomes. It rather confirms that environments or societies in which delayed gratification is encouraged, see more progress.
In societies where people are able to defer the receipt and enjoyment of goods, save and produce more capital goods, there is usually more technological advancement in the long run. There is also more peace and prosperity as participants in such economies are aware that conflicts hinder the smooth production of capital goods and conduction of economic activities.
Time Preference and Bitcoin
It is necessary to understand what sound or hard money is before proceeding to the link between time preference and bitcoin. The financial dictionary defines sound money as a currency that is backed by a tangible commodity (gold, silver etc) and is less susceptible to inflation than fiat currencies. Sound money has its purchasing power determined by market forces and is free from government control.
In furtherance, as Saifedean Ammous explained in his book, “The Bitcoin Standard: The Decentralized Alternative to Central Banking”, entities in any economy would create new money if they can. Considering the fact that the creation of new money often leads to the depletion of purchasing power, it is crucial that the creation of new money in any economy is limited. As Ammous stated in his book, “theoretically ideal money would be one whose supply is fixed, meaning nobody could produce more of it.”
In explaining how sound money engendered low time preference by motivating users to produce more, Ammous adds that:
“The only non-criminal way to acquire money in such a society would be to produce something of value to others and exchange it with them for money. As everyone seeks to acquire more money, everyone works more and produces more, leading to improving material well-being for everyone, which in turn allows people to accumulate more capital, and increase their productivity.”
Bitcoin, which is scarce as a result of its 21 million cap and counterfeit-proof nature, is deflationary as a result. The fact that it cannot be controlled by governments is also common knowledge. Like gold, the digital currency is sound money and engenders low time preference.
How Fiat Currencies Impact Society
Firstly, leaving the control of national currencies in the hands of politicians with short terms of office means policies and decision concerning the currencies would be short-term in nature. The rising debt of various nations is evidence of this problem.
Also, due to the arbitrary printing of new notes by central banks, fiat currencies have lost their purchasing power over time. This has made the currencies unsuitable for the store of value use case. With this information in mind, rational citizens tend to save less of fiat currencies are accumulating more debt than before. Since less savings translates into less capital accumulation, low productivity follows as a consequence.
Generally, the short-term mindset that characterizes the use of unsound money causes individuals as well as organizations to engage in bad actions for quick gains. The actions of bankers and credit rating agencies prior to the collapse of the U.S housing market in 2008 is an example.
Sound Money(Bitcoin) Engenders Prosperity
In a nutshell, time preference has an impact on the life outcomes of the individuals. In the same vein, monetary systems that encourage low time preference, saving, capital accumulation, and production create technological advancements that positively impact society.
Conversely, the use of inflationary fiat currencies incentivizes consumption, less saving and less capital accumulation. These, in turn, lead to a decline in productivity and lower wages.
The conclusion here is that the adoption of sound money such as bitcoin would create a better world for all whereas sticking to the current system with fiat currencies at the core, would take the world down the path of periodic economic crisis. Sound money motivates users to have lower time preferences which in turn leads to better outcomes.
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About the Author
Wes was exposed to Bitcoin in 2012 and fascinated by the possibilities of this new technology.
Gaining competency on technical blockchain issues, he has consulted with various projects mainly on product viability, blockchain compatibility, product design and launch, marketing, and blockchain systems integration.
Enjoys participating in public technical discussions focused on the issues and possibilities of Bitcoin and CryptoCurrencies.
Wes currently serves as Chief Operating Officer at CRYPTOFISH
CRYPTOFISH facilitates the purchase of CryptoCurrencies worldwide through our online and mobile interface specifically designed to take the complexity out of the process.