The Value Of The Future
The value of the future can be quantified through the concept of time preference. It helps us to understand how the civilizing process is deeply rooted in our individual need for safety.
Everyone recognizes Benjamin Franklin’s famous quote:
“Time is money!”
The slogan’s sheer popularity gives enough reason to assume its resonance with people. However, I am convinced that it is misguided. It shouldn’t be “Time is money!” but rather:
“Money is time!”
The two variants differ in whether we believe we say something clever about time or money. Time is more fundamental than money, and we use money to manage and organize our time.
How we put our time to good use in the present shapes our future. In this essay, I make the value of the future intelligible, what that means and how our attitude toward the future is connected to the process of civilizing itself.
What is time preference?
I want to introduce you to a concept, or an idea, which arose from the work and analysis of the Austrian economic theory, often referred to as Austrian Economics. The idea is called “time preference”, a fundamental concept that enables us to understand and describe economic activity and human decision-making. Even though it is a crucial idea, it is relatively easy to grasp, making it just more tragic that so many people are unaware of it.
The idea is best understood through a thought experiment: Let’s say I offer you 100 Dollars on the spot, and you can take it if you like. Alternatively, I would provide you with 100 Dollars plus an extra, let’s call it X, which you would receive additionally if you were willing to wait a year to receive it. Now we estimate the value of X so that you are motivated enough to wait.
We will find such an X theoretically for everybody. For example: How about we set the X to 999,900.00 Dollars? Then you could get 100 Dollars right now or a million Dollars if you are willing to wait. That sounds alluring to most people. Almost anybody would agree if the amount of X were way lower than that. A precise measurement of this X is challenging, if possible, but that is not of great importance to understand the general lessons one can learn from the consequences of this thought experiment.
First of all, it should be noted right from the get-go that the waiting period requires a forgoing of additional resources to gain even more resources in the future. We can ask, for starters, why the waiting period should be rewarded in any way. Can we not just wait, and it’s ok? The reason is simply that the future is always contaminated with uncertainty. If I wait a year, maybe I will die. Maybe due to a sudden disease or a car crash, who knows? Whatever the scenario, one can think of many reasons why the future upholds uncertainties. Those must be respected and compensated for in some way if you willingly choose to forgo additional resources in the immediate present.
For this reason, we can identify the quantified value for variable X as one’s attitude toward the future. Somebody, who prefers waiting only if they are being offered a very high value for X, prefers the present significantly compared to the future. This is the case, for whatever their particular reasons might be. Maybe they are very old and don’t think they have enough time to live to benefit from their patience, or one assumes there will be a horrible war soon or some similar traumatic event. Whatever the concrete reasoning, a high value for X signifies an apparent preference for the today over the tomorrow.
Of course, the argumentation works according to the same logic vice versa. Somebody whose X is relatively low looks at the future more calmly and composedly. They aren’t anticipating big catastrophes that they couldn’t handle or react to accordingly and are happy to forgo the use of additional resources in the immediate for the promise of an extra gain over time that they can happily look forward to.
The Meaning of Time Preference
The Individual need for safety and its connection to capital markets
The future is, to at least a certain degree, contaminated with uncertainty. No religious attitude or ambitious scientific endeavor can ever significantly change this fact. Whether we look composed and in great anticipation toward the future or motivated by reluctance and aversion depends on our subjective feeling of safety. Time preference is a subjective variable, just as everyone differs in their need for safety. Somebody might be content with 50 bucks in their pocket to go on and start a nice grand adventure, and somebody else might need a serious amount of saved money to finally relax a little bit.
Independent of the concrete need for safety, one can take only one legit course of action to satisfy it: saving. We accumulate something for ourselves, which might grant us some security so that we might not end in abject existential and material poverty if something unforeseen happens. Some people might be scared to lose their job or not go to the doctor because they fear high costs after their longed-for treatment. If enough is already saved in the piggy bank, those people will continually lose their angst and feel more accepting of such prospects.
For the critical reader, the question might arise if the argumentation so far has been circular. A low time preference means that someone can, without more extensive problems, forgo consumption and access to additional resources for the outlook of additional gains in the future. But now we said that time preference could only be lowered through saving. But isn’t saving the same? Isn’t saving also a forgoing of consumption and access to additional resources for potential use in the future?
First of all, yes, this is precisely the case. However, there are differences as well. Saving is nothing more and less than the forgoing of consumption and access to additional resources in the present. Saving does not entail any promise of additional gain in the future. The concept of saving today is watered-down if one associates saving with today’s saving accounts offered by banks because they promise interest for the saver, which is an additional gain in the future. To understand the concept of saving properly, we can look at a predecessor of today’s monetary system.
If we go back to the 19th century, for example, gold was used as money. With gold as money, it becomes clear what saving is about. Saving under a gold money standard means nothing more and less than collecting and stacking gold coins. If somebody, for example, could save up ten gold coins, maybe in a little trunk, then this person would still have precisely ten gold coins at a later time. There will be no gain nor a loss.
In the above-described concept of time preference, there is the variable X, which quantifies the additional gains that somebody claims for his present forgoing of access to additional resources. For that reason, in Austrian economics school, the concept of time preference is interpreted as the average interest rate resulting from a free capital market.
What does this mean? Let’s assume we would not live in a world with central banks, complicated laws, regulations, and intransparent institutional actors. You would be confronted with the simple situation that there are people who saved some money on the one side and people on the other looking for people with money because they want to invest it into something. Those loan seekers might want to build a new production building or acquire a new machine to produce additional goods, which can be sold afterward. In such a world, there is nothing more than a marketplace where savers are confronted with entrepreneurs seeking investment in their endeavors. The savers will now ask the entrepreneurs for compensation because the future is uncertain, and this must be reflected in their dealings. Such compensation is necessary for a saver to be willing to part with his hard-earned money.
Those savers manifest the supply side of the market. On the other side are the entrepreneurs with different investment ideas that promise different interest rates. All those entrepreneurs manifest the demand side of the market.
The supply and demand side will work toward an equilibrium through such a market, resulting in an average interest rate for loaning money for investments. This average interest rate describes the average price for money for capital investments. The difference between saving and investing is mainly that investing always comes with a risk.
Investments surely promise the gain of additional resources, but always only in connection to a corresponding risk. If a saver gives money for capital investment, he must always take the burden of that risk upon himself. Saving, on the other side, is free of risk. But, there is no outlook for potential gain when saving. Your savings will neither increase nor decrease, but they will be there for you, for example, in a moment of need.
To lower one’s time preference, one has to save, not invest, because only saving will satisfy one’s own need for safety. If people save a comparatively serious amount of money, they will feel less stressed about potential future events. Over time, such people will be more willing to loan money for risky capital investments. A society with high saving standards is also a society with a lot of willingness for investments.
Time preference and the process of Civilizing
Interpreting time preference as the quantization of one’s need for safety, the connection between that and the motivations of saving and investing, and the cumulation of all this in the free capital market is already highly relevant in the context of society. Even though it may sound a little bit dry to philosophize about the capital market, it should be noted that the resulting average interest rate is the base for estimating how valuable the present is compared to the future in society.
Time preference is a relevant concept way beyond the societal scope. Following loosely the argumentation of the economist and philosopher Hans-Hermann Hoppe, working toward lowering the time preference in a population is identical to the process of civilizing itself.
How can one even fathom such a connection in the first place?
The idea is that civilization is only possible based on a positive outlook on the future. Civilization is made possible by making things that last for a long time and increasing the output of things we produce. As has become clear through our analysis of the connection between the concept of time preference and the average interest rates on the free capital market, one should be able to intuitively grasp a close relationship between time preference and wealth.
On a most basic level of analysis, people do become more wealthy through the accumulation of capital. Capital is defined as a good that produces goods. So a fish is not capital, but a fishing rod is. A car can be capital, but only for the pizza delivery guy, not for the car manufacturer. More profane examples would also include farming and livestock. Farmland, as well as livestock animals, produce additional goods over time.
Especially in today’s discourses, there is frequently a synonymous usage of the words “capital” and “money”, which unfortunately leads to countless misguided argumentations and general confusion. Money itself produces nothing. Money is foundational for the satisfaction of our need for safety. Money, in that sense, is something enduring that is at hand if need to be.
On the other hand, there is capital. Capital cannot be found or stumbled upon. Capital must be created. A machine, for example, has to be built, and a cow has to be bought and brought over. Afterward, the machine, as well as the cow, can produce additional value for oneself. It is crucial, though, to note that there is always a risk of loss involved with capital creation. You can buy the cow, and once bought, it will continually supply you with fresh milk, but only if it doesn’t get sick or dies. Every investment is risky, simply due to the fact that the future is always contaminated with uncertainty.
It needs some bravery to acquire capital and a willingness to take the risk oneself. From time to time, the try to acquire capital will fail, but if one succeeds, the production of additional goods will follow, and one creates additional wealth. Capital becomes more valuable over time, as the longer it holds up, the longer it produces additional goods and increases wealth. Capital itself is a construct that becomes meaningful as well as possible only through the lens of an optimistic attitude toward the future.
The more people have saved, the better their need for safety is satisfied. People will be more willing to invest their money in the risky try to acquire capital. The more people try this, the more people will succeed. The more people succeed, the wealthier they will become over time.
A civilizing force will become visible throughout society if the time preference generally decreases. People are saving, satisfying their safety needs, and will look more relaxed toward the future. Short-term strategies will more often than not be exchanged for long-term alternatives. Surplus savings will be put toward the risky endeavor of acquiring capital, and the fruits of those attempts will lead to a better material situation in the future.
This process can become self-enforcing. If people who have already saved enough to satisfy their security needs succeed in becoming even wealthier through capital acquisition, the more investments they will be willing to try. Such a society will live through a significant period of cultural and economic flourishing, as expressed in great architecture or a lively art and music culture. Consider only the so-called Belle Epoque during the 19th century or the north Italian Renaissance. During does epochs, people had an especially low time preference.
Time preference in the context of the Zeitgeist
A speculation about the contemporary situation
As time preference is a quantifiable variable, it should give us an insight into the state of the civilizing process in the present. How, then, should we evaluate the immediate present? Are we in the process of increasing our degree of civilization, or are we becoming more barbaric? Even though this is a fascinating question, one cannot answer it with conclusive certainty.
The reason is relatively simple: The time preference of a population expresses itself through the means of the average interest rate on the free capital market. The problem is now: There are no free capital markets! A full explanation and critique of that fact would be complex and multifaceted. Still, to grasp a first intuitive understanding, it should suffice to point out that today’s money system is organized through a central bank, which defines a minimum interest rate. Accordingly, the interest rates on the capital markets are manipulated by a central authority.
That means that one must refrain from subsuming anything from the average interest rates in today’s capital markets that would make us any wiser in consideration of our interest in the attitude of people toward the future. The resulting interest rates are a mere expression of bureaucratic preferences and have become a political issue. I will not argue for the appropriateness or inappropriateness of current minimum interest rates because such an estimation must remain fruitless. After all, without data that can only be generated through a free capital market, the final evaluation remains unresolved.
I should at least want to deploy a little speculation. When high time preference is prevalent in a population, the need for safety is not satisfied. In a high time preference society, the outlook on the future should be primarily pessimistic. Of course, this has to be estimated by everyone for themselves, though I would argue that this applies perfectly to our current state of society in at least most western countries. In the blink of an eye, I can think about a couple of culturally important or even dominating narratives that would be adequately characterized as having a negative outlook on the future. The discourse about the climate crisis stands for this observation par excellence, as it proposes, in whichever nuanced version you prefer, that because of a too-ambitious use of the resources of this planet, a catastrophe will occur in due time. Countless public intellectuals subscribe to the opinion that our planet is overpopulated. Those narratives tend to follow the logic that we are too many people, and if we do not reduce this number significantly over a relatively brief time, a catastrophe will occur in due time. Also, there were countless summonings in public media during the still-lasting war in Ukraine about the potential beginning of a third world war and, of course, the employment of nuclear warheads that would, again, lead to a catastrophe to occur in due time. Every reader can think of a couple more examples that have dominated public discourses over the last few years. I don’t want to give my opinion on any of the above-described issues or criticize anyone for their particular opinion. Still, a lot of the narratives that dominate western culture and western societal discourse are primarily pessimistic.
Such developed angst and paranoia toward the future is undoubtedly abnormal and underlines the hypothesis that the need for safety is not satisfied to a sufficient degree. This becomes particularly clear when one looks at empirical investigations about the current state of the world as well as its recent development, like in Stephen Pinker’s book Enlightenment Now, that the frantic fears of many current societal and cultural participants seem somewhat out of place and based on no pragmatic foundation. The base and consequence of such long-lasting societal anxiety states are a decline of culture and civilization, but they also make one depressed.
The time preference must be lowered if one wants to work toward a better future than the present or the past. This is valid for the whole scale of society. Everyone can work on lowering their time preference, and political decisions can help to lower the time preference on the level of the whole society. I don’t plan on giving particular personal or policy advice in this essay, as those topics are too complicated to fit here.
In general, everything that enables people to save money easily works constructively toward lowering the time preference in society. At the same time, the contrary is also valid: Everything that makes it harder to save raises the time preference and leads to a degeneration of civilizational achievements.
That is the value of the future.
Sources
[1] Ammous, Dr. Saifedean: The Bitcoin Standard (2018)
[2] Ammous, Dr. Saifedean: The Fiat Standard (2021)
[3] Ammous, Dr. Saifedean: The Bitcoin Standard (Podcast)
[4] Booth, Jeff: The Price of Tomorrow (2020)
[5] Farrington, Allen: Wittgenstein’s Money (2020)
[6] Farrington, Allen: The Capital Strip Mine (2021)
[7] Farrington, Allen: Bitcoin is Venice (2021)
[8] Hernando, De Soto: The Mystery of Capital (2000)
[9] Hoppe, Hans-Hermann: Democracy — The God That Failed (2001)
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