Thursday, April 09, 2009

"Consumer Time Preference"

The three words above sound like some forebodingly complex economic term... but what it means is really quite simple. An individuals "time preference" simply refers to how patient one is, whether one is willing to wait through hard work to reach a better result, or whether one is impatient and demands pleasure and leisure NOW, and damn the future. The later is an attitude many commentators decry about Americans in general. In economic jargon, the level of "consumer time preference" in America is very high.

What does this means? Imagine some kind of small community, living on a temperete island with about a hundred people, cut off from the world. Their future prospects are very dependent upon the level of "consumer time preference" found within the community. If they spend spring and summer just taking what food is available from the local environment, eating and wasting it all, saving nothing for later, when winter comes, there will be no food (or at least, not any food that doesn't come without extreme hardship). They will starve to death. If, however, they work a little harder, consume a little less, storing up preserved foods, when winter comes, they will have more and better to eat.

Even if the island is tropical, their future prospects are still dependent upon time preference. If they work to create a store of goods to draw upon, tools and structures to make living easier and more pleasant, in exchange for hard work earlier, they will have a more pleasant life later. If all they do is lounge about on the beach, eating what comes their way, they'll just have to suffer through the gaps in the food supply, and won't have good shelter against the occasional tropical storm. Time preference is important.

What is true of the small, aboriginal community (which can only advance beyond the aboriginal state by thinking beyond a single year), is also true of a civilized, industrial community. If people are willing to wait for the larger, more efficient factory, their future quality of life will be better, with consumer goods made more efficiently (and thus consumers paying lower prices and able to buy more of everything). If they're not, prices remain high.

It's worse is if a generation arises which has a lower aggregate consumer time preference than the previous one. Such a generation might neglect the maintenance of the large factory (prefering to be lazy and just let things fall apart than maintaining a high standard of quality) and actually reverse the community's standard of living. An industrial community has much farther to fall than an aboriginal one: they can spend considerable time consuming their capital structure before their standard of living falls as a result. An aboriginal community that neglects its minimal capital structure feels hardship rather quickly, a much swifter correction.

(A good way to imagine this at a very low level is to envision how one keeps his house. A clean, organized house is both more pleasant, and easier to navigate. Its easier to find things. It's less likely to have actual sanitation issues. It is evidence of a low time preference: the inhabitants are willing to spend their time now so they might enjoy the benefits of a clean house in the future. A high time preference person would rather goof around now and deal with the consequences later, even if it means he spends more time overall looking for things. Anyone who sees the way I keep my living space can see that, personally, I am a very high time preference kind of guy.)

Is consumer time preference something that can be shaped? Can a community which displays a low time preference be made to change for the better? Or is it purely random, or even static? Can it be measured? If it can be changed, I would imagine the method would involve some sort of encouragement or reward for those who have low time preferences (and thus are building the community up), perhaps some sort of penalty for those whose high time preference potentially erodes the community.

This is long enough for one entry, so I'll continue next week, with the shape of an institution that does, in fact, reward low time preference and offer a measure of a community's overall time preference.


Anonymous said...

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Tarvok said...

Heh, ok. What was the assignment on, and how did you use my material?