This section is from the "Economics In Two Volumes: Volume I. Economic Principles" book, by Frank A. Fetter. Also available from Amazon: Economic
§ 1. Subjective rate of time-preference. § 2. Time-preference showing in care and repairs. § 3. Time-preference showing in production of indirect agents. § 4. Time-preference rate pervading an economy. § 5. Time-preference and moral weakness. § 6. Beginnings of durative direct goods. § 7. Valuation of durative direct goods. § 8. Relation of technic to time. § 9. Examples of technical and time-differences. § 10. Degrees of roundaboutness ruled by time-preference.
§ 1. Subjective rate of time-preference. The fundamental ideas of value (developed in Part I) have application to the rate of time-preference. Wherever there is a good that offers a time-choice to its possessor, there arises valuation as regards time. One may eat the apple now (a typical direct good) or postpone its use, may shift it forward or backward in time. "We know little of the absolute magnitudes of the desires that men may have for these things at the two different points of time. We infer only that if a man eats the apple now, his desire for its present use is greater than his present desire for its future use. The preference of the present may be due (case 1) to the prospect that apples which are scarce now will be much more plentiful in the future; there we feel almost warranted in saying that the absolute magnitude of the present value is greater than it will be at that future time. We at least feel that we can infer something as to this. But again (case 2) the present use is chosen when the prospect is that apples will be no more plentiful, indeed when it is certain that they will be less plentiful, but when our need and our desire for them will be greater. Again (case 3) when one eats a part and keeps a part of a large crop and the keeping involves no trouble or cost whatever, and no loss from decay, etc., there may be no difference whatever in the present values of the different units of the stock. The principle of indifference applies. But in almost every conceivable case the keeping of a good calls for some labor (thought and physical effort) and the use of agents valuable for other purposes (case 4). The present value of a future unit would have to be therefore at least enough greater than that of the present unit to make up this additional cost, otherwise it will not be kept. Present value plus estimated cost of keeping equals present value of future unit. There is time-preference for the future, exactly offset by costs. The marginal unit for each period would be in equilibrium with the marginal unit in the other period. (See Figure 32.)
In these cases, however, there is no element of pure time-preference, other than that offset by costs, no degree of preference for the present unit simply because it is present. The supposition involved is that of equality of value to the results of equal expenditures of labor and to equal amounts of other agents regardless of the time-distance at which various products would appear. Even in a Crusoe economy such a preference must exist. If Crusoe disregarded all time-differences he would take exactly the same thought of the products of fifty years distant as he did of present products and would put just as much of his labor and equipment upon them; that is, he would divide the year's products into fifty (or more) parts, using only a fiftieth. Normally he uses all or nearly all of this year's income, leaving to next year's labor and equipment the task of providing for next year's needs. Practical observation and all the considerations adduced above (Chapters 3, 10, and 20) regarding man's nature, support the view that present desires will receive on the whole more attention than future desires. If any true time-preference whatever prevails, it must be at some rate, in each case, tho the rate may vary with the mood and the conditions in which Crusoe finds himself. One could, by watching different individuals working at their own affairs, form a general opinion, often a pretty accurate one, as to whether their rates of time-preference were high or low. It would show in many ways in their use of their own time and of their stocks of goods, in the qualities of thrift, industry, prudence, etc. But to express any general rate at all exactly would be most difficult so long as we observed only the choice among many objects, without any common standard of value in which to compare them.
§ 2. Time-preference showing in care and repairs. If Crusoe's time-preference (for the present) were very high it would show in his use both of his stock of enjoyable goods and of his stock of indirect durative agents. (See Chapter 11, section 11, on the economy of repairs.) When he landed in his canoe he would let it lie on the beach at the risk of its being filled with water or dashed against the rocks, or carried out to sea. This act necessarily implies that at that moment he values his own effort to pull it up more than he values the dimly seen necessity of bailing it out to-morrow, or of repairing the injury done by the rocks, or of making a new one when this is lost. When his house leaks he would do as the proverbial Arkansas farmer (not peculiar to that state), who could n't mend his roof when there was rain and saw no need to mend it when there wasn't. Crusoe's use and management of his garden, of his fowls, and of his goats, their feeding, breeding and care, all would involve and express a certain comparison between present and future vegetables, grain, eggs, milk, cheese, goat meat and skins, his own labor, etc. In every economy, whether in Crusoe's or in a larger community, the practice of each individual as to repairs and the efforts made by him to offset depreciation, inevitably embody that individual's rate of time-preference in a thousand ways, tho it varies more or less with his mood, health, fatigue, etc., and tho he is quite unconscious of any arithmetic expression of it.
A rate would show itself among other ways, in the need of more labor and more materials later, than would suffice now. A handful of earth may stop a hole in a dyke, whereas a trainload would be insufficient later. Whenever it is true that a stitch in time (now) saves nine (next year) and the stitch is not taken, then the neglect involves a rate of 800 per cent in terms of present stitches (one now, increment next year eight). If one day's labor now on the canoe is found by experience to save two days' labor a year later and it is not taken, then the rate is over 100 per cent a year (one now, two next year; increment one, or 100 per cent of quantity). Plainly, however, two greatly diverse rates if recognized, could not long continue to exist side by side. For if the rate were even 99 per cent, not only would the canoe be mended but the stitch would be taken in time wherever it would save two or more stitches next year. And so, it would be if there were a thousand different kinds of repairs to be done. There would not be a thousand different actual rates of physical increments; for so far as there is any normal habit or consistency in the individual's conduct these different rates of increments will be brought more or less into conformity with a prevailing rate of time-preference. "Whatever that rate be, there is good reason to make the possible repairs that involve a greater rate. But those repairs, the neglect of which involve a smaller increment, ought not to be made. The rate of time-preference, like an isothermal line, marks off the repairs that hypothetically would involve a greater increment (and which now are made) from those which involve a less rate (which now are left undone).
* The bars of different length represent repairs involving different rates of time-preference. If the rate is nine per cent, all the kinds of repairs here shown would be made. The same illustration applies to the choice of indirect processes, discussed in sec. 3.