This section is from the "Economics In Two Volumes: Volume I. Economic Principles" book, by Frank A. Fetter. Also available from Amazon: Economic
§ 6. Beginnings of durative direct goods. The illustrations of time-value thus far have been of consumptive direct use of goods. (See the analysis in Chapter 11, section 1.) These are the nearest to psychic income, and in this class of cases time-value appears in its simplest form. Historically viewed, likewise, this is the starting point of time-value. The animals (with few exceptions) live only in the realm of value that contains present, direct, consumptive uses. The savage's range of vision and choice is wider, but still is limited mainly to direct present uses gained with such aid as his simple tools and weapons afford. He leads necessarily "a hand to mouth" existence. He has no surplus stock except by lucky chance. Lack of success for a few days in the everlasting search for food means hunger, then famine, and the diseases which always follow in its train. The increase of wealth in early times, therefore, took largely the form of larger stocks of direct goods. Some of these were of a kind that could be kept, such as stores of vegetable food, flocks and herds of animals kept to be eaten, hoards of precious ornaments, more and better clothing and shelter, weapons of the chase, horses, dogs, etc., which were valued also as direct agents in sport, not merely as means of getting food.
§ 7. Valuation of durative direct goods. Let us now extend our study of time-value to more durative direct goods. (See numerous illustrations, Chapter 11, sections 2 and 3.) Take a dwelling as an example. Literally every moment's use of a house is a separate use, but for convenience these infinitesimal uses are grouped into conventional units, as one day's or month's or year's use, evaluated all at one date. The uses of a house for the next ten years may be practically the same in a physical sense but they are distributed in time. But it is not a stock of present, non-perishable goods which may be all treated as present uses or all as future uses subject to the leveling influence of time-preference. Each use is fixed in time and must be valued there or not at all. (See Figure 34.) If every future use were valued now without discount, the present values of the units would be represented by the top line. If this occurred in the case of a durable house that should last a hundred years, the total present value of future uses would be one hundred times this year's use. A piece of real-estate kept up under the renting contract has an indefinite series of uses, which if not discounted would have an incredibly large present value, a thousand times, or an infinite number of times, the value of the annual use. But if the future uses (as usually happens) are discounted in the pres-ent, this might be represented by the descending line. Such regularity results, however, only in a market where the great variety of individual differences of conditions have been combined into a market-rate of time-preference. A (Figure 35) has a growing family and the uses of the house will steadily increase for the next six years, and then, as his children leave home, will decline. B is expecting to be away for a time, and the house will first yield uses of smaller, then of larger, value. If each of these persons or families were in a Crusoe economy such differences would affect the amount of labor and materials put upon a house, the year in which it would be built or improved, etc. But in a market for house uses many other adjustments are possible, through moving out and moving in, buying and selling, sub-letting, etc., by which these differences of individuals' circumstances largely disappear, and only the general and persistent discount, reflecting a market-rate of time-preference, remains. A diamond necklace is a good example of an absolutely durative series of uses. If each year the value of the use is expected to mature as one hundred dollars, the necklace would have an infinite value if the future uses were not discounted.
§ 8. Relation of technic to time. Directness of use (technical) and timeliness are not the same. (See 10.) Of the thousands of forms of matter in the world, only a comparatively few ever will make an immediate impression on man's senses. But many of them are in his life so connected with uses by instinct, association, and reasoning that he attaches an importance to them. In most cases it would require close thought to see that the service attributed directly to them is but a reflection of that performed by some other thing. To include indirect uses in choice, calls for something the same kind of wider vision that is needed to include future uses. Indirectness and futurity may be, and often are, united in a single concrete good. Indeed, these two qualities of goods are very commonly confused in thought, whereas their gradations are in different planes of thought; they are, so to speak, at right angles with each other but having a single point in common. This may be graphically represented as in Figure 36. § 9. Examples of technical and time differences. Mere technical indirectness per se has nothing to do with time-value. If a technical process involving a half-dozen or more steps is completed within an instant, then the most indirect agent must have all the value reflected to it from the product, subject to no discount on account of the lapse of time. The man can get the nuts by climbing the tree, or by taking a stick and knocking the nuts to the ground. The difference in the time of the two processes is negligible, the indirect method
* The block A represents the comparatively small area of direct present goods. The economic subject, M, enjoys those direct uses of goods at each present moment. The rectangle A-Z represents all present goods, ranging from most to least direct. Their technical uses are being transmitted along the line from Z to A, while M and all his possessions are being carried along from M to N by the stream of time. The indirect uses of goods thus are like swimmers moving toward an opposite shore and being carried along by the time-stream. They move across at different angles, for while time moves at the same rate for all, the swimmers move forward at very different rates. Some uses that are very indirect technically, are causing psychic income almost at once (line Z-B) ; other uses but slightly indirect, the slow swimmers, are not to attain the shore of direct use for a long time as they move through the successive technical stages. The course they describe would be represented by the straight line Z y 6; or if the early indirect steps are faster or slower than the later ones, the agents describe courses represented by Z x N and Z z N. securing the product as soon as the direct method. Hence there is no choice between the two as to the time-remoteness of the product, but only as to the amount of the product per unit of labor (or ease of labor to get the same product). If sticks are free goods, the whole amount of the additional product is attributed to the labor; if sticks are scarce, a part of the product must be attributed to the usance of the stick. But that is a usance-problem, not a time-value-problem. But if the same amount of labor will plant another tree which will yield a much larger and better crop annually after twenty years, then time is an element. Or again: the coal heats the iron tubes, the tubes heat the water, the steam moves the piston rod, the piston rod turns the wheel, the wheel a belt, the belt turns a dynamo, the dynamo generates electricity, the electricity is carried through a wire to a filament in a glass bulb, and you are enjoying artificial daylight in your home. The coal is the first link in a chain of indirect uses the last link of which is at the same instant yielding a direct use. Whatever part of the value of the use is imputable to the coal on value-principles, as one of the various complementary agents, is, so to speak, payable on the instant. When, however, the roundaboutness of the process is necessarily time-consuming, then time-preference operates. For an interval of time divides the indirect use of the agent and the final psychic income from which its value must be reflected. If the coal has been mined for some time, time-value is involved in the relation between the worth of the coal when it was mined and its worth when it is turned into illumination. Various possible ultimate uses, at various degrees of distance in time from the present, some a year, some five years, some twenty years, may compete for some indirect agents. The various products are located at different points in the line of time, and because of this difference (besides other differences) appeal with varying degrees of force to desires. If this were not so time-preference would have a zero magnitude.1
1 This distinction between timeliness and roundaboutness must be kept clearly in mind, for confusion at this point betrays one into a false notion of the nature of interest.
§ 10. Degrees of roundaboutness ruled by time-preference. Nearly the whole of the great mass of indirect goods applied to making stuff-, form-, and time-changes require more or less the lapse of time to yield their uses. True, the indirect uses as well as the direct uses of goods (see Chapters 9 and 10) may be more or less hastened or delayed, but that is a time-change that involves the sacrifice of other agents. There is in each economy a certain normal time-point, a point of maximum economy for a product to appear. Rush orders are always costly. If a horse is worked beyond a certain point, the present use shortens the horse's working life. If, to save another trip, a wagon is too heavily loaded it is strained or broken. If a machine is geared to run beyond a certain speed, it does poorer work or goes to pieces. A sudden rise in the value of the product may warrant the sacrifice of agents. To warn the inhabitants of the valley that the dam has broken, the rider may ride his horse to death. To keep from freezing, a man will use mahogany furniture as firewood. A war vessel going into action throws overboard the piano and other cabin fittings. The outbreak of war sets all the armories to working overtime.
What is the psychological change that happens in these cases? The present use suddenly becomes so much more valuable than the future use, is so much preferred, that the mode of use, or intensity of use, is altered. Time-preference dominates the technical processes. And this is so in normal as in abnormal times. The normal time-point, the point of maximum economy, at any period, is one where the uses of indirect agents are distributed along the path of time in accord with an existing rate of time-preference. If next year's uses are now valued just as much as this year's uses, there would be one choice of roundabout processes, if they are valued one tenth less, there will be a very different application of indirect agents. There is thus a relation between roundaboutness and time-preference, but it is one in which the mere mechanical method is passive and subordinate to human choice, time-preference.