Time Preference Fallacy

There is a theory that lower time preference is better than higher, as it results in greater production and therefore greater wealth. This is a reversal of cause and effect.

Time preference is the economic axiom that states people prefer a "present good" over the same "future good". As a conflict with subjective value, this idea cannot be proven. Time is unique in that it is assumed to have inherent value. This assumption is grounded in the observations that people have limited time and that it is a necessary factor of all production.

Value derives from the human perception of utility. A person who trades a car for a horse objectively values the usefulness of owning the horse more than the car. This implies nothing about why one is more valuable to the person than the other, even given the exchange. The value placed on one good over another is a preference. It cannot be shown that a person will express a preference for any good, even his own life. The reason for a preference is not provable in rational economic theory, with one exception - the effect of wealth on time preference.

Diminishing marginal utility implies that each additional unit of a good accumulated by a person has a lower utility to the person than the previous. This implies that, for a given interest rate, increasing wealth implies an increasing willingness to lend. This is the expression of falling time preference, and is subsequently reflected in a falling interest rate due to the increased supply of capital competing for loans.

The economic rate of interest is merely a reflection of time preference. While anything can affect a person's time preference, only a change to wealth implies a necessary change. A higher interest rate implies a greater willingness for a person of a given time preference to lend. It would be an error however to assume that higher interest rates increase time preference. It is a similar error to assume that a person will be wealthier if he lowers his time preference. These are both reversals of cause and effect. As such the theory is invalid.

Infinite time preference implies no lending and therefore no production. Zero time preference implies no consumption of what is produced. Given that production exists only to satisfy eventual consumption, zero time preference also implies no production, as there is no value attributable to the consumption of products. Therefore lowest time preference is not inherently more productive. As such the theory is invalid. Time preference is a balance between consumption and production.

A person's wealth increases only to the extent that he is more able to satisfy his preferences, including those for present and deferred consumption. States employ fiscal and monetary stimulus in an attempt to increase consumption or production respectively. Yet this comes at the cost of taxation. The outcome is the shifting of capital allocation decisions from the market to the state, resulting in capital wasted on unconsumed (glut) or unavailable (shortage) products. This implies people are less able to satisfy preferences. However it implies no change to the preferences that they hold, except as tax diminishes their wealth or subsidy increases it.

Economics does not make value judgments, it infers their necessary consequence. The theory presumes a morality, which can be assumed but must be objective. Aggression differentiates the free market from market intervention, such as by the state. However, even if one accepts nonaggression as the moral divide, no moral distinction between higher and lower time preference exists. There is no ratio of consumption to production that implies aggression, it remains subjective despite being affected by wealth. As such the theory is invalid.

It can be enlightening to consider the subjectivity of value in terms of sexual preference.

{ X, Y }
{ X->X, Y->Y }
{ X->X|Y, Y->X|Y }
{ X->Y, Y->X }

One might consider this list ordered in terms of increasing production (i.e. producing more humans). Many states attempt to reduce the expression of sexual preference to the set { X->Y, Y->X }. Both outright criminalization of expression and explicit financial incentive for it are employed to this end. This has a discernible impact on expression of sexual preference, but cannot be said to have any impact on the preference itself.

Similarly it should be clear that an increase in production is not objectively good. People doing what they prefer is the moral good, again assuming the moral principle of nonaggression. Even if we assume all people prefer continuation of the species, this implies no effect on individual sexual preferences.

A related theory states that people can demonstrate lower time preference by hoarding more bitcoin. An increased level of hoarding at the expense of lending implies higher time preference. An increased level of hoarding at the expense of consumption seems to imply a lower time preference, since consumption appears deferred. Yet a hoard represents only the liquidity required for consumption.

As a game of chance, any speculation is consumption of the cost of "playing", supported by its required liquidity. This cost is, at a minimum, the opportunity cost of not lending the amount (i.e. interest). Despite the fact that the game, like all consumption, requires time, the expressed preference is to play the "game", not to capture time value. As such this theory is also invalid.

There is a related theory that time preference is expressed by deferred consumption - when a person accumulates savings vs. consuming those savings. As shown in Speculative Consumption this misrepresents all savings as implied investment. Savings is a general term encompassing both a person's hoard and investment.

Savings is the source of all investment, but only actual investment expresses time preference. A hoard can certainly change in marketable value. But considering a greater hoard an expression of lower time preference is a common colloquial misinterpretation of the economic meaning of the term. This reverses its meaning, leading to such conclusions such as full hoarding expresses zero time preference. Yet with full hoarding interest rates are infinite, and infinite interest reflects infinite time preference. This direct contradiction exposes the fact that the meaning of the term time preference has been reversed, invalidating the theory.