However, no matter what a person's original time-preference rate or what the original distribution of such rates within a given population, once it is low enough to allow for any savings and capital or durable consumer-goods formation at all, a tendency toward a fall in the rate of time preference is set in motion, accompanied by a "process of civilization."7
The saver exchanges present (consumer) goods for future (capital) goods with the expectation that these will help produce a larger supply of present goods in the future. If he expected otherwise he would not save. If these expectations prove correct, and if everything else remains the same, the marginal utility of present goods relative to that of future ones will fall. His time-preference rate will be lower. He will save and invest more than in the past, and his future income will be still higher, leading to yet another reduction in his time-preference rate. Step by step, the time-preference rate approaches zero—without ever reaching it. In a monetary economy, as a result of his surrender of present money, a saver expects to receive a higher real-money income later. With a higher income, the marginal utility of present money falls relative to future money, the savings proportion rises, and future monetary income will be even higher.
If [the lower class individual] has any awareness of the future, it is of something fixed, fated, beyond his control: things happen to him, he does not make them happen. Impulse governs his behavior, either because he cannot discipline himself to sacrifice a present for a future satisfaction or because he has no sense of the future. He is therefore radically improvident. ... He works only as he must to stay alive, and drifts from one unskilled job to another, taking no interest in his work.... He is careless with his things ... and, even when nearly new, they are likely to be permanently out of order for lack of minor repairs. His body, too, is a thing "to be worked out but not repaired." (Banfield, The Unheavenly City, pp. 61-62)
Phenomena typically associated with the "lower class," such as family breakdown, promiscuity, venereal disease, alcoholism, drug addiction, violence, crime, high infant mortality, and low life expectancy, all have a common cause in high time preference. Their cause is not unemployment or low income. Rather, notes Banfield, causation is, if anything, the other way around: lasting unemployment and persistently low incomes likewise are the effects of an underlying high time preference.
As another important exception to the general neglect of the phenomenon of time preference at the hands of noneconomists see T. Alexander Smith, Time and Public Policy (Knoxville: University of Tennessee Press, 1988).
7For a detailed empirical, socio-psychological description of the phenomenon of the "process of civilization" see also Norbert Elias, Uber den Prozess der Zivilisation (Frankfurt/M., 1968); English edition, The Civilizing Process: A History of Manners (New York: Urizen Books, 1978).
Moreover, in an exchange economy, the saver-investor also contributes to a lowering of the time-preference rate of nonsavers. With the accumulation of capital goods, the relative scarcity of labor services increases, and wage rates, ceteris paribus, will rise. Higher wage rates imply a rising supply of present goods for previous nonsavers. Thus, even those individuals who were previously nonsavers will see their personal time-preference rates fall.
In addition, as an indirect result of the increased real incomes brought about through savings, nutrition and health care improve, and life expectancy tends to rise. In a development similar to the transformation from childhood to adulthood, with a higher life expectancy more distant goals are added to an individual's present value scale. The marginal utility of future goods relative to that of present ones increases, and the time-preference rate declines further.8
Simultaneously, the saver-investor initiates a "process of civilization." In generating a tendency toward a fall in the rate of time preference, he—and everyone directly or indirectly connected to him through a network of exchanges—matures from childhood to adulthood and from barbarism to civilization.
In building up an expanding structure of capital and durable consumer goods, the saver-investor also steadily expands the range and horizon of his plans. The number of variables under his control and taken into account in his present actions increases. Accordingly, this increases the number and time horizons of his predictions concerning future events. Hence, the saver-investor is interested in acquiring and steadily improving upon his knowledge concerning an increasing number of variables and their interrelationships. Yet once he has acquired or improved his own knowledge and verbalized or displayed it in action, such knowledge becomes a "free good," available for imitation and utilization by others for their own purposes. Thus, by virtue of the saver's saving, even the most present-oriented person will be gradually transformed from a barbarian to a civilized man. His life ceases to be short, brutish, and nasty, and becomes longer, increasingly refined, and comfortable.
Figure 1 provides a graphic illustration of the phenomena of time preference and the process of civilization. It relates individual time-preference rates (the height of the premium of a specified present good over the same good at a specified later date which induces a given individual to engage in intertemporal exchange) on the vertical axis to the individual's real money income (his supply of present money) on the horizontal. In accordance with the law of marginal utility, each individual timepreference curve, such as Tl or T2, slopes downward as the supply of present money increases. The process of civilization is depicted by a movement from point 11—with a time preference rate of til—to point 22—with a time preference rate of t22. This movement is the composite result of two interrelated changes. On the one hand, it involves a movement along Tl from point 11 to 12, representing the fall in the time-preference rate that results if an individual with a given personality possesses a larger supply of present goods. On the other hand, there is a movement from point 12 to 22. This change from a higher to a lower time-preference curve—with real income assumed to be given—represents the changes in personality as they occur during the transition from childhood to adulthood, in the course of rising life-expectancies, or as the result of an advancement of knowledge.
8to avoid any sort of misunderstanding, it must be made clear that the mere fact of a longer life has no impact on time preference. Rather, it is only the individual's personal knowledge—the subjective expectation—of this fact, that leads to a fall in a person's degree of time preference.
Time Preference, Property, Crime, And Government
The actual amount of present goods allocated to the production of future goods depends on the one hand on a person's technical knowledge. For instance, without the knowledge of how to build a fishing net, Crusoe obviously could not have begun to exchange present goods for future ones, that is, to save and invest. On the other hand, given a person's technical knowledge, the amount of saving depends solely on his supply of present goods and his time-preference schedule. The smaller his supply of present goods and the higher his time-preference schedule, the higher his effective time-preference rate and the lower his actual savings will be.
In the beginning of humanity, there was only "land" (nature-given resources and obstacles) and "labor" (human bodies). Strictly speaking, the only given supply of any good is that of body-time. The supply of all other goods—be they perishable or durable consumer goods such as berries or caves, or indirectly useful goods (production factors), such as berry bushes and their surrounding land—is not "given." It is the result of someone's prior action; of the appropriation (homesteading) of nature by a specific individual. The facts and laws of nature and human biology are "givens," of course, and nature as such may be generous or skimpy. But only through an individual's act of appropriation is nature turned into a supply of goods. It is even more obvious that the supply of all produced goods is not "given." Be they consumer goods, which have been stored, conserved or made more durable, or produced factors of production (capital goods), they are all the outcome of the activities of specific individuals. Finally, technical knowledge is also not a "given." Tha
t one potato saved today can yield ten potatoes one year from now may be a fact of nature, but one must first have a potato. Yet even if one did and one were perfectly willing to invest it for this return or an even lower one, such a fact would be irrelevant unless the person in question knew the laws of potato growing.
Thus, neither the supply of present goods nor technology is given or fixed. Rather, they are artifacts, created with the intention of improving their appropriator-producer's well-being. These expectations can turn out right or wrong, and rather than securing a profit for the actor, his actions may result in a loss. But no one would spend any time picking berries unless he expected the berries to be edible. No one would appropriate a berry bush unless he thought that this would enhance his berry harvest. No one would want to learn about any fact or law of nature unless he anticipated that such knowledge would help him improve his circumstances.
In a social context, an individual's supply of appropriated and produced goods, his time-preference schedule, and hence his effective timepreference rate may also be affected by the actions-and the expectations regarding these actions—of others.9
The tendency toward a fall in the time-preference rate and the accompanying process of civilization will proceed so long—as has so far been tacitly assumed to be the case—as no one interferes with another's acts of nature-appropriation and production. So long as this is the case and each person is respected by everyone else as the owner of his supply of body-time and whatever goods he has appropriated and produced such that everyone may enjoy, unmolested by others, all present and future benefits to be derived from these goods, the existence of more than one person either leaves the tendency toward a fall in the time-preference rate unchanged, or it even accelerates and reinforces the very process. The former is the case if and insofar as A appropriates a previously unowned, nature-given good, or if he transforms such a good into a different one without causing any physical damage to the goods owned by another person B. A's supply of present goods, or the value of such goods for A, is increased, and hence, ceteris paribus, his time-preference rate will fall. Because A's acts have no impact on the supply of goods owned by B, B's time-preference rate remains unaffected. Furthermore, the tendency will actually be accelerated insofar as A and B, based on the mutual recognition of each other's property, engage in voluntary trade or cooperation and even without any such exchange insofar as they merely observe each other's activities and copy each other's knowledge. For any voluntary trade or cooperation between A and B increases—ex ante—the supply and/or the value attached to the supply of the goods of both parties (otherwise it would not take place), and hence the time-preference rate of both Aand B will fall. Moreover, by learning facts and laws from one another, such as that there are potatoes, that potatoes can be eaten, or that one's present potato may yield ten future ones, the tendency toward a fall in the rate of time preference spreads from one person to another.
However, if violations of property rights occur and the goods appropriated or produced by A are stolen, damaged or expropriated by B, or if B restricts the uses that A is permitted to make of his goods in any way
9See on the following Rothbard, Man, Economy, and State, pp. 147-59; see also idem, Power and Market (Kansas City: Sheed Andrews and McMeel, 1977); HansHermann Hoppe, A Theory of Socialism and Capitalism (Boston: Kluwer, 1989); idem, The Economics and Ethics of Private Property (Boston: Kluwer, 1993).
(apart from not being allowed to cause any physical damage to the property of B), then the tendency toward a fall in the rate of time preference will be disturbed, halted, or even reversed.
The violations of property rights—and the effect they have on the process of civilization—can be of two kinds. They can take the form of criminal activities (including negligent behavior), or they can take the form of institutional or governmental interference.
The characteristic mark of criminal invasions of property rights is that such activities are considered illegitimate or unjust not only by the victim, but by property owners in general (and possibly even by the criminal himself). Hence, the victim is considered to be entitled to defend himself if need be by retaliatory force, and he may punish and/or exact compensation from the offender.
The impact of crime is twofold. On the one hand, criminal activity reduces the supply of the goods of the victimized appropriator-producer -exchanger, thereby raising his effective time-preference rate (his timepreference schedule being given). On the other hand, insofar as individuals perceive a risk of future victimization they will accordingly reallocate their resources. They will build walls and fences, install locks and alarm systems, design or buy weapons, and purchase protection and insurance services. The existence of crime thus implies a setback in the process toward a fall in the rate of time preference as far as actual victims are concerned, and it leads to expenditures—by actual and potential victims—which would be considered wasteful without the existence of crime.10
Therefore, crime or a change in its rate has the same type of effect on time preference as the occurrence or a changed frequency of "natural" disasters. Floods, storms, heat waves, and earthquakes also reduce their victims' supplies of present goods and thus increase their effective timepreference rate. And the perceived risk-change of natural disasters also leads to resource reallocations and expense adjustments—such as the construction of dams, irrigation systems, dikes, shelters, or the purchase of earthquake insurance—which would be unnecessary without these natural risks.
More importantly, however, because actual and potential victims are permitted to defend, protect, and insure themselves against both social disasters such as crime as well as natural ones, the effect of these on time preference is temporary and unsystematic. Actual victims will save or invest a smaller amount of goods because they are poorer. And the altered risk perceptions among actual and potential victims shape the direction of their future actions. But as long as physical protection and defense are permitted, the existence of social or of natural disasters does not imply that the time-preference degree of actual or potential victims —their degree of /uh
10See also Gordon Tullock, "The Welfare Costs of Tariffs, Monopolies, and Theft," Western Economic Journal 5 (1967).
Matters fundamentally change and the process of civilization is permanently derailed whenever property-rights violations take the form of government interference, however. The distinctive mark of government violations of private property rights is that contrary to criminal activities they are considered legitimate not only by the government agents who engage in them, but by the general public as well (and in rare instances possibly even by the victim). Hence, in these cases a victim may not legitimately defend himself against such violations.13
11In terms of Figure 1 above: Social and natural disasters alike imply a movement upward and to the left on a given time-preference curve—insofar as actual victims are concerned. But they do not imply a change in a person's character structure, i.e., a shift from a lower to a higher time-preference curve. Such a shift occurs in the presence of government disasters, however.
12 On the evolution and efficiency of systems of competitive law courts and privately provided defense and law enforcement see Gustave de Molinari, The Production of Security (New York: Center for Libertarian Studies, 1977); William C. Wooldridge, Uncle Sam the Monopoly Man (New Rochelle, N.Y.: Arlington House, 1970); Murray N. Rothbard, ForANew Liberty (New York: Macmillan, 1978); Hoppe, The Economics and Ethics of Private Property; Morris and Linda Tannehill, The Market for Liberty (New York: Laissez Faire Books, 1984); Terry Anderson and P.J. Hill, "The American Experiment in Anarcho-Capitalism: The Not So Wild, Wild West," Journal of Li
bertarian Studies (1980); Bruce L. Benson, "Guns for Protection, and other Private Sector Responses to the Government's Failure to Control Crime," Journal of Libertarian Studies (1986); idem, The Enterprise of Law: Justice Without the State (San Francisco: Pacific Research Institute, 1990); Roger D. McGrath, Gunfighters, Highwaymen, and Vigilantes: Violence on the Frontier (Berkeley: University of California Press, 1984); idem, "Treat Them to a Good Dose of Lead," Chronicles (January 1994).
13On the theory of the state see besides the works cited in footnote 9 above Franz Oppenheimer, The State (New York: Vanguard Press, 1914); idem, System der Soziologie, vol. 2, Der Staat (Stuttgart: Gustav Fischer, 1964); Alexander Rustow, Freedom and Domination (Princeton, NJ: Princeton University Press, 1980); Charles Tilly, "War Making and State Making as Organized Crime," in Bringing the State Back In, Peter B. Evans, Dietrich Rueschemeyer, and Theda Skocpol, eds. (Cambridge: Cambridge University Press, 1985); Richard Epstein, Takings: Private Property and the Power of Eminent Domain (Cambridge, Mass.: Harvard University Press, 1985).
The imposition of a government tax on property or income violates a property or income producer's rights as much as theft does. In both cases the appropriator-producer's supply of goods is diminished against his will and without his consent. Government money or "liquidity" creation involves no less a fraudulent expropriation of private-property owners than the operations of a criminal counterfeiter gang. Moreover, any government regulation as to what an owner may or may not do with his property—beyond the rule that no one may physically damage the property of others and that all exchange and trade with others must be voluntary and contractual—implies a "taking" of somebody's property on a par with acts of extortion, robbery, or destruction. But taxation, the government's provision of liquidity, and government regulations—unlike their criminal counterparts—are considered legitimate, and the victim of government interference—unlike the victim of a crime—is not entitled to physical defense and protection of his property.
DemocracyThe God That Failed Page 4