DemocracyThe God That Failed (5 page)

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).

⁷
For 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.

⁸
to 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." That 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

⁹
See 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).