Time preference

Glossary definition: The preference for present goods over an equal quantity of the same goods available in the future. Time preference explains the existence of interest: future goods are valued at a discount against present goods.

In plain words

If you are offered the same apple today or in a year, you choose today. Time preference is this preference for present goods over the same goods in the future.

To wait, one must be offered something more in the future. That difference is interest. The more willing people are to wait (low time preference), the more they save and the lower the market rate of interest.

An example

Robinson catches fish by hand. If he eats a little less for a few days, he gains time to make a net; after that he catches far more fish. Today’s sacrifice (saving) becomes capital (the net), which makes his work more productive.

The Austrian viewEugen von Böhm-Bawerk explained interest by the different valuation of present and future goods; Mises showed that time preference is a category of all human action. When the central bank pushes interest rates down artificially, it falsifies this signal and causes the business cycle; when inflation eats savings, it penalizes those who wait and favours consumption today.

In the original“Time preference is a categorial requisite of human action.”

Ludwig von Mises, Human Action, ch. XVIII, §2 “Time Preference as an Essential Requisite of Action” · mises.org ↗

Definitions are from the site’s Glossary; the examples and the “Austrian view” are Praxeologos’s reading. Links to outside sources open in a new tab.