Thursday, March 16, 2006

Immeasurable Importance of Immeasurable Time Preference!

Mortality, our connection to our earthly existence, is what makes time a scarce resource. Our constant perception that time is omnipresent makes time a dominant element in the economy. Yet despite this very obvious importance of time the concept known as time preference appears as a major economic determinant only in classical liberalism.

In a sense time preference is self explanatory. Because of time we humans prefer things now rather than later.

The subtle significance of time preference is that the future is bridged to the present. Future goods can be given present value, ultimately as a result of time preference. The willingness of people to finance any efforts that are not immediately, palpably fruitful depends on the degree of confidence there is in the future (as expressed in time preference).

Now comes the reason time preference is disregarded by empirical economists - it is not directly measurable! It is reflected in the pure interest rate which is also not directly measurable! Those 'economists' who are after convenience rather than seeking to understand time preference leave the scientific arena without discovering its significance.

The whole world of capital and capital structure came out into the open to those patient, probing economists of the classical liberalism tradition because they sought to understand time preference.

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