§2. Reduction to Enjoyment Income

What are these goods which are thus contrasted? At first sight it might seem that the goods compared may be indiscriminately wealth, property, or services. It is true that present machines are in general preferred to future machines; present houses to future houses; land possessed today to land available next year; present food or clothing to future food or clothing; present stocks or bonds to future stocks or bonds; present music to future music, and so on. But a slight examination will show that some of these cases of preference are reducible to others.

When present capital wealth, or capital property, is preferred to future, this preference is really a preference for the income expected to flow from the first capital wealth, or capital property, as compared with the income from the second. The reason why we would choose a present fruit tree rather than a similar tree available in ten years is that the fruit yielded by the first will come earlier than the fruit yielded by the second. The reason one prefers immediate tenancy of a house to the right to occupy it in six months is that the uses of the house under the first leasehold begin six months earlier than under the second. In short, capital wealth, or capital property, available early is preferred to the capital wealth, or capital property of like kind, available at a more remote time simply and solely because the income from the former is available earlier than the income from the latter.

Thus all time preference resolves itself in the end into the preference for comparatively early income over comparatively remote, or deferred, income. Moreover, the Edition: current; Page: [64] preference for early, or prompt, income over late, or deferred, income resolves itself into the preference for early enjoyment income over deferred enjoyment income. Any income item which consists merely of an interaction or, otherwise expressed, of a preparatory service31 (that is, an item which, while it is income from one species of capital, is outgo in respect to another species) is wanted for the sake of the enjoyment income to which that interaction paves the way. The consumer prefers the service of milling flour in the present to milling flour in the future because the enjoyment of the resulting bread is available earlier in the one case than in the other. The manufacturer prefers present weaving to future weaving because the earlier the weaving takes place the sooner will he be able to sell the cloth and realize his enjoyment income.

To him, early sales are more advantageous than deferred sales, not because he desires the cloth to reach its ultimate destination sooner, but because he will the sooner be in a position to make use of the purchase price for his own personal uses—the shelter and comforts of various kinds constituting his income.

The manufacturer is conscious of only one step toward the ultimate goal of clothes—the money he expects to get for the cloth from the jobber to whom he sells it. But this money payment in turn discounts a further step. To the jobber this money he pays is the discounted value of the money he will receive from the wholesaler, and so on through the retailer, tailor and wearer. The result is that each is unconsciously discounting, as the ultimate link in the chain, the enjoyment to be derived by the wearer of the clothes. Of course this is not the whole Edition: current; Page: [65] story, but it represents the main parts relevant to the present problem.

All preference, therefore, for present over future goods resolves itself, in the last analysis, into a preference for early enjoyment income over deferred enjoyment income. This simple proposition would have received definite attention earlier in the history of economics had there been at hand a clear-cut concept of income. The stream of future enjoyment income plays the essential rôle.

But, as explained in Chapter I, for practical purposes we may well stop at the objective services of wealth, as measured by its cost—the cost of living—that is, the money values of nourishment, clothing, shelter, amusements, the gratifications of vanity, and the other miscellaneous items in our family budget. It is the money value of this income stream upon which attention now centers. Henceforth, we may think of time preference as the preference for a dollar's worth of early real income over a dollar's worth of deferred real income. It is assumed, then, that the income goods are reduced to a common money denominator, and that the prices of all items of real income—the prices of nourishment, shelter, clothing, amusements, etc.—are predetermined.

In these cases, as already noted, no appreciable time elapses between valuation and realization. We pay for a basket of fruit and eat it forthwith. But we pay for a fruit tree and wait years for the fruit. So in the prices of many other enjoyable services—nourishment, shelter, etc.—no discount element, or rate of interest, enters or, at any rate, it does not enter in the direct way in which it enters in case of interactions.32 That is, in the present, Edition: current; Page: [66] the price of present real income contains no appreciable interest to complicate the problem because these goods are consumed so soon after purchase; and for the same reason in the future price of future real income there is no appreciable interest element. When, however, any goods other than enjoyable goods are considered, their values already contain a rate of interest. The price of a house is the discounted value of its future income. Hence, when we compare the values of present and future houses, both terms of the comparison already involve a rate of interest. Although, as will be noted more specifically later, such a complication would not necessarily beg the question, its elimination simplifies the picture.