§5. Time Preference

We turn now to the remaining factor, namely, the dependence of time preference of each individual on his selected income stream. We have seen that the rate of preference for immediate as compared with remote income will depend upon the character of the income stream selected, but the manner of this dependence is subject to great variation and change. The manner in Edition: current; Page: [504] which a spendthrift will react to an income stream is very different from the manner in which the shrewd accumulator of capital will react to the same income stream. We have seen that the time preference of an individual will vary with six different factors: (1) his foresight; (2) his self-control; (3) habit; (4) the prospective length and certainty of his life; (5) his love of offspring and regard for posterity; (6) fashion. It is evident that each of these circumstances may change. The causes most likely to effect such changes are: (1) training to foster a realization of the need to provide against the proverbial "rainy day"; (2) education in self-control; (3) formation of habits of frugality, avoiding parsimony on the one hand and extravagance on the other; (4) better hygiene and care of personal health, leading to longer and more healthful life; (5) incentives to provide more generously for offspring and for the future generations; (6) modification of fashion toward less wasteful and harmful expenditures for the purpose of ostentatious display.

These various factors may act and react upon each other, and may affect profoundly the rate of preference for present over future income, and thereby influence greatly the rate of interest. Where, as in Scotland, there are educational tendencies which instill the habit of thrift from childhood, the rate of interest tends to be low. Where, as in ancient Rome, at the time of its decline, there is a tendency toward reckless luxury, competition in ostentation, and a degeneration in the bonds of family life, there is a consequent absence of any desire to prolong income beyond one's own term of life, and the rate of interest tends to be high. Where, as in Russia, under the Czars, wealth tended to be concentrated and Edition: current; Page: [505] social stratification to be rigid, the great majority of the community, on the one hand, through poverty and the recklessness which poverty begets, tends to have a high rate of preference for present over future income, whereas, at the opposite end of the ladder, the inherited habit of luxurious living tends, though in a different way, in the same direction. In such a community, the rate of interest is likely to be unduly high.