§9. The Personal Factor

The proposition that, in the theory of interest, the impatience of a person for income depends upon the character of his income—as to its size, time shape, and probability—does not deny that it may depend on other factors also, just as, in the theory of prices, the proposition that the marginal want for an article depends upon the quantity of that article does not deny that it may depend on other elements as well.

But the dependence of impatience on income is of chief importance; for impatience, whatever else it depends on, is always impatience for income—exactly as the dependence of the marginal want for bread on the quantity of bread is more important than the dependence of this marginal want for bread on the quantity of some other commodity, such as butter.36

We have seen, therefore, how a given man's impatience Edition: current; Page: [81] depends both upon the characteristics of his expected income stream, and on his own personal characteristics. The rate of impatience which corresponds to a specific income stream will not be the same for everybody. This has already been noted, incidentally, but requires special discussion here. One man may have an annual rate of time preference of 6 per cent, and another 10 per cent, although both have the same income. Impatience differs with different persons for the same income and with different incomes for the same person. The personal differences are caused by differences in at least six personal characteristics37 : (1) foresight, (2) self-control, (3) habit, (4) expectation of life, (5) concern for the lives of other persons, (6) fashion.

(1) Generally speaking, the greater the foresight, the less the impatience, and vice versa.38 In the case of primitive races, children, and other uninstructed groups in society, the future is seldom considered in its true proportions. This is illustrated by the story of the farmer Edition: current; Page: [82] who would never mend his leaky roof. When it rained he could not stop the leak, and when it did not rain there was no leak to be stopped! Among such persons, the preference for present gratification is powerful because their anticipation of the future is weak. In regard to foresight, Rae states:39

"The actual presence of the immediate object of desire in the mind, by exciting the attention, seems to rouse all the faculties, as it were, to fix their view on it, and leads them to a very lively conception of the enjoyments which it offers to their instant possession. The prospects of a future good, which future years may hold out to us, seem at such a moment dull and dubious, and are apt to be slighted, for objects on which the daylight is falling strongly, and showing us in all their freshness just within our grasp. There is no man, perhaps, to whom a good to be enjoyed to-day, would not seem of very different importance, from one exactly similar to be enjoyed twelve years hence, even though the arrival of both were equally certain."

The sagacious business man represents the other extreme; he is constantly forecasting. Many great corporations, banks, and investment trusts today maintain statistical departments largely for the purpose of gauging the future developments of business. The carefully calculated forecasts made by these and independent services tend to reduce the element of risk, and to aid intelligent speculation.

Differences in degrees of foresight and forecasting ability produce corresponding differences in the dependence of time preference on the character of income. Thus, for a given income, say $5000 a year indefinitely, the reckless might have a degree of impatience or rate of time preference of 10 per cent, when the forehanded would experience a preference of only 5 per cent. In both cases, Edition: current; Page: [83] the preference depends on the size, time shape, and risk of the income; but the particular rates corresponding to a particular income will be entirely different in the two cases. Therefore, the degree of impatience, in general, will tend to be higher in a community consisting of reckless individuals than in one consisting of the opposite type.

(2) Self-control, though distinct from foresight, is usually associated with it and has very similar effects. Foresight has to do with thinking; self-control, with willing. Though a weak will usually goes with a weak intellect, this is not necessarily so, nor always. The effect of a weak will is similar to the effect of inferior foresight. Like those workingmen who, before prohibition, could not resist the lure of the saloon on the way home Saturday night, many persons cannot deny themselves a present indulgence, even when they know what the consequences will be. Others, on the contrary, have no difficulty in stinting themselves in the face of all temptations.

(3) The third characteristic of human nature which needs to be considered is the tendency to follow grooves of habit. The influence of habit may be in either direction. Rich men's sons, accustomed to the enjoyment of a large income, are likely to put a higher valuation on present compared with future income than would persons possessing the same income but brought up under different conditions. When those habituated to luxury suffer a reverse of fortune they often find it harder to live moderately than do those of equal means who have risen instead of fallen in the economic scale; and this will be true even if foresight and self-control are inherently the same in the two cases. The former, brought up in the lap of luxury, will be more likely to be the prodigal son, Edition: current; Page: [84] that is, the more impatient for present income. The lack of such traditions among the Negroes tends toward a high rate of impatience, while the traditions of thrift among the Scotch curb impatience.

Our thrift campaigns are designed to reduce impatience by cultivating certain habits of regular saving out of income. So also is the propaganda for life insurance with its high-pressure salesmanship. On the other hand, the corresponding salesmanship for installment buying tends, in the first instance, in the opposite direction. The individual can indulge himself in the immediate enjoyment of a radio or an auto. Yet, it must not be overlooked that, after the sale is made, there ensues a new responsibility to provide for the future payments agreed upon which may permanently improve the faculties of foresight and self-control.

(4) The fourth personal circumstance which may influence impatience for immediate real income has to do with the uncertainty of life of the recipient. We have already seen, in a somewhat different connection, that the time preference of an individual will be affected by the prospect of a long or short life, both because the termination of life brings the termination of the income from labor, and because it also terminates the person's enjoyment of all income.

It is the latter fact in which we are interested here—the manner in which the expectation of life of a person affects the dependence of impatience on his income. There will be differences among different classes, different individuals, and different ages of the same individual. The chance of death may be said to be the most important rational factor tending to increase impatience; anything that would tend to prolong human life would Edition: current; Page: [85] tend, at the same time, to reduce impatience. Rae goes so far as to say:40

"Were life to endure forever, were the capacity to enjoy in perfection all its goods, both mental and corporeal, to be prolonged with it, and were we guided solely by the dictates of reason, there could be no limit to the formation of means for future gratification, till our utmost wishes were supplied. A pleasure to be enjoyed, or a pain to be endured, fifty or a hundred years hence, would be considered deserving the same attention as if it were to befall us fifty or a hundred minutes hence, and the sacrifice of a smaller present good, for a greater future good, would be readily made, to whatever period that futurity might extend. But life, and the power to enjoy it, are the most uncertain of all things, and we are not guided altogether by reason. We know not the period when death may come upon us, but we know that it may come in a few days, and must come in a few years. Why then be providing goods that cannot be enjoyed until times, which, though not very remote, may never come to us, or until times still more remote, and which we are convinced we shall never see? If life, too, is of uncertain duration and the time that death comes between us and all our possessions unknown, the approaches of old age are at least certain, and are dulling, day by day, the relish of every pleasure."

The shortness of life thus tends powerfully to increase the degree of impatience, or rate of time preference, beyond what it would otherwise be. This is especially evident when the income streams compared are long. A lover of music will be impatient for a piano, i.e., will prefer a piano at once to a piano available next year, because, since either will outlast his own life, he will get one more year's use out of a piano available at once.

(5) But whereas the shortness and uncertainty of life tend to increase impatience, their effect is greatly mitigated by the fifth circumstance, solicitude for the welfare of one's heirs. Probably the most powerful cause tending Edition: current; Page: [86] to reduce the rate of interest is the love of one's children and the desire to provide for their good. Wherever these sentiments decay, as they did at the time of the decline and fall of the Roman Empire, and it becomes the fashion to exhaust wealth in self-indulgence and leave little or nothing to offspring, impatience and the rate of interest will tend to be high. At such times the motto, "After us the deluge," indicates the feverish desire to squander in the present, at whatever cost to the future.41

On the other hand, in a country like the United States, where parents regard their lives as continuing after death in the lives of their children, there exists a high appreciation of the needs of the future. This tends to produce a low degree of impatience. For persons with children, the prospect of loss of earnings through death only spurs them all the more to lay up for that rainy day in the family. For them the risk of loss of income through death is not very different from the risk of cessation of income from any ordinary investment; in such a case the risk of cessation of future income through death tends to lower their impatience for income. This act supplies the motive for life insurance. A man with a wife and children is willing to pay a high insurance premium in order that they may continue to enjoy an income after his death. This is partly responsible for the enormous extension of life insurance. At present in the United States the insurance on lives amounts to over $100,000,000,000. This represents, for the most part, an investment of the present generation for the next.

An unmarried man, on the other hand, or a man who cares only for self-indulgence and does not care for posterity, Edition: current; Page: [87] man, in short, who wishes to "make the day and the journey alike," will not try thus to continue the income after his death. In such a case uncertainty of life is especially calculated to produce a high rate of time preference. Sailors, especially unmarried sailors, offer the classic example. They are natural spendthrifts, and when they have money use it lavishly. The risk of shipwreck is always before them, and their motto is, "A short life and a merry one." The same is even more true of the unmarried soldier. For such people the risk of cessation of life increases their impatience, since there is little future to be patient for.

Not only does regard for one's offspring lower impatience, but the increase of offspring has in part the same effect. So far as it adds to future needs rather than to immediate needs, it operates, like a descending income stream, to diminish impatience. Parents with growing families often feel the importance of providing for future years far more than parents in similar circumstances but with small families. They try harder to save and to take out life insurance; in other words, they are less impatient. Consequently, an increase of the average size of family would, other things being equal, reduce the rate of interest.

This proposition does not, of course, conflict with the converse proposition that the same prudent regard for the future which is created by the responsibilities of parenthood itself tends to diminish the number of offspring. Hence it is that the thrifty Frenchman and Dutchman have small families.

(6) The most fitful of the causes at work is probably fashion. This at the present time acts, on the one hand, to stimulate men to save and become millionaires, and, Edition: current; Page: [88] on the other hand, to stimulate millionaires to live in an ostentatious manner. Fashion is one of those potent yet illusory social forces which follow the laws of imitation so much emphasized by Tarde,42 Le Bon,43 Baldwin,44 and other writers. In whatever direction the leaders of fashion first chance to move, the crowd will follow in mad pursuit until almost the whole social body will be moving in that direction. Sometimes the fashion becomes rigid, as in China, a fact emphasized by Bagehot;45 and sometimes the effect of a too universal following is to stimulate the leaders to throw off their pursuers by taking some novel direction—which explains the constant vagaries of fashion in dress. Economic fashions may belong to either of these two groups—the fixed or the erratic. Examples of both are given by John Rae.46 It is of vast importance to a community, in its influence both on the rate of interest and on the distribution of wealth itself, what direction fashion happens to take. For instance, should it become an established custom for millionaires to consider it "disgraceful to die rich," as Carnegie expressed it, and believe it de rigueur to give the bulk of their fortunes for endowing universities, libraries, hospitals, or other public institutions, the effect would be, through diffusion of benefits, to lessen the disparities in Edition: current; Page: [89] the distribution of wealth, and also to lower the rate of interest.