New Year's Resolutions and Time Preference
by Anthony Gregory
by Anthony Gregory
Most New Year's resolutions share a common theme. Time preference, the principle that people, to varying degrees, tend to prefer satisfaction now over satisfaction later, is at the heart of economic thinking. The typical resolution for the upcoming year, whether it involves dieting, exercising more, being a better neighbor or putting more effort into work, is a promise to oneself to become more patient, to put some enjoyment on hold, to live more for tomorrow rather than today.
On an individual basis, being future-oriented usually pays off in the long run, and can have short-term benefits as well. People feel better about themselves when they are more confident about their future. Eating poorly and spending a lot of money on instant gratification might feel good at the time, but it does not take long before one's body and mind respond with discomfort, guilt and regret. Perhaps humanity is special because of the human capacity to feel regret so quickly, thus shortening the horizon between actions and consequences. Maybe humans are special because they can feel good or bad about decisions rather quickly, thus allowing concern even for the short term to help guide us in the long term.
Civilization flourishes on a low time preference. The more people save, the more there is available to invest in the future, the brighter the future and more rapid economic and social growth. A very high time preference is the mark of childishness, frivolous behavior, and, in extreme cases, even criminality. The modern state thrives on and encourages a higher time preference, and thus the process of decivilization for society as a whole.
The welfare state favors spending over saving, while making socially conscious do-gooders feel like they are actually forward-looking. The paternalistic police state feeds off the desire to feel secure in one's society while discarding liberties that took centuries to obtain and will take long to reclaim. War and empire, while always sold as a way to defend the future, actually signify radical shortsightedness, for the consequences over the long haul are rarely thought through seriously. Deficit spending obviously falls into the same category. The prototypical high-time preference state project is inflation, which induces high rates of personal and social spending in the hopes that another boom now will actually pay off in the end.
In the free market, time preference regulates spending, saving, borrowing and investing. A society that favors lavish present consumption cannot do so forever, for there will be insufficient funds to invest and develop for future consumption. The inflationary state brings on the worst, however, as it distorts this crucial balance. Easy credit and easy money fool entrepreneurs into large, irrational investments, as though there were future customers saving up to buy from them years down the road. So factories are built, deals are made, real estate is developed, and employees are hired with high wages. But the saving is not happening. The artificially increased money supply encourages both large investments and lots of spending. This creates the unnatural boom. The bust must come eventually, and the longer it is delayed the worse. The worst cases of monetary expansion entail hyperinflation, the greatest of all economic programs of decivilization. When the dollar's value falls gradually, saving is still rational and a responsible people can offset the ill effects, but when its value plummets by the day it is hard for anyone to rationalize saving instead of spending all they can while it's still worth anything.
To respond to the more commonplace boom and bust, the government and its kept propagandists always advocate more personal and governmental spending, for they want another bubble to delay the inevitable. But this is a grave error. Ignore their advice. Saving is generally the best course for one's finances and personal life as well as for future generations and the greater good. Now is the time for a low-preference New Year's resolution and even more saving than usual.
So instead of a specific goal for 2009 — hitting the gym, eating less fat and fewer carbs, cutting down on vice or saving more — I have an all-encompassing personal aspiration that sums up the spirit of most New Year's Resolutions: To lower my time preference. This is what I resolve to do for myself, those around me, and for humanity.
And again, this will pay off faster than it sounds. Exercise rewards the body and mind week by week. Cutting back on processed trash and focusing on one's diet can bring rewards within minutes of eating. And working harder and saving more with an eye toward the future feels good right now.
There are ways to expedite the rewards of a low time preference. Since spending cash can be quite fun, I can divert money I plan to spend on uses that will last for months and years. Springing for nice clothes need not be a high-time preference activity. Eating less garbage and putting the money and time into good, healthy meals often make food more enjoyable on a daily basis. BK Marcus pointed out to me that buying a little silver every now and again is a great thing, since the purchase is both an investment for the future and a joy in the present.
Being a good neighbor and member of one's family and community requires a concern for the future but the pleasures of being charitable and friendly are instantaneous. We as a species, ironically enough, are rewarded now for thinking about tomorrow. This is something to embrace.
On the other hand, an overly ambitious New Year's resolution runs the risk of being a cheap and easy way to feel good in the midst of frivolous celebration. A broken resolution can turn out to be a high-time preference endeavor. And of course, the New Year is a tough time to radically ratchet down one's time preference, for we have just enjoyed the fruits of the holiday season.
I for one had a great Christmas vacation with my folks in Las Vegas. The family didn't waste money in the casino, however, and instead focused on excellent food and wonderful shows — high in price, but a good value in that such entertainment is subsidized by the slot players who spend their whole week emptying their bank accounts to watch wheels with cherries and sevens spin round and round. The shows and food also mean precious memories for many years to come. Most important, it was a terrific, enriching time with mom and dad.
The trip also taught me something priceless: Another perk of lowering one's time preference for young people like me — I'm proud to say I was carded almost every day on the floor — is that when you're older, you'll have some money for such vacations once in a while, and they won't feel at all like a waste. I hope to have the occasional trip like that in my old age, and above all to have family with whom to spend it. This hopeful goal is something I can enjoy daily while working toward, and the lower my time preference now, the more likely it will happen.
Of course, life is to be lived and moments are to be cherished. I've known people who got hurt putting too much stock into a future that didn't arrive and they then regretted the opportunity costs that come from missing years of life as they whizzed by. But this too is the mark of a distorted time preference. It's good to live in a way that you can both feel good about the future but also where you don't squander your time never enjoying yourself. Seize the day on occasion. Reasonable present consumption is important too. Do be willing to part with money, especially for goods that will last and experiences you'll always fondly remember. Don't forget to enjoy life. Time is a commodity even more precious than money, and it can't be won back. Either way there is a little bit of a gamble, but you can often hedge your bets, living for the day, saving for the ages, and feeling good about the journey.
But most people can afford to cut back a little bit and still enjoy the present. My suggestion to those who still do not have a resolution in mind, and who might think any one goal, to be meaningful, seems all too daunting: Just vow to lower your time preference generally, as much as is reasonable for your situation. Under normal circumstances, such a promise to oneself will pay off day by day, reveal itself as a tangible accomplishment within a year, and help secure the future for the rest of one's lifetime. Under the world's current circumstances, such a resolution, adopted by enough people, might be just what is needed to save our civilization.
December 31, 2008
Anthony Gregory [send him mail] is a writer and musician who lives in Berkeley, California. He is a research analyst at the Independent Institute. See his webpage for more articles and personal information.
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