Time Preference

Abstract

Time preference is the insight that people prefer ‘present goods’ (goods available for use at present) to ‘future goods’ (present expectations of goods becoming available at some date in the future), and that the social rate of time preference, the result of the interactions of individual time preference schedules, will determine and be equal to the pure rate of interest in a society. The economy is pervaded by a time market for present as against future goods, not only in the market for loans (in which creditors trade present money for the right to receive money in the future), but also as a ‘natural rate’ in all processes of production. For capitalists pay out present money to buy or rent land, capital goods, and raw materials, and to hire labour (as well as buying labour outright in a system of slavery), thereby purchasing expectations of future revenue from the eventual sales of product. Long-run profit rates and rates of return on capital are therefore forms of interest rate. As businessmen seek to gain profits and avoid losses, the economy will tend toward a general equilibrium, in which all interest rates and rates of return will be equal, and hence there will be no pure entrepreneurial profits or losses.

This chapter was originally published in The New Palgrave Dictionary of Economics, 2nd edition, 2008. Edited by Steven N. Durlauf and Lawrence E. Blume