Economists, with justice, are accused of holding a narrow, one-dimensional, and somewhat pedestrian world view. Noneconomic factors can determine how well a society is organized, say the critics. An efficient price system won’t solve all of society’s problems; there are also cultural and moral problems that can undermine society, and these have no economic fix.

According to Professor T. Alexander Smith, that criticism better applies to the way economics is done in modem times than to the actual or alleged limits of economics itself But given the inherent trappings of the profession, it sometimes takes an outsider to explore the farther reaches where economics and culture intersect. Smith is a political scientist who has done just that in his path-breaking new book. Time and Public Policy. He takes an insight from “Austrian” economics—that all action implies a “time preference”—and spells out its far-reaching implications for culture and public policy. He recognizes that many social and cultural problems have no economic fix, but he shows how intervention with the free market can severely undermine healthy social and cultural norms. His conclusions bolster the case for a free society and responsible individualism.

Economists usually ignore the role of time as a factor in human choice. In the most commonly-used model in economics—”general equilibrium”—action occurs within a timeless world. And the models that do factor in time tend to homogenize it by assuming everyone acts on the same time horizon. In the real world, of course, this is not the case.

Whatever differences exist in individual time-horizons, this we know: all individuals, by the very fact that they act within the passage of time, choose to satisfy desires in the more immediate as opposed to the more distant future, other things being equal. That is to say, a bird in the hand is always better than one in the bush. Since the Fall, man acts within a world of scarcity; we can’t have everything at once, so we must rank our goals in the order in which we want to obtain them. This is what creates what is called “time preference,” the general desire to meet ends sooner rather than later.

Everyone has time preferences, but the rates can vary. Some people and cultures have habits that delay gratification by putting off current consumption for greater future rewards. They have a long-run orientation: a low time preference. These groups tend to save more and be more prosperous; saving, after all, is the precursor to capital investment and economic growth.

Other individuals and cultures practice and promote more immediate gratification, consuming now rather than later. They are more oriented toward the short term: they have a high time preference. These groups, which consume more and do not delay gratification, are relatively less prosperous since their habits work against saving, capital investment, and economic growth.

The social rate of time preference (the aggregation of individual rates) is primarily a function of such things as culture, habit, self-control, and regard for posterity; and these derive from religious beliefs or social values held generally. They can be influenced by medical technology and life span; if everyone died at age 30, the social rate of time preference would likely be greatly heightened. They can also be influenced by government policy.

The free market, as Smith shows, necessarily rewards a long-run orientation over short-run orientation. The interest rate is the most obvious example. The person who has no money yet wants a car as soon as possible (i.e., has a high time preference) must pay interest on a loan. The person who puts off buying a car until he has the money (i.e., has a low time preference) pays no interest. The more people put off buying in the present, the lower the interest rate, because it reflects the social rate of time preference.

So it is with the regard for capital resources, which under a free market pay a return equal to the social rate of time preference. The businessman who invests in a new company has to pay out wages and rents long before he realizes a profit; this requires a low time preference because he delays present consumption for a future higher return. The lower the time preference, the longer the processes of production, and the higher the eventual reward for waiting. Thus the free market has an inherent mechanism that rewards low time preference and fosters long-run thinking.

All of these virtues tend to be rewarded by the market, creating what Smith calls Economic Man: he is forward-looking, conserves resources, and in doing so promotes the good of society.

In contrast, Political Man operates outside the market and faces an exactly opposite set of forces on his time preference. In the political sphere, there is no return on capital, no penalty for quick consumption and waste, and ho incentive to delay gratification. Political Man is rewarded for high time preference. Examples range from the government bureaucrat to the common thief.

Smith’s greatest achievement is to show how government intervention in the economy lowers the social rate of time preference and thus leads to both increased poverty and cultural breakdown. The more Political Man grows in social significance relative to Economic Man (as happens with government interventions), the higher the social rate of time preference.

Smith’s formulation of Political and Economic Man are the precise opposite of the way the two are described in academia—where Economic Man is greedy and short-run oriented, and Political Man is long-run oriented and promotes the good of the public.

Inflation is the most obvious government intrusion that lowers the social rate of time preference. One can apply the same analysis to the welfare state, redistributive taxation, and even rent control. All interfere with the ability to think and plan long term; they inculcate values that reward immediate gratification at others’ expense.

What Smith wants is the depoliticization of society, with fewer and fewer social decisions taking place through political means. He wants, in short, the Rule of Law, “a mode of moral association” in which “noninstrumental” laws are “known in advance.” There’s no room here for social planners. The system is most conducive to low rates of time preferences and therefore to what we associate with civilized prosperity.

Smith has embarked on a radically new research program, one that leads us to discover that economics and culture have more links than economists like to admit. If his thought isn’t fully formed, and if the argument still needs formalization, with the application of time preference to public policy, Smith has nonetheless tilled fertile ground.

 

[Time and Public Policy, by T. Alexander Smith (Knoxville: University of Tennessee Press) 288 pp., $29.95]