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Time Preference

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This article is part of the Basic Liberalism Course -> Module 5: Notions of Austrian Economics

Last updated: 2026-05-01

Definition

Time Preference is:

  • the proportion of value that an individual assigns to a good in the present compared to that same good in the future.
  • the natural and universal tendency of human beings to value present goods more than identical future goods.

The "time preference" is a topic developed by the Austrian School, especially Eugen von Böhm-Bawerk.

1. The basis: "A bird in the hand is worth two in the bush"

All else equal, we all prefer to satisfy a desire now rather than later. This is not by whim, but for two logical reasons:

  • The finitude of life: The future is uncertain and we do not have life guaranteed. A good today is a reality; a good tomorrow is a promise.
  • The scarcity of time: Time is the only resource we cannot recover. Postponing a satisfaction is, technically, losing time of enjoyment.

Every human being, in every time and place, prefers to satisfy their needs as soon as possible, because the future is uncertain and life is finite.

2. High vs. Low Time Preference

Here is where economics becomes interesting, since each person has a different "degree" of preference:

  • HIGH Time Preference (Present-oriented):

    • The individual wants immediate satisfaction.
    • Is not willing to wait; prefers to consume today even if that means having less tomorrow.
    • Result: Little saving, little interest in long-term projects and greater tendency to indebtedness.

  • LOW Time Preference (Future-oriented):

    • The individual is able to postpone their gratification.
    • Is willing to sacrifice a pleasure today because they value security or growth tomorrow more.
    • Result: High saving, investment in capital goods (tools, education, machinery) and sustainable economic growth.

Why does time preference exist?

Böhm-Bawerk gave three profound reasons:

  1. Present needs are more urgent
    Today's hunger hurts more than tomorrow's hunger.

  2. Uncertainty of the future
    No one knows if they will be alive tomorrow (mortality, risks).

  3. Subjectivism + Marginal Utility
    The marginal utility of a good decreases over time. A future good always has lower subjective utility than the same present good.

3. The Process of Civilization

From the Austrian point of view (especially authors like Hans-Hermann Hoppe), the history of civilization is the process of lowering time preference.

  • The hunter-gatherer has high preference: consumes what he hunts in the day.
  • The farmer has low preference: saves seeds, waits months for the harvest and builds granaries. That sacrifice of "not eating the seed today" is what generates the wealth of tomorrow.

4. Connection with interest and saving

  • The interest is the price of time.
    It is the compensation demanded by the saver for renouncing present goods.

  • Saving is the voluntary act of lowering time preference: postponing consumption to free up real resources.

  • That saving allows longer productive processes :
    Example:

    • Without saving: fish with your hands (short process).
    • With saving: make a net (longer process) → catch much more later.

The lower the time preference of a society, the longer and more productive its capital structure.

5. What affects our Time Preference?

It is not static; it changes according to the environment:

  • Legal Security: If you believe your savings will be stolen tomorrow (by taxes, inflation or insecurity), your time preference rises (you spend everything today because tomorrow you might not have it).

  • Currency Stability: * If money loses value (inflation), people prefer to get rid of it quickly. Artificial inflation raises the time preference of society. * People think: “money devalues → better spend today”. This destroys saving and generates economic cycles.

  • Stage of life: Generally, children have extremely high time preference (they want everything now), while mature adults usually have it lower thinking about their retirement or their children.

Visual summary

  • Low Time Preference = Saving → Investment → Capital Goods → More Wealth.
  • High Time Preference = Total consumption → Debt → Decapitalization → Poverty.

In summary, time preference is the filter through which we decide whether we act for the "me of today" or for the "me of tomorrow".

This article is part of the Basic Liberalism Course -> Module 5: Notions of Austrian Economics

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Categories: Home -> Economy

Last updated: 2026-05-01

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