Politics Increases Time Preference

Since we discussed politics yesterday, this tweet by Per Bylund is interesting.

Channeling my inner Christopher Hitchens, I am tempted to say that “politics poisons everything” but I channel my inner James Buchanan and recognize that politics is useful when it is considered as a form of exchange.

There’s much in politics as practiced — not as ideally conceived — that does poison a whole lot of the world and one of them is that it impedes wealth creation. One of the major avenues by which politics do so is what Bylund points out in his tweet.

Let’s get the vocabulary right. The term “time preference” basically means that you prefer the present over the future. If you have a very high time preference, you care more about the now than about the future; if you have zero time preference, you are indifferent between getting something now and getting that something in the future; if you have low time preference, you prefer the present to the future but not too much.

If I know that the world is going to end tomorrow, I will have an infinitely high time preference.

Let’s make that concrete. Suppose there is a choice between getting $10 today or getting $15 a year from today. Person A says that  he’d rather have $10 today than getting $15 a year from today, and person B says that he’d rather have $15 a year from now instead of $10 today. We can say that A has a higher time preference than B. Person B is willing to wait and get $5 extra, while person A is impatient.

This is like an interest rate. $10 saved today at an interest rate of 50% a year grows to $15. Therefore, person A is not willing to “save” at that rate but person B is willing to “save.”

Time preference — and interest rates — depends on how secure the future is. If you know for sure that the borrower will repay your principle and interest, you are likely to agree to a lower interest rate than if you are not quite certain of repayment. The risk of default forces interest rates upward.

People will not save if they believe that their savings may be lost (the bank going under) or taken by roving bandits, or confiscated by the government (which amounts to the same thing if one realizes that the government is essentially a stationary bandit.) “People will not save” means the same thing as “people will have a high time preference.” Better consume what you have now because if you keep it for tomorrow, it is likely to be taken by others.

Politics — including democratic politics — is about majorities imposing their will on minorities. Productive people are generally a minority in any population. Through majoritarian democracy, the majority can easily dispossess the minority. Politicians justify their takings by claiming that they are merely following “the will of the people.”

Production requires capital investments (machines, etc.) and therefore for an economy to create goods and services, people have to save. The risk of political taking of one’s saved assets (money, factories, etc.) forces people to have higher time preferences than they would otherwise have. There will be lower savings, and therefore lower capital accumulation, and therefore lower production and productivity growth, etc.

In our discussion yesterday, we noted that people respond predictably to incentives, and the incentives that people face depend on the institutional infrastructure of the economy. When private property rights are secure — meaning what you have will not be taken away by force — the economy prospers. But if the government feels free to take away property at will, that spells poverty of the many.

Why does the state/government take away property if it impoverishes the nation? Because, remember, the state is not some abstract supra-individual entity; it is composed of politicians, bureaucrats and their cronies. Taking private property enriches them, and that is what matters to them — not some “public interest” or the “public good.”

The Indian government “nationalized” lots of industries. Air India is a good example. And then it ran it into the ground. The government did it in “the public interest” but actually the politicians and bureaucrats wanted to have their free private airlines. So there you are.

 

 

Author: Atanu Dey

Economist.

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