Chapter 13: Time Preference

Table of Contents

[No] matter what a person’s original time-preference rate or what the original distribution of such rates within a given population, once it is low enough to allow for any savings and capital or durable consumergoods formation at all, a tendency toward a fall in the rate of time preference is set in motion, accompanied by a “process of civilization.”

– Hans-Hermann Hoppe

Whereas Chapter 10 discussed money conceptually, this chapter and the next two will take a closer look at the operation of money in a capitalist market economic order, as discussed in Chapters 11 and 12. This chapter begins with a discussion of time preference, and its role in determining interest rates on the market. The next chapter introduces the topic of banking, and Chapter 15 explains how the distortion of the market for money results in the business cycle. This is a topic of extreme importance in economics because one cannot understand the economic calamities that have befallen the world in the past century except as a consequence of the disruption of the workings of the market for money and capital. The standard state-sponsored economics textbook views economic crises as a normal, inevitable, and inexplicable part of the market process. In this view, the business cycle is like the weather or a natural disaster, an unstoppable act of nature that must be managed and alleviated by central governments through wise fiscal and monetary policy. The closely related Marxist economists imagine economic breakdown to be the inevitable consequence of a capitalist economic system, and the precursor to workers’ inevitable revolt against capitalism.

But applying the economic way of thinking and the tools of economic analysis to the question of money can explain how and why crises happen, how they can be avoided, and the problems of state-sponsored economics textbooks. Perhaps in no area of economic analysis are the implications of the Austrian method more significant than this. The reason the Austrians are so vilified and excluded from mainstream academia is not because their ideas are egregiously wrong. It is because they offer a coherent explanation of the emergence of money on the free market and the devastating consequences of subjecting this enormously important technology to government monopoly control. It is possible for money to exist without the state, and it is possible for the topic of money to be studied without resorting to the ridiculous quasi-religious faith that modern economic textbooks place in the omnipotent and omniscient monetary central planners. The Austrians are vilified because their accurate understanding of economics poses a threat to all who benefit from strong central governments controlling money.

For the majority of its history, the Austrian school has had to explain its theories in the terms laid out by state-sponsored economists. This book approaches the question of money from the perspective of the Austrian school itself and builds the case from the first principles. In order to explain money as a market phenomenon, we must begin the treatment from an understanding of time preference.

The scarcity of time is the starting point for all economic choices. The scarcity of time forces man to choose between alternatives at all points in his life, and it means that every decision has an opportunity cost. Even with no restraint on the quantity of resources available, an individual’s choice of how to spend his time results in the elimination of all other choices for which he could have used the time.

Economizing time is unique because time passes and cannot be stopped or reversed. When he is born, man’s life clock begins ticking; it continues ticking relentlessly, and it only stops when he dies. There is no knowing when this clock will stop, and there is no restarting it after it stops. Man gets one uninterrupted shot at life, and he never knows when it will end.

Time is not a normal commodity for which man can choose the quantity he would prefer. There is no market choice between different quantities of time, and time cannot be traded directly. The way an individual values time is subjective and variable, but some regularities exist. The nearer the period of time to the present, the more valuable it will appear to an individual. The present is certain, as it is already here, but the future is always uncertain, as it may never come. The future can only come through successfully securing survival in the present, which makes the needs of the present always more pressing and important. The present is where all senses experience life and its pleasures and pains. Future pains and pleasures are hypothetical, but those of the present are real and visceral. Hunger felt in the present is far more pressing than hunger anticipated in the future, which makes food more valuable in the present than the future. The danger in the present is far more pressing than future danger, and tools that secure safety today are thus more valuable today than in the future. Given a choice between obtaining a physical good in the present, or the same good in the future, man chooses the present.

An endless variety of factors can affect an individual’s rate of time preference, and Hoppe distinguishes between external, biological, and social or institutional factors. External events influence an individual’s expectations of the future, and thus influence the degree to which they prioritize the future. The biological realities of life also shape an individual’s time preference. As Hoppe explains:

It is a given that man is born as a child, that he grows up to be an adult, that he is capable of procreation during part of his life, and that he ages and dies. These biological facts have a direct bearing on time preference. Because of biological constraints on their cognitive development, children have an extremely high time-preference rate. They do not possess a clear concept of a personal life expectancy extending over a lengthy period of time, and they lack full comprehension of production as a mode of indirect consumption. Accordingly, present goods and immediate gratification are highly preferred to future goods and delayed gratification. Savings-investment activities are rare, and the periods of production and provision seldom extend beyond the most immediate future. Children live from day to day and from one immediate gratification to the next.

In the course of becoming an adult, an actor’s initially extremely high time-preference rate tends to fall. With the recognition of one’s life expectancy and the potentialities of production as a means of indirect  consumption, the marginal utility of future goods rises. Saving and  investment are stimulated, and the periods of production and provision are lengthened.

Finally, becoming old and approaching the end of one’s life, one’s timepreference rate tends to rise. The marginal utility of future goods falls because there is less of a future left. Savings and investments will decrease, and consumption—including the nonreplacement of capital and durable consumer goods—will increase. This old-age effect may be counteracted and suspended, however. Owing to the biological fact of procreation, an actor may extend his period of provision beyond the duration of his own life. If and insofar as this is the case, his time-preference rate can remain at its adult-level until his death.

Numerous social and institutional factors affect an individual’s time preference. Perhaps most important among them is the security of property, which would provide man with a very effective way of providing for his future. Acquiring durable goods is arguably the initiation of the process of the decline of time preference for humanity. A man who commands a valuable good that can be used in the future reduces the uncertainty that surrounds his future and becomes likely to discount it less. As the concept of property rights becomes widely accepted in a society, as discussed in Chapter 5, it leads to a widespread decline in time preference as individuals begin to increase their valuation of their increasingly secure future. The security of property rights strongly influences time preferences. As a property owner’s certainty of their command of a good increases into the future, he is likely to maintain the good in good shape and more likely to act with the future in mind.

Time Preference and Money

Providing for the future suffers from the problem of coincidence of wants discussed in the context of trade in Chapter 9. The future is unknowable and uncertain, and no individual can know for sure what goods they will require in the future. In the same way that money solves the problem of coincidence of wants in trade, it solves it for future provision. By saving money, the most liquid good and the generalized medium of exchange, the saver is able to exchange it in the future for the most valuable goods available, and to do so at the time of their choosing. Money is thus held precisely because of uncertainty. In a future that is perfectly predictable, individuals could arrange all their future financial inflows to go directly to the providers of the goods they would need at the time they need them, and would not need to hold any money. But in the real world, where the future is unpredictable, money is the best tool for providing for the future, as its liquidity allows it to be converted to whatever goods are desired in the future. As the most salable good, money can be most cheaply converted into whatever good has the highest marginal utility to the holder in the future. As human society develops money as a good, humans find it a very convenient and powerful tool for transferring value into the future,and this allows them to lower their time preference and to engage in more saving and future provision. Money supercharges our ability to save over just holding the consumer goods for the long term, as their utility in the future is more uncertain, and they are not as salable.

As humans use money to conduct trade, the technology used for money improves and becomes more efficient at carrying out its task as a medium of exchange, both in the present between individuals, and between a present individual and his future self. Money is a technology, and the proliferation of users leads to a proliferation of choices competing against each other. Better ideas and technologies win out and drive out the inferior ones. In money, the productivity of the technology pertains to how well it performs its function as a medium of exchange, or its salability, as discussed in Chapter 10.

A monetary medium that is easy to produce in excessive quantities in response to demand increases will likely experience substantial increases in its supply and a reduction in the economic value held in it over the long term. On the other hand, monetary media that are difficult to produce in increasing quantities in response to demand increases are likely to witness their supply expand to a limited extent, which causes their price to rise to meet increasing demand, making them better at  reserving value. Those who store their wealth in the harder monies witness the preservation and appreciation of their wealth, while those who store it in easy money witness its dissipation. They may learn this lesson before it is too late, moving their wealth to the harder money, or they may not. In both cases, the end result is the same: The majority of the wealth will accrue to the hardest money.

This process explains the demonetization of seashells, glass beads, iron, copper, and other primitive monies in favor of gold and silver all over the world. It also explains the demonetization of silver in the nineteenth century and the precipitous decline in its value compared to gold, the undisputed winner of the global market for money at the end of the nineteenth century. As the vast majority of the planet converged on the one commodity which had the reliably lowest annual supply growth rate, secure savings into the future became ubiquitous, encouraging people around the world to save for their future, thus lowering their time preference. This made plenty of savings available for capital investment, increased labor productivity, incentivized investment in technological innovations, and increased prosperity.

As humanity progresses toward using monetary media that are harder to produce, our ability to provide for our future increases. The efficiency of transacting with our future selves increases, and the uncertainty of the future declines. The security of money as a medium of saving has allowed countless people to escape the ravages of war and disaster with wealth they can easily transport worldwide. As the uncertainty of the future declines, and the expected wealth we are able to transfer to it increases, the discounting of the future decreases and the rate of time preference declines. For any society and at all times, the hardness of monetary technologies available to people is inextricably connected to time preference, for good or for ill.

Time Preference and Saving

Economic goods can be used in three ways: They can be consumed, held for future consumption, or invested in order to produce more economic goods. The same is true for money, which is an economic good optimized for holding value into the future. Money is always used in one of three ways: It is exchanged for consumer goods, saved in a cash balance, or exchanged for capital goods, which means it is invested in the production process of other goods, in the hope it will generate a return higher than holding a cash balance.

Economic goods can be used in three ways: They can be consumed, held for future consumption, or invested in order to produce more economic goods. The same is true for money, which is an economic good optimized for holding value into the future. Money is always used in one of three ways: It is exchanged for consumer goods, saved in a cash balance, or exchanged for capital goods, which means it is invested in the production process of other goods, in the hope it will generate a return higher than holding a cash balance.

The distinction between saving and investment lies in the salability and risk in each category. Saving specifically refers to accumulating money in cash balances. The rationale behind holding cash is to hedge against future uncertainty. If man lives in a world in which everything is certain and perfectly predictable, he has no reason to hold any cash. With the perfectly predictable timing of all future income and expenditure flows, he can hold all his wealth in investments that earn a return, and only liquidate them at the times in which he needs to spend. But because life is uncertain, and man never knows when he will need to spend, he prefers to hold a balance of cash to take advantage of its high salability, even if it earns nothing. Investment, while it can earn you returns, is less salable, harder to liquidate, and involves the risk of losses. When man needs to liquidate his investment to spend it, he risks being unable to find someone willing to pay the price he wants at the time he wants. Further, in times of systemic crises, when everyone wants to liquidate investments for cash, the reduction in the market price from what the owner expected would be large. In contrast, money’s value rises in times of crisis as individuals reduce expenses and liquidate investments for cash.

Cash allows its holders, be they individuals or businesses, to protect themselves against unexpected negative economic shocks, and to take advantage of positive economic opportunities. Should the money holder get into an accident and require medical treatment, he can spend the cash rather than liquidate an investment. Should he come across a good business opportunity, if he is holding cash, he can allocate to it quickly. If he has his money tied up in other investments, he may not be able to. The grandmother’s wisdom of always keeping savings on you is quite common across the world. Value investment, at least in a world where cash is not penalized through inflation, encourages investors to maintain a large amount of cash as “dry powder” so they are able to move very quickly on good investment opportunities. Investing all your cash in whatever opportunities are available is a sure way to miss out on the best opportunities, which emerge unexpectedly and are snapped up quickly.

Money is acquired for one property only: Its marketability or salability, the ease with which it can be sold without a significant loss in its value. Cash salability is helped by its widespread use, its divisibility, durability, transportability, and the expectation that it can resist inflation in the future. Cash savings are held not to chase a return on investment, but for their liquidity and low risk of reduction in their value. A gold coin or a U.S. dollar bill is highly salable worldwide in our current day. Should you hold one and need to liquidate it, there will likely be no shortage of willing buyers to take it at a price close to the prevalent value on the market. A house, a car, a stake in a business, or a fine painting, on the other hand, have far lower salability. Should one need to sell these, it would likely take some time to find the right buyer willing to pay the prevalent market price for these goods. A house that’s worth 10 bitcoins will not fetch these 10 bitcoins immediately after being put on the market. Many people will want to see the house, examine it, and think about it before buying. You may not be able to quickly find someone whose requirements for a house are exactly those of the house you have, so you will only get bids from people who don’t value your house highly, offering a lower price. If you have no choice but to sell, you will be forced to sell at a significant loss. When you want to sell a house, you would much rather it not be a time-sensitive sale so you can wait until the right buyer who properly values your home comes along. For time-sensitive unexpected expenditures, you want to have highly salable liquid cash stashed away.

Unlike saving, investing necessitates relinquishing control of your capital so that it can be employed in production. You give up on the salability and reliability of having a cash balance in order to employ the capital in a productive process, hoping it will generate a profit. The investor sacrifices liquidity of cash and takes on the risk of loss in exchange for a return on investing. There is no investment without risk, as there is always the risk of partial or complete loss of capital.

Time preference can be understood as the driver of savings and investment. Once an individual can lower their time preference to engage in activities that do not offer immediate rewards, they can choose to sacrifice present time in exchange for the future. Once they decide to forgo consumption of present goods in order to save them for the future, they are lowering their time preference further.

Conceptually and chronologically, saving can only be understood as the precursor and prerequisite of investment. No matter the capital good, it can also be consumed or exchanged for goods that can be consumed in the present. Before one can invest capital, one must first defer its consumption by saving it. No matter how short the period between earning wealth and investing it, that period is a period of saving. This is the logic of grandmothers and present-day money managers worldwide: Reduce your expenditures to be able to save a certain sum you need as a cash balance, to protect you from a rainy day or an accident, and once you have reached that amount, start investing your excess savings in productive businesses.

One does not need to choose between savings and investment in the absolute, and each has their place in a person’s portfolio. The choice between these two is decided at the margin, and it depends on the quantity of each already held. Young people with little wealth will likely prefer to secure some cash balance free from risk before they can take risks in capital markets. Those who accumulate significant savings are more likely to invest in capital markets.

As a man starts accumulating his cash balance from zero, the marginal utility of holding cash is very high, since he has very little of it. At this point, the utility of a cash balance is likely larger than any investment, since all investments have risk and low salability, and with a small amount of wealth, salability is prized, while risk is undesirable. As he accumulates larger cash balances, the marginal utility of adding to these balances declines, until it drops below the expected return of the best investment opportunity available to him. The more cash the man has, the more he is able to withstand the riskiness of the investment. A bad investment will not ruin him because he will still have his cash balance.

The lowering of time preference is what drives individuals to accumulate cash balances and to invest. The lower the time preference, the less they consume, and the more resources they will have to save and to invest. Each person keeps in cash a balance they would like to have with certainty, and takes risk with their investment in search of returns. Under a hard money standard, such as gold, the hard money itself would be held as savings, as its relative scarcity makes it appreciate slightly every year. In a modern easy-money economy, “cash is trash,” as every investment manager knows. People instead hold the equivalent of their savings in government bonds or low-risk investment stocks, and take more risks with the rest of their portfolio.

Saving and investment are not competitors; investment follows saving. Both are driven by, and must be preceded by, a lowering of time preference and a delaying of gratification. When money is expected to appreciate, people are more likely to defer consumption to save in hard money. When savings increase, the possibility of investing increases. When cash balances can be held with confidence in their value, individuals have the freedom to take on more risks with their investments. In a world of hard money, the only investments that would make sense would be ones that offer positive real rates of return, unlike the scenario under easy money, where investments that offer positive nominal returns but negative real returns can be undertaken, leading to capital destruction in real terms. Contrary to Keynesian propaganda, inflation does not promote investment, it misallocates it. In Chapter 6, we saw how the Keynesian model posits the baseless claim that savings need to be equal to investments at equilibrium. From that perspective, a surplus of savings over investment results in unemployment and recession. But in reality, investments follow savings, and tend to rise as savings rise. The choice to allocate between consumption, savings, and investment is faced at the margin, and is shaped by time preference. As time preference declines, economic resources shift from consumption to savings. As savings increase, the marginal valuation placed on added units of savings declines, making investment risk more tolerable.

The more time preference declines, the more likely individuals are to defer consumption, and the more cash they have on hand, the more they are willing to invest and lend. The abundance of loanable funds allows for the financing of an increasing number of productive enterprises, at progressively lower interest rates. As more capital is available, productivity of labor increases, and with it income and living standards. The increase in income, in turn, allows for more capital accumulation, in a virtuous cycle of improving material well-being. This is the process of civilization.

Time Preference and Civilization

As individuals lower their time preference and accumulate more capital, their productivity increases, and as a result, they are incentivized to lower their time preference further. In The History of Interest Rates, Homer and Sylla show a 5,000-year process of decline in interest rates, intertwined with significant increases during periods of war, disease, and catastrophe. The move toward harder monies with better salability across space and time can be viewed as a contributor to the epochal decline in time preference by allowing humans better savings technology, making the future less uncertain for them, and thus making them discount it less. This results in more savings, and thus more capital available at lower interest rates.

For as long as individuals are able to accumulate capital and reasonably expect it to remain theirs after they invest in it, this process is likely to continue, generating a higher stock of capital and a lower interest rate. This process, however, can be interrupted and reversed through various factors. Natural disasters destroy property and capital, lower living standards, and endanger survival, leading to a higher discounting of the future and a need to consume more available resources in the present, reducing capital accumulation, and raising time preference. But man-made disasters are an equal, perhaps more common threat to property.

Violations of property rights are the most important social and institutional factor affecting time preference. Theft, vandalism, and other forms of crime have a similar effect to natural disasters in that they reduce the stock of capital and goods available to an individual, forcing them to consume a larger fraction of their resources in the present, and increasing their uncertainty about the future. The increased occurrence of crime further leads to the expenditure of increasing resources on protection from crime, taking resources away from other productive enterprises. The more prevalent crime becomes, the more resources need to be dedicated to protection, which produces no increase in wealth.

Far more significant than individual crime is institutional or organized crime in the form of predatory government policies, which arguably extends to all forms of coercively imposed regulation, as discussed by Per Bylund in The Seen, The Unseen, and the Unrealized. Whereas it is possible to purchase protection from random individual criminals, government violations of property rights are systemic, recurring, and inescapable. Because they are considered legitimate, it is much more difficult to defend against government violations of property rights than individual crime. Taxation implies a reduction in future income and a reduction in the return on investment.

The devaluation of the currency is one violation of property rights that is highly destructive of future orientation and the process of the lowering of time preference. The process of lowering time preference is inextricably linked to money. Having money allows man to delay consumption in exchange for something that can hold value well and be exchanged easily. Without money, delaying consumption and saving would be more difficult, because the goods could lose their value over time. You could store grains to grow, but the chance of them spoiling before the next season is higher than the chance of a gold coin being ruined. If you can sell the grain for gold, you are able to exchange it back for grain whenever you need to, and you can use it to purchase something else in the meantime. Money naturally increases the expected future value of deferring consumption, compared to a world with no money. This incentivizes future provision. The better the money is at holding on to its value into the future, the more reliably individuals can use this money to provide for their future selves, and the less uncertainty they will have about their future lives.

Salt, cattle, glass beads, limestones, seashells, iron, copper, and silver have all been used as money in various times and places, but by the end of the nineteenth century, practically the entire globe was on a gold standard. With the gold standard of the late nineteenth century, the majority of the world had access to a form of money that could hold its value well into the future while also being increasingly easy to transfer across space. Saving for the future became increasingly reliable for more and more of the world’s population. With the ability to save in hard money, everyone is constantly enticed to save, lower their time preference, and reap future rewards. They see the benefits around them every day in terms of falling prices and the increased wealth of savers.

The twentieth century’s shift to an easier monetary medium has reversed this millennia-old process of progressively lowering time preference. Rather than a world in which almost everyone had access to a store of value whose supply could only be increased by around 2% a year, the twentieth century gave us a hodgepodge of government-provided abominations of currencies growing at 6%–7% in only the best examples, usually achieving double-digit percentage growth and occasionally, triple-digit growth. The numerical average for the growth of all national currencies’ broad supply during the period between 1960 and 2020 is 30% per year. Calculating the average weighted by currency size shows us roughly a 14% annual increase in the market supply of all fiat currencies, which can be viewed as the average money supply increase experienced by the average citizen of the fiat nations of the late twentieth and early twenty-first centuries.

Rather than expecting money to appreciate and thus reliably retain value into the future, fiat returned humans of the twentieth century to far more primitive times, when retaining value into the future was far less certain, and the value of their wealth was expected to be reduced in the future, if it survived at all. The future is hazier with easy money, and the difficulty in providing for the future makes it less certain. This increased uncertainty leads to a higher discounting of the future and thus a higher time preference. Fiat money effectively taxes future provisions, leading to a higher  discounting of the future and an increase in basic present-oriented behavior among individuals. Why delay consumption today when your savings will buy you less tomorrow? In this way, fiat monetary systems distort natural economic incentives and warp human behavior, often in ways that stymie human flourishing and undermine well-being, as I discuss in more detail in The Fiat Standard.

The extreme of this process can be seen when observing the effects of hyperinflation, i.e., the move to a very easy and rapidly devaluing currency. A look at the modern economies of Lebanon, Zimbabwe, or Venezuela through their recent hyperinflationary episodes provides a good case study, as do the dozens of examples of hyperinflation in the twentieth century. Adam Ferguson’s When Money Dies provides a good overview of the effects of hyperinflation in interwar Germany, a society that was one of the world’s most advanced a few years earlier.

In each of these hyperinflationary scenarios, as the value of money was destroyed, so too was a concern for the future. Attention turns instead to the short-term quest for survival. Saving becomes unthinkable, and people seek to spend whatever money they have as soon as they secure it. People begin to discount all things that have value in the long run, and capital is used for immediate consumption. In hyperinflationary economies, fruit-bearing trees are chopped down for firewood in winter and businesses are liquidated to finance expenditure—the proverbial seed corn is eaten. Human and physical capital leave the country to go where savers can afford to maintain and operate them productively. With the future so heavily discounted, there is less incentive to be civil, prudent, or law-abiding, and more incentive to be reckless, criminal, or dangerous. Crime and violence become exceedingly common as everyone feels robbed and seeks to take it out on whoever owns anything. Families break down under the financial strain. While more extreme in the cases of hyperinflation, these trends are nonetheless ever-present, in milder forms, under the yoke of the slow fiat inflationary bleed.

The most immediate effect of the decline in the ability of money to maintain its value over time is an increase in consumption and a reduction in saving. Deferring consumption and delaying gratification require one to give up immediate pleasure in exchange for future reward. The less reliable the medium of exchange is for transforming value into future reward, the lower the expected value of the future reward, the more expensive the initial sacrifice becomes, and the less likely people are to defer consumption. The extreme of this phenomenon can be observed at the beginning of the month in supermarkets in countries witnessing very fast inflation. People who get their paycheck will rush to the supermarket to immediately convert it into groceries and essentials, knowing that the quantities they can acquire by the end of the month will be far smaller due to the destruction of the value of the currency. Fiat’s low and steady inflation does something similar, but it is more subtle.

The culture of conspicuous mass consumption that pervades our planet today cannot be understood except through the distorted incentives fiat creates around consumption. With the money constantly losing its value, deferring consumption and saving will likely have a negative expected value. This pushes unsavvy savers to consider investing in securities. But finding the right investments is difficult, requires active management and supervision, and entails risk. The path of least resistance, the path permeating the entire culture of fiat society, is to consume all your income, living paycheck to paycheck.

When money is hard and can appreciate, individuals are likely to be very discerning about what they spend it on, as the opportunity cost appreciates over time. Why buy a shoddy table, shirt, or home when you can wait a little while and watch your savings appreciate to allow you to buy a better one. By contrast, with cash burning a hole in their pockets, consumers are less picky about the quality of what they buy. The shoddy table, home, or shirt becomes a reasonable proposition when the alternative is to hold money that depreciates over time, allowing them to acquire an even lower-quality product. Even shoddy tables will hold their value better than a depreciating fiat currency.

The uncertainty of fiat extends to all property. With the government emboldened by its ability to create money from thin air, it grows increasingly omnipotent over all citizens’ property, able to decree how they can use it, or to confiscate it altogether. In The Great Fiction, Hoppe likens fiat property to the sword of Damocles hanging over the head of all property owners, who can have their property confiscated at any point in time, increasing their future uncertainty and reducing their provision for the future.

Another way to understand the destructive impact of inflation on capital accumulation is that the threat of inflation encourages savers to invest in anything they expect will offer a better return than holding cash. In other words, inflation decreases the perceived value of discernment. When cash holds its value and appreciates, an acceptable investment will return a positive nominal return, which will also be a positive real return. Potential investors can be discerning, holding on to their cash while they wait to find a better opportunity to invest in the future. But when money is losing its value, savers have a strong impetus to avoid the devaluation of savings by investing, and so they become frantic to preserve their wealth. They are less discriminating. Investments that offer a positive nominal return could nonetheless yield a negative real return. Business activities that destroy economic value and consume capital appear economical when measured against the debasing monetary unit and can continue to subsist, find investors, and destroy capital. The destruction of wealth in savings does not magically create more productive opportunities in society, as Keynesian fantasists want to believe; it reallocates that wealth into destructive and failed business opportunities. It also creates a massive investment management industry to sell people what the gold standard offered them by default for free: appreciating savings. This is a negative-sum game: The value lost to inflation to finance wasteful government spending cannot be acquired back by all victims of inflation. Only a fraction will be able to invest to beat inflation, but the financial industry, with its monopoly central banking privileges, can be relied upon to come out on top. This is also a deeply regressive tax: Those most likely to beat inflation with their investment, are likely the rich who can afford to invest resources in researching markets, not the poor.

The manners and mores that make human society possible also suffer when time preference rises, as broad discounting of the future leads to increased interpersonal conflict. Trade, social cooperation, and the ability of humans to live in close contact with one another in permanent settlements are dependent upon them learning to control their basest, hostile animal instincts and responses, and substituting them with reason and a long-term orientation. Religious, civic, and social norms all encourage people to moderate their immediate impulses in exchange for the long-term benefits of living in a society, cooperating with others, and enjoying the benefits of the division of labor and specialization. When these long-term benefits seem far away, the incentive to sacrifice for them becomes weaker. When individuals witness their wealth dissipate, they rightly feel robbed. The supposed social contract appears to have been torn up, and they question the utility of living in a society and respecting its mores. Rather than a way to ensure more prosperity for all, society appears to be a mechanism for an elite few to rob the majority. Under inflation, crime rates soar and more conflict emerges. Those who feel robbed by the wealthy elite of society will find it relatively easier to justify aggression against others’ property. Diminished hope for the future weakens the incentive to be civil and respectful of clients, employers, and acquaintances. As the ability to provide for the future is compromised, the desire to account for it declines. The less certain the future appears to an individual, the more likely they are to engage in reckless behavior that could reward them in the short term while endangering them in the long term. The long-term downside risk of these activities, such as imprisonment, death, or mutilation, is discounted more heavily compared to the immediate reward of securing life’s basic needs.

Time Preference and Bitcoin

The emergence of bitcoin represents a fascinating opportunity to understand the effect of money on time preference, as well as to reverse the global trend of rising time preference presented by fiat. Bitcoin is free and open-source software for operating a peer-to-peer payment network with its own native currency. The two most important features of bitcoin are that its native currency has a strictly fixed supply that is completely unresponsive to demand, making it the hardest money ever invented, and that it allows for cross-border payments without needing any political authority to supervise the transaction. These two properties—hardness and censorship-resistance—arguably give bitcoin the capability to be the most salable good across time and space. Its scarcity means that its supply cannot be diluted unexpectedly, ensuring it is likely to hold on to its value in the future. And its automated processing of payments, secured by a truly decentralized network, means it can travel worldwide, and no single authority has the power to censor or confiscate it.

Bitcoin is pretty basic, and it simply allows you to hold and transfer ownership of currency units. In practice, the most prevalent use case for bitcoin has been its use as a store of value, or a savings account replacement. Millions of people worldwide have used bitcoin as a savings account, and they have profited from this immensely as bitcoin’s price has appreciated significantly in the long term.

This offers us a very interesting insight into the importance of money to time preference. Democracy, inflation, government predation, wars, the Keynesian managerial state, and the vast majority of modern factors causing an increase in time preference are still there, and they are usually getting worse.

Yet for a small but growing minority of the world’s population, bitcoin represents an escape hatch from monetary inflation. Unlike the vast majority of humans in the past century, bitcoiners today are able to save for the future in a monetary medium protected from debasement; they can expect, with relatively low uncertainty, to have their savings available in the future and to have their purchasing power increase. If money is important for time preference, we would expect to see these people differentiate themselves from their fiat peers by having a lower time preference. My personal experience from years of discussing this with bitcoiners has provided me with compelling evidence for this.

The story of bitcoin leading to increased savings is one I have come across very frequently. Before bitcoin, many people simply had no conception of saving and delayed gratification. They spent all the money they earned, and when they had major expenses, they went into debt to pay for them. They continued to work and pay off debts indefinitely. To the extent most people invest, they do so through their work retirement funds. People who do invest are mostly those who spend considerable time studying the markets and trading, making it almost a job. The notion of saving passively while earning money from a job was very rare. After bitcoin, it became increasingly common.

As it is expected to lose its value over time, easy money is not a reliable way of providing for the future; this increases future uncertainty, encouraging heavier discounting of the future, or a higher time preference, as observed in the twentieth century under the fiat standard. Because it can be expected to hold on to its value into the future, hard money increases the potential payoff from saving and delaying gratification, reducing the uncertainty of the future, and encouraging more saving and more future-oriented behavior, as was the case under the gold standard, and in the nascent bitcoin standard. Bitcoin could be the free market’s solution to the problem of rising time preference. It is the technological solution that allows anyone to rejoin the process of lowering time preference, saving, capital accumulation, and civilization. It requires no political permission, it obviates politics and monetary policy, it is unstoppable, and it is hugely rewarding for everyone who adopts it.

Chapter 12
Chapter 14