Austrian School Views
The Austrian School sees time as the root of uncertainty within economics.
In his book Capital and Interest, the Austrian economist Eugen von Böhm-Bawerk built upon the time-preference ideas of Carl Menger, insisting that there is always a difference in value between present goods and future goods of equal quality, quantity, and form. Furthermore, the value of future goods diminishes as the length of time necessary for their completion increases.
Böhm-Bawerk cited three reasons for this difference in value. First of all, in a growing economy, the supply of goods will always be larger in the future than it is in the present. Secondly, people have a tendency to underestimate their future needs due to carelessness and shortsightedness. Finally, entrepreneurs would rather initiate production with goods presently available, instead of waiting for future goods and delaying production.
By contrast, George Reisman says that time preference arises because of the possibility of being less able (say through injury or the effects of aging) or totally unable (through substantial incapacitation or death) to enjoy the use of goods in the future. The further into the future someone considers, the less likely it is that this someone will be able to enjoy the goods as much as they can be enjoyed now. The root of time-preference in Reisman's view is an internal risk premium that is specific to the owner of the goods, in contrast to an external risk premium that is demanded when the owner invests them in a production process or lends them to another. He then points out that the scarcity of capital combined with the uncertainties he raises, means that time preference is unavoidable and hence a minimum rate of return on that capital (such as in interest and normal profit) is always going to be required by suppliers of capital.
In Human Action (chapter 18), Ludwig von Mises discusses time inconsistency: that sooner-occurring future intervals are valued more highly than later-occurring future intervals. This observation has been observed in behavioral economics.
Read more about this topic: Time Preference
Famous quotes containing the words austrian, school and/or views:
“The war shook down the Tsardom, an unspeakable abomination, and made an end of the new German Empire and the old Apostolic Austrian one. It ... gave votes and seats in Parliament to women.... But if society can be reformed only by the accidental results of horrible catastrophes ... what hope is there for mankind in them? The war was a horror and everybody is the worse for it.”
—George Bernard Shaw (1856–1950)
“The scope of modern government in what it can and ought to accomplish for its people has been widened far beyond the principles laid down by the old “laissez faire” school of political rights, and the widening has met popular approval.”
—William Howard Taft (1857–1930)
“It is even more grim and wild than you had anticipated, a damp and intricate wilderness, in the spring everywhere wet and miry. The aspect of the country, indeed, is universally stern and savage, excepting the distant views of the forest from hills, and the lake prospects, which are mild and civilizing in a degree.”
—Henry David Thoreau (1817–1862)