Hoffer on the Importance of Time Preference

While looking over recent posts of Terry Teachout's blog About Last Night, I came across a quotation from Eric Hoffer Teachout posted:

“One wonders whether a generation that demands instant satisfaction of all its needs and instant solution of the world’s problems will produce anything of lasting value. Such a generation, even when equipped with the most modern technology, will be essentially primitive—it will stand in awe of nature, and submit to the tutelage of medicine men.”

Eric Hoffer, Reflections on the Human Condition

Hoffer does not use the term time preference, but that is what he is talking about. If someone is not willing to forego present gratification, he will not be willing to save, but spend all his income on consumption. Without savings there can be no investment in capital maintenance let along accumulation. Productivity and incomes will fall, along with the standard of living.

On the other hand, if we have social institutions that foster the accumulation of capital and if people have low enough time preferences, capital accumulation and prosperity will follow. As Mises puts it in Human Action (p. 562):

The characteristic mark of economic history under capitalism is unceasing economic progress, a steady increase in the quantity of capital goods available, and a continuous trend toward an improvement in the general standard of living.

Mises Quote of the Day: Christianity and Capitalism

From Theory and History by Ludwig von Mises:

"There is nothing in any ethical doctrine or in the teachings of any of the creeds based on the Ten Commandments that could justify the condemnation of an economic system which has multiplied the population and provides the masses in the capitalistic countries with the highest standard of living ever attained in history. From the religious point of view, too, the drop in infant mortality, the prolongation of the average length of life, the successful fight against plagues and disease, the disappearance of famines, illiteracy, and superstition tell in favor of capitalism" (Theory of History, p. 343).

There  are some who wish to drive an immovable wedge between the economics of Ludwig von Mises and Christian faith and practice. Some have even argued, that Mises himself thought that sound economics was incompatible with Christianity. However, by the end of his life, (Theory and History was published in 1958, when Mises was 76 years old) he does not seem to have thought that there is such an inseparable gulf.

James Grant on The Endless Spending Spree

Everything written by James Grant is worth reading. Therefore I direct your attention to his review of White House Burning that appeared in this past weekend's Wall Street Journal. His object of review is a book by Simon Johnson and James Kwak, who, in Grant's words, "are the resume champions of the world." They argue that our economy is in trouble because the government neither regulates nor taxes enough.

Grant demurs. He rightly traces our troubles in large part to our leaving the last semblance of the international gold standard in 1971. Grant likens this move to giving the state a "magic credit card," because it removed virtually all constraint upon government spending, because no more did the state have to rely on taxes and private lending. It could rest on borrowing funded by the Federal Reserve.

That is exactly what it did. Grant notes that

In the 10 years before 1971, the "gross" public debt (counting even those obligations held by the government itself) had climbed to $408 billion from $293 billion. This increase amounted to a compound annual rate of only 3.4%, the Great Society and the Vietnam War notwithstanding. In the next 10 years, till 1981, the gross debt jumped to $995 billion from $408 billion—a compound annual rate of 9.3%, the close of the Great Society and the end of the Vietnam War notwithstanding. Not until fiscal 2001 did the debt reach $5.8 trillion. Yet it expanded by an identical $5.8 trillion in the four short years between 2007 and 2011. Now the grand total stands at $15.6 trillion.

While Grant is not pleased with Johnson and Kwak's "wonky" policy prescriptions, it is their overall view of American economic history that really bothers him.

Some will chafe at the authors' proposals for raising the gasoline tax or reducing the mortgage-interest deduction or increasing the Medicare Part B premium. Myself, I take umbrage at their interpretation of the American past. In money and banking, and therefore in debts and deficits, the way forward is through the constructive adaptation of a history they never quite acknowledge. Here's an idea: Let's try capitalism for a change.

Grant is such a good writer and he is sound on so many things. He is right on the gold standard, correctly distinguishing between the real thing and the relatively weak gold exchange standard put in place after World War I and the even weaker Bretton Woods system which followed World War II. He is right on financial liability issues. He is right on the depression of 1920-21. As always with Grant, the entire piece is worth reading and I highly recommend it.

What the Bible Says About Capitalism

Aryeh Spero has a very thoughtful essay on that very topic in this past Monday's Wall Street Journal. Spero is a Jewish Rabbi, so not surprisingly he limits his discussion to the Old Testament. Nevertheless, what he says is quite good. His thesis is that the general religious ethos at our nations founding was, as he puts it Judeo-Christian, and provided legal, institutional, and moral support to capitalism.

More than any other nation, the United States was founded on broad themes of morality rooted in a specific religious perspective. We call this the Judeo-Christian ethos, and within it resides a ringing endorsement of capitalism as a moral endeavor.

Spero notes the Bible's stressing personal responsibility, the importance of labor, the implications of our being made in the image of God, the necessity of honesty in business dealing, and equality under the law. All of these things are important for sustaining a prosperous and free economy.

Spero also discusses the important example of Joseph's plan in dealing with the famine in Egypt (Gen. 41; 47).

At the end of Genesis, we hear how after years of famine the people in Egypt gave all their property to the government in return for the promise of food. The architect of this plan was Joseph, son of Jacob, who had risen to become the pharaoh's top official, thus: "Joseph exchanged all the land of Egypt for pharaoh and the land became pharaoh's." The result was that Egyptians became indentured to the ruler and state, and Joseph's descendants ended up enslaved to the state.

Spero ends with a very profound insight about how corrosive the sin of envy is for the good society.

God begins the Ten Commandments with "I am the Lord your God" and concludes with "Thou shalt not envy your neighbor, not for his wife, nor his house, nor for any of his holdings." Envy is corrosive to the individual and to those societies that embrace it. Nations that throw over capitalism for socialism have made an immoral choice.

The entire essay is well worth your thoughtful reading.

A Christian Speaks Up for Capitalism

I just recently came across the thought-provoking essay "A Christian Speaks Up for Capitalism" by James D. Gwartney, co-author of a very popular principles of economics text. The piece originally appeared in the August 1986 Freeman, but is as timely as today's headlines. Gwartney explains why Capitalism is an ally of Christianity, not a necessary enemy. He argues thus by stressing several points:

• Capitalism rewards and reinforces service to others.
• Capitalism provides for the masses, not just for the elites.
• Capitalism provides opportunity for achievers of all socioeconomic backgrounds to move up the economic ladder.
• Capitalism provides for minority views.

I think the first point is so important. Way too many Christians (and people in general for that matter) are under the mistaken impression that capitalism is a barbaric free-for-all in which the greedy eat the bread they have made with the ground up bones of the exploited working class. In a free capitalist society, however, the only way for a capitalist/entrepreneur to make a profit is to serve his customers better than anyone else. Not only does capitalism reward service, it provides an incentive to be the best servant possible. In fact, even if an entrepreneur was the epitome of the greedy capitalist pig, the only way for the pig to feed his desire for wealth is to serve others. It is the only economic system with the potential to turn a vice into something beneficial for someone.

Gwartney concludes:

Of course, capitalism does not impose the moral demands that Christianity does. But economic systems seeking to perfect human nature have more often led to tyranny than to bettering the human race. Christians would do well to settle for an economic system that reinforces Christian virtues, improves living standards, and provides for minority views. Capitalism is such a system.

Capital in Proverbs

There are many who think that there is a fixed wall of separation between faith and science in general and between the Scriptures and economic science in particular. Showing this dichotomy to be false is one of the great purposes of my book, Foundations of Economics. Because the Author of the Bible is also the maker of the created order, we should expect that there is no ultimate conflict between the special revelation constituted in Scripture and the general revelation we see manifest in creation.

I came across a simple case in point recently while reading in the book of Proverbs. Proverbs 14:4 reads,

Where there are no oxen, the manger is clean,
but abundant crops come by the strength of the ox.

Plowing in Nivernais by Rosa Bonheur (1822-1899)

Bible commentator Matthew Henry says the following about this verse:

Where no oxen are there is nothing to be done at the ground, and then nothing to be had out of it; the crib [the manger] indeed is clean from dung, which pleases the neat and nice, that cannot endure husbandry because there is so much dirty work in it, and therefore will sell their oxen to keep the crib clean; but then not only the labour, but even the dung of the ox is wanted.

Charles Bridge has a slightly different take on this verse. In his A Commentary on Proverbs he explains

Oxen are used in husbandry (Deut. xxv.4. 1 Kings, xix.19.) Where, therefore, no oxen are, to till the ground, the crib is clean. (Amos iv. 6) Because, where is no labour, there can be no food wherewith to supply it. God works by means not by miracles. There must be good husbandry, in order to an abundant harvest. let the ox be put to his work, and much increase will be by his strength. (Ps. cxliv.14.)

Regardless of whose particular interpretation regarding the meaning of the clean manger (or crib) is correct, here is a case where the author of this practical manual for living reminds the reader that, in his agrarian setting, oxen are powerful means for producing abundant crops. Yesterday I explained the importance of capital for economic prosperity. In this case, the ox is a great capital good used to produce a great harvest, which was a chief source of livelihood in that day. Without the use of an oxen, on the other hand, the farmer's lack of output would leave him wanting.

The Importance of Capital

Yesterday, I began a series of posts that will briefly explain the economic sources of prosperity. I discussed the nature and beneficial consequences of the market division of labor and how voluntary exchange is necessary for the division of labor to thrive. (By the way, an outstanding article on the topic is Murray Rothbard's masterful, "Freedom, Inequality, Primitivism, and the Division of Labor.")

A highly developed division of labor would be impossible, however, without capital goods. Another engine of economic development, therefore, is capital. Capital goods are produced means of production: tools, machines, buildings, and intermediary goods.Capital is the sum of the monetary value of all a firm’s assets that are dedicated to that firm’s productive operations minus the sum of the monetary value of all of a firm’s liabilities . These assets may consist of land, physical plant, tools, machinery, goods-in-process, receivables, cash, etc.

The use of capital goods increases the productivity of the user, by allowing people to produce a greater quantity of output in the future. They also enable people to produce some goods that could not be had at all without capital goods, such as watches, automobiles, or iPads.

However, capital goods do not spontaneously spring fully developed from nature. Before capital goods can be used, they must be produced. Producing them takes time. In order to obtain capital goods it is necessary to save and invest these saved resources toward the formation of capital.

Additionally, because capital goods are perishable, they must be replaced with further investment. At any moment in time, therefore, each producer has the option of accumulating capital, maintaining capital, or consuming capital. Accumulating and maintaining capital requires a certain amount of saving. Consuming capital requires only that the producer use up his capital stock. As implied above, the choice regarding whether a producer is going to accumulate, maintain, or consume his capital depends upon how much that producer values present goods over future goods. It depends on his time preference.

The higher people’s time preferences are, the more present-oriented they are. They tend to consume more and save and invest less. With high enough time preferences they will consume capital, resulting in less productive labor. Output and real incomes will fall and society endures a lower standard of living.

The lower people’s time preferences are, the more they save and invest. Over time, people will have more capital goods and labor will be more productive. Output will increase and the general standard of living rises. Consequently, a chief determinant of whether an economy expands or contracts is the size of the stock of capital.

If we want a society that enjoys increased prosperity, therefore, we need to foster social institutions that encourage capital accumulation. Such an institution is private property. Unless an investor is secure in his property, he will remain uncertain whether he will be able to keep both his accumulated capital and any positive return on his investment. He will have little incentive to save and invest in further capital maintenance not to mention accumulation. Private property, the institutional setting of capitalism, is therefore a key that opens the door to prosperity. As Mises says in Human Action (p. 562):

The characteristic mark of economic history under capitalism is unceasing economic progress, a steady increase in the quantity of capital goods available, and a continuous trend toward an improvement in the general standard of living.

Sustainability and the Cultural Mandate

Anyone unsure that economic policy necessarily includes an ethical component need only to look at the issue of sustainable economic development.  The debate over sustainability is at least waist deep in ethics as evidenced by the lengthy essay "For Goodness Sake" by Ashley Thorne at the National Association of Scholars. Thorne reviews in detail the ethical imperatives heaped upon sustainable development that separate the virtuous, low-carbon footprint sheep from the villainous polluting goats. She documents the spectrum of ethical unction on this issue, culminating with comments manifesting extreme environmentalism. Thorne's final example quotes the text of a website designed to comfort women who have had abortions:

[B]ecause I chose to end my accidental pregnancies, there are two fewer human beings on the earth impacting the habitat of butterflies and other creatures.

This is a logical conclusion for one who fails to see human beings a creatures made in the image of God.

Of course Christians must bring thoughts about creation and man's place in it captive to Christ. We do this by meditating upon His general and special revelation. We find in Genesis 1 that the very first command given to man is what has been variously called the creation mandate, cultural mandate, or the dominion mandate. Even before sin and the fall of man, God told our first parents to “Be fruitful and multiply and fill the earth and subdue it and have dominion over the fish of the sea and over the birds of the heavens and over every living thing that moves on the earth” (Gen. 1:28). In Genesis 2 we find that the cultural mandate includes working and keeping the created order. Thus, as David Hegeman in Plowing in Hope explains,  the cultural mandate requires filling, working, keeping, and ruling creation.

We are called to do this, however, in our present, fallen and finite world faced with scarcity. Since our banishment from the Garden of Eden, man has faced a central cultural dilemma: how do we fulfill God’s creation mandate in a world of aggravated scarcity without either starving to death or killing one another. One of the primary goals of my book Foundations of Economics is to show how economics helps us to answer this question.

In the first place, multiplying the population and subduing and exercising dominion over the earth requires economic progress. It obviously requires survival and each person developing their potential and it requires the development of the potential of the natural order.

Fulfilling God’s dominion mandate, however, also requires wise balance. It is possible that we rashly try to draw too much from creation too quickly, make changes too abruptly, or do so without replenishing the earth. We can, however, err on the other extreme by taking our cue from the environmentalist movement and  and act as if nature is a museum and we are its curator. Exercising dominion and developing civilization requires making concrete and lasting change to the created order. At the same time we are not to be spoilers of creation.

Economic theory tells us there are three sources necessary for economic progress: the division of labor, capital accumulation, and entrepreneurship. The division of labor opens the door to increased productivity by allowing people to specialize at lines of production where they are most efficient. The use of capital goods contributes to economic progress by increasing the productivity of the user. In order for economic progress to continue over time, however, it is important not to waste capital that has already been accumulated, which is why entrepreneurship is the third major contributor to economic development.

It turns out that all three of these sources of economic development require private property. Without private property there can be no voluntary exchange nor division of labor, capitalists will be discouraged from saving and investment, and entrepreneurs will lack the incentive to engage in profitable production and they will be unable to calculate economic profit and loss because there would be no market prices to use in such a calculation.

Additionally, the institution of private property also helps prevent the destruction of the creation as it is developed. The strict liability that is a feature of private property constrains would be polluters, for example, because they will be held accountable if they aggress against the property of their neighbor through things like smoke emissions or chemical dumping.

In fact it is in societies with little or no private property that we find little prosperity but much waste of resources. Economic development that is truly sustainable can only occur in societies that adhere to the Christian ethic of private property. Once again we find the Christian ethic of property supporting general revelation manifest in economic law.

Of Gravy and Doughnuts

The government gravy still keeps flowing. On the same day that the Obama Adminstration forecast a record high annual budget deficit of $1.4 trillion (that's trillion! with a tr in front, not a b as in billion), President Obama called for the establishment of a $30 billion small business lending fund. The stated goal of the program "is to make sure the people who are looking for a job, can find it." The idea is that the government would invest $30 billion dollars in community banks who would then find it easier to loan to small businesses. It seems that the official line is that there is no economic problem that can't be solved by throwing billions of dollars at it.

It's understandable why the Administration might be advancing this particular policy. It is pretty clear from the data that the Great Recession was accompanied by commercial lending falling off a precipice.

Don't forget, however, that if commercial lending collapsed dramatically (although note that it is still greater than in mid-2006, not all that long ago), there is a reason for it. One thing holding lending back is the current regime uncertainty I've discussed before, fostered in part by the very budget deficits and government debt to which this program contributes. Another is the fact that massive malinvestment during the 2000s resulted in large scale capital consumption and financial institutions are still working on rebuilding their capital.

No matter how much we'd like it to be otherwise, capital cannot be created out of thin air. Capital goods don't come into being by clicking our ruby slippers together and chanting "There's no place like D.C. There's no place like D.C." No, capital must be accumulated through the allocation of real savings. Government loans and subsidies to small businesses merely give them the ability to bid the ownership of such goods away from their most highly valued use. It does not add to the capital stock, it merely redistributes the existing capital stock. We should never assume that investments made possible only due to government subsidies will wisely use the capital invested.

A case in point is the story of how the lives of inhabitants of a small Iowa town were forever made more dismal due to our friends at the Small Business Administration who were there to help. Many years ago this town had a lively doughnut shop that was one of the townspeople's favorite meeting places and served the best glazed fried cinnamon rolls on the planet. The firm maintained a profit because in addition to the retail shop it also daily serviced a very large account at the town's largest employer.

One day a businessman who owned a doughnut shop somewhere else received an SBA grant to also operate a wholesale doughnut bakery in town. Because of the grant, he was able to underbid the established firm for the account at the large employer.  He won the bid and the other doughnut maker had to close up shop. A couple of years later the SBA grant to the second doughnut maker ran out and he was not able to profitably operate either. He had to shut down and the little town in Iowa was left with only holes where the doughnuts used to be. The moral of this true story is that whenever government intervenes with commercial subsidies, resources are misallocated from the point of view of society. Scarce land, labor, and capital goods were used less efficiently than they would have been without the intervention, and the community was left worse than before the government stepped in to support commercial activity.

Fighting Poverty with Capitalism

PBS NewsHour (of all places) featured this hopeful item on Martin Fisher, a designer who went to Africa a socialist wanting to help poor African's escape poverty and, after six years of disappointment, became, as he put it, "a small-'c' capitalist" selling water pumps to farmers.


The money quote comes from Mark Bell who teaches international agricultural development at the University of California at Davis. Contrasting two ways of attempting to fight poverty in rural Africa he says:

If you go in and say, here's a freebie, then people are going to say, sure. Give it to me. And when you leave, you know, who knows what happens to it. But if a farmer is given the opportunity to assess and then makes the decision to buy, I think that's the real proof that this is something that is beneficial to him.

This is the main lesson yet to be learned by many foreign aid activists. The last sentence gets at the heart of demonstrated preference. When a person trades away property to receive something else, he demonstrates that the maker of the good (in this case water pumps that are practically useful and inexpensive enough to afford) has actually done something productive.