Human Action: A Treatise on Economics

Appendix

appendix A Critique of Böhm-Bawerk’s Reasoning in Support of His Time Preference Theory by Ludwig von Mises This is the critical analysis to which Mises refers on page 488, note 5. It appeared in Nationalökonomie (Geneva, Switzerland: Editions Union, 1940), pp. 439– 44. This excerpt has been translated from the German by Bettina Bien Greaves and edited by Percy L. Greaves, Jr. In order to appreciate this critique, it is important to realize that, while Mises gave Böhm-Bawerk full credit for his important analysis of the phenomenon of interest, he pointed out here that Böhm-Bawerk failed to understand why present goods regularly attain a higher value than physically identical future goods do, i.e., the sole cause giving rise to the phenomenon of interest. Mises went on to explain in Nationalökonomie, as he does in Chapter 18 of Human Action, that time preference is an inherent category of human action. For the same reason that “a bird in the hand is worth two in the bush,” present goods are worth more than the identical items in an uncertain future. Present goods are more valuable than future goods, not because of some psychological factor or personal value judgment of particular persons at particular times and places—but simply because the present goods are available here and now and the future goods are not. Thus, interest is a praxeological consequence of man’s cognition of time. Individuals are bound—by the limitations of the universe and the very nature of man with his a priori or innate awareness of time—to place a lower value on future goods than they do on present goods. However, to call this lower valuation an under-valuation, as Böhm-Bawerk did, is a judgment of value and not a scientific statement. bbg & plg Böhm’s Theory Based on Psychology In his trail-blazing inquiry into the problem of interest, BöhmBawerk starts with the assertion that present goods are in every in- stance more valuable than future goods of the same kind and quantity.* He then attempts in two different ways to prove this theory on psychological grounds. The second reason† offered by Böhm-Bawerk for the higher valuation of present goods as compared with future goods is that future needs and the means available for satisfying them are regularly, but incorrectly, under-valued (i.e., valued too low). Böhm holds that there can be no doubt that this undervaluation exists. He attributes this to (1) lack of knowledge about our future needs, (2) indecision which, among other things, leads us to prefer present enjoyment to future enjoyment even when we know this choice is not in our overall welfare, and finally (3) the realization that life is both short and uncertain. All these factors operate in this direction. These psychological factors, to which Böhm-Bawerk looks for an explanation of the under-valuation of future requirements, undoubtedly do exist. Moreover, they certainly can affect human actions. They certainly play an important role in the decisions of many persons. Still—and Böhm-Bawerk recognized this—they affect different individuals to a very different extent and they affect the same individuals differently at different times when they are in different moods and humors. Böhm-Bawerk also noted that a tendency to overvalue future goods may appear among those persons who have fanatical fears for the future. In discussing such psychological factors, we should keep in mind that they are not inexorably and universally true. We may assume, if we wish, that many men are regularly driven by the factors cited by Böhm-Bawerk to under-value future needs. But then we must also consider the effect of antithetical psychological factors which lead some to place higher valuations on future goods. We may, if we choose, disregard those persons who might be considered mentally disturbed—misers and those with a fanatical fear of not having enough in the future. But then we must also disregard the opposite pathological types who give no thought at all to the future—the wild spenders, the simpletons too dull to conceive of any future worries and those who are depressed by the fear of some serious and imminent danger. 888  appendix * See Böhm-Bawerk, Eugen. Capital and Interest. 3 volumes. English translation from the German 4th edition (South Holland, Ill.: Libertarian Press, 1959). This section discussed here appears in Volume II, pp. 259 ff. Page...