Time Preference

A staple of both micro- and macroeconomics is the individual time preference. According to this theory, first, goods and services are worth more now than they are later, and second, individuals have different time preferences: some prefer fewer goods and services now rather than more later; others prefer more goods and services later than fewer now. In other words, if I'm entitled to one latte each day, I would never go without a latte today just so I could consume two tomorrow; there's no benefit to foregoing today's latte just so I can drink it tomorrow. But I I can go without a latte today and consume three lattes tomorrow: today's latte, tomorrow's latte, and the "extra" latte I gain by going without today. Some people would rather have their one latte each day; others would rather forego some individual day's lattes so they can get extra in the future.

That there is a time preference is obviously true: some people do not save at interest, and consume everything they're entitled to today; others, in exactly the same situation, consume less than they're entitled to today to consume more tomorrow. However, the question is whether time preference is an intrinsic or a derived element of an individual's utility function.

Let's consider an obviously unrealistic economy. First, we assume the economy is completely stable: there's no per capita economic growth*. We will produce exactly the same amount tomorrow as we do today, and everyone knows and expects economic stability. Second, everyone has exactly the same income, and we assume no individual's income will ever change. Third, we assume that everyone's utility function is constant across some period of time, say a four-week month: every individual will always want to consume exactly the same bundle of goods in any given month.

It seems clear that at least some elements of individuals utility functions still make sense: some people will prefer to consume only lattes and go without yoga lessons; some will consume only yoga lessons and go without lattes, and some will prefer various combinations of lattes yoga lessons. The aggregate of all the utility functions will create a family of indifference curves between lattes and yoga lessons, and the marginal costs of lattes and yoga lessons will create a production possibility frontier, and we know there's one optimal point where the indifference curves and the production possibility frontier intersect, specifying the relative quantities and prices of lattes and yoga lessons. Let's assume that the optimum is that one latte per day for a week is, in aggregate, equivalent to one yoga lesson per week, and people can choose between two lattes per day for a week, two yoga lessons per week, or any combination in between**.

*We can either assume no population growth and no economic growth, or we can assume that per capita production is always constant.

**It doesn't matter here whether or not we can produce and consume fractional lattes and yoga lessons.

We can say, then, that any element of a utility function that makes sense under these restricted conditions is an intrinsic element. Any element that makes sense only when we relax these assumptions is a derived element, derived, that is, from the relaxation of the assumption. For example, if an individual's utility function changes because we allow per capita economic growth, that change is an element derived from the fact of extrinsic economic growth.

Under these assumptions, then, time preference would say different individuals who valued lattes and yoga lessons equally but had different time preferences would choose between the following options:

1. Neutral: one latte every day (28 per month) and one yoga lesson per week (4 per month) on the one hand, and on the other hand, they might choose
2. High: two lattes every day for one week (14 per month), two yoga lessons the first week (2 per month), and none at all for the rest of the month.
3. Low: no lattes or yoga lessons at all for one week, and two lattes and two yoga lessons for the next three weeks (42 lattes and 6 yoga lessons).

The first individual has a neutral time preference, the second has a high time preference, and the third has a low time preference. It's clear that if time preferences are symmetrically distributed, then those with low time preference can trade with those with high time preference, and production and consumption remains constant on a daily basis, with every pair of individuals consuming a total of one latte per day and one yoga lesson per week.

However, it's hard to look at this as specifically a time preference. If we assume that everyone is rational, then every person knows they will have to go without sooner or later. Instead we can look at these kinds of preferences as saying that an individual prefers two lattes a day for a week more than they dislike going without a latte for a week. But in this case, they can trade one-for-one with others with the same preference. They can trade their lattes this week for others' lattes next week, and then switch back and forth. Then, instead of getting two lattes per day (and two yoga lessons) for only one week per month, they get two lattes per day and two yoga lessons per week for two weeks. Thus, a time preference, where more goods later can be substituted for fewer now, seems entirely irrational under conditions of absolute stability.

If we relax the assumptions, then time preference starts to seem more reasonable. If we assume economic growth, or if we assume that income levels change over time (note that the former implies the latter, but not vice versa), or if we assume that fundamental preferences change over time, then a time preference obviously makes sense. Some people will be happy with their one latte a day; those who forego their latte today invest the unused labor to make latte production more efficient tomorrow, and they reap the "extra" lattes not taken from the high time preference consumers but from increased productivity. Indeed, investment and increasing productivity are not the result of time preferences; time preferences are an artifact of economic growth.

What is a voluntary agreement?

Today, a rather stupid anonymous commenter left this message in response to my post, The Libertarian Argument:

How can you not see the difference between a lease, which was signed by the tenant, and a decree that was forced upon a citizen by the majority? One is a voluntary agreement, the other is force.

The commenter makes a number of rather obvious errors, most notably that that Libertarian argument does not usually consist of how to justify the initiation of coercion, but rather that the initiation of coercion is intrinsically unjustifiable. Of course, as I discuss in the post, the Libertarian argument is fundamentally in bad faith: agreements they don't like are unjustifiable because they entail the initiation of coercion; agreements they like aren't the initiation of coercion because they are justified. I find this "argument" as tedious and stupid as Divine Command Theory.

But this comment, while completely stupid, does suggest a more interesting question: what is an agreement? What do agreements mean? When is an agreement voluntary? The Libertarian position is straightforward: Agreements are what Libertarians want them to be, they mean what Libertarians want them to mean, and they're voluntary when Libertarians like them (and involuntary when they don't like them). Libertarians interpret "voluntary agreement" like Christians interpret the Bible.

But there are more subtle issues (more subtle than a Libertarian is like shorter than Manute Bol) about agreements.

What is a voluntary agreement and what does it mean? Well, first of all, an agreement has to provide mutual benefit: all parties to an agreement have to be better off overall than if the agreement did not happen. Second, all parties to a voluntary agreement must be able to forego the agreement without harm. Finally, an agreement cannot be fully explicit: there must be a social process to interpret the meanings of agreements. But even with this definition, there are still notable controversies.

First, although an agreement has to provide mutual benefit, there's no determinist how that mutual benefit is allocated among the parties. The allocation of the "surplus benefit" is a matter of bargaining power, not logic, which then raises the question: what are legitimate and illegitimate ways of obtaining and exercising bargaining power? Is possession of money legitimate bargaining power? How about votes? How about violence, threatened or actual? People have any number of positions on these issues, but there's no single rationally correct answer; they're political questions.

Second, what constitutes "harm"? It's relatively uncontroversial that getting killed or beaten constitutes harm, so that giving my wallet to a mugger who points a gun at me is not a voluntary agreement. But what about natural harms? Does freezing or starving to death constitute a harm that renders an agreement involuntary? How about becoming stateless, ejected from the protection of a society? Is it harm to lose some portion of the mutual benefit of an agreement because of a change in bargaining power. No one is self-sufficient; we all need to rely on others for our physical survival. Does our mutual dependence entail at least some obligation on the part of others to assist the survival of others? Again, these are not rational but political questions.

Third, how do we resolve disagreements between parties to an agreement about what a particular agreement actually means? What, precisely, have the parties agreed to? What do we do about these disputes? Again, how to interpret an agreement is as much a matter of not rationality but politics.

It's not enough to lay out just a consistent set of answers to these questions, because there are a very large number (perhaps infinite) number of consistent answer sets. Why should I prefer your set of answers to another?

One problem (out of many) with not only Libertarianism (right-anarchists) but also left-anarchism is that anarchists simply push all the interesting political questions to "voluntary agreements" and assume all these problematic questions are thereby solved at a stroke. I think this position is at best naive, and at worst dishonest.

The Stupid! It Burns! (incompatibility edition)

The author of the blog, Shadow to Light, does not appear to like Susan Jacoby’s Atheistic Beliefs:

So the community that insists science and religion are incompatible is now going to embrace the notion that emotion and reason are complementary? Well, intellectual consistency has never been a strong point of atheism.

Again, I've only given you a taste of the stupid.

ETA: The stupid refers to the Shadow to Light author's critique. Susan Jacoby rocks!

The Stupid! It Burns! (which god? edition)

Christians say Atheists are right Atheists don't believe in

god as Kim Jung Il. . . A god of power and supervision and invigilation and suspicion. . . . And [a Christian] almost always has to say: I don't believe in that god either.

Uh... I know a lot of Christians who actually do believe in such a god, but all right, let's run with that. What kind of a god do you believe in, Dave?

When a Christian says GOD they mean who you know when you know Jesus. Jesus whose purpose is to introduce his Father. (Luke 10) God who is firstly Father, who sent his Son into the world in the power of the Holy Spirit. Not power, but a person - a person who is universally acknowledged to have been good and kind and innocent, and who was nonetheless executed and then it was claimed resurrected. There is a story to consider, to read.

Wait, what?

Lots more stupid in the article.

The Stupid! It Burns! (humility edition)

Why Are Atheists Always Attacking Christians?:

It's common to read attacks by Atheists on practicing Christians on Daily Kos -- and, indeed, on the Internet at large. These attacks often infantalize Christians, assault their sense of reason, slander them or level broad accusations that have little support in fact. The context of these attacks is usually the All-Seeing Eye of the Atheist, which is capable to seeing into the minds of Christians and instantly understanding their motiviations, even when such motivations are cloudy or obscure to the Christian himself. . . .

Human nature is such that, on closer examination, the Atheist movement is full of the same weak, irrational, conflicted, myopic human beings that fill the ranks of the religious. We're all small -- tiny, really -- when compared to the grandeur of the Divine or the Universe. (Your choice.)

So, please. A little humility?

Economic growth and the gold standard

Assuming a gold standard were possible (i.e. that people wouldn't just create fiat money around it), it doesn't seem possible that we could get optimal economic growth under a gold standard.

In market/capitalist economics, Y * P = M * V: Real gross domestic product (Y, the total production of final goods and services) times the price level (P) equals the quantity of money (M) times the velocity of money (V, the number of times, on average, a unit of money is used in a transaction for final goods and services). We can also say Y = (M * V) / P. We can choose our units so that P = 1; therefore Y = M * V.

Remember that V in this case is not just the number of transactions using a particular unit of money, it is the number of times the unit of money crosses the production/consumption boundary. Alice's employer pays her; that's one transaction. Alice buys food at the store; that's two transactions. The store uses the money to buy food from a wholesaler. That's not a transaction that counts towards V, because the store and the wholesaler are both on the production side. Similarly, when the wholesaler pays the processor, or the processor pays the farmer, or when the farmer pays his mortgage, those are not transactions that count in the velocity of money. It's only when the store, wholesaler, processor, farmer, or banker, pays an employee, investor, or landlord does the money cross the producer/consumer boundary and V increases. It seems clear, therefore, that V is physically limited. No matter how an ounce of gold is represented, whether it's a physical coin, an ingot, or an entry in a database that corresponds to some physical gold, money can move only so quickly.

The point of a gold standard is to physically limit M, to create a quantity of money whose increase is physically limited. Since V is already physically limited, that means the quantity of money in motion, M * V, is physically limited. If we have price stability, then P is constant. Therefore, an increase in real gross domestic product is limited to the limit of the increase in the physical quantity of gold. But there is no particular reason to believe that the limit on the increase on the physical quantity of gold is the optimal increase in real gross domestic product. And that's absolute GDP; there's no reason to believe that the increased quantity of gold even match even population growth.

Furthermore, what is the value of a specific quantity of gold? Gold has very little intrinsic value, outside of electronics and jewelry: you can't eat or drink it, nor does it keep you warm or dry. Gold does, however, have a physical cost: the marginal socially necessary abstract labor time to produce the "last" unit quantity of gold. Expressed in money, the marginal cost of one unit quantity of gold is one unit quantity of gold. In other words, all the economic growth would go to the gold producers. There really isn't a world with an industrial economy in which a gold standard is a good idea.

There are, of course, any number of people that support a gold standard who have just not thought through the economics. But there must be gold standard advocates who have thought through the economics. Some of them, I suppose, really would limit real economic growth, but I've never seen a gold standard advocate say explicitly endorse limiting economic growth to the increase in the supply of gold. The others, however, realize that some sort of fiat currency is necessary for economic growth in an industrial economy. The question, then, is who gets to control economic growth, and, more importantly, who gets to distribute the benefits of economic growth. It is fairly obvious, then, that such control would go to the people that own most of the gold.

Economic power, control over the means of production, is political power. One does not imply the other; they are the same thing. In an advanced industrial economy, the means of production is not ownership of factories or land, but ownership of money itself. By definition, the government is the set of institutions and their members that own the money. Thus there can be no such thing as "private" ownership of money: the fundamental owners of money are, by definition, the government. So the question is not whether we should have government ownership of money, but rather what kinds of institutions, with what kinds of members, should constitute the governmental ownership of money.

I'm not a big fan of republican democracy, but a republic is, at least to some extent, accountable to all the people. Putting the government in the hands of people who say proudly and explicitly that they recognize no accountability except to their own well-being seems like a Very Bad Idea.

Promises that can be kept

In "Promises That Can't Be Kept", John Long argues that the government benefits are like free ice cream, eroding the profitability of the economy until it becomes bankrupt. Yes, people like free stuff, but Long argues that if a business starts giving out too much free stuff, someone has to pay for it, and the people who can afford to pay extra will go elsewhere. There Ain't No Such Thing, dontcha know, As A Free Lunch. Long explicitly describes his on-the-course-to-bankruptcy ice cream shop as an analogy to the federal debt. Mentioning (but not citing), I presume, "Why $16 Trillion Only Hints at the True U.S. Debt," by former Republican congressmen Chris Cox and Bill Archer. In this article, Cox and Archer claim that the federal government owes $86.8 trillion:

The actual liabilities of the federal government—including Social Security, Medicare, and federal employees' future retirement benefits—already exceed $86.8 trillion, or 550% of GDP. For the year ending Dec. 31, 2011, the annual accrued expense of Medicare and Social Security was $7 trillion.

According to Cox and Archer, we will soon have to collect $8 trillion per year to fund these entitlement programs, a task that would be difficult even in an economy with an annual gross domestic product of $13-14 trillion. Sooner or later, something has to give. But Cox and Archer's numbers are suspect; more importantly, Long's ice cream shop analogy is misleading and fails to accurately describe the macroeconomic role of a government with a sovereign currency.

Cox and Archer are trying to scare us with big numbers, and they don't describe these numbers and their sources accurately enough for us to really understand the numbers. On what time-frame does the government "owe" $86.8 trillion? Are these actual debts, or just promised payments? There is a difference: I could say that you personally owe more $1 million, because that's how much money you'll have to spend to stay alive over the next 30 years. But you don't have to reduce your spending to pay back that "debt": that "debt" just is what you'll have to spend. I'm not an expert in social security accounting, but I do more-or-less vaguely know that both Social Security and Medicare project income and expenses over about 75 years. So if that's $86.8 trillion over 75 years, then that's about $1.16 trillion per year, which is not particularly scary. Similarly, as an accountant, I look carefully at qualified numbers. When Cox and Archer talk about an "annual accrued expense of $7 trillion," the first thing I want to look at is how they calculate an "annual accrued expense." Even the most honest accountant uses bullshit numbers, and this $7 trillion smells like a bullshit number. Without telling us how they got it, I just don't know what it means. Finally, these are Republicans talking about government money, and Republicans have less credibility talking about money than Kent Hovind has talking about population genetics. I don't even bother to check Republican math anymore; I simply presume it's an outright lie.

John Long's analogy, though, is not merely unhelpful, it is actively misleading. First, the government is not handing out free ice cream, and it is not handing things out to poor people. They are providing a service that everyone must have: retirement income and old-age health care to people who have, for the most part, worked and paid taxes their whole lives. No rational person would forego these benefits, and the only reason anyone might do so would be to survive in the short term. By making it a universal tax-supported government benefit, employers cannot force workers to compete on who is willing to starve later to work now. Second, the government is not a business that must make a profit (or at least not make a loss) to survive. The government must have debt, because net government financial debt is net private-sector financial assets. If we want to have net private financial assets, then we must have net public debt. That's how the financial system works. Furthermore, the government does not, like an ice cream shop, have to compete with other businesses, and does not have to match its revenues to its expenditures, even in the long run. The government not only must run a deficit, it can print money at will. There are pros and cons to printing money, of course, but they are completely different than the pros and cons of a private business borrowing from individuals. Any time someone compares the government to a business, they simply do not understand fundamental macroeconomics. John Long does not understand fundamental macroeconomics.

Social Security and Medicare are obligations that Americans, as civilized human beings, must meet. We simply cannot choose to let any of our old people starve or go without adequate medical care. We simply must do it. And we can. Even if it did take 50% of our GDP to take care of our old people, then that's what we would have to do. Letting old people starve and die is simply not an option. But the idea that we will have to spend 50% of our GDP to take care of our old people doesn't make any sense. In "A Summary of the 2012 Annual Reports," the Social Security and Medicare Boards of Trustees report that total Social Security spending, 4.2% of GDP in 2007, will rise to about 6.4% of GDP in 2035 and then fall to about 6.1% of GDP in 2050. Similarly, Medicare, at 2.0% of GDP in 2011, will rise to 4.0% of GDP by 2086. Cox and Archer are pulling annual expenditures of 50% of GDP out of their asses; The true amount of 10-11% of GDP isn't couch-cushion money by any means, but it's hardly impossible. For Long to repeat these numbers is simply irresponsible journalism. Our promises to, well, ourselves, that our society will ensure that we won't starve or die of treatable medical conditions in our old age, must be kept, and they can be kept.

The Stupid! It Burns! (leap of faith edition)

The Atheistic Leap of Faith

I want to point out some of the contradictions that I see in [an atheist's] worldview. My point in the following is to be loving by clearly presenting the truth as I see it. I recognize this style is a bit abrupt and can come across as harsh, but I assure you, that’s not my intention.

Here are the clashing statements, right next to each other:
1: There are no objective moral truths.
2: I’ve decided to accept some moral axioms as true, because I think it is important to have a moral system to live by.

1: There is no ultimate moral accountability for my actions.
2: Even when I know no one can catch me doing things that we would both consider to be “bad”, but are still incredibly fun things to do, I try to do what I think is right.

1: In the long run, all life will be extinguished.
2: I’m pretty hopeful about the future.

1: Anyone you help will die shortly afterwards.
2: I’m willing to make sacrifices so that others can have a better life.

1: Looking at it scientifically, we are specks of cosmic dust.
2: I think my life has a lot of meaning.

1: Everything happens in accordance with the laws of physics and biochemistry.
2: I have free will.

1: Everything happens in accordance with the laws of physics and biochemistry.
2: My mind rationally assess propositions in order to make logical conclusions.

1: We are biochemical reproducing machines.
2: I truly love my family and friends.

1: Our particular existence is the result of a colossal series of random events and the process of natural selection.
2: I’m trying to figure out the purpose of my life.

1: Everything about us can be explained by evolutionary pressures.
2: My own beliefs about reality are explainable in terms of what is most reasonable.

[inline links omitted]

Day 9: Godwin's law

Hitler's Economics, by Llewellyn H. Rockwell, Jr.

Day 9 of Robert Wenzel's 30 Day Reading List on Libertarianism

Day 0: The Libertarian catechism

Previous: An unproductive critique
Next: We're done.

I'll skip Day 8, Murray Rothbard's opaque and seemingly pointless Taxation Methods Evaluated, where he seems to say that taxes are bad because they cannot be made more palatable, and when they can be made more palatable, they are thereby worse; they are bad because they cannot adjust incentives, and when they can adjust incentives, they are thereby worse. Yeah, we get it, you don't like taxes.

In day 9, however, Llewellyn H. Rockwell, Jr. explicitly invokes Godwin's Law. Yes, the title of the piece really is Hitler's Economics. Yes, according to Rockwell, Keynesians are Nazis.

I think we're done here. According to this Libertarian canon, which prominently features Llewellyn H. Rockwell, Jr., Ron Paul's campaign manager, Libertarians really are batshit crazy.

Day 7: An unproductive critique

Is Greater Productivity a Danger?, David Gordon

Day 7 of Robert Wenzel's 30 Day Reading List on Libertarianism

Day 0: The Libertarian catechism

Previous: The cause of, and solution to, all the world's problems (summary) (response)
Next: (soon)

There's really no point in reading David Gordon's more-or-less accurate summary of Tim Jackson's article, "Let’s Be Less Productive or Gordon's trivial response. Jackson's article isn't that informative: I really don't know whether or not we might no longer be able to increase labor productivity. Furthemore, while Jackson offers an ontological definition of productivity, he doesn't talk about how to measure it.

The only point I can see in in Gordon's summary and response (and Wenzel's inclusion) seems to be to accuse those crazy liberals of arguing against productivity, which Jackson manifestly doesn't do.