Editing Time preference (section)

== History and development of time preference ==
Work on time preference began with John Rae’s “The Sociological Theory of Capital” in an attempt to answer why wealth differed across nations.<ref name=":0" /> He theorized that it was due to differences in saving an investment from the population, ultimately driven by tolerance for uncertainty and ability to delay gratification.<ref name=":0" /> Later, views expanded to examine why individuals may have differences in how they trade off benefits between the present and the future. Some theories include risk, preferences for immediate gratification, and ability to estimate future wants.<ref name=":0" /> This means that people may view the future as uncertain, and therefore, they should consume now instead of saving for later. They may also have a compulsion to consume now and are unable to delay the pleasure. Lastly, they may be unable to comprehend their future needs and wants. Irving Fisher was the first person to model these choices economically as a tradeoff between your current and future self.<ref name=":0" />

        Such ideas were later formalized by Paul Samuelson in “A Note on Measurement of Utility.” In this paper, he described a model wherein people want to maximize their utility over all future periods, with future utility being devalued exponentially from the present value.<ref>{{Cite journal |last=Samuelson |first=Paul A. |date=1937 |title=A Note on Measurement of Utility |url=https://www.jstor.org/stable/2967612 |journal=The Review of Economic Studies |volume=4 |issue=2 |pages=155–161 |doi=10.2307/2967612 |jstor=2967612 |issn=0034-6527|url-access=subscription }}</ref>

=== Neoclassical views ===
In the [[neoclassical economics|neoclassical]] theory of interest due to [[Irving Fisher]], the rate of time preference is usually taken as a parameter in an individual's [[utility function]] which captures the trade off between consumption today and consumption in the future, and is thus [[exogenous]] and subjective. It is also the underlying determinant of the real rate of interest. The rate of return on investment is generally seen as return on capital, with the real rate of interest equal to the marginal product of capital at any point in time. Arbitrage, in turn, implies that the return on capital is equalized with the interest rate on financial assets (adjusting for factors such as inflation and risk). Consumers, who are facing a choice between consumption and saving, respond to the difference between the market interest rate and their own subjective rate of time preference ("impatience") and increase or decrease their current consumption according to this difference. This changes the amount of funds available for investment and [[capital accumulation]], as in for example the [[Ramsey growth model]].

In the long run steady state, consumption's share in a person's income is constant which pins down the rate of interest as equal to the rate of time preference, with the marginal product of capital adjusting to ensure this equality holds. It is important to note that in this view, it is not that people discount the future because they can receive positive interest rates on their savings. Rather, the causality goes in the opposite direction; interest rates must be positive in order to induce impatient individuals to forgo current consumption in favor of future.

Time preference is a key component of the [[Austrian school of economics]];<ref>{{Cite web |last=Judy |date=2018-12-14 |title=A Brief Defense of Mises's Conception of Time Preference and His Pure Time Preference Theory of Interest |url=https://mises.org/library/brief-defense-misess-conception-time-preference-and-his-pure-time-preference-theory-interest |access-date=2023-10-06 |website=Mises Institute |language=en}}</ref><ref>{{Cite web |last=Clay |date=2017-04-10 |title=11. Time and Time Preference |url=https://mises.org/library/11-time-and-time-preference |access-date=2023-10-06 |website=Mises Institute |language=en}}</ref> it is used to understand the relationship between saving, investment and interest rates.<ref>{{Cite web |title=Time preference {{!}} economics {{!}} Britannica |url=https://www.britannica.com/topic/time-preference |access-date=2023-10-06 |website=www.britannica.com |language=en}}</ref><ref>{{Cite book |last=Hoppe |first=Hans-Hermann |title=Democracy: The God That Failed |date=2018-02-06 |isbn=978-0-203-79357-2 |doi=10.4324/9780203793572}}</ref>

=== Historical understanding of time preference theory in relation to interest rates ===
The Catholic scholastic philosophers firstly brought up sophisticated explanations and justifications of return on capital, including risk and the [[opportunity cost]] of profit forgone, associated with the discount factor.<ref name=":1">{{Citation |last=Langholm |first=Odd |title=Scholastic Economics |date=2016 |work=The New Palgrave Dictionary of Economics |pages=1–6 |url=https://link.springer.com/referenceworkentry/10.1057/978-1-349-95121-5_2755-1 |access-date=2024-09-14 |place=London |publisher=Palgrave Macmillan UK |language=en |doi=10.1057/978-1-349-95121-5_2755-1 |isbn=978-1-349-95121-5|url-access=subscription }}</ref> However, they failed to interpret the interest on a riskless loan and hence denounced the time preference discounter as sinful and usurious.

Later, Conrad Summenhart, a theologian at the University of Tübingen, used time preference to explain the discount loans, where the lenders won't profit usuriously from the loans as the borrowers would accept the price the lenders ask.<ref name=":1" /> A half-century later, Martin de Azpilcueta Navarrus, a Dominican canon lawyer and monetary theorist at the University of Salamanca, held the view that present goods, such as money, will naturally be worth more on the market than future goods (money). At about the same time, Gian Francesco Lottini da Volterra, an Italian humanist and politician, discovered time preference and contemplated time preference as an overestimation of "a present" that can be grasped immediately by the senses.<ref name=":2">{{Citation |last=Rothbard |first=Murray N. |title=Time Preference |date=2016 |work=The New Palgrave Dictionary of Economics |pages=1–5 |url=https://link.springer.com/referenceworkentry/10.1057/978-1-349-95121-5_1896-1 |access-date=2024-09-14 |place=London |publisher=Palgrave Macmillan UK |language=en |doi=10.1057/978-1-349-95121-5_1896-1 |isbn=978-1-349-95121-5|url-access=subscription }}</ref> Two centuries later, Ferdinando Galiani, a Neapolitan abbot, used an analogy to point out that just similar to the exchange rate, the interest rate links and equates the present value to the future value, and under people's subjective mind, these two physically non-identical items should be equal.<ref name=":2" />

These scattered thoughts and progression of theories inspired [[Anne Robert Jacques Turgot]], a French statesman, to generate a full-scale time preference theory: what must be compared in a loan transaction is not the value of money lent with the value repaid, but rather the 'value of the promise of a sum of money compared to the value of money available now;<ref>Turgot, A.R.J. 1977. In The Economics of A.R.J. Turgot, ed. P.D. Groenewegen. The Hague: Martinus Nijhoff.</ref> in addition, he analyzed the relation between money supply and interest rates: If money supply increases and people with insensitive time preference receive the money, then these people tend to hoard money for savings instead of going for consumptions, which will cause interest rates to fall while prices to rise.