Ethical Banking – the Woes of The Co-operative Bank

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The Co-operative Bank, one of Britain’s smaller financial institutions, has recently gone through several spectacular stages of self-destruction that has left many of its advocates, having trumpeted the fact that the bank initially emerged from the financial crisis of 2008 relatively unscathed, eating hearty slices of humble pie. Earlier this year its planned acquisition of more than six hundred branches from Lloyds Banking Group fell through when it was revealed that the bank was harbouring a large capital shortfall, most of it stemming from bad debts that were incurred as the result of an earlier merger with Britannia Building Society. The resulting rescue attempts by The Co-operative Group – its outright owner – left seventy per cent of the bank in the control of its bondholders, many of whom, such as US hedge funds, are precisely the kind of outfits that this “ethical” institution did not wish to emulate. Then, in November, the bank’s chairman at the time of its crisis, the Reverend Paul Flowers, was filmed allegedly purchasing illegal drugs from an acquaintance days after his appearance before a Treasury Select Committee during which he was unable to answer basic questions about the bank’s operations during his tenure, and had apparently organised drug fuelled orgies with rent boys from his bank email address, in addition to other past indiscretions. To make matters worse it has been alleged that Reverend Flowers’ influence extended to the leadership of the British Labour Party, expanding the Co-op’s in-house crisis into a political one. This succession of events has highlighted not only the hypocrisy of The Co-operative Bank in striving to maintain and promote an ethical stance and status (an aim that it is shared by its parent and the wider Co-operative movement) but also those who have used this institution as a political tool in holding it up as a paragon of virtue in the wake of the havoc and destruction caused by those greedy and unethical city banks. But this raises a very pressing and pertinent question – precisely what is ethical banking?

The Co-operative Bank’s ethical pride appears to centre on its mutual, member-owned status (or at least that of its parent) that allegedly offers an alternative to the shareholder model, and its Ethical Policy that prevents it from extending banking services to arms dealers, polluters, oppressive regimes, animal testers and so on. Having apparently brought itself to the brink of collapse through over-expansion and bad loans on the watch of a junky chairman who didn’t even know the size of the bank’s loan book does not appear to give much credit to this. Nevertheless, as far as the basic ethics of banking are concerned, all of this is pretty irrelevant. Rather we must conclude that banking, as far as it is practised in most of the world today, is inherently unethical. The Co-operative Bank, regardless of its ownership or its lending policy, was still engaged in the fraudulent cartel of fractional reserve banking under the aegis of a central bank and in that overriding respect it was no different from any other financial institution – and it was this fact that is at the foundation of its weakness. It took money from depositors and lent that very same money with which it had been entrusted to borrowers, expanding the supply of money, lowering the rate of interest and diverting resources to otherwise unsustainable capital projects and investments. It is this that marks the grossly unethical conduct of The Co-operative Bank and one cannot claim to be an ethical institution while at the same time engaging in this kind of fraud, the outcome of which can only be to lead the economy on to a destabilised path. Thieving depositors’ money is not made any better simply because it is lent to politically correct, environmentally friendly and do-gooding borrowers (indeed given that Co-operative Bank has apparently extended several million pounds worth of loans on favourable terms to the Labour Party some might say it makes it much worse).

Genuine, ethical banking can only come about only when a deposit institution issues one, single title to each penny that is on deposit. Where a bank extends a loan this must be met either from its own funds, or from fixed term deposits that mature at a date specified to coincide with the repayment of a corresponding loan. Naturally a bank can specify that it will only lend to certain borrowers in order to attract a certain class of saver, but that is only a distraction from a bank’s basic ethical duty – to safeguard the funds of its depositors. Any bank, regardless of the characters and qualities of its borrowers, puts these funds at extreme risk under the fractional reserve system if those same borrowers cannot repay the loans. Whatever went wrong with The Co-operative Bank’s particular peculiarities, one should not allow them to detract from this central fact of the banking system and focus should be diverted to its direction if we are ever to have truly ethical financial institutions.

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Statism and Non-Aggression

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In the ideological battle between statists and libertarians, the latter are happy to apply the scriptures of non-aggression and non-violence to any human being. We do not distinguish between certain categories or castes of human in explaining this application; rather, it is a universal ethic. It is often supposed that statists embrace the opposite or the precise contrary of this principle – that, in favouring the violent invasion of other people in order to impose their will, they lie on the other extreme of the spectrum of the permissibility of violence.

It would be a mistake to view the statist contention in this way. For the precise opposite of the non-aggression principle – that no human may initiate violence against another – is that any human may or should initiate violence against another. But statists do not hold this view; indeed they do not, in any way, come close to rejecting the edicts of non-aggression. They simply believe that it does not apply to a certain set of individuals who form part of the state. Indeed one popular argument in favour of government and against anything approaching anarchy (in its literal meaning of “no ruler”) is that only government can preserve “order” and prevent “chaos”, chaos which almost certainly would prevail if everyone were allowed to run rampant by stealing from and murdering each other. Universal aggression is, therefore, firmly rejected by statists.

In understanding this we come to the, perhaps, surprising realisation that statists have more in common with libertarians that we might at first suppose. States, which may use violence permissibly according to the statist, are, after all, always a minority and the ordinary citizenry, who must refrain from violence, make up the majority. Statists do, therefore, very much embrace the non-aggression principle more than they reject it – they believe it applies to most of the population! In presenting a challenge to them, therefore, simply repeating the mantra of non-aggression is to overlook this fact. We are therefore faced with the challenge – or perhaps, the opportunity – of having to apply a more subtle and nuanced argument against statists. Instead of blathering on about how violence is unethical and how holy the non-aggression principle is (although one most not deny the truth of either of those propositions), let us meet the statist on his own terms: “fine, let us accept that violence is permissible – the why restrict it to only these humans beings that make up the state? Why are they so special? Why is only a monopoly of violence held by certain individuals justified?”

The present author argued recently that our primary preoccupation is with the state and how persuading people of its evil nature – or at least, its lack of necessity – is often a different task from understanding and refining core libertarian doctrine. Taking on the state is therefore our first and highest priority and accomplishing this through the shortest and most persuasive route possible should be prioritised ahead of trying to fill everyone’s heads with the details of libertarian thought (although it would hardly be a bad thing if everyone wished to embrace those details). The line of argument suggested here is a case in point, focussing on the core issue of the monopoly of violence enjoyed by the state, rather than concentrating on violence per se that may lead one to awkward and otherwise unpersuasive debates concerning, for example, lifeboat situations. This may be a more penetrating and revealing line of attack for one’s audience. But even if we were to proceed down the route of non-aggression and end up debating hard cases such as whether a person can be forced to save a drowning toddler, we can still deploy the rejoinder: “OK fine, let us say that a person can be forced to save this drowning baby. Why may only the state do the forcing? Why does this situation call for these people and only these people to force this person to act?”

How then, might such a challenge to a statist unfold? The first counterargument is likely to be that which was mentioned earlier – the necessity for order. That without the state, society as we know it will simply collapse into a frenzy of individualistic war of all against all. There are numerous retorts to this line of thinking. First of all, far from being the resolver of conflict, government is, rather, its creator and sustainer. Conflicts only exist because people hold different opinions as to the ends to which scarce resources should be directed. Government forcing one set of ends to triumph over the others does not resolve these conflicts – in fact it is a manifest admission that resolution is not possible or is not worth trying. Resolution of a conflict would be to peacefully and voluntarily agree an outcome and hence all parties would be satisfied, even if grudgingly. The imposition of violence, however, simply forces an end upon an unwilling victim, totally overriding any concerns the latter has whatsoever, harbouring not harmony and understanding but bitterness and resentfulness. Indeed we might even say that government force is a direct incitement to revolution and overthrow. Statists rarely admit that what they mean by collectivism is their own version of it – that government is brilliant and harmonious so long as it is producing ends that they themselves desire. But they never consider the situation of the barrel of the gun pointing at them and ordering them to do something with which they disagree, or even detest. In any case we should point out that if the lack of a government will unbridle an inherent disposition on the part of humans towards chaos and violence then we are entitled to ask why giving some of these very same evil, animalistic ogres special powers of violence will improve the situation. Won’t they just respond to using these special powers with the very same base and savage motivations that propel them towards disorder in an anarchical society? Indeed isn’t it giving them a unique advantage in doing so? Why are they suddenly so wise, trustworthy and angelic simply because they operate under the aegis of the state? To this we could anticipate the rejoinder “Ah but we have democracy! The stewards will be accountable to the people so will never abuse their powers!” Even if we were to accept the notion that a majority vote once every few years is sufficient to control the demagoguery we are still left with the same problem – the majority is still made up of humans choosing humans to supervise humans. Rather than simply place their trust in these holy guardians to keep the peace, won’t they just try and use them as a legitimised route to the same plunder and pillage that they would have otherwise tried to accomplish through a war of all against all?

Let’s turn next to the question of economic order. Even if he was to concede that government isn’t needed to keep the peace, wouldn’t our budding statist still be armed with the fact that there would simply be market and allocational chaos without government, that there would be shortages, booms, busts, depressions, greed, avarice, and so on? After all, everyone knows that the free market and capitalism caused the Great Depression, right? I trust that the majority of the readers of this essay will understand why this view is completely incorrect but it is worth repeating the truth because it is so ironic: that government, far from being the cure of or even an innocuous attempt at trying to relieve these problems, is in fact the very cause of them. Allocational chaos always stems from government interference whereas the pricing profit and loss system would produce neither surplus nor shortage, and it is government induced credit expansion through a fraudulently propagated fractional reserve banking system, together with the ring fencing of politically connected financial institutions from losses, that causes the business cycle. Government is responsible for these catastrophes, and we certainly do not need their attempts to solve them with the very thing that sets them off in the first place.

What if the statist falls back on saying that we all need to “follow the same plan” and “move in the same direction?” Such an argument could be made from either an economic viewpoint, a moral one, or both – that we either need government to direct production (or at lay down the “rules” for freer production), to provide us with moral guidance and outlaw certain behaviour, or to do both of these things at the same time. This raises the question of precisely which and whose moral or economic programme should be followed, and why. Government is only “needed” because everyone’s plans differ and, as we said above, they do not want to devote the scarce resources available to the same ends. You therefore have to force them into directing them towards the government’s ends. Why does the statist think that a good, productive and morally nourished society is built upon the fear and intimidation of being bullied and harassed into directing production, or into following a certain moral code, according to the will of a handful of faceless bureaucrats? In short, what is so special about these people’s ends – why are they to trump all others? But even if this could be answered the entire alleged necessity of following one “plan” is based upon a misunderstanding of the need to avoid conflict. Certainly, if we execute our individual plans, we need to avoid skirmishes with each other when we do so, but it doesn’t follow from that that we must all be forced to take the same path like a set of mindless lemmings, and that there is not a way for different plans to peacefully coexist.

These are just some of the possible lines of argument that might proceed from an understanding of how statists really view violence and non-violence, and embracing this more nuanced view might permit more incisive and hard-hitting arguments that libertarians can deploy during debates with their ideological opponents.

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The Good Libertarian

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Libertarians face a number of difficulties in how to live their own lives while they are pursuing a world that that they believe is just. This essay will explore a number of them.

Two of the aims that a libertarian should try strive for is, first of all, a deeper and better understanding of the foundations of libertarianism and political philosophy in general. In particular, the reasons why ethics arise, a passion for truth and justice and how libertarianism is to be distinguished from other political philosophies are key points of focus (indeed, it is surprising how very few people of all persuasions consider the first of those questions). Only through this can a libertarian have a rigorous an immovable understanding of the truth of his position. The second is aim is to attempt to convince others of this inherent truth and why libertarianism would lead to a “better” world than either what we have already or what could be offered by an alternative philosophy. For while it is all very well sitting alone at home and being satisfied with one’s personal understanding, the world a libertarian seeks is unlikely to be achieved unless it is embraced by a majority of the population1.

These two aims are mentioned together because the elements that are applicable to each are often conflated whereas, in fact, they possess a degree of exclusivity. Indeed, different people will display different capabilities towards intellectual rigour on the one hand and towards spreading the fruits of that rigour on the other and it has often been the case in political movements that the visionaries, developers and consolidators of thought have had to wait for their work to be embraced by the practically minded revolutionary. The first aim is one that can be achieved through meticulous and almost puritanical or hair-splitting debate between libertarians themselves, i.e. within the school of those who self-identify as libertarians and have already embraced, in principle, a passion for liberty. In order to gain the best understanding of the foundations of our position we cannot rely on batting away the worn, tired, and relatively “light-weight” arguments of statists and busybodies then, having become satisfied with this relatively straightforward intellectual accomplishment, retire comfortably. We must, rather, take on the heavy-weights within our own movement with whom we disagree. A world-ranking sportsman is not likely to ever improve his ability by taking on the weakest opponents – rather he must constantly test himself with the best that is out there and so too must libertarians embrace clefts within the movement in order to move closer to the truth. Some examples might be whether minimal government is justified or whether government is totally unjustified; whether the non-aggression principle always applies; or whether the concept of “universally preferable behaviour” is a logically valid test of moral propositions.

At the same time, however, it is very important to realise that simply because a libertarian belief or conclusion from some internal debate is true does not necessarily mean that it is useful in persuading others of libertarianism. It would also be wrong for ideological debate within the movement to form publically acknowledged sects, with libertarians appearing as a divided camp that does not know what it wants. We must remember that the opinions that must be swayed towards liberty are not those of the hardcore, intellectual statist or socialist who form only a relatively insignificant minority in number. Rather, the people that will matter are the passive and uncommitted people who, although perhaps disillusioned with current government and think it needs to be “better” and run by “better” people, otherwise hold no firm or passionate commitment to any particular political ideology. Blasting these people with the concepts of self-ownership, non-aggression, natural law, argumentation ethics or whatever is not likely to appeal to them and will simply come across as abstract, irrelevant, ivory-tower conjectured gobbledygook. As libertarians, our educative concerns are very little to do with whether a person can be forced to save a baby drowning in a puddle. Rather, we must emphasise that our primary pre-occupation is with the evil monstrosity that is the state and the jealously reserved monopoly of legitimised violence that it possesses. It is sufficient, in order to at least begin a person on a path towards a better understanding of this edifice, to appeal not towards our cherished libertarian doctrines that we are happy to discuss and argue about amongst ourselves, but, rather, to people’s grasp of basic morality. Murder is wrong; the state murders. Theft is wrong; the state steals. Kidnap is wrong; the state kidnaps. Humans are bound by a common code of morality; the state consists of humans. Why then can the state get away with these horrendous crimes? What is it that makes these humans so special? Why can they circumvent the rules that everybody else has to follow? Why the hypocrisy? Much of what we are doing is simply revealing to people what they already know to be true and to benefit from that by applying it consistently. This will, of course, not be the complete answer towards turning someone against the state. But a definite first step is to try and render the state as a separate and distinct caste from the ordinary citizenry. One of the greatest “triumphs” of democracy from the statist point of view has to been to immunise the division between rulers and ruled, that, because we are able to exercise a vote between a tiny selection of screened and approved candidates once every four years, that we are all somehow a part of government, are able to control it and can demand what we want from it. Rendering inert this well-engrained impression is a libertarian’s primary educative task. The less a person feels himself a part of the state, the less able he feels to exert a degree of control over it, and the more it appears that it is reserving for itself special powers to do whatever on Earth it likes, the greater will be the seeds of doubt in a person’s mind as to its legitimacy.

None of this means to say that one should not engage in deeper discussion if that is where a particular conversation is heading; but one must at least wait for signs of a kindling of interest in those directions and should always try to look for the path that is most suitable with each particular audience.

Conversely we must also guard ourselves against the opposite danger. Just because a true proposition, or a piece of libertarian doctrine is not, in the main, useful in persuading others to turn towards libertarianism does not mean that such a proposition has no fundamental truth, aids nothing at all for understanding and must, consequently, be abandoned. Truth exists regardless of whether people are prepared to embrace it. While some detailed application of libertarian ethics and the strict adherence to self-ownership and private property in so-called “lifeboat” situations may produce outcomes that seem bitter and distasteful, not only do we have to bear in mind that such judgments are being made in a world that is inherently un-libertarian and where private property and self-ownership do not command a great deal of respect, we must also consider the supra-libertarian values and ethics that happen to prevail. To take an example: is the starving person wandering in the forest who comes across somebody else’s log cabin morally permitted to break in and steal the food in the cabin in order to prevent his death? In a society where charity and helping one’s fellow neighbour is a virtue and where we have long been accustomed to government invading our private property in order to try and achieve a redistributive result, it is understandable that any emphatic “no, he may not” in response to this question by a libertarian invoking the canons of the non-aggression principle and self-ownership will be met with outright derision and hostility from those he is trying to persuade. But one could also posit a world where taking care of yourself and relieving others of the burden of your needs is the prevailing virtue, and that the situation of being helpless and isolated is a grave and shameful relinquishment of personal responsibility. Such a world may also command a great deal of respect for private property and keeping off other people’s turf. In that situation a typical person might happily conclude that the starving wanderer has no moral right to break into the cabin and that it is meet and proper for him to seek fulfilment of his own needs self-sufficiently. Both sets of supra-libertarian virtues – charity on the one hand and taking care of oneself on the other – are, in principle, compatible with libertarianism and non-aggression. It does not necessarily follow that simply because one set of circumstances prevails and the other does not that anything about libertarian ethics should be rejected. If there is shock and disbelief at the revelation of the world being round it does not follow that it should be regarded as flat.

Another difficulty that libertarians face is how to live a life in accordance with libertarian principles. In other words, to what extent should we each go to in order to act non-violently and preserve the self-ownership of others? Should we, for example, use government roads to travel, visit government hospitals when we are sick, or send our children to government schools? Are we not benefitting from the taxes levied by force from others in order to achieve ends that we may seek through government-provided facilities? Should we even vote? When government spreads it tentacles so far and wide into every nook and cranny of existence it is practically impossible to say whether any good or service that a single person enjoys has been brought about entirely through voluntary arrangement – not to mention the fact that numerous industries have been nationalised directly. In fact it is almost certain that a government edict, a regulation, a tariff imposition, a directly-government managed industry, a government-privileged business, or a union-backed worker must at some point, if not all, have taken effect in or otherwise “contributed” to the chain of production. Indeed, practically anything that is transported must use government-controlled roads, railways, seaports or airports. Furthermore, as we noted earlier, democracy itself has effectively nationalised the citizenry, so that every person is now a potential beneficiary of government operations but also can be, at least on the face of it, responsible for its actions.

How are libertarians to cope in such a world without opening themselves up to the charge of hypocrisy? Although we could say that libertarians themselves as tax payers are contributing to anything the government runs and are just, therefore, taking what they have been forced to pay for when they use these services, the more pressing moral concern is that it is difficult to suggest how a person should behave in a perfectly non-violent way in such a world. It is a basic requirement of morality that a person must be able to do what is moral; the extent of government has been to render practically every action a potentially morally questionable act. Yet a person always has to act and cannot refrain from doing so. Even just sitting at home he is taking advantage of government building code edicts, planning permission, utilities that supply the house, heating, gas, and light etc. Where every choice is a potentially morally bad choice then there is, effectively, no moral choice and one cannot be held morally responsible for acts that may benefit from minute and, to the actor at least, imperceptible and remote grains of violence when the only alternative action was one that was equally culpable. To take an extreme example, let’s say that the government tells a person that he must choose between whether A should die, B should die, or (should he refuse to choose) either of them will die. In this situation one cannot condemn this person for making an immoral choice when every option was equally bad. This person would not be labelled a cold blooded killer who could be regarded as hypocritical if he was to suggest that people should not commit murder. Rather, libertarians should focus on ensuring that the conduct of their lives is as free as possible from directly and obviously contradicting libertarian principles. In order to accomplish this there is an important distinction that must be borne in mind and that is whether a hypothetical action is, on the one hand, merely a consequence of the state or whether, on the other hand, it would be an emulation of the state. In other words can an act be regarded as the result of what flows from the state’s interference, or is it a new and extensive act of violence that is independent from that perpetrated by the state? Making this judgment in practice may be very difficult and there will, of course, be many grey areas and room for disagreement that a libertarian should be open to acknowledging as informants of this judgment. Whereas shooting a person in order to steal his possessions would clearly be a new and unique violent act, other actions may be more nuanced. But it is important to at least understand the conceptual distinction as a first step. In any case, however, libertarians are already somewhat used to judging actions in this manner. We can clearly distinguish between the wealthy politician living off the largesse of tax receipts and the poor old lady who uses a government road to purchase a loaf of bread from the grocery store. None of us, in trying to promote a libertarian world, would hope to be taken seriously by ignoring the government sponger and focussing on the “evil” pensioner2.

Additionally, however, even if it is possible to condemn a person as behaving in an anti-libertarian way, is it not far better for him to acknowledge this and call for its cessation rather than merely staying quiet and carrying on, even if he risks ridicule and charges of hypocrisy?

One curiosity concerning this topic before we leave it is that it tends to be a preoccupation among libertarians and is not one that is too often mentioned in retort by statists. Perhaps the latter see more clearly that they are gladly forcing you to do things their way and that you cannot help it? In that case let the libertarian who is without sin cast the first stone – if he suggests that everyone should not engage with government at all in all of his actions then allow him to demonstrate how he has managed to even survive without doing so.

Finally, however, and perhaps more importantly than the foregoing from a strategic point of view, is that libertarians should attempt to cultivate a personal code of morality that is in accordance with but above and beyond their libertarian beliefs. A popular charge against libertarians is that we are the “anything goes” crowd, that simply because an action does not hurt anyone then it is A-OK and must happen. While it is true that any non-violent action must be tolerated and not subjected to violent imposition or restraint, it does not follow that it is free from criticism, nor must it be liked, loved, embraced or welcomed as a good thing. It might be non-violent to allow gambling adverts to appear during children’s television programmes, but that does mean that we are inclined to agree that they should. People may be harming no one else by taking drugs but that does not mean that it should be welcomed as a good thing, nor should one necessarily want to frequent with drug users. People cannot be forced to give to the poor but that does not mean that, if they choose not to, they should be regarded as fine and upstanding people. We very much need, as libertarians, to make plain the fact that we as a group neither condemn nor promote non-violent actions but as individuals we too have our own tastes, morals, pleasures and displeasures, just like anyone else and we use these to judge the conduct of other people and whether we wish to associate with them. “Live and let live” applies only to the imposition of violence and our difference as libertarians qua libertarians is that we do not believe in using violence to enforce our preferences on other people. But we do, as human beings, have these preferences and we should not be afraid to express them simply because they concern the non-violent acts of others. Non-violence is not the highest moral achievement, merely the most basic on which a free and prosperous society can be built; it is the first step towards a good society and not the last (although, at present, it may seem like an enormous leap across a chasm rather than a step). How that society is shaped within the sphere of non-violence is a question to which we must contribute along with every other thinking, desiring, choosing and acting human being.

1Elsewhere the present author has argued that education, in the goal of eliminating or at least reducing the state, may well take a back seat to innovating government away, i.e. that people’s natural affinity for individualism will simply circumvent government through superior technological development. This does not, however, render education redundant and it would still be far better if government was both out-innovated and knowingly rejected.

2In many cases it is also arguable that this judgment could be sharper. There is a tendency for libertarians to condemn acts that are proximately violent, yet they all too readily leap to the defence of actions that, while proximately non-violent, reap huge advantages from less obvious government intrusion. For example, if it is complained that western corporations are paying employees in poor countries too low a wage then one must support the principle that wages must be freely negotiated between employer and employee. But one must also balance this against the possibility of these corporations benefitting from monopoly and regulatory privilege, brand protection, intellectual property and any other enforced reduction of competition that would have served to increase the wage rate.

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Time Preference and Human Action

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The role of time preference in human action can be a difficult subject to grasp correctly. This essay will seek to resolve some common misunderstandings that are essential before one can consider the full implications of the concept in economics. First of all we shall attempt to correct a few particular errors or myths before explaining the true, praxeological foundations of time preference.

Classes of Goods

The first misunderstanding we must address is that the concept of time preference is nearly always expressed with the statement “present goods are more valuable than future goods”. However such a formulation is only shorthand at the very best as it violates some well accepted and understood truths with which “Austrians” are well acquainted and have no difficulty in applying to other concepts. Humans do not have any relation at all to whole categories of goods in their physical embodiment – all of the gold, all of the iron, all of the bread in the world and so on. Rather, humans only act in relation to specific quantities, or units, of goods in order to meet their ends and it is these specific quantities to which value is imputed. Hence the so-called paradox of value – i.e. why a diamond, a seemingly trivial ornate luxury, is more expensive than a bottle of water, which is essential for life – was solved after having confounded the classical economists. The categories “present goods” and “future goods” are precisely this kind of holistic, indiscrete and meaningless concept that has no relevance to action. No human ever acts in relation to all of the present goods in the world, nor to all of the future goods. Rather, we have to examine the precise circumstances in action from which this shorthand derives.

Present Ends and Future Ends

Secondly we must realise that an understanding of time preference cannot come about from any comparison of present ends with future ends, that is, ends that must be met now compared to ends that must be met at some point in the future. Economic laws are only true when they conform to the ceteris paribus rule – that all else is equal. In understanding an economic phenomenon, it is necessary to hold all independent variables constant and to alter only the dependent variable under examination. With time preference, the variable under examination is goods, the means used to extinguish an end, and more specifically the time at which they become available. In testing this variable and making alterations to whether a good takes effect in the present or the future, the end itself, another variable, must remain constant. To talk of present ends and future ends in trying to understand time preference, however, is to make an alteration to a variable other than the one that is under examination. It is to change both the nature of the good and the nature of the end simultaneously, the equivalent of trying to understand the effects of an increase in the quantity demanded while also varying the quantity of supply. If demand was to rise beyond the valuation of the marginal buyer yet supply was to rise beyond the valuation of the marginal seller at an equal rate then price would, all else being equal, remain constant. One would derive from this the conclusion that an increase in demand has no effect upon price, which is clearly incorrect. With time preference, therefore, the examination is to determine the difference between the ability of a present good and a future good to satisfy the same end.

To elaborate on this point, a human has needs that arise at different times, some in the present and some in the future, depending on the length of his period of provision. He may, for example, realise that he needs to satisfy his hunger not only today but also tomorrow, the next day, next week and so on. However, humans themselves exist only in the present and all decisions, choices and actions must be made in the present – not tomorrow, not next week and not next year – and the ends to which they strive must all be ends that exist now. Simply because a need takes effect in the future and may be described as a “future need” does not mean, praxeologically, that it is a future end – end being a category of action that can exist only in the present. Therefore all ends that are sought after must take a place in a human’s rank of values now, and the urgency of their satisfaction will be determined by that rank. For example, I may know that I need to satisfy my hunger today and also that I will have to satisfy my hunger tomorrow. I have two loaves of bread now, one of which I devote to satisfying my hunger now so I eat it now; the other I direct towards the end of satisfying my hunger tomorrow so I store it in a bread bin. Or, in place of the latter, I may arrange to acquire a second loaf of bread tomorrow rather than having one available immediately. However one of these ends is not a present end of satisfying my hunger now and the other a future end of satisfying my hunger tomorrow. I can only make choices and decisions that lead to actions now, in the present, as I do not exist in the future. Therefore all ends must be expressed as present ends. The two ends are, therefore, correctly described as follows: the end of satisfying my hunger now; and the end of providing for the satisfaction of my hunger tomorrow. For the first end, the relevant action is eating the first loaf of bread today. For the second, it is directing the second loaf into the bread bin for storage (or arranging for the acquisition of the second loaf tomorrow). Both ends are therefore present ends met through present actions and if the second end is sufficiently high in my value rankings then it will need to be fulfilled now also and the stored loaf bread, or the expected acquisition of a second loaf of bread, is fulfilling this end now. Crucially, however, the importance that each end may have could be higher or lower than the other. There is no necessity for the second loaf of bread, simply because it will feed me tomorrow, to be less valuable than the first. If I am desperately hungry today then the first end, satisfying my hunger today, may be very high on my rank of values and the second end may be low. Alternatively, if I believe that tomorrow will bring excruciating hardship then the end of providing for tomorrow might be the highest end and the one with which I will be preoccupied. Solely because one end concerns the present and the other the future does not automatically mean that the end concerning the future is a less valuable and provides any explanation of time preference. And there is, consequently, no necessity for the second loaf of bread to be ranked lower in value than the first. Indeed, if providing for tomorrow was the more important end then if one loaf of bread was to vanish this loss would be shifted to the least valuable end – hence I would go hungry today and use the remaining loaf to eat tomorrow.

This analysis explains why, at any present moment in time, a set of fireworks for July 4th may be more valuable than the same set for May 4th; or why ice cream in winter is less valuable than ice cream the following summer; or why someone may engage in plain saving without any expectation of interest. Indeed it is quite conceivable that someone on May 4th would exchange a set of fireworks in return for acquiring the very same set (or even a set with a lower quantity or quality) back on July 4th. The understanding of time preference does not come from situations where the goods are available either now or in the future and where the ends also take effect at varying points of time also. Rather, it comes from those situations where the ends must be met now but where the goods are available at different points in time. In short, we are comparing the ability of a good available today with a good available at a point in the future to satisfy the same end.

Psychology and Physiology

Related to the previous discussion is the fact that psychological and physiological explanations of time preference are not sufficient to establish the necessary truth of the phenomenon. The notion that people may underestimate their future needs, that they may care less about the future than the present, or that their aging bodies will simply be less capable of enjoying satisfaction in the future may all be true but they needn’t necessarily be so. Further, much of this would again be varying the end rather than the type of good. Moreover as we shall see further below, the fact of uncertainty is not sufficient to explain time preference either. Rather, our investigation will concern why time preference arises praxeologically. In other words, what is it about action that causes the law of time preference to arise as a necessary result?

Goods and Serviceability

A step forward towards understanding the difference between a present unit of a good and a future unit of the same good is the difference between their serviceability. All goods derive their value from the ends that they service. Ends are ranked in order of urgency, that is a human will devote goods to fulfilling his most highly valued end first, the second highest next, and so on. As goods to fulfil ends are always scarce, any devotion of a good to one end involves the foregoing of other ends. Where goods can be devoted to either end A or to end B, for example, B will be foregone if the value of attaining A with the goods is ranked higher. Where a particular good is able to accomplish the fulfilment of an end alone (or in combination with very few other goods – there will always, at the very least, be labour) we can derive two things. First, as the good will be sharing its service towards the fulfilment of an end with very few other goods, close to the full value of the end will be imputed to the good. Secondly, because so few other goods have to be used to fulfil the end then there are more goods to be devoted to other ends, hence there are fewer ends that need to be foregone in the pursuit of this, most urgent end. Hence this latter end will be relatively more highly valued. Let’s say, for example, that there are five ends, A, B, C, D, and E, and that there are five goods a’, b’, c’, d’ and e’ to service these ends. If good a’ can service end A without any use of the remaining goods then this leaves all of these goods to service ends B-E. Not only will good a’ be accorded the full value of end A, but the relative value of end A and compared to ends B-E is high. We may say, in this instance, that the good possesses a high degree of serviceability. Where, however, a good requires a higher number of complementary goods to fulfil an end then a lower value will be imputed to that particular good as the full value of the end must now be imputed to a greater number of goods; furthermore, the necessary devotion of more goods towards fulfilling the end will mean that a greater number of other ends will have to be foregone. For example, if good a’ was not able to fulfil end A alone but, rather, needed to act in concert with goods b’-e’, then all of the ends B-E would have to be foregone in the pursuit of end A. While end A may be the highest individually valued end, losing all of these other ends will serve to reduce its relative value and, indeed, the cost may be so great that end A will simply be abandoned.

Let us examine this first of all by exploring an analogy to time, which is distance. Let us say that I strive towards the end of quenching my thirst and that this is my most highly valued end so that I want to act to fulfil it immediately. If I have a bottle of water right next to me that will satisfy this end then, ignoring the cost of labour, the value of the bottle of water will equate to that of the end itself1. The bottle of water has served to fulfil this end with a high degree of serviceability as it has not required the use of any other goods in order to accomplish its task. This means that more goods are left over for the fulfilment of other ends. So let us then say that, as I have easily fulfilled that end, I have a second end of going to pick apples for the day. I then, having had my first end fulfilled, can proceed merrily with the fulfilment of my second with the remaining stock of goods available. And having proceeded with this second end I may have more goods left over for the pursuit of a third end of baking bread. However, what if, in a second scenario, I still desire the same end of quenching my thirst but now the bottle is not right next to me but is ten miles away? This bottle is the same, physically homogenous resource as the bottle that was right next to me but if the distance of ten miles makes, in my mind, an appreciable difference what now is the value of the bottle? The distance means that an appreciable cost must be borne in order to utilise the bottle, costs that are not shared by the utilisation of this bottle in scenario one, rendering the bottle in the second scenario with a lesser degree of serviceability. These costs, clearly, are those that must be borne in order to transport the bottle to me or me to the bottle. Because of this necessity of transportation, complementary goods must now be brought in order to service the end. But these goods were goods that could have been devoted to ends other than quenching my thirst – namely, picking apples and baking bread. The lower serviceability of the bottle means that, in order to utilise it, additional ends to which means could have been devoted now have to be foregone. From this we can derive two conclusions. First, the degree of remoteness caused by distance means that the bottle in scenario two must share its fulfilment of the end with a greater number of goods compared to the bottle in scenario one. The lower capability of the distant bottle in scenario two means that the value of the end of quenching my thirst must be imputed to a greater number of goods2. The value of the bottle in scenario two, therefore, must be discounted accordingly. Secondly, the loss of the other ends – picking apples and baking bread – serves to impose a relatively lower value on the end of quenching my thirst. If this loss becomes too great – i.e that I am not prepared to forego the loss of picking apples and baking bread in order to quench my thirst – then the then the latter end will simply be abandoned and the bottle will cease to have value (or it may be earmarked for a lower valued end to which it may be more suited). In either case in scenario two – whether I proceed to bring the distant bottle to me or I abandon the end of quenching my thirst entirely – the value of the distant bottle in scenario two is lower than that of the bottle right next to me in scenario one.

It is this kind of understanding that is the foundation of an explanation for the phenomenon of time preference – a present unit of a good has greater serviceability in satisfying an end than a future unit of the same good. We will now explore this in detail.

Time and Serviceability

Although analogous, the remoteness of time presents a challenge more difficult than that of distance and there are some important differences. Whereas with distance, the lower value of the distant good could be explained by the option of foregoing lesser valued ends in order to overcome it, an acting human does not necessarily have this luxury with time. Nothing can be done to “speed up” time and its passage must be borne at a constant rate. We therefore have to look to the particulars of action that we touched upon earlier to explain why “remoteness” in time causes an otherwise equally serviceable unit of a good to have lower value.

An action is the result of a choice to satisfy ends with means available. But as we noted above human exists only in the present and must live through the present before the future arrives. A person cannot act in the future; he has to do so in the present. All decisions are therefore present decisions to act towards present means towards present ends. In other words, the very fact that a human acts at all means that he wants an end to be extinguished now or soon, not in the future or later – to act always means to meet an end sooner rather than later. The contrary position – to seek satisfaction in the future – is antithetical to action for if a person desires to meet an end later rather than sooner then he would never act. The present could pass without action but as soon as the later period of time came around it would itself then become the present and the person would be faced with the same conundrum – he would, at that moment, either have to act (in which case he would revert to preferring satisfaction sooner rather than later) or delay action again, in which case he would never act. The logic of action therefore requires sooner satisfaction rather than later. Indeed, even where the action concerned may not bring satisfaction for a long period of time, to begin the action is to demonstrate a preference for the satisfaction of the end to be brought closer in time. It follows also that the end to which action is directed first must be the one that is, in the eyes of the acting human, in the most urgent need of fulfilment, i.e. it is the highest valued end.

What does this mean for the value of a present unit versus the value of a future unit of a good? All goods, as we know, derive their value from the ends that they satisfy. If a human acts now in relation to a good – say a bottle of water – in order to achieve the end of extinguishing his thirst it means that, now, at this moment, this end is his most highly valued end and the good must be accorded (in the absence of other appreciable costs) the same value as the end. To act now means that this end must be fulfilled now, or at least brought closer in time to fulfilment. However, if we take the same moment in time – the present – but remove the good from present availability and move it to a future availability then what does this entail for action? It means that the most highly valued end at that moment cannot be fulfilled by that good. It completely lacks any serviceability towards this end compared to the serviceability of the presently available good. One of several things may happen as a result. If the end is to be satisfied now, substitute present goods must be found. These, however, must be drawn from the satisfaction of other ends and the urgency of these ends must be reweighed against the urgency of satisfying the human’s thirst in light of the fact that the present bottle of water is no longer available. It is quite conceivable that the end would be either abandoned entirely or satisfaction of it would be delayed – in either case it necessarily ceases to be the most valuable end. As other ends now become the object of action so they become more valuable and hence, the future good reduces in value accordingly3. Furthermore, if the end is either abandoned or satisfied by substitutes, the future bottle of water may be earmarked for a lesser valued end such as providing for tomorrow’s thirst – the end being necessarily lesser not because it takes effect in the future but because it is not the most valuable end to be met at the moment when quenching my thirst is most pressing, the very moment when the relevant valuation under scrutiny is occurring.  In all of these cases – substitution, abandonment, delay and direction of the good to a lower valued end – the future bottle of water derives a lower value than the present bottle of water. It is these facts, arising from the logic of action, that is the cause of the phenomenon of time preference, the future bottle being imputed with a discount to reflect its lower utility. We can therefore state the law of time preference as being as follows: a unit of a good that is available to satisfy an end immediately (or sooner) will be more valuable than a unit of a good that can only satisfy the same end in the future (or later).

We can also understand from this why there are gradations of serviceability of future goods – for example, a present unit of a good may be more valuable than a unit available one year from now, a unit one year from now more valuable than a unit two years from now, a unit available in two years more than one in three, and so on. For if the logic of action is to bring ends closer to their satisfaction the nearer in time a good is to that satisfaction the lighter will be the discount applied. If, for instance, a person chooses to delay satisfaction, then the lower that satisfaction will slip down the rankings the longer it must remain unfulfilled, as the cause of that delay is, by necessity, a decision to devote action to other, more highly valued ends in the meantime. The very fact of delay implies a lower value as to act is to place a higher valuation on the object of action now and to seek satisfaction now or sooner where as to not act or delay action is the precise opposite. From this we can also understand the capitalised value of durable goods – why, for instance, uses that are delivered in future slices of time incur a heavier discount the further they stretch into the future. For, at the moment of valuation, each separate use of the durable good must seek out its ability to fulfil an ever diminishing pool of ends that a human holds, each end reducing in value until they are dissipated. Hence the reason why land that is, for all intents and purposes, a permanent good that can yield utility for all eternity, trades for a finite price – to the extent that the remotest future uses can fulfil any end the human holds at all they will be of such infinitely small value as to be negligible.

What if a person deliberately and constantly decides not to act? Do we not here have a definitive example of where a person can persistently prefer future satisfaction? Not at all. To not act is itself an action that must have an end to fulfil. If so, whatever end this may be – peaceful meditation, reflection, or the strength gained through the bearing of hardship – it is more important than the end that some other present good could satisfy. To continue delaying, for example, the quenching of my thirst by not opening a bottle of water doesn’t mean that I prefer a future bottle of water to the present bottle of water. It simply means that not drinking is more valuable than drinking. As soon as, however, drinking becomes my most valuable end it would be the case that the present bottle of water would be more valuable than a future bottle of water in satisfying that end. The situation of choosing not to act therefore has no bearing on the phenomenon of time preference.

Finally, what about the situation where, for example, my most highly valued end is to provide for next week’s hunger and I want to ensure that this is met now, either by storing goods now or by arranging, now, for their acquisition next week? I have an apple available now but it will rot before next week comes and will not fulfil this end. An apple that becomes available next week however, will not be rotten and will fulfil the end. Surely, therefore, we now have a clear case of where a future unit of the same good is able to better satisfy the same end more than a present unit and won’t, in this instance, the future unit be accorded a higher value? Unfortunately not, because the fact that the present apple will rot imposes upon it a qualitative difference from the apple that will not. In other words, an apple that is rotten before the end is fulfilled is not the same good as an apple that is not rotten before the end is fulfilled. We are therefore altering a variable other than the one under examination and hence we can conclude nothing about the latter from such a situation.

Human Appreciation of Time

It must be emphasised that the difference in the elapse of time between the availability of a present unit of a good and a future unit is determined praxeologically. All actions do, of course, take place through time and all goods are remote in time to different degrees. If I decide to drink a bottle of water I first of all have to pick it up, open it and then bring it to my mouth, all of which has to occur through time. But in order to have any relevance in economics the difference has to be appreciated by the human – there has to be a conscious awareness of its passage. With the opening of the bottle all of the actions may happen so quickly that, in my mind, they are praxeologically simultaneous and I therefore impute no lower value to the unopened bottle sitting on the table to the water that I am swallowing and enjoying. On the other hand, the passage of a week before I can drink the water would probably make a lot of difference, especially if I had no other access to water in that time. Further still we can see that £100 received in five minutes will probably not be valued lower than £100 received in this very instant, whereas £100 received in one year’s time would be valued markedly lower. Moreover it should be obvious that it will never occur with units of free goods – a unit of present air is just as valueless as a unit of future air.

Does this fact mean that our analysis of time preference is circular? That we are explaining the fact that humans appreciate time by the fact that humans appreciate time? Not at all, for what we are trying to explain is why a future unit of a good must necessarily be of lower value than a present unit of a good. In other words, using a human’s appreciation of the factor of time as a given, we are concluding from the logic of action that time preference must always be in favour of a present good ahead of a future good. We are not begging the question by reaching this conclusion.


Time preference has often been explained by the fact that the period of time that elapses between now and the availability of the future unit of the good is fraught with uncertainty – that because the future is always uncertain a person does not know whether the future unit will, in fact, become serviceable and hence this risk possibly serves to discount the utility of the future good. This uncertainty has two sources – a) uncertain future circumstances; b) the uncertainty of the future good actually becoming available. While it is true that uncertainty pervades all human action and that, generally, the longer the period of time that must elapse before an action is complete the greater the uncertainty, it is not in and of itself the cause of time preference. Even if uncertainty was reduced to the point of negligibility, to act now would still mean to prefer satisfaction now rather than later. A good that becomes available in the future must still either be the cause of the delay of satisfaction of the end, or, in the event that the end is satisfied with substitute goods, seek to fulfil a lower valued end or not end at all. In all cases the value of the future good would diminish.

This does not mean that uncertainty is redundant in a complete understanding of time preference; the height of uncertainty could certainly affect the rate of a person’s time preference as it imposes a psychic cost on a human which will affect the valuation of either the delayed end or the new end which a future good could satisfy. In other words, the fact of uncertainty would cause these ends to diminish further in value at the present moment in time, this further reduction being imputed back to the future good. But so too could total certainty serve to increase time preference. If, for example, it was certain that the world would be destroyed tomorrow time preference, far from falling as a result of the certain future, would rise to an astronomical height, with a heavy discount applying to goods that may become available as little as an hour into the future. On the other hand, if there was only a reduced chance of the world being destroyed the discount might be a little lighter. The effects of uncertainty are not therefore uniform upon the phenomenon of time preference and as an explanation of its ultimate cause it is neither necessary nor sufficient.

Exchange between Present and Future Goods

If what we have concluded above is true, that a unit of a future good must be less valuable than a unit of a present good, in which circumstances would a person exchange a present unit for a future unit? After all, we see this every day, mostly clearly in the lending of money at interest and almost certainly engage in the practice ourselves. What is it that could entice us to regard a future good as more valuable?

The key to understanding this is that, compared to our scenarios above, there must be an alteration to the serviceability of the future good that, in the eyes of the acting human, serves to increase its value above that of the present good. It cannot be the case that the same unit of a good available in the future is more valuable than the same unit available right now. What, therefore, is this alteration in serviceability to the future good? The answer should be familiar to us. Nearly always it is an increase the quantity of the future good while the quantity of the present good remains constant. So with the lending of money, for example, the present good may be £100 but the future good for which is exchanged may be £110. £110 has greater serviceability in terms of quantity compared to the £100, however the £100 has greater serviceability in terms of time compared to the £110. A human has to decide which of these two imbalances is of greater value to him. Typically we say that if he prefers a larger unit of a future good to a smaller unit of a present good he possesses “low time preference”. Conversely, if he prefers a smaller unit of a present good to a larger unit of a future good he is said to have “high time preference”. While this is useful shorthand for determining whether a person will have a propensity to save and invest rather than spend and consume (or indeed, when judging the direction of a society’s economic development), it does not tell us the whole picture. For to express a high or low time preference by trading present goods for future goods is an exchange like any other and a high value attached to the good received in exchange must correspond with a low value attached to the good given up in exchange. If, therefore, someone has a low time preference he must, conversely, have what we may term a relatively high “quantity preference” – the increased quantity of the future good being more valuable to him than the end that must be delayed, abandoned or met through substitutes today in order to receive it. On the other hand, if a person has high time preference he has a relatively low quantity preference, preferring to meet an end now with a smaller quantity of a good rather than delay it, abandon it or meet it through substitutes. We might say, therefore, that time preference and quantity preference are negatively correlated.

The concept of time preference is not necessarily limited to a single, homogenous good. It would, for example, be possible to exchange a quantity of present apples for a quantity of future oranges. In this case, while it would not be possible to determine a “rate” between the two quantities exchanged in the way that we can express an interest rate, we can say that a present apple would fetch in exchange a greater number of present oranges than a future apple. Or, conversely, a present orange could be sold for more present apples than a future orange could. There is also the possibility of a qualitative difference as opposed to a quantitative difference. A present apple may, for example, fetch a quantity of the ripest and most luxuriant present oranges whereas a future apple may only fetch the same quantity of lower grade, bog standard present oranges. All of these possibilities are expressions of the law that a present unit of a good is more valuable than a future unit of the same good.


What we have determined, therefore, is that the common expression “present goods are more valuable than future goods” is, at best useful shorthand that can muddy the waters when determining the fundamental truth. Neither also does an understanding of time preference arise from psychological considerations nor from the fact of uncertainty. Rather it is the logic of action itself that means a present unit of a good must always be more valuable than a future unit of a good when comparing their abilities to satisfy the same end. Only an advantageous change in the serviceability of the future good – such as an increase in its quantity – can serve to render the future good more valuable than the present good.

We have not explored the further implications of time preference in economics – particularly its role in interest and the business cycle, which is of great import to “Austrians”. However, a clear understanding of the fundamentals of the phenomenon should serve to enable one to tackle these difficult questions.

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1We are, of course, assuming that the bottle cannot be substituted in the event that it is lost in order to avoid the implications upon value that substitution has.

2Exactly the same would be true if, for example, the bottle was, as in scenario one, right next to me, but is now of an appreciably different quality or quantity (i.e. appreciable to the extent that the end cannot be satisfied to the same degree). Once again its serviceability, its power, as judged by my mind, to extinguish an end is diminished and other goods must be brought in to fully satisfy the end.

3It is of course true that in the case of the possibility of substitution the value of the present bottle of water would equate to that of the substitute goods and not from the end of quenching my thirst but this has no bearing upon our analysis of the relatively lower value of the future good as compared with that of the present good.