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Zero time preference and eternal postponement of consumption

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  • Pavel Potuzak

    (University of Economics, Prague)

Abstract

Ludwig von Mises in his magnum opus Human Action claimed that the absence of time preference would lead the consumer to postpone the act of consumption to indefinite future. Olson and Bailey (1981) demonstrated that zero time preference is consistent with positive real interest rate and positive present consumption if the marginal utility of consumption is rapidly decreasing and the income endowment is rising over time.This paper shows that zero time preference does not restrict present consumption to nil even if positive interest rate enables future consumption to be very large. Dynamic neoclassical model is applied to confirm that low intertemporal elasticity of substitution leads to positive present consumption even in the case of patient consumers. Determinants of the optimum present consumption are derived, and it is proved that labour income might not be increasing over time to confirm the approach of Olson and Bailey and to disprove the Mises theory.

Suggested Citation

  • Pavel Potuzak, 2017. "Zero time preference and eternal postponement of consumption," Proceedings of Economics and Finance Conferences 4507367, International Institute of Social and Economic Sciences.
  • Handle: RePEc:sek:iefpro:4507367
    as

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    References listed on IDEAS

    as
    1. Olson, Mancur & Bailey, Martin J, 1981. "Positive Time Preference," Journal of Political Economy, University of Chicago Press, vol. 89(1), pages 1-25, February.
    2. Gilbert Ghez & Gary S. Becker, 1975. "The Allocation of Time Over the Life Cycle," NBER Chapters, in: The Allocation of Time and Goods over the Life Cycle, pages 83-132, National Bureau of Economic Research, Inc.
    3. Gilbert Ghez & Gary S. Becker, 1975. "The Allocation of Goods Over the Life Cycle," NBER Chapters, in: The Allocation of Time and Goods over the Life Cycle, pages 46-82, National Bureau of Economic Research, Inc.
    4. Gilbert Ghez & Gary S. Becker, 1975. "A Theory of the Allocation of Time and Goods Over the Life Cycle," NBER Chapters, in: The Allocation of Time and Goods over the Life Cycle, pages 1-45, National Bureau of Economic Research, Inc.
    5. Trostel, Philip A & Taylor, Grant A, 2001. "A Theory of Time Preference," Economic Inquiry, Western Economic Association International, vol. 39(3), pages 379-395, July.
    6. Gilbert Ghez & Gary S. Becker, 1975. "The Allocation of Time and Goods over the Life Cycle," NBER Books, National Bureau of Economic Research, Inc, number ghez75-1.
    7. Frank A. Fetter, 1902. "The "Roundabout Process" in the Interest Theory," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 17(1), pages 163-180.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    time preference; Ludwig von Mises; postponement of consumption; intertemporal elasticity of substitution;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • B53 - Schools of Economic Thought and Methodology - - Current Heterodox Approaches - - - Austrian
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General

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