Thursday, April 12, 2012

Time preference and the wealth (or poverty) of nations

A few hours ago, I was sitting in an airplane after it had just landed and observing the people taking their belongings from the overhead compartments and proceeding towards the exit. Everyone was very polite. Some people who had fewer things could have rushed forward, but they did not.

The cause of this politeness was patience (among other factors). In other countries, like some Western European countries, or Russia, or Israel, people might be pushing and behaving aggressively. One of the reasons for this difference, I think, is cultural predisposition to time preference -- a need for an instant gratification vs. ability to put things off.

A recent article by a Harvard economist hypothesized a link between the wealth of nations and the languages they spoke -- in particular, whether they spoke a language in which the future tense was definitively expressed (e.g., "It will rain tomorrow") or one in which the future tense was expressed as a form of the present tense ("It is raining tomorrow"). The article was very bad mainly because the data contradicted it. For instance, English-speaking countries tended to be the richest in the last few hundred years. On the other hand, while modern Germany is relatively stable, Germans have suffered one of the worst inflations in the world's history in 1930s. I.e., there simply is very little correlation.

But the premise of the article is correct. Time preference is an extremely important factor contributing to the wealth and prosperity of nations. Nations in which saving and investing are valued over spending tend to prosper more. Not just the nations. Many know of the famous experiment in which children were given a choice: to eat a marshmallow right away or wait for ten minutes and get two marshmallows. Most children chose to eat a marshmallow right away. Some were able to wait. Some time in future after the experiment, researchers tracked down those children who had now grown up. Those that had been able to wait (who had low time preference) did much better in their personal and financial lives that those that had needed the instant gratification.

High time preference can lead not only to economic ruin, but also to health problems associated with overeating or addictive behaviors. It can also lead to crime: a study has shown that most criminals have tendency towards high time preference.

Interestingly, most governments do too. (Well, as someone who considers all governments essentially criminal, I am not surprised.) By their nature, governments tend toward "quick" solutions to problems. Slavery? Let's invade the South and spend hundreds of thousands of lives. (The so-called Civil War remains the bloodiest American conflict. Never mind that most European nations got rid of slavery through peaceful means, driven by changing economic conditions. Not to mention that the result of the so-called Civil War was freeing the slaves but enslaving the free for the next century and a half to come. American Republic was essentially destroyed by Abraham Lincoln.)

Poverty? Let's tax the rich and give money to the poor. Poor education? Let's give more money to the schools, make it difficult to expel students, make teachers have greater assurance in tenures. Poor people can't afford medicine? Unsafe working conditions? Long hours? Traffic accidents?

All these problems have very effective solutions that markets can provide. The only thing is: one must wait for them. Sometimes they may take years or even a few decades. But, it's worth it. Because the solutions will truly improve everyday life and will be a real increase in the lifestyle, an advance in civilization.

All government solutions, on the other hand, seem like they might solve the problem right away, but: a) they almost never do (in many cases they make the problem worse), b) they create a lot of side-effects in a form of perverse incentives and unintended consequences.

So, one can wait for the markets to come up with solutions to low wages (accumulated capital will lead to expansion of industry, which will lead to an increased demand for workers, increased competition for the workers and thus increasing salaries), or one can pass minimum-wage laws, which effectively increase the unemployment among the low-wage earners. (If hiring a worker X will give me profit of $5 and hour, but the minimum wage is $7 an hour, I will not hire anyone from this group of workers. So, instead of helping the workers who were earning "only" $5 an hour, the government made them unemployed. On the other hand, had the government waited, I would have maybe invested capital, increased efficiency of production, increased marginal profit from hiring a worker, and increased each worker's salary. If I decided not to, competition with other business owners who were doing the same thing would force me to do that or lose my employees and much of the profit.)

Any time you hear of some social ill and the proposed solution that uses government's coercion, think of this idea. The government is nothing but a crack addict's quick dose that does not help the problem at all; it makes it worse, makes the real solution more distant, less likely, and more difficult, and introduces a lot of side effects (which in turn need to be solved... and the cycle continues).

And, as a little bonus, this is the kind of people that made American great (can you imagine this kid as a bureaucrat?):

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