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Critical error in the Mises pure time preference theory: Zero time preference and deferred consumption

Potuzak Pavel, University of Economics, Prague

Ludwig von Mises (1949) claimed that the absence of time preference would lead to an indefinite deferment of consumption. Olson and Bailey (1981) proved that zero time preference is consistent with positive present consumption and positive real interest rate if the marginal utility of consumption is drastically decreasing and the income endowment is growing over time. This paper shows that zero time preference does not eliminate present consumption even if positive interest rate enables future consumption to be very large. The Fisher intertemporal model is applied to demonstrate that low intertemporal elasticity of substitution leads to positive present consumption. A more advanced model with finite and infinite planning horizon is then used to disprove the Misesian thesis. It is shown that labour income stream does not have to be increasing over time to confirm the approach of Olson and Bailey.

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Keywords: zero time preference, deferred consumption, Ludwig von Mises, intertemporal elasticity of substitution

Paper file