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economics-and-time

10. Most economic factors change when time is entered into them.

Economics is a process made up of countless individual inputs, with a constantly changing composition. Many of these individual factors change over time. What is valued by someone now may not be valued as highly by them in a few months time. People reckon that a degree of satisfaction now is worth more to them than that same degree of satisfaction in six months time. Pleasure diminishes when time is factored into it because immediate pleasure is worth more than distant pleasure.

If money has to be foregone now, the immediate pleasure its use might bring has to be postponed for the promise of subsequent pleasure. Money now is worth less than that same amount of money in six months time because of that. If I am to lend someone £100 for a year, I have to be compensated for that exchange of immediate pleasure for subsequent pleasure, and I might need £105 to make it worth my while.

People who produce goods immediately to meet a perceived demand are taking a smaller risk than those who commit resources to production to meet an anticipated future demand. The latter is less certain and less immediate. As a higher risk activity it will need a greater anticipated return than the immediate activity in order to compensate for the delay and the risk to the reward.

We speak of a ‘time horizon,’ meaning the distance forward that people will contemplate future rewards and let them outweigh, if they are greater, the more immediate rewards of present consumption. Different cultures and social groups have different time horizons, and a different propensity to sacrifice current pleasures in return for greater anticipated future gains.

Time has to be factored into economic processes, and it changes most of them. The further off into the future that an outcome lies, the more it becomes vulnerable to the changes of circumstance that can befall it, and the less certain it becomes. If people are to commit to such long-term activity, they will need correspondingly greater rewards. Many economic activities take time to show their effects, and some of the plans people make will be rendered futile by changing circumstances in between the initiation and the outcome. Some economic activities, arising as they do from human psychology, will change over time as human psychology changes in unpredictable ways.

This is part of Dr Pirie’s ongoing series: Philosophical Observations on Economics.