Re: Market failure to sufficently weigh the future

From: Dan Fabulich (
Date: Thu Nov 02 2000 - 19:52:01 MST

Wow. You step away from the list for a few weeks, and a discussion
like this one pops out.

It is, IMO, ridiculous to explain the existence of an interest rate by
virtue of the fact that I'd rather have pleasure today than tomorrow.
(I'll ignore the case where preferences are satisfied without my
knowing it and lump preference satisfaction together with "pleasure.")
The standard argument claims that, since I prefer pleasure more today
than tomorrow, and since I'm rational, I'd refuse to trade away
today's pleasure for tomorrow's pleasure, unless tomorrow's pleasure
was sufficiently greater than today's pleasure.

This argument is wrong, because, if rational, it seems I'd also rather
have pleasure yesterday than today, which is false. I WOULD rather
have $1M 20 years ago than $1M today, yet it's not at all obvious that
I'd like to eat an ice cream cone yesterday more than I'd like to eat
that cone today.

(So far, we notice, there's no reason for a beneficient utilitarian
government to step in and make me eat my cone tomorrow instead of
eating it today, assuming that the government is trying to maximize
the sum of my pleasure states over time. If I eat the cone at time X
rather than at time Y, at time Y I'll wish I had a cone, and at time X
I'll be happy to have one. It doesn't matter whether time X comes
before or after time Y; I'd be just as happy, overall, either way.)

There's a better explantion for why we have interest rates: money
which is used today to buy microeconomic capital like machinery,
advanced technology, training, etc. will make more money tomorrow.

This has nothing to do with human desires and everything to do with
the raw material payoffs of investment. Pleasure sensations, (and
events which satisfy preferences,) which happen when I take a bite out
of a chocolate-covered double-mint sugar cone, can't be invested today
to get more pleasure sensations tomorrow, while the money I spent on
that cone can be saved and spent on infrastructure.


There is SOMETHING to the argument from future/past discounting, which
I take to be a real psychological fact. This psychological fact
actually provides us with the moral reasons why we should NOT allow
the government to step in and prioritize the future for us.

The argument for government stepping in and making us more
future-minded goes as follows. Pleasure we have today is good, but
tomorrow we'll tend to feel bad that we're not having pleasure THEN.
If we tend to discount tomorrow, however, we won't count tomorrow's
regret as much as we count today's pleasure, and may find ourselves
taking pleasures today which we regret, too much, tomorrow.

Of course, if we prioritize the past more than we prioritize the
present, we'll still make rational decisions. Suppose it's time T1
and I decide that pleasure today is worth more than my future regret
at T2. Our future (discounted) regret is outweighed by today's
pleasure. Now suppose T2 has rolled around. If we prioritize the
past over the present, our regret will STILL be outweighed by our
(prioritized) past. I'd always think: "Yes, the headache hurts today,
but I had so much fun last night that it's worth it." More to the
point, I'd never catch myself overall regretful if I was fully
informed about the outcome of my actions. As the paper points out,
I'd never say to myself: "Thank heavens that bad lecture is over,"
since bad lectures would actually be WORSE the further they were in
our past.

All of this argument was to show that we DON'T prioritize the past
over the present, but rather we prioritize the present over the past
(as well as the future); this explains why we do stupid things today,
which we regret, more than we enjoyed them, tomorrow.

The government should step in, it is argued, to MAKE us prioritize the
future over the present, to MAKE us save our money to spend later,
because we spend our money irrationally in the present.

But this argument needn't stop there. Money invested today yields
more money tomorrow. So why not invest it ALL? Why not invest every
cent you own on technology, training, building factories, etc. and
never again buy anything for the purposes of pleasure? After all, the
cheap thrills you'd experience today would be 10% less (or whatever)
than the pleasure you'd reap if you'd invested your money.

And, of course, the pleasure you'd get next year is 10% less than the
pleasure you'd get from saving THAT for the year after, and so on.
You'd invest it all, and always invest all of the outcome of your
investment, again and again, forever.

A person who lived like that would be a super-miser. A super-miser
would never actually be happy, since he'd consistently postpone his
happiness for later. Compare this to a situation in which someone is
living a progressively happier life, spending some of his earnings and
saving the rest, developing investments slower than a super-miser, but
living a substantially happier life.

This, I argue, is the way that life ought to be led; this is the
reason why it is rational to prioritize the present over the future,
even if we prioritize the present over the past.

Another argument for prioritizing the future, the argument from
"brevity/uncertainty" of life, provides some reason not to be a
super-miser, but nowhere near ENOUGH reason. According to this
argument, risk prevents us from being super-miserly. Investment, as
we all know, is at least somewhat risky. Some investments don't pan
out. Some investments do pan out, but for various reasons
(e.g. death) you don't get to reap the benefits of your investment
personally. (Death is not the ONLY such reason; it's merely the most

Still, if this were your ONLY reason for not investing all your money,
you wouldn't spend a penny of it until the very last reasonable
instant, then blow it all. You'd live out most of your life under the
worst possibly tolerable conditions, and then, finally, you'd go out
with a bang. If you were immortal or if your risks were negligibly
low, you'd still be a super-miser.

Worse, if you're a beneficent preference-satisfying government, (an
organization with no obvious lifespan,) you'd never take special risk
to INDIVIDUALS into account, only the expected payoff for the group.
So the fact that I might die (or for some other reason never see the
payoff from my investment) is irrelevant: the payoff from *my*
investments could go to the future pleasure of your children or other
people's children. And their money could go to the future pleasure of
their children. And so on, and so on, with no individual generation
or time EVER receiving a payoff from investment, since it would ALL be

Another related argument which might be raised is that money has
diminishing marginal utility. Having one more dollar is great when
you've only got $2, but it's just a drop in the bucket when you've got
$2 billion.

This argument, as trained economists know, is actually just the
argument from risk aversion again, because having a diminishing
marginal utility is exactly the same as being risk averse; they're
perfectly logically equivalent. If I get ten utils of pleasure from
having $1M (relative to being penniless) but I only get two more utils
from having $2M over $1M, then, if I've got $1M, I'll refuse to make a
50:50 bet of $1M. I'll have a 50% chance of getting 2 utils, and 50%
chance of losing ten. On average, that's a loss of 8 utils; a bad

So since having a diminishing marginal utility is just the same thing
as being risk averse, arguments from diminishing marginal utility are
just arguments from risk with different phrasing, and the same
argument I applied to the argument from uncertainty applies here,
though diminishing marginal utility does suggest to us that it may be
harder than we think to invest with negligibly low risk, since risks
seem bigger the more we have to invest.

Interest rates come from material payoffs, not from human desires.
Because of this, if we don't prioritize the present over the past,
then a benificient government must prefer us to be super-misers,
individuals who invest everything forever, never ever spending on
pleasure, even when we take risks and diminishing marginal utility
into account. This is an unacceptable utilitarian outcome, and this
is the reason why we should be allowed to (apparently irrationally)
*spend* some of our money rather than investing all of it.


      -unless you love someone-
    -nothing else makes any sense-
           e.e. cummings

This archive was generated by hypermail 2b30 : Mon May 28 2001 - 09:50:19 MDT