11 March 2011

The Ever-Present Poor

[Note: This is a reprint from my new book, The Early Years. My book is a collection of essays that I wrote prior to joining the blogosphere. It is available as a free download at Scribd. Additionally, I plan on making all my books and long-form papers available as free downloads at Scribd.]
For the poor you have with you always (John 12:8)
In spite of the son of God himself making this proclamation, there are some people, namely liberals, who believe that poverty can be eradicated.  In fact, they believe this so strongly that some have even declared war on poverty.  Yet, despite forty years of “war,” there are still poor people in this world.

Why is this still the case?  There are, of course, a variety of reasons as to why poor people will exist, in both relative and absolute terms, but one reason that tends to be ignored is that some people have short time-preferences.

Time-preferences, simply put, are the time horizon for consumption.  Some people are quite content to wait months or even years before buying an item that they want.  They will scan advertisements for sales, discounts, and coupons.  They will price the item among various competitors.  Some may even try to get sellers to directly compete against one another in order to get the best price, no matter how long they have to wait to get it.  These people are the ones who save faithfully, which is the foundation of investment capital.

People with short time-preferences are the exact opposite.  They are often price-insensitive, and will pay large amounts of money to get what they want right away.  They also tend to be more brand-conscious, and less concerned with waiting around for good deals.  Those with a shorter time-preference will rarely make a point of saving money.  As a result, they are very often poor, since they do not make the point of accumulating wealth.

While this mindset is generally deplored, it is not altogether illogical.  If a person lives in a country that is undergoing a period of high inflation, it is likely to be counter-productive to save money, since the interest rate is likely to be lower than the rate of inflation.

Furthermore, if someone lives in a country that places a high tax burden on savings and investment returns, then there is little point to saving and accumulating capital.  What good is it to earn 2% interest on one’s savings account when most of that will be confiscated by the government?

Political instability also contributes to encouraging shorter time-preferences.  If you are unable to know with even the slightest bit of accuracy if the current regime, tax rates, and rules will be in place a year from now, than you are not likely to accumulate capital since it may be destroyed or confiscated before you have a chance to use it.

One last contributing factor to short time-preferences is life expectancy.  If one does not believe he will live long, whether due to environmental factors or genetic factors, then he will be unlikely to make a point of storing up for future consumption.  While the causal factor between poverty and shorter life-spans is uncertain, the correlation does make sense.  If you don’t believe you are going to live past, say, sixty. There is little point to have storing up capital that will enable you to live comfortably past that age.

Of course, it is entirely possible that someone just wants everything now, and will pay through the nose for it.  Not everyone behaves with perfect rationality.  No matter what the reason is, though, people with short time-preferences will always exist, and thus we will always have poor people.

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