Time Preference and its Effects on Intertemporal Optimization of Economic Resources, A Critical Viewpoint

Time preference has a peculiar role in determining the level of economic activities. Time preference is the most important origin of interest rate. In this paper we study the founders and defendersʹ viewpoints about time preference and then we try to criticize them. It seems that discounting future utilities is resulting from irrationality and it is ethically indefensible too. From mathematical aspect, discounting is necessary because it convergences sum of social welfare function to some finite number and so the optimal time path for consumption is attained. But this isnʹt true for a growing population. It seems that there arenʹt any rational reasons for preferring current generationʹs welfare to future generationsʹ. If we have time preference, in intertemporal allocation, it reduces available resources for future consumption and so the level of saving will be decreased. We study a numerical example for affecting time path of an ore extraction of a nonrenewable resource. Results show that the higher the time preference, the higher the rate of extraction will be occurred. Because with a high rate for time preference, present value of cash flows will be discounted more strongly and it increases the incentive to mine the more quickly