In my post on Computers and the Return on Capital I made the point that cheaper and more ubiquitous flows of information will drive the risk free return on capital towards the time preference (assuming that capital can also flow freely). But I didn’t really explain what that meant or how it was determined. Let’s start with an extreme case to illustrate the basic idea. Suppose that everyone everywhere was happy with how much they can spend out of their current income (that includes individuals, companies, governments). In that case the risk free return on capital would be zero as nobody would be interested in having debt or raising equity capital.
For there to be a positive market clearing rate of return on capital it has to be the case that some people or companies or governments want to spend faster today than their income allows and so need to attract capital from those who have capital to lend or invest. Time preference is a catch all for capturing this desire to spend now rather than in the future. The relationship between technology and time preference is complex but I think there is fairly strong reason to believe that over time technology is reducing time preference.
Let’s start with individuals. The major purchases for which individuals tend to borrow include education (biggest outstanding debt in the US today, greater than credit card debt), cars, homes and consumption more generally. We are seeing the beginnings of technology being used to dramatically lower the cost of education, in the extreme by making it available for free as in the case of Khan Academy, EdX, etc. So one way technology can reduce the need for capital is simply by making something a lot less costly. But there is another effect at work here. If I need to get all my education up front I may have to borrow, but if we are moving to lifelong and on-demand education I may be able to pay for it out of current income.
Another way that technology can reduce the need for capital is by making assets shareable. That’s what we are seeing with cars which used to be incredibly inefficiently used assets (standing around idly 95% of the time). Whether it is through car sharing, ride sharing or ultimately driverless cars, technology can help shift from an ownership model (which may require capital) to an on-demand model which can again be paid for out of current income.
As far as general consumption is concerned, technology has been driving down the cost of many products so that more people can purchase them out of current income. Computers themselves are of course a great example of that with smartphones being a computer that almost everyone can afford now (not just here in the US but globally). Known deflation has another impact on time preference: unless you have an immediate need you are more likely to wait as products are getting cheaper and better over time.
The one place where for the time being technology has not yet had an impact is real estate. Many people borrow to buy a home and with urbanization still increasing the cost of homes has been on the rise. There is a great infographic showing the multiple of annual earnings required to buy a home in different parts of the UK with a breakout for London. Technology won’t solve this problem in the near term but (unlike many others) I suspect that we are close to peak urbanization and will in fact see people spreading out more in the future. Probably a subject for another post!
A final impact of technology that is relevant to individual time preference is longer expected lifespan. My desire to get something today rather than say next year or the year after is likely to be lower when I feel I have more time. None of this is saying much though about individual preferences. There will likely always be people who are patient and others who are not.
In an upcoming post I will consider the likely impact of technology on time preference for companies. There too I believe that technology is largely acting to reduce time preference in the long run. So we might get all excited about a future of lower returns on capital and how this might reduce the impact of wealth inequality. That, however, would neglect the potential for external shocks. The one I am thinking of in particular is climate change. There is a scenario in which a lot of capital is required very quickly to deal with say rising sea levels. Time preference would go way up, eg we need a sea wall now, not over the next hundred years. If that were to happen there would be a spike in the returns to capital *if* this is financed by borrowing and investment in privately owned companies and infrastructure.
