A Culture of Debt

Posted on November 1, 2010 at 1.04 pm

Q. I have a question about the judgment of mankind and the issue of procrastination. After reading this article, I find myself wondering if our tendancy to evaluate only the situation we are currently in and lack the ability to make rational choices when gratification is immediate, leads to our poor decision making as a whole regarding policies in all sectors.

I can’t but help draw a parallel to the economic issue where we constantly go in debt to solve today’s problems, assuming that we will be better off in the future to make more rational decisions then. This issue is haunting us as we speak yet no one except to most responsible people in government, such as Dr. Paul, voice concern over the tendency to be so short-sighted in our policies.

How does the libertarian address procrastination? How can a capitalist society deal with the tendency to feel knee-jerk reactions without logic? Finally, how can we mitigate this issue in our society? — nothingsinister, from tumblr.

A. I’ve put off answering your question for a few days because I can’t decide if the answer should be more about time preference or more about central banking.  Finally I determined to just give you a little of both.

First, time preference:  This is the idea that people value goods differently depending on when they’ll get them.  So a child, for instance, lacking in logical reasoning skills, might value one piece of candy now over five pieces of candy in five minutes because he simply can’t bear to wait.  Thus, his time preference leads him to prefer less of the good, but sooner.

Having a low time preference (being able to control oneself and wait for future goods) is important to economic success:

[Stanford psychologist Walter Mischel] found that a relatively higher or lower time preference (within the study group) was consistent over the individual’s life, and that low time preference correlated with greater success in all areas of life, including work, friends, family, substance abuse, and weight control….The findings not surprising to Austrian economists, who have demonstrated that societies with a lower average social rate of time preference will accumulate more capital and experience a more rapid rise in their standard of living over time.

So I’d be more inclined to call the problem of widespread over-indebtedness in pursuit of immediate gratification a problem of too high a time preference than procrastination (though I guess one could say that people procrastinate about paying for what they want now…it’s two sides of the same coin).  And that’s something which needs to be addressed in two ways:  education and no more central banking.  I’ll get to the central banking bit below, so let me just cover education here.

Basic economic principles are not difficult.  I consider that I have a decent working knowledge of them — at least enough to write this sort of blog without having to do too much research for each post — and it all comes from (literally) two books, a very poorly taught macroeconomics gen ed in college, and some casual reading on the internet.

The vast majority of what I know could be easily understood by middle schoolers.  Yet economics classes are rare below the college level, except perhaps in expensive prep schools.  How is this incredibly important subject so neglected?  (I’d suggest it’s an intentional downfall of government education, but that’s another blog post.)  And then why are we surprised when people don’t understand economics?  They can hardly be blamed; they were never taught.

Second, we have a culture of debt, don’t we?  You want a car?  Go into debt.  A house?  Debt.  College?  Debt.  Vacation?  Put it on the credit card.

Debt has become a way of life for us.  Federal debt is atrocious, certainly, but look at the numbers on our personal debt…and then look at our average savings per family.  So it seems we’re in need of a serious cultural shift which values saving over borrowing.  How that will happen, I don’t know.  But I think part of it would come from the second half of this:  central banking.

You may be familiar with the Austrian Business Cycle Theory, which basically says that government intervention in the economy sends false signals to investors, and malinvestment causes bubbles as well as their inevitable burst.  I’ve previously explained it in more detail/provided links to articles which can explain it better than I, so I won’t go into that again.

At any rate, what’s relevant here is that central banking confuses the marketplace, which contributes to this problem of immediate gratification — to this culture of debt.  It isn’t so much that people are acting based on “knee-jerk reactions without logic,” but rather that they’re acting logically based on false signals.

For instance, suppose you don’t know your lefts from your rights, and suppose I’m trying to back into a parking space.  I ask you to get out of the car and tell me how to turn so I don’t hit anything.  Since you have a better view, I logically do everything you say.  But since you don’t know your lefts and rights, I still crash.  It wasn’t lack of logic on my part; it was logic based on poor information.

To make another analogy, if an argument hangs together in formal logic, it’s called “valid.”   But it isn’t considered “sound” unless it’s also composed of true information.  Most Americans are probably trying to make sound economic decisions, but if they’re given false information about the state of the economy, the best they’ll come up with is valid decisions, which won’t work with the way reality truly is:

F.A. Hayek won the Nobel Prize for his work showing how the central bank’s intervention into the economy gives rise to the boom-bust cycle, making us feel prosperous until we suffer the inevitable crash. Most Americans know nothing about Hayek’s theory (known as the Austrian theory of the business cycle), and are therefore easy prey for the quacks who blame the market for problems caused by the manipulation of money and credit. The artificial booms the Fed provokes, wrote economist Henry Hazlitt decades ago, must end “in a crisis and a slump, and…worse than the slump itself may be the public delusion that the slump has been caused, not by the previous inflation, but by the inherent defects of ‘capitalism.’”

….Government-established central banks can artificially lower interest rates by increasing the supply of money (and thus the funds banks have available to lend) through the banking system. This is supposed to stimulate the economy. What it actually does is mislead investors into embarking on an investment boom that the artificially low rates seem to validate but that in fact cannot be sustained under existing economic conditions. Investments that would have correctly been assessed as unprofitable are falsely appraised as profitable, and over time the result is the squandering of countless resources in lines of investment that should never have been begun.

It sounds pretty malicious, no?  That’s because it is.  As Rep. Ron Paul has said, “[s]ince the creation of the Federal Reserve, middle and working-class Americans have been victimized by a boom-and-bust monetary policy….every economic downturn suffered by this country over the past century can be traced to Federal Reserve policy. The Fed has followed a consistent policy of flooding the economy with easy money, leading to a misallocation of resources and an artificial “boom” followed by a recession or depression when the Fed-created bubble bursts.”

Central banking is a terrible system, and, if we are to permanently change the course and culture of our economy, it needs to stop.

Thanks for the question!

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