Fisher’s Time Preference Theory
Fisher emphasizes the fact of “time preference” as the central point in the Theory. Individuals prefer present satisfactions to equally certain future satisfactions. They are thus impatient to spend their incomes now. The degree of impatience depends upon the size 9f the income, the distribution of income over time, the degree of certainly regarding enjoyment in the future and the temperament and the character of the individual. Thus, people with larger incomes are likely to have their present wants more fully satisfied and will thus discount the future at a lower rate than poorer people.
As regards distribution of income over time, three kinds of situations may be imagined. The income may be uniform throughout one’s life, or increase with age, who first pointed out that saving involved a sacrifice or “abstinence” as he put it. Saving was an act of abstaining from consumption. Since to abstain was painful, it was necessary to reward people for this act. This reward was in the form of the interest paid to those who saved. rather than consumed their incomes. or a part of their income. ritidslII. The idea of abstinence was widely criticised on the ground that it suggested positive discomfort. while the rich people. who are the main source of capital, save without the least inconvenience. That is why Marshall substituted the term aiting” for “abstinence”. Saving implies waiting. When a person saves. he does not refrain from consumption for all time; he merely postpones present coosumption to a future data. Meanwhile, he has to wait But since most people do not like to wait, an inducement is necessary to encourage this postponement of consumption. Interest is this inducement. Some “waiting”. however, may be forthcoming without any inducement in the way of interest payment. Other people will “wait” even uh a negative rate of interest. But aggregate of savings thus made will not be adequate to meet the tocal demand for capital. Interest must be paid to induce many more people to save in the case of whom “w iting” does involve inconvenience. The rate of interest must be high enough to bring forth the marginal increment of saving or “waiting” in order to meet the aggregate demand for capital. The rate of interest wilJ be fixed at a level at which the supply of “waiting” ill be equal to ” the demand for it. This theory has a considerable element of truth in it, but it does not clearly analyse forces acting on the side of demand for capital