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Meet Robinson Crusoe
It is appropriate to utilise a venerable (but by modern standards perplexing) approach, the method of Crusoe Economics, to illustrate the critical importance of time and time preference in human action. This method, used to great effect by Eugen von Böhm-Bawerk and modern Austrians such as Israel Kirzner and Murray Rothbard, eliminates from consideration what for our purposes are extraneous and needlessly complicating factors such as social, cultural, political and inter-personal relations. The Crusoe method isolates the essential elements of – and thereby enables us better to understand – individuals’ actions. These essentials cannot be observed directly and are therefore not amenable to statistical manipulation. By stripping our analysis of social and cultural context we not only detect much more readily the inescapable importance of time preference upon individual decision-makers; we also appreciate its ubiquity across cultures and history.
Consider, then, a hypothetical and solitary individual brought face-to-face with the forces of nature on an isolated, uninhabited and virgin island. Robinson Crusoe, as we shall call him, washes ashore with no more than the clothes on his back. In this respect our Crusoe differs somewhat from Daniel Defoe’s The Life and Strange and Surprising Adventures of Robinson Crusoe (1719), The Farther Adventures of Robinson Crusoe (1719) and The Serious Reflections of Robinson Crusoe (1720). Three other differences: first, there is no Friday; second (as we will see in Part III), Crusoe will have descendents; third, a well-armed tribe inhabits a neighbouring island. Its members agree to keep their distance from Crusoe and to impose themselves in only one way: in return for the unrestricted use of the island and protection from any invaders, each month Crusoe will render to them a portion of fruit and berries equal to the amount he can collect with his own hands and without any assistance during a single day.
Production Precedes Consumption
During his initial days and weeks on the island Crusoe’s brains, brawn and resolution are severely tested. He must find enough food, water and shelter to ensure his immediate survival; and during the next several months he must also find (or grow or catch) and store enough food and water to survive both regular occurrences (such as storms and winters) and irregular calamities (such as droughts, cyclones, extended cold, fires, etc.) to which the island might be prone. His task is therefore to combine his labour with the island’s resources (of whose extent he is unaware when he first sets foot on the island) and any tools and instruments (i.e., capital goods) he can devise from them in order to maximise his chances of survival.
First things first: Crusoe does not wish to die of exposure, hunger or thirst. Yet they will occur within days or at most weeks if he does not act immediately to avert them. Initially, therefore, and depending upon the beneficence of nature’s endowment of the island, he must either forego capital goods entirely or create crude (i.e., easily and quickly devised) capital. It is likely, for example, that he will either use his bare hands to pick berries from bushes and fruit from small trees or content himself with a long stick to knock berries and fruit from taller trees. For similar reasons his first living quarters, hurriedly assembled as they are from branches, leaves, mud and straw, will be extremely rudimentary.
Under these circumstances Crusoe cannot make (say) fishing gear and a bow and arrow, and thus cannot catch fish and consume meat. Even less feasible is the construction of a well. These simple capital goods are out of the question not because Crusoe lacks technical knowledge but because he lacks time. The time devoted to the creation of these capital goods is time that cannot be devoted to the collection of basic consumption goods; and in the absence of a stock of basic consumption goods (i.e., a “pool of funding”) sufficient to ensure his survival during the creation of the capital goods it makes no sense to create such goods. Hence Ludwig von Mises’ quip, in Human Action, that “lack of capital is dearth of time.”
Little Capital, Low Living Standards and High Time Preferences
Under the straightened circumstances of his first days and weeks on the island, then, it is likely that Crusoe will devote all of his waking hours to the satisfaction of his most basic needs; further, to satisfy these needs is to exist at the barest standard of subsistence. Absent the conditions necessary for the creation and accumulation of capital (i.e., time, a pool of funding, knowledge and successful experimentation), in other words, Crusoe’s survival, if it eventuates, will remain at or close to subsistence level. More generally, the smaller and the less productive one’s capital stock the lower one’s sustainable material standard of living.
At this early stage of his “economic development” Crusoe cannot utilise “capitalistic” methods of production; that is to say, he cannot yet undertake what Böhm-Bawerk labelled “roundabout methods of production.” The urgency of his immediate needs occupies his waking hours, and this lack of time precludes the creation of more advanced capital goods that might eventually increase the quantity, quality and diversity of the consumption goods at his disposal. Given his limited ability to produce them, Crusoe’s store of consumption goods – i.e., his “pool of funding” – will be meagre. It will also be perishable. Initially, then, Crusoe is very strongly focussed upon consumption today and is thus strongly averse to the sacrifice of current consumption in favour of greater future consumption. His hand-to-mouth existence places strong limits upon his ability to delay gratification; accordingly, Crusoe’s time preference must necessarily be very high.
But this does not end the story. Let us say that after several months Crusoe is able reliably to meet his most basic needs. He locates a reliable source (albeit modest quantities) of fresh water; using a crude stick he is able to access fruits and berries; he also discovers edible plants, seeds, roots, nuts and the like; and his rude hovel is able to shelter him from life-threatening elements. Further, let us say that whether by entrepreneurial search-and-discovery or sheer good fortune (i.e., nature’s liberal endowment of the island with food and water, mild climate, etc.), Crusoe is able to secure a supply of food and water that modestly exceeds the amounts he requires in order to survive; and given no small amount of discipline and frugality, Crusoe resolves to save (i.e., forego the current consumption of) his modest surplus. Accordingly, this perishable surplus (“pool of funding”) creates time. It puts Crusoe in a temporary position to allocate some of the time hitherto required to secure his survival towards “investment” – i.e., the creation of capital goods that might enable him to consume more in the future and thereby improve his material standard of living. Given a habit of savings and a modest pool of funding, in other words, Crusoe can devote some time to trial-and-error experimentation. Its purpose is to create remunerative capital goods (investments); remunerative investments, in turn, enable the production of more, more advanced and more varied consumption goods; finally, and following Say’s Law, the ownership of productive investments enables one eventually to consume more, more advanced and more varied food, housing and leisure than would be possible without the investments.
Savings and Entrepreneurship Beget Capital
Let us say that many of Crusoe’s experiments succeed. He discovers, for example, an accessible deposit of copper on the island and is able to mould the copper into rudimentary tools such as an axe, saw and nails. He also discovers horses (or whatever beasts of burden) and is able to capture and domesticate one. He then uses the axe to fell trees, the horse to transport the logs, the saw to produce timber and the nails to erect a house (that’s right, Virginia: residential housing is a consumption good; it is not a capital good and hence is not an investment).
Crusoe’s accumulating capital has another important attribute: not only does it enable him to build a home; but many of his capital goods have uses that are sufficiently flexible to enable Crusoe to accumulate still other capital goods. To build a boat, for example, requires many of the same implements that were required to build the house. Hence Crusoe can use the same axe (thus saving the time and effort required to make another); and he can use the same horse to transport more timber (obviating the need to catch and train another horse), the same saw to produce lumber and the knowledge previously acquired to make more nails. Each of these seemingly “roundabout” steps actually saves Crusoe much time and effort. So too – because it enables Crusoe to catch more fish in less time – does these steps’ end result (the boat). Through this process of disciplined capital accumulation, Crusoe becomes progressively more productive, can save more and accumulate a bigger and more permanent pool of funding, can create more capital, can put this increased capital to productive purposes and over time can therefore consume more. The benefits of past capital accumulation thus cumulate: they saved Crusoe time, have paid a stream of benefits from the past into the present and future, and they now save Crusoe further time and enable him to devote time to the production of more, more varied and better consumption goods. It dawns on Crusoe that if this process proceeds over an extended period of time, then he may reasonably hope to reach goals of which he could only dream during his first days and months on the island.
More (and More Productive) Capital, Higher Living Standards and Lower Time Preferences
This process of disciplined savings and capital accumulation causes Crusoe’s initial burden of poverty (and paucity of time and hence capital which causes this poverty) to ease considerably. In this respect we must not forget that Crusoe is the fortunate subject of a benign government: the fruit-and-berry tax levied by the neighbouring tribe is not increased (indeed, relative to his capacity to produce consumption goods it decreases substantially), no additional taxes are levied and his land and capital stock are not threatened. Under these conditions the elapse of time and the habits of frugality and successful entrepreneurship enable Crusoe to “lengthen the period of production,” save time, accumulate capital and save more out of his enhanced capacity to consume.
Given his greatly augmented ability to produce consumption goods, Crusoe’s store of consumption goods – i.e., his “pool of funding” – is far bigger and less perishable than it was during his early days and months on the island. Over time, then, and given the ever more apparent results of Crusoe’s frugality and record of successful investment, his preference for present versus future consumption falls appreciably, i.e., his time-preference decreases to a relatively low level.
...continued in Part III
 
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