Time-value is taken account of in the keeping up of repairs
3. The problem of time-value is involved in repairs and depreciation, and in the use of consumption goods. It is possible, as we have seen, to increase the sum available for present needs, and to encroach upon the future by postponing repairs on intermediate goods. The balancing of the cost of repairs against the future income is a never-ending task in practical business. One making repairs must purchase the needed materials and labor at a capitalization determined by their expected earning-power in other industries. If the repairs in question will not ensure an annual saving as great as this expected rent, they will not be made. When an industry is declining, it may, for the sake of putting the capital into a better business, be good policy to let the machinery fall into bad repair. The problem of time-value is involved in the application of one's energy to repairing one's own possessions. It is a thought of wide bearings that numberless minor decisions in every petty business involve, if they are correctly made, a measuring of the rate of capitalization.
And in the choice of enjoyments
As will be more fully shown in discussing the relation of the prevailing rate of interest to saving, the recognition of time-value is implied in the use men make of consumption goods, in their postponement of enjoyment, in their storing of goods for future use. The varying gratifications yielded by consumption goods, and their values in different conditions cannot be explained without taking account of differences in time. Wherever there can be a choice in the time at which, and consequently in the conditions under which, a thing can be used, there is a choice presented between the different values. Time-value is present even in a period during which no goods continue to exist, as when a good is consumed at a moment of greater need, to be replaced at a time when less valuable. If an apple is borrowed on the promise to return an apple and a peach at the end of a year, the peach represents the time-difference in value but in the meantime there has been no apple in existence. It is only in a figurative sense that it may be said that interest is paid on that "capital." Interest is paid because of a difference in want-gratifying power, but during the interval there is no material capital.
Prodigality and vice involve a high discount of future happiness
4. The problem of time-value is involved in much foolish pleasure, in prodigality, and in vice. Economics touches frequently on the borders of ethics. If there were to be formulated an economics of personal conduct, it surely would give a large place to the comparison between present and future pleasures. Forethought, or prudence, is the virtue of recognizing not only future dangers to be avoided, but the greater future joys to be gained in exchange for present pleasures. The reckless and the prodigal underestimate the future and barter all to gratify the moment's impulse. The drinker exchanges the hopes of worthy life for the exhilaration of the spree. Indulgence in social pleasures, if secured at the price of lost sleep, weakened health, and debauched character, are loans from the future made by youthful prodigals at usurious interest. If no one ever paid more than a moderate rate of interest for the gratification of his present whims and impulses, most hospitals, drug-stores, and medical colleges would close, and half, if not all, the prisons would be empty.
Indeed, time difference in value is a universal phenomenon of life and conduct. Contract interest is but one phenomenal form of time-value, and this in turn is but one phase of value. This section may serve to suggest how much more varied and pervasive the fact of time-value is than has usually been recognized in popular or economic discussion of the subject of interest.
§ II. THE ADJUSTMENT OF THE RATE OF TIME-DISCOUNT
The exchange value of present and future goods
1. The fixing of the discount on future goods is, in its essentials, like the fixing of the market price of consumption goods. This problem appears to be one of the most difficult in economic theory; but reduced to its simplest terms, it is an aspect of exchange value, and its ultimate explanation must be found in a comparison of psychic incomes. There must be noted the conditions of demand and supply, the interplay and final equilibrium of the two forces. The declining and marginal utility to the two parties to exchange must be carefully analyzed. One who can do these things is prepared to find the answer to the problem of time-value. Whenever a group of buyers and sellers meet, a ratio of exchange commonly will be arrived at. The ratio of exchange between buyers and sellers of present and future rents likewise is fixed at the estimates of a "marginal pair," at which point the amount offered and taken comes to equilibrium, for at that point no motive exists for any one to change sides.