Indispensable Economics Long-Run Wisdom—Short-Run Stupidity

Dec 5, 2008

Since economics is a part of a science of human action, we can relate some basic human behaviors to their effects on economics. One of these is the penchant for what is called "instant gratification." People generally have what is called a high time horizon, which means that they prefer things now rather than later. Would you like $100 dollars now or next June? Obviously you would want it now. If I am going to put it off, you will want it with interest, because $100 dollars in June is worth less than $100 now, firstly, due to inflation, and secondly, the wait.

But a good person must learn to temper this natural human tendency for instant gratification, and the failure to do this leads to a lot of trouble. Let’s take a few examples.

1. Two 17-year-olds are dating, and they both realize that, as far as they can tell, they are meant for each other. The natural tendency of those who have found each other is marriage, and with it, conjugal privileges. But that means that these two lovebirds have to wait until circumstances permit the tying of the permanent knot, hardly the case at 17 in this modern society. But the drive for the conjugal privileges is there now. If they have no ability to temper this above named tendency, they will lose their virginity, and a possible pregnancy will result when neither is ready to care for this new life.

2. A person is raised in a comfortable family. The person is not spoiled, but he or she has always had whatever he or she needed. The parents were good providers. They went on nice vacations, the person went to private schools, got music lessons, etc. Then they graduate from college and get an entry-level job. They are used to living the comfortable life, not only for their whole childhood, but even in the college they went to where everything was provided for them. They did not have to cook or work, etc. But now their salary cannot provide that type of life. They are paying a high rent, which eats up a large part of their pay. Then there are the utilities, transportation, clothing, and so forth. To the rescue comes the credit card, or even the bank loan for that house so that the person does not have to live in an apartment. The result—massive debt. Why? The failure to control the time horizon has resulted in a failure to wait until, like his parents, he could afford to live a better life.

3. Every year or quarter accountants issue the financial statements of companies. The statements have their purpose. They give a picture of the health of the company. But what happens if the company lost money this quarter? Well, to the trained eye, factors can be seen that can explain the losses. Coupled with other sources, and an examination of the economy, one can make a reasoned judgment about what the company should do, or stop doing, to get out of the hole. But this loss is not a cause for panic, all things being equal. The function of the management is to enhance the wealth of the stockholders. This task is a long-run job, and at times, just like my alma mater’s basketball team, might require a few years of "rebuilding." But since most people have a high time horizon, they want instant gratification. They want the stock price to go up now; they want to be rich today; they are unwilling to wait for the company to grow. So they dump their stock. When the economy recently began to decline, one guy on a financial channel advised folks to dump all of their stocks and go into cash. This was totally foolish advice, and if you had a high time horizon, you are just the person who listened to this advice. The company should produce a positive return now, or good-bye.

The effect of this growing attitude of the public on CEOs is dangerous, because now they will fear to grow the company if this means taking a loss for a period, because they will be punished by the stockholders for their long-term plans. They will then do things to look good in the short term—things which might be to the detriment of the company in the long run, such as entering into a deal for a new product without much forethought because the publicity will make the company hit the news just before the financial statements come out. Those who have studied for an MBA know better, but the big CEO salary creates an interest that might trump knowledge, and even morality.

But the source of this problem is the society in general. We must not be hyper-critical; to take the beam out of our own eye before taking the speck out of our brother’s eye. Our materialist society more and more has encouraged the high time horizon attitude. No one wants to put off anything anymore; no one can see the long-term benefits in things. No payoff now and I’m not interested. This has even affected the Church, where so many people think that serving God doesn’t pay off now (of course it does, but you have to experience it before you realize it, or you have to trust the saints) or you refuse to abide by the teachings. Prayer is useless to so many people if it is not a "gimme" prayer, and God’s answer is "no." This may even be a cause of college students’ binge drinking. It is possible that they see no intrinsic value in the long-term study process they are engaged in, so they hide in alcohol and rampant sexuality.

We need to teach each other and our youth that a low time horizon is a good thing. Waiting pays off bigger than instant gratification. Self-control is a virtue, and the widespread acquiring of this virtue will be reflected in a better society, and a more healthy economy.

There are many more implications to this, but space will not permit me to follow them up now. One line of thought is the Federal Reserve’s constant expansion of the money supply to give the illusion of prosperity. Perhaps next time.

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