Most of us hadn’t thought about Davy Jones of the Monkees in many years. Suddenly, he died at the age of 66 and we were all instantly living in his world. Tributes were everywhere. His YouTube videos were slammed with hits. Praise for his life and works appeared on blogs everywhere.
People were honoring his memory by looking back at the timeline of his life, seeing the change in his face and appearance from the youngest age when he played the Artful Dodger to his last year, in which he was still singing (and actually, he looked great!).
The same now happens when every major culture figure passes on. We see a lifetime of pictures. We see the change, the aging process, the gradual graying, the weight gain, the other intriguing responses of our physical appearance to the passage of time.
The digital age has brought us many new things, but the least expected is a new awareness of time and the inevitability of decline and death. Digits have a way of collapsing it all so we can view it in a much sped-up process. We can see performances from decades ago as easily as we can see one from yesterday.
It’s never been this easy to observe the phrase “ashes to ashes” play itself out before our eyes. The analog age generally gave us only what was going on at the time, or rather, we could go to some lengths to get the full picture of past and present The digital age, with its penchant for giving us every bit of information we could possibly want, puts the passage of time at our fingertips and burns the reality of mortality into our brains.
The passage of time is newly fashionable. Facebook, used by nearly one-sixth of humanity, has recently changed its default layout from displaying random stuff to organizing it all in a timeline. Software widgets show what we will look like in 50 years. Our email archives keep a running chronicle of our lives, day by day, thought by thought, friend by friend.
It’s all symbolic of a new embrace of the most-relentless force in the universe, more powerful than all states and all private markets put together: the inevitability of change embedded in the passage of time. It is unstoppable, undeniable and omnipresent and a constant reminder that no matter how much power humankind accumulates, it will never be more powerful than time itself. There is some comfort in that.
What economic institution most embodies the inescapability of time’s relentless march? Ludwig von Mises, in his wonderful treatise Human Action, tells us that it is the interest rate. Interest rates reflect our degree of valuation of present goods over future goods. Everyone prefers the same good now, rather than later, all else being equal. However, in the same sense that we choose which goods and services we want to buy or decline to buy, we also choose our time horizon: acting for now or acting for later to achieve our ends.
If we want a car today and don’t want to defer our consumption for a year or two down the line, we have to pay someone else who has deferred that consumption to loan us saved money. If we are starting a business and think its near-term profits are going to be higher than the expected interest charges, we make the deal. If we save money and make it available to others to use, we expect a reward in the form of interest.
The interest rate is supposed to signal to investors how to handle time commitments. A low rate of interest is supposed to signal vast savings available in a society that has deferred consumption and planned for the future. A high rate of interest suggests a relative scarcity of savings and a scramble to use what is available. In this way, interest rates carefully sync present and future.
The passage of time also instantiates itself in the institution of capital — goods produced not for immediate consumption, but rather for making other goods. If there were not time structure of production, capital would have no unique value, no real contribution to overall prosperity. But it does because its very existence points to how property owners are able to plan for the future.
In societies in which there is no planning for the future, either because the culture is present oriented or because the law is too unstable to permit planning, no capital formation takes place. No time structure of production exists. And there are no savings to back the wide availability of credit.
In developed economies, the capital structure reflects a huge variety of time commitments. Every production process has an endpoint of consumption, but those endpoints are all over the map. I can make soup to eat now. Or I can save to buy some grapevines and build a vineyard to make wine that might only be drinkable and marketable 10 or 15 years from now.
The Austrian economists tell us that other economic theories are nearly brain-dead when it comes to thinking about the passage of time and its role in the institution of capital. This is one of many reasons that they miss an extremely important point about Federal Reserve policy. That is, by manipulating the interest rates, the Fed is playing with the signaling system that tells investors and capitalists how much they can plan ahead — how much “real stuff” is available to cause their plans to work out.
In this way, a manipulated rate like we have today is nothing but a lie. It tells capitalists to borrow and plan when the resources aren’t really available to justify that. It tells us that there are huge reserves available to support future consumption, whereas they aren’t really there. As a result, the finely calibrated singling system of capital markets isn’t really functioning as it should.
In a strange way, then, the Fed is in denial about something that we’ve all embraced in the digital age.
Even Facebook is on board with acknowledging that all its accounts will go the way of all flesh. The Fed seems to think that its powers allow itself to live as if time doesn’t matter.
Bernanke might be powerful, but he can’t achieve what no one ever has: the abolition of time as a undeniable factor of economic life. It is the ultimate act of arrogance to act as if the relentless forward march of time is pure illusion.