Thursday, March 19, 2009

On the cornerstones of civilization

A primitive man whose only objective in life is to collect enough berries to survive would most likely be considered uncivilized today. Developed societies prefer to describe themselves as "civilized". But where is that dividing line between a caveman collecting berries and a salesman selling them?

In short, it is time preference. Our berry collector has a very high time preference - everything he produces (by collecting berries) he immediately wants to consume (by eating them). By not eating all berries and instead trading some for, say, clothes, other foods or weapons, he could increase his health and security and further down the road he might even have the prospect of living in a hut instead of a cave. A man living in a hut is certainly more civilized than one who dwells in a cave. Of course, this only works if at least two people share a time preference below immediate consumption of all goods produced, that is, if at least two people have saved goods to trade them afterwards. Civilization is thus largely dependent on human cooperation; it is individuals interacting in their rational self-interest. It is a community phenomenon also known as "the free market".

Obviously, those who consume all they produce immediately cannot take part in this exchange community. As time passes, an increasing number of producers will recognize the benefits of lowering time preference to save and trade and the market web will expand, thereby enriching every participant. Those with exceptionally high time preferences will soon be a tiny minority, but even these people will benefit from others' capital accumulation, be it through a wealthy man's ability to donate to charity or through surplus production that is given out for free.

Given time, this market process will eventually lead to modern civilization. While ideas, resources and business opportunity all play a role in it, the most important and fundamental prerequisite is low time preference; the willingness of a sufficient number of people to sacrifice present consumption for the sake of future profits that enables others to develop and materialize their concepts and productive endeavors. Henry Ford's ideas on automobile production would've been as valid 3000 years ago as they are today; still, with high time preference being the prevalent attitude, no factory could be built or sustainably run due to a lack of credit (that is, deferred consumption) and also purchasing power.

Productive processes can be reversed and destroyed if time preferences shift upwards again. A famous example would be the Roman Empire where, in its end phase, drinking orgies and corruption on all levels of society were quite common since investing and producing had long become unprofitable due to adverse political circumstances. Sounds strangely familiar, doesn't it? The strong economic foundation of the Roman Empire can still be seen today in its resilient ruins that have endured 2000 years of destructive environmental influences. Still, the productive processes that kept the Empire alive eventually came to a halt. That's when the somewhat intellectually developed world ended and a long dark age set in.

Can this happen again today? Yes, most certainly. Ironically, the Romans suffered from similar problems that we experience today - depreciated currency, nepotism, a burdensome military budget etc - that ultimately raise time preference to unhealthy levels. The rationale has remained the same over the centuries: if production doesn't get me anywhere, I might as well get drunk.

That's how civilizations perish. And that's why we shouldn't fall for the same temptations that have wrecked so many of them before us - because, in my humble opinion, there's something to be said for Western civilization after all.

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