Discounting – Foundational Thoughts

One of the things that has been on my mind is the justification of discounting on a realist basis. There is a great deal of unreality in modern economics and discounting is a corner stone of modern economics and finance. Let us consider not so not so much along the usual lines of money, but let us consider some real concrete capital. Let us consider a chainsaw the product of which is lumber.

A thing is valuable in so far as it is useful to man (ST II.II.Q77.A2.ad3), that is it meets some need or desire of man. This is grounded in the objective powers and potencies of the thing itself. A thing is either really able to meet these needs or it is not. Thus while there is a subjective valuation, this may error. Thus we can distinguish between the subjective and the objective value of a thing. The objective value is the ability of the thing to actually meet the needs of some person, while the subjective value is a person’s estimation of the objective value.

Now these powers and potencies requires us to consider this objective value in terms of future production. That is in order to estimate the value, we must consider future achievement of our needs and desires. When we value a chainsaw, we consider its power to create lumber and how much it could do so in the future and over some period.Consider then a chainsaw that can produce one lumber a day for a week, after which is becomes non-functional. We know exactly the kind of production it will create and we can value you it according to that. We might want to say that it is worth five lumber. We might enter in now to a discussion of time preference and that the lumber produced now is worth more than the lumber produced at the end of the week, but let’s avoid this for the time being.

The value of the chainsaw is not only in its ability to produce lumber, but in how fast it can produce lumber. A chainsaw that can produce five lumber per day is more valuable than one that can produce only one per day. If we have two chainsaws, one that produces one per day for five days and one that produce five in one day then becomes non-functional, how are we to decide the value of each. The production is the same, but it seems that the second would be more valuable in itself in virtue of its greater power. For surely, we know that it is a greater power to build a skyscraper in a day then in a year, so too to actualize some potency in a shorter time requires a greater power.

Now we may also really desire the product sooner than later and this desire can be met by something of greater power to actualize the end in a shorter period. Time preference seems to be grounded in the real desire to have something sooner which can be found in something of greater power to actualize. Along this line of thinking, time preference is like any other desire. We desire things sooner than later and this can be achieved by something of greater power to produce.

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