Is the time value of money natural or artificial?

Question

Certainly there is a time value of money: If the nominal interest rate of treasury bonds is 5%, then if one has a choice between receiving a hundred dollar bill now and receiving it a year from now, the better option would be to receive it now.

But what if we lived in a society where charging interest is illegal? Would there still be a time value of money? In other words, if we lived in such a society, then if one had a choice between receiving a hundred dollar bill now and receiving it a year from now, would the better option still be to receive it now?

So the essence of my question is "Is the time value of money natural or artificial?" If it is natural, then a law against charging interest would have no effect on the reality that there is a time value of money. And if it is artificial, then the law which states whether charging interest is illegal or not is what determines whether there is a time value of money.

Answer 1

Let's first write down two realistic reasons as to why the "time value of wealth" (since here "money" is considered in its function as store of value), is "natural and not artificial", to use the OP's words.

1) The phenomenon of inflation. If we expect to see price inflation, then a given amount of nominal "wealth tomorrow" will buy for us less goods and services than the same amount of "wealth today". So "wealth today" is preferable than "wealth tomorrow", since what we care about, is goods and services which are the things generating utility for us.

But note that inflation is not some always-present phenomenon in all economic systems, economies, countries, eras: for example the 19th century has been largely a deflationary period, with prices tending to fall during the century, in the main capitalistic economies.

2) The uncertainty of the future. This is always present, even if it has to do with the possibility of unexpected death. So "wealth tomorrow" may not be enjoyed because I will have die suddenly and unexpectedly till then. So "wealth today" is preferable, and so more valuable.

In a lending and borrowing situation, we can also map to the "uncertainty of the future" the risk of not-repayment etc. and so view the time value of wealth as being also a compensation for undertaking these risks.

Also, in a long-term approach, eventually we all die, so the very finiteness of our horizon creates a situation where "wealth today" is more preferable and so more valuable than "wealth tomorrow", if this "tomorrow" is far in the future.

The thing is, economists argue that "wealth today" is always preferable to "wealth tomorrow"
a) even if there is no inflation, or alternatively, if we examine wealth in "real terms" (i.e. in terms of goods and services),
b) even if there is no uncertainty at all,
c) even if we have an "infinite" time horizon, i.e. even in the hypothetical situation that we are certain that we will never die, not even from "natural causes."

This is why in intertemporal models of consumer choice and utility optimization that are deterministic /incorporate no uncertainty, and assume an infinite time horizon, still, a "discount factor" exists that discounts future certain utility in real terms, which indirectly reflects that "wealth today" is preferable to "wealth tomorrow".

What is the argument behind that? Well, sometimes there is no philosophical argument only a methodological argument: "a deterministic economic model with infinite time horizon and in real terms is an approximation to reality, which is uncertain and has finite horizon for economic agents, and so we include the discount factor to keep it a little closer to reality". That's fine, that's what economic models do (models in general actually).

But could we come up with an argument that even an immortal living in a perfectly deterministic world, would prefer "wealth today" to "wealth tomorrow"?

We can. It's called "opportunity cost". It can stand on its own without invoking uncertainty or the possibility of death. It depends on the following very simple axiom, which is supported by timeless experience related to human behavior: "more is better". Under this axiom, having wealth today will permit me, if I choose so to have more wealth tomorrow and for all tomorrows. So it potentially expands my "choice set" for all eternity. If more is better, then I want a larger choice set, so I would prefer to have all my future wealth today rather than tomorrow.

...one could of course argue that the "more is better" postulate is not an independent trait of humans, but is one more incarnation of the "survival instinct" and so it is in reality a response to uncertainty and risk of death. Certainly, but everything can be eventually attributed to the "survival instinct", and what explains everything explains nothing.

Answer 2

The prevailing explanation for the existence of rate of interest (aka time-value of money) is the one thoroughly explained above by Alecos. My objection to this is that it analyses the phenomenon from a psychological perceptive, and not from a purely economical one. I will give Marx's arguments on the matter, as an alternative for you to consider.

According to Marx, there is no such thing as "Natural Interest". There is nothing natural in it. The rate of interest is just an agreement made between money capitalists on one side (banks) and the industrial and commercial capitalists on the other (factory owners, merchants, etc.) and it varies depending on the competition between them.

The theory behind this explanation, lies on Marx's central idea that profit is not made during product exchange, but during the production, by extracting the surplus value from the workers. So, how does a banker makes a profit? What is really happens, in simple words, is firstly he lends capital to the factory owner/merchant, then profit is produced via the production process and in the end profit is shared between the two. Thus, competition between the two different types of capitalists (relation between real capital/money in an society at a given time period), determines the rate of interest.

Given these arguments, the answer to your question is that in a capitalistic society, there is indeed time-value of money, as there has to be rate of interest (credit system will always be essential for such a society to exist). However, in a non-capitalistic society, ex. in a socialist one, there can be banks to serve public needs, public sector projects & state-owned enterprises, but there won't be a rate of interest for that, thus the time-value of money disappears in such a society.

Capital Vol. III Part V Division of Profit into Interest and Profit of Enterprise. Interest-Bearing Capital Chapter 22. Division of Profit. Rate of Interest. Natural Rate of Interest.

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EDIT:
The time value of money in a capitalist society stems from the fact that a capital now can be invested to yield a larger capital later. Thus, it has a dynamic, a potential and there lies its time value. And that's its connection to the interest rate, as explained above. In a socialist society, that's not the case, as there is no private investment for profit.

The "more is better" argument is debatable, as it lies on psychological reasoning. To what extend money for consumption now is better than money for consumption later in any kind of society can vary according to individual's preferences, views, current needs, economic security of a given society, etc.