In incorporating a story into my book, I’ve encountered a bit of a dilemma. While many books in the business and investing category incorporate stories, the stories always seem to be of one of two types.

The first of these is the telling of a story in more or less chronological order. The focus is on telling the story, not on explaining why the events occurred. Michael Lewis uses this approach in The Big Short: Inside the Doomsday Machine and I suspect the same approach is used in his Moneyball: The Art of Winning an Unfair Game and in Walter Isaacson’s book on Steve Jobs. This approach is effective in telling what happened historically but is less effective in explaining why it happened.

The second approach is to tell a series of disconnected stories, each one illustrating one of the concepts addressed in the book. This technique is known a concretizing. Abstract concepts are easier to understand if the writer presents a concrete example of the concept in action. This technique is used by Malcom Gladwell and Daniel Kahneman in their popular books.

My dilemma arises from the fact that production of goods and the creation of value run in opposite directions. The creation of value begins with the needs and wants of consumers and ends with decisions made regarding natural resources and the associated labor. The production process and chronological order run in the opposite direction. Consequently, in order to incorporate a single unified story into an explanation of value, I’ll have to tell the story in reverse chronological order.

Several works of fiction have been written in reverse chronological order, typically to demonstrate how the strange situation that occurs at the beginning of the story developed, but I am unaware of any non-fiction that uses this approach. It introduces a complexity that I would like to avoid. It seems that this book is already leading me down paths that I didn’t anticipate.

An article in the November 25 issue of the Wall Street journal provides an opportunity for us to observe economic theory in action.

Time preference has been extensively studied in economics as a factor in production. The general idea is that as individuals in particular, and economic systems in general, produce enough to satisfy their immediate needs they will begin saving and investing so that they can produce more in the future. In a primitive economy (typically using alternative Robinson Caruso stories in economic literature) this process might manifest itself by saving fish to provide enough food for workers while they are building a net to catch more fish. In an advanced economy, it is more likely to manifest itself in the form of wage workers investing in their retirement funds and similar investments.

There is, however, another important role that time preference plays in an economy and this is related to consumption.

The value of a good or service is never intrinsic to the product. Rather, it is determined by the quality and number of renditions of service that the product can provide. For example, a hotel room night might be considered one rendition of service. A monthly rental would then constitute about 30 renditions of the same service and an annual rental would be 365 renditions. If you were to purchase the room as a permanent living space, it might serve you for 30 years, resulting in 10,950 renditions of service.

Time preference theory demonstrates that everyone will always prefer a service delivered immediately to an otherwise equivalent service to be delivered at some time in the future. This evening, we can rest assured that our lodger will be willing to pay more for a room for tonight than for a room on November 25, 2041. The annual difference between the rate that he is willing to pay now and that that he is willing to pay in the future is his natural rate of interest.

The natural rate of interest has been obscured beyond all recognition in production goods and labor and in consumption goods that are typically financed by the Federal Reserve’s manipulations of interest rates. With other consumer durables, however we can still learn a lot from spending patterns.

The Wall Street Journal article indicates that spending on services has increased by only 2.8% since 2009, whereas spending on goods (by which they mean durable goods) has increased by 9.1%. This reflects a decrease in time preference on the part of consumers. What’s interesting is that this decreasing time preference reflects fear of the future instead of increasing prosperity in the present. Any entrepreneur who has an idea for a product or service that can increase the future security or stability of consumers should take note.

I’ve created this blog to discuss everything related to asset valuation. I am working on a book about the application of Austrian Economics to asset valuation and am hoping to gain some insight on the topic from others who are interested in the subject.