How can Crusoe or any other investor know if the value of
the larger future output is worth the short-term cost? Most of us have a preference for
goods now rather than later. For example, if you are a typical person, you would prefer a
sleek new sports car now rather than the same car ten years from now. On average, individuals
possess a positive rate of time preference. That is, other things being the
same, people subjectively value more highly goods obtained sooner than goods obtained later.
When only Crusoe is involved, the attractiveness of the
investment in the fishing net depends upon his time preference. If he places a high value
on a couple of fish per day during the next fifty-five days, as indeed he may if he is
on the verge of starvation, the cost of the investment may well exceed the value of the larger
future output. If Crusoe could find someone who would loan him fish while he built the net,
however, he could consume the borrowed fish now while building the net, and pay later
with the extra fish made possible by the net. If such a loan is available, the attractiveness
of the investment (building the net instead of hand-fishing now) will be influenced by the
price of borrowing fish. Is the cost of borrowing fish in order to maintain his consumption
while he constructs the net worth the extra cost? To answer this question, Crusoe must
consider the cost of paying for earlier availability-he must consider, in effect, the
interest rate.