CH. 14 THE CLASSICAL THEORY OF INTEREST 179

would lead naturally to another proposition whichembodies an important truth; namely, that, if the rateof interest is given as well as the demand curve forcapital and the influence of the rate of interest on thereadiness to save out of given levels of income, the levelof income must be the factor which brings the amountsaved to equality with the amount invested. But, infact, the classical theory not merely neglects the in-fluence of changes in the level of income, but involvesformal error.

For the classical theory, as can be seen from theabove quotations, assumes that it can then proceed toconsider the effect on the rate of interest of (e.g .) a shiftin the demand curve for capital, without abating ormodifying its assumption as to the amount of the givenincome out of which the savings are to be made. Theindependent variables of the classical theory of therate of interest are the demand curve for capital andthe influence of the rate of interest on the amount savedout of a given income; and when (e.g .) the demandcurve for capital shifts, the new rate of interest, accord-ing to this theory, is given by the point of intersectionbetween the new demand curve for capital and the curverelating the rate of interest to the amounts which willbe saved out of the given income. The classical theoryof the rate of interest seems to suppose that, if thedemand curve for capital shifts or if the curve relatingthe rate of interest to the amounts saved out of a givenincome shifts or if both these curves shift, the new rateof interest will be given by the point of intersectionof the new positions of the two curves. But this is anonsense theory. For the assumption that income isconstant is inconsistent with the assumption that thesetwo curves can shift independently of one another.If either of them shift, then, in general, income willchange; with the result that the whole schematismbased on the assumption of a given income breaksdown. The position could only be saved by some