THE THEORY OF INTEREST

This principle is complicated, but not impaired, by thefact that the cost of production of further dwellings,machines, tools, and other capital plays a part. Theprinciple which rests on future incomes, including, ofcourse, items of negative future income (costs) appliesto any existing capital at any stage of its existence. Thevalue of anything (as indicated in Chapter I, and morefully in The Nature of Capital and Income) is typi-fied by the case of a bond whose value, as every brokerknows, is calculated solely from the future services, orsums, expected and the rate of interest and the risk. Thecost of producing other competing houses or other instru-ments so valued, in so far as that cost lies in the future,has an important influence. Past costs may also affect thevalue of the house by influencing through competition thevalue of the future services or disservices of that house,or the rate of interest, or the risk. Thus, cost plays animportant role but not the simple one usually assumed.

Although business men are constantly employing thisdiscounting process in the valuation of every specific itemof property bought or sold, they often cherish the illusionthat somehow, somewhere, there is capital which doesnot get its value by discounting future services but hasalready made value which produces interest. They persistin thinking of interest as moving forward in time insteadof as discount moving backward.

The necessity of presupposing a rate of interest is re-inforced by observing the effect of a change of the rate ofproductivity. If an orchard could in some sudden andwholly unexpected way be made to yield double its orig-inal crop per acre, only its yield in the sense of physicalproductivity would be doubled; its yield in the sense ofthe rate of interest would not necessarily be affected at

[ 56 ]