CHAPTER IV

TIME PREFERENCE (HUMAN IMPATIENCE)

§1. Preference for Present over Future Income

In the preceding chapter we mentioned some pitfallsin the explanation of interest. We are now ready to con-sider more searchingly the fundamental causes whichdetermine the rate of interest. We shall find a place foreach of the partial truths contained in the inadequatetheories.

Many people think of interest as dependent directly oncapital. As already suggested, it will help the reader toproceed in the following analysis if he will try to forgetcapital and instead think exclusively of income. Capitalwealth is merely the means to the end called income,while capital value (which is the sense in which the termcapital is ordinarily used by interest theorists) is merelythe capitalization of expected income.

The theory of interest bears a close resemblance to thetheory of prices, of which, in fact, it is a special aspect.The rate of interest expresses a price in the exchange be-tween present and future goods. Just as, in the ordinarytheory of prices, the ratio of exchange of any two articlesis based, in part, on a psychological or subjective element—their comparative marginal desirability—so, in thetheory of interest, the rate of interest, or the premium onthe exchange between present and future goods, is based,in part, on a subjective element, a derivative of marginal

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