THE THEORY OF INTEREST
desirability; namely, the marginal preference for presentover future goods. This preference has been called timepreference, or human impatience. The chief other part isan objective element, investment opportunity. It is theimpatience factor which we shall now discuss, leaving theinvestment opportunity factor for discussion in laterchapters.
Time preference, or impatience, plays a central rolein the theory of interest. It is essentially what Raecalls the “effective desire for accumulation,” and whatBohm-Bawerk calls the “perspective undervaluation ofthe future.” It is the (percentage) excess of the presentmarginal want for 1 one more unit of present goods overthe present marginal want for one more unit of futuregoods. Thus the rate of time preference, or degree of im-patience, for present over future goods of like kind isreadily derived from the marginal desirabilities of, orwants for, those present and future goods respectively . 2
1 Or ophelimity, utility, wantability, or the want for one more unit.See The Nature of Capital and Income, Chapter III; also my articles,Is ‘Utility’ the Most Suitable Term for the Concept It Is Used to De-note? American Economic Review, June, 1918, pp. 335-337; and AStatistical Method for Measuring “Marginal Utility" and Testing theJustice of a Progressive Income Tax. Economic Essays Contributed inHonor of John Bates Clark, pp. 157-193.
a To be more specific, we obtain the rate of time preference for apresent dollar over a dollar one year hence by the following process:
(a) take the present want for one more present dollar; and
(b) the present want for one more dollar due one year hence; andthen
(c) subtract (b) from (a); and finally
(d) measure the result (c) as a percentage of (b).
In terms of the usual illustrative figures, if a present dollar is worth105 wantabs (want units) and a next year’s dollar is now worth 100wantabs, then the difference, 5, is 5 per cent of the latter.
For a more strictly mathematical formulation, see Appendix toChapter XII, §1.
[ 62 ]