CHAPTER V

FIRST APPROXIMATION TO THE THEORY OFINTEREST

Assuming Each Person’s Income Stream Foreknown andUnchangeable Except by Loans

§1. Hypotheses of First Approximation

In the last chapter we reached three conclusions:

(1) that the rate of time preference, or impatience forpresent over future goods, is, in the last analysis, a pre-ference for present over future enjoyment income, or, letus say, real income;

(2) that the degree of impatience depends, for anygiven individual, upon the character of his real income-stream—in particular, on its size, time shape, and prob-ability;

(3) that the nature of this dependence differs withdifferent individuals.

The question at once arises: will not the actual degreesof impatience of different individuals necessarily be verydifferent, and if so, what relation do these different rateshave to the market rate of interest? Is the market rateof interest a sort of average of these individual degreesof impatience, or does it equalize them?

It is doubtless true that the different rates of impatienceof different individuals who are not connected through acommon loan market do vary widely. In a nation of

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