FIRST APPROXIMATION

Similar reasoning applies to the individual on theother side of the market, whose rate of preference isinitially less than the market rate of interest. He alsowill bring his present net total desirability to a maximumby lending up to the point where his rate of preferencecorresponds to the rate of interest. At the beginning, $100this year has to him the same present desirability as,say, $102 due one year hence, whereas in the market hemay secure not $102 but $105. It is then clear that bylending $100 he gains the present desirability of $3 dueone year hence. By lending each successive $100 he willadd something to the total present desirability of hisincome, until his rate of preference for present overfuture income is raised to a level equal to that of therate of interest, five per cent. Beyond that point hewould lose by further lending.

§8. Market Equilibrium

We are now in a position to give a preliminary answerto the question, What determines the rate of interest?Thus far we have regarded the individual only, and haveseen that he conforms his rate of income-impatience tothe rate of interest. For him the rate of interest is arelatively fixed fact, since his own impatience and result-ing action can affect it only infinitesimally. To him it ishis degree of impatience which is the variable. In short,for him individually, the rate of interest is cause, and hislending and borrowing is the effect. For society as a whole,however, the order of cause and effect is reversed. Thischange is like the corresponding inversion of cause andeffect in the theory of prices. Each individual regards the

point whether the height is measured above sea level or from the centerof the earth.

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