CHAPTER VI

SECOND APPROXIMATION TO THE THEORY OFINTEREST

Assuming Income Modifiable (1) by loans and (2) by

other means

§1. The New Hypothesis

Hitherto we have assumed:

(1) perfect foresight, and

(2) absence of any opportunity to alter incomesave by trading.

We now abandon the second of these hypotheses. Stillassuming that all available income streams can be defi-nitely foreseen, we now introduce the new hypothesis,much nearer actual life, that the income streams arenot rigid, but are flexible, that is, that the owner of anyitem of capital-wealth or capital property, including, ofcourse and especially, his own person, is not restrictedto a sole use to which he may put it, but has open to hischoice several possible or alternative uses, each of whichwill produce a separate optional income stream. He has,therefore, two kinds of choice: first, the choosing onefrom many optional income streams, and secondly, asunder the first approximation, the choosing of the mostdesirable time shape of his income stream by exchangingpresent income against future.

The two sorts of choice are exercised concurrently in

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