SECOND APPROXIMATION

whereas a low rate of interest will encourage investmentin incomes which yield distant returns. As the businessman puts it, when interest is high, he can less afford towait for a remote return because he will “lose so muchinterest.” An investor will, therefore, make very differentchoices among the various options open to him, accord-ing as interest is at one rate or another.

Consequently, the existence of various options to useone’s capital introduces a new variable into the problemof interest determination. For the individual, the rate ofinterest will determine the choice among his optional in-come streams, but, for society as a whole, the order ofcause and effect is reversed—the rate of interest will beinfluenced by the range of options open to choice. If welive in a land covered with young forests or otherwiseaffording plenty of opportunities for distant income butaffording few opportunities for immediate income (as wasthe case in the pioneer days in this country) the rate ofinterest will, other things being equal, be very muchhigher than in a land full of nearly worked out mines andoil fields or otherwise affording many opportunities forimmediate but few opportunities for remote income.

We are thus coming in sight of a principle, applying tointerest determination, new in our study, the principleof opportunity to invest, not simply by lending but bychanging the use of one's capital. This new principle,largely physical or technical, is just as important as thepsychical principle of human impatience. It is really old inthe sense that, implicitly, it has been recognized in almostall theories of interest, and explicitly in those of Rae,Landry, Walras, and Pareto. To trace this new influenceon interest is the special purpose of the second approxi-mation.

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