SECOND APPROXIMATION

among those available to them and on the basis of theseincome streams—not the same as before under 5 percent. In a word, there will now be a different supply anddemand. The land owner, for instance, instead of lending,may now borrow (or sell securities) to even up his incomestream. Should it then happen that the demand andsupply of loans, on the basis of 4 per cent, are still notequal, but that, this time, the demand exceeds the supply,it would be a proof that not 4 per cent is the true solu-tion, but some higher rate. By again changing our trialrate—part way back toward 5 per cent, we may evidentlyreach some intermediate point, let us say 4Vk per cent,at which rate not only will each individual choose thebest use of his capital—that having the highest presentworth—but also, at the same time, the demand andsupply of loans engendered by all such choices will ex-actly clear the market, i.e., bids and offers at the given ratewill be equal. Likewise, the same clearing will be workedout for next year and for all years. 6

The introduction, therefore, of flexibility into ourincome stream still leaves the rate of interest entirely de-terminate, even though the income streams are now, inthe second approximation, not fixed or rigid but subjectto choice, and even though that choice will depend onthe rate of interest itself.

§6. Summary

For the determination of the rate of interest we mustnow, therefore, in the second approximation, add two newprinciples to the four principles already given in the firstapproximation described in the previous chapter.

*The details of such a multiform equilibrium are given in mathe-matical terms in Chapter XIII.

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