THE THEORY OF INTEREST

THE TWO INVESTMENT OPPORTUNITYPRINCIPLES

A. Empirical Principle

There exists, for each individual, a given specific set orlist of optional income streams to choose from, differingin size and time shape (but without any uncertainty as towhat will happen if any particular one is chosen).

B. Principle of Maximum Present Worth

Out of this list of options each individual will choosethat particular income stream possessing the greatestpresent worth when calculated by means of the rate ofinterest as finally determined by these six conditions.

THE TWO IMPATIENCE PRINCIPLESA. Empirical Principle

The degree of impatience, or rate of time preference,of any given individual depends upon his income streamas chosen by him and as modified by exchange.

B. Principle of Maximum Desirability

Each person, after or while first choosing the optionof greatest present worth, will then modify it by exchangeso as to convert it into that particular form most wantedby him.

This implies, as we have seen, that each person’s degreeof impatience, or rate of time preference, will at themargin, be brought to equality with the market rate ofinterest and, therefore, with the marginal preference ratesof all the other persons.

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