THE THEORY OF INTEREST

life not merely a single use, as was assumed for sim-plicity, but a whole group of optional uses. Thus, thefarmer may carry farming to any degree of intensity, andthe same may be said of mining or lumbering. For eachparticular degree of intensity he will have a differentincome stream. He may, for instance, find it possible atthe beginning of the scale of intensity to invest an extra$100 worth of his or other labor in the present in orderthat one year later he may have an income of $150 morethan he would otherwise have. If the rate of interest is4 per cent per annum, he would evidently prefer thiscourse, for while his present income is diminished by$100 he would realize an increase of $150 in his incomeone year later, or $50 over cost, making a rate of re-turn over cost of 50 per cent per annum, whereas the in-terest is only 4 per cent. If he invests another $100 inpresent cultivation, this will add to his income in a year’stime something less than the $150, say $130, making arate of return of 30 per cent. And so each successivechoice compared with its predecessor follows the law ofdecreasing returns. A third $100; will add, let us say, $120or $20 more than the cost. A fourth $100 may secure areturn of an additional $10 a year over and above thecost; a fifth $100 may secure a return of an additional $8;a sixth $100 may bring $6; a seventh $100, $4.

Thus far, in the scale of intensity, each option yields4 per cent or more, while the rate of interest is 4 percent a year. The lure of a rate of return equal to or inexcess of the interest rate will induce the farmer to incurthe additional cost. But the next option, let us say, is toinvest an eighth $100 for an additional $3 a year. Evi-dently, it will not be to the farmer’s advantage to takethis last step; he will stop at the previous step, at which

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