THE THEORY OF INTEREST

of Individual I, or of any other individual, shows whetherthat individual is potentially a borrower or a lender. Ifthe individual’s W line is steeper than the M line, hewill borrow; if it is less steep, he will lend.

Therefore, if this second individual lends $100, whilethe first individual borrows $100, both at 10 per cent, bothwill reap advantage. One will shift down a 10 per centMarket line from P 1 to M\, and the other will shift upthe 10 per cent Market line from P 2 to M' 2 .

If we had only these two persons trading this year’sincome for next year’s income between themselves, therate of interest agreed upon for a loan of $100 this yearwould not, of course, necessarily be 10 per cent, but wouldbe determined by the respective bargaining power of In-dividual 1 and Individual 2. The rate might fall anywherebetween the 2 per cent, the lowest rate at which Individ-ual 2 is willing to lend $100, and the 30 per cent, thehighest rate, at which Individual 1 is willing to borrow$100. But we are less interested in such a special trade, orhaggle than in the general market.

§12. Interest Fixed for an Individual

It is a fact long recognized by price theorists, 7 that thetheoretical determination of any price in a special tradeor haggle between two persons, each of whom is consciousof his influence on that one price, is more complicatedthan in a full-fledged competitive market in which eachindividual is so small a factor as to be unconscious of hisinfluence on the market price. We here assume such a

7 See Auspitz und Lieben. Vnlersuchungen iiber die Theorie desPreises. Leipzig, Dunker und Humblot, 1889, p. 405; Marshall , Alfred.Principles oj Economics. London, Macmillan and Co. , 1907, p. 332; alsomy Mathematical Investigations in the Theory of Value and Prices,

p. 25.

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