THE THEORY OF INTEREST

§5. The Double Adjustment Discussed

In such a double adjustment, P lt the point of tangencyon the Investment Opportunity line, has to be found firstand Qi, the point of tangency on a W 1 line last, for thereis only one Opportunity line and only one point on itat which the slope corresponds to the rate of interest;while there are an infinite number of W lines with a pointon each having that slope or direction. 2

It is worth noting that the point P x thus located on theOpportunity line will be quite different from the Point Ron that line shown in Chart 37 when the individual vmsassumed to he cut off from loans. 3 The two may differ ineither direction.

It is also to be noted that the W 1 lines always say thelast word, that is, fix the final income position at Q u thepoint of tangency of the M line to a W 1 line. All otherincome positions represent points reviewed in Individ-ual l’s mind but rejected in favor of Q lm The point Pon any individual’s Opportunity fine is merely a point intransit toward Q, which is the final point of equilibrium.

If we wish to be even more realistic, our individual need

3 The point Pi may also be described as that income position, or option,on the Opportunity line which has the greatest present value, as hasbeen shown in Chapter VII and as may also be shown geometrically ifdesired.

3 It would not then be true that he would choose the option of high-est present value. That point is not R but Pi. Thus it is not self-evident,as it might seem, that a man will always choose the income stream ofhighest present value in the market. He will only do so provided he has,in addition, perfect freedom to move from that situation by means ofa loan market. Otherwise he might not be willing to suffer the incon-venience, say, of a very small income this year even if his expected in-come next year is very large. The only maximum principle preserved inall cases is not that of maximum market value but that of maximumdesirability.

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