THE THEORY OF INTEREST

must make in other products (fish) of his labor, if he builds theboat.

“Jones offers to sell him an exactly similar boat already built for$150. Smith refuses to pay over $40. Since other fishermen do thesame, the demand for boats is such that Jones can’t get $150. Thefact is that the income Smith could get from his fish, which heexpects to catch this week ($40) affects the price Jones can charge(value) for a boat (capital good) already built. This $40 worth offish is not income from the boat we are about to value. It certainlyis not the value of that income or its discounted value. And it isnot a future cost of the to-be-valued boat.

“The cost you are thinking of as ‘included’ in your formulation(discount principle of capital value) is, for example, the expectedcost (say 5 years hence) of replacing a worn-out or broken seat,broken oarlocks, etc., and the annual cost of painting. But the $40which measures the cost to Smith of duplicating Jones’ boat willmake Smith unwilling to pay $150 even though your formulation,taken by itself, would let him—for he must have some boat. AndSmith would have a curious mind if the $40 cost affected him onlythrough first making him think of more plentiful and therefore lessvaluable future services. It has a direct effect on his price offer, notan effect consequent solely on a revaluation of expected futureservices.

“You can’t make the psychology of the fisherman, Smith, fit intoyour formula. It’s better to make a formula that fits what Smith’smind really does.”

I accept all of Professor Brown’s reasoning and con-clusions except his application to me. His contention thatthe cost of duplicating existing capital will influence thevalue of that capital is perfectly correct, but so is thediscount formula.

The two are not inconsistent. If they were, by the samelogic, the generally accepted formula by which the valueof a bond is calculated in every broker’s office is contra-dicted every day whenever a cheaper bond is available.The first axiom in economics is, naturally, to get anything

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