THE THEORY OF INTEREST

or time preference theorists. Each combatant seems tothink that he and he alone has hit upon the correct andcomplete explanation and that, therefore, any other ex-planation is necessarily false. As a matter of fact, bothproductivists and time valuists are substantially right intheir affirmations and wrong in their denials. Thus,theories which have been presented as antagonistic andmutually annihilatory are in reality harmonious andcomplementary.

§5. Productivity as a Determinant of Interest Rates

When the true nature of the income concept is grasped,it will be found that it includes within itself many specialcases which have been advanced by various writers inexplanation of the rate of interest. The relation of bothimpatience and opportunity to the rate of interest, in myopinion, can be comprehended accurately only by analyz-ing rigorously these concepts and determining the effectof each upon the income stream. By this procedure, wearrive at a fundamental explanation of the nature of im-patience and of return on income invested and see how,by changes in the income stream, these rates are broughtinto conformity with the rate of interest.

I have always felt that John Rae came closer than anyof the earlier writers to grasping all the elements of theinterest problem. According to Rae, all instruments maybe arranged in an order depending on the rate of returnover cost. This amounts to saying that the formation ofany instrument both adds to and subtracts from the pre-existing income stream of the producer, its cost being thesubtracted item and the return, the added one. Thestatement of Rae that for a certain cost of productionan instrument will yield a certain return, is merely a form

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