THE THEORY OF INTEREST

investment opportunity rate or rate of return overcost, r.

Yet these equations are not enough to make the prob-lem determinate without those of the other four sets ofdetermining conditions (clearing the market, repayingdebts and empirical dependence of impatience and in-vestment opportunity).

Much less is it possible to determine the rate of in-terest from the subjective side alone, through time pref-erence, or from the objective side alone, through invest-ment opportunity, or “productivity”, or “technique ofproduction”.

The full explanation requires both (as well as themarket principles) in order that there may be as manyindependent equations as unknown variables in theproblem. Moreover there is not merely one rate of in-terest; there are many, one for each interval of time. Andeven so the explanation is full only under the theoreticalconditions presupposed. If we pass beyond the presup-positions in order to approximate closer to the actualworld, we find that, to be determinate, the problem re-quires more and more equations of a more and moreempirical nature. This is especially true as (1) we in-troduce risk with its innumerable and omnipresentramifications, involving in particular a multiplicity ofrates of interest even for the same period of time; andas (2) we extend our view to admit variations in allother prices besides the rates of interest, involvingthereby the whole economic equilibrium, not only ofthe loan market but of all markets, each interacting onevery other; and as (3) we extend our view from onetheoretical market to the actual markets of the wholeworld, involving thereby all the relations of international

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