SUMMARY

trade; and as (4) we take account of any other factorswhich may not be included in the foregoing specificationsso as to take account, in particular, of all “institutional”influences, laws, politics, banking practices, governmentfinance and so on to the end.

In the economic universe, as in astronomy, every starreacts on every other. From a practical point of viewwe cannot ignore the many perturbations. But from thetheoretical point of view we gain clearness, simplicityand beauty, if we allow ourselves to assume certain otherthings equal, and confine our laws to a little part of thewhole, such as the solar system.

From such a point of view, the second approximationis the most instructive, rather than the first which rulesout the important element of investment opportunity, orthan the third which becomes too complicated and vaguefor any complete theoretical treatment.

§3. The Nature of Investment Opportunity

In the second approximation—which, as we have justnoted, contains all that is most typical in the theoryof the rate of interest—the distinctive factor is the rateof return over cost or the investment opportunity rate.This is also the most difficult factor to picture, isolate,and disentangle from the rate of interest which it helpsdetermine. Therefore, it is a matter of great importancepedagogically to make that distinction clear. The in-vestment opportunity rate is distinct from the market orloan rate of interest because an investment opportunityis distinct from a loan. Investment opportunity, as hereused, does not include a mere loan at the market rateof interest nor any other purchase-and-sale transactionmade merely on the basis of the market rate. The defi-

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