XXV. "Saving", "Investment", and the "Consumption of Capital"

CHAPTER XXV " SAVING ", "INVESTMENT ", AND THE "CONSUMPTION OF CAPITAL" THERE are certain consequences which follow from the considerations advanced in the last three chapters which, although they fall for the most part outside the scope of Changes In data pure equilibrium analysis, may be briefly lead to spontaneous t d h Th . It f change. In the quan-commen e upon ere. e maIn resu 0 my of capital these last discussions is that if unforeseen changes in the data occur, the value of the stock of capital that exists and will have to be maintained if income is to be kept constant from now onwards will also change, l and that consequently there is no reason to expect that in a dynamic world any of the conceivable dimensions of capital will remain constant. It remains true, of course, that ceteris paribus it is necessary to maintain a reservoir of goods of constant size in order to maintain a given output. But when conditions change so as to make a smaller or l~rger reservoir necessary for the same purpose, its contents will tend to change spon taneously in such a way as to make provision, from the moment when the change becomes known, for the par ticular new income stream which is now most preferred from among all the income streams of different time shapes which are now obtainable. The fact that an impending change is likely to become known to different people at different times will lead to capital gains and capital losses on the part of individuals, with the result 1 The same applies whether we measure the stock of capital in value terms or in any other way, say as a certain multiple of the income of a given period, or as the result of a certain " average" waiting period or in any other way.

334 OR. XXV " Saving" and " Investment" 335 that the persons who have shown the greatest foresight will command the greatest amount of resources. But in a world of imperfect foresight, not only the size of the capital stock, but also the income derived from it, will inevitably be subject to unintended and unpredictable changes which depend on the extent and distribution of foresight, and there will be no possibility of distinguish ing any particular movements of these magnitudes as normal. These conclusions have rather far - reaching con sequences with respect to the much used, or much abused, concepts of saving and investment. If the stock of capital which will be required in a chang-Changes In value or ing society to keep income constant at capital need notcorre-spond to saving or successive moments cannot in any sense be Investment defined as a constant magnitude, it is also impossible to say that any sacrifice of present income in order to increase future income (or the reverse) will necessarily lead to any net change in the amount of capital. Though saving and investment in the ordinary sense of those terms are of course one of the factors which affect the magnitude of capital (in any conceivable quantitative sense), they are by no means the only such factor. The changes in the size of the capital stock cannot therefore be regarded as indications of what sacrifices of present income have been 01 are being made in the interest of future income. This idea, which is appropriate enough for the analysis of the effects of a change under otherwise stationary conditions, has to be entirely abandoned in the analysis of a dypamic process. If we want to retain the con nection between the concept of saving and investment, and the concept of a.. sacrifice of potential present income in the interest of future income,! we cannot determine the size of either saving or investment by any reference_ to changes 1 It will be shown later that it is this latter concept which is of importance in the connections in which the terms saving and invest ment are commonly ust\d.

336 Capitalistic Production under Competition PT. III in the quantity of capital. And with the abandonment of this basis for the distinction there must go the economists' habitual practice of separating out the part of general investment activity which happens to leave the capital stock in some sense constant, as something different from activities which add to that stock. This distinction has no relationship to anything in the real world. 1 To deny that the usual distinctions between new investment and merely renewed investment, and between new savings out of net income and merely maintained PossIble dIvergence savings, as distinctions based on the idea between plans 01 In-of quantitative increases or decreases of veston and the Intentiona of conaumen capital, have any definite meaning, is not to deny that they aim at a distinction of real importance. There can be no doubt that the decisions of the con sumers as to the distribution of consumption over time are something separate from the decisions of the entre preneur capitalist as to what quantities of consumers' goods he should provide for different moments of time.

And the two sets of decisions mayor may not coincide. All that is denied here is that the correspondence or non-correspondence between these two sets of conditions can be adequately expressed in terms of a quantitative correspondence between (net) saving and (net) invest ment. 2 But if this distinction is not to be formulated in 1 The same applies, of course, in even more marked degree to the assumption implied in the distinction according to which the activities which lead to such net increases of capital are in some way subject to a different set of determining influences from those which lead to a mere quantitative maintenance. This ought always to have been obvious from the mere' fact that when additions in this sense are made (i.e. if capital increases in the usual terminology) this will always affect the concrete form of the new capital goods by which the old ones are replaced. 2 This is of course not to suggest that the difficulty can be avoided by using gross concepts instead, as Mr. Keynes believes (1936, p. 60).

The whole concept of gross saving and gross investment is closely connected with the view that treats durable goods only as capital, and proceeds as if there were a fundamental difference between fixed capital and circulating capital and as if these two categories were OR. XXV " Saving" and" Investment" 337 this particular way, what are we to put in its place? In general terms the answer is nQt difficult. If we can no longer speak in terms of absolute increases and decreases of capital we must attempt a more direct comparison of the time distribution of income. Capital accounting, as has been shown before, is itself only an abbreviated method of effecting this conlparison in an indirect way. And if this indirect method fails, it is only natural to go back to its rationale, and to carry out the comparison explicitly. The indirect method consists in comparing the increase or decrease with the supposed standard case where capital remains " constant", and thus arriving at the concepts of net saving (net income minus consump tion) and net investment, and then placing these derived concepts in juxtaposition. Instead of this we need to make a direct comparison of the intentions of the con sumers and the intentions of the producers with regard to the shape of the income streams they want to consume and to produce respectively.

The question, then, is essentially whether the demand for consumers' goods tends to keep ahead of, to coincide with, or to fall behind the output of consumers' goods, irrespective of whether either of the two Comparison between magnitudes is increasing remaining con_shape of income , streams provided and stant, or decreasing in any absolute sense. demanded But in order to give this question a clear meaning we have still to decide upon a unit in terms of which the demand for and the supply of consumers' goods can be measured. Otherwise we have no means of determining whether they coincide or whether the one exceeds the subject to different laws. ' In fact, of course, the point where we draw the line between the two is not only purely arbitrary, and any classifica· tion based on these two concepts of little significance, but it is definitely misleading, because it suggests that the' factors guiding investment in fixed capital are different from those influencing investment in circu· lating capital. The concepts of gross saving and gross investment ought to disappear from economic analysis with the sharp division between fixed and circulating capital (or, for that matter, between the short and the long period).

23 338 Capitalistic Production under Competition PT. III other. In a sense, of course, demand and supply are always equal, or are made equal by the pricing process. Thus to speak of their comparative magnitudes pre supposes the existence of some unit in terms of which their magniturie is measured independently of the prices formed on the market. Consider first the decisions of the "savers" or the body of consumers as a whole. The assumption which we must make regarding their behaviour is clearly not Relative values 0 f that they will under all conditions aim at present and future an income stream of a particular shape, but lncomes-that if they are offered a present income of a given magnitude plus the sources of a future income of a certain magnitude, they will attach certain relative values to these incomes. For every such combination of a given present income and the sources of a certain future income we must assume these relative valuations to be determined. Now these relative values which people in general will attach to given supplies of present income relative to the given sources of future income may clearly be either greater or smaller than the cost of the former in terms of the latter.

If the values consumers attach to the sources of future income (in terms of present income) is higher than the cost (in terms of present income) of reproducing new _ compared with sources of future income of the same theIr relative costs magnitude, more such sources will be pro duced and vice versa. And assuming that the relative valuations of the consumers do not change abruptly as they are unlikely to do if the income that becomes available in each successive period is equal to the income and sources of future income for which they have planned - the amounts of present income and sources of future income which production will provide in each successive period will tend to be such that their relative costs (in terms of each other) will approximately correspond to the relative values attached to them by the consumers.

CR. XXV " Saving " and " Investment " 339 But if, for some reason, the prices of the sources of future income ha ve been raised out of correspondence with the valuations of the consumers, the result will be that more sources of future income will be provided for the next period than consumers will then be willing to take at prices corresponding to the relative costs. Consumers will find themselves getting less current real income, and consequently will attach a greater value to it compared with the sources of future income. In spite of the special senses recently attached to the idea of differences of saving and investment it is difficult not to describe this case as one in which saving exceeds investment (or vice versa). And we shall DOff ' 1 erences between indeed see later that the special cases to saving and investh· h h h I b ment in real terms W IC t ese terms ave recent y een generally applied are only particular instances of the general case we are now considering. They differ from the general case only through the cause which brings about the difference between saving and investment, which in the special case is a monetary cause. But the effects are the same and they are in turn instances of an even more general case, that of demand exceeding or falling short of supply: when investment exceeds the saving that will be available at the time when it will be required because of the previous investment, l the result will be that the supply of capital goods will exceed the demand, and the supply of consumers' goods will fall short of the demand for them; and when investment falls short of the saving that will be performed at the relevant dates, the effect will be that the current output of capital goods will be valued at less and the current output of consumers' goods at more than their costs. The case is simply one where, because of wrong expectations on the part of the producers, the supply of certain types of 1 On the relation between the dates when the direction and volume of investment is changed and the date when the saving will be required see above, Chapter XX, pp. 279-281.

340 Capitalistic Production under Competition PT. In commodities will exceed, and the supply of other kinds of commodities will fall short of, demand. And the changes of prices relatively to cost will be exactly of the kind which will be necessary to bring about the appropriate changes of production. We shall see later why monetary changes are particularly apt to cause this sort of wrong expectation. But although it is possible, as a first approximation, to treat this problem in terms of the relations between saving and invest~ent, this terminology creates consider" Net" Investment able difficulties as soon as we apply it need not Increase to any except the simplest ceteris paribus quantity of capital U d h . f h cases. n er t e assumptIon 0 ot erwise constant conditions (i.e. unchanged knowledge, tastes, etc.) we could deal with the changes on the invest ment side in terms of changes of the investment periods and the changes in the quantity of capital l caused by them. We could say that, by increasing the waiting periods and thereby accumulating more capital, pro ducers cause a temporary gap in the income stream which leads to a relative scarcity of consumers' goods unless consumers restrict their consumption by a corresponding amount. And the same mutatis mutandis for a shortening of the investment periods and a decrease of capital. But as soon as we drop the ceteris paribus assumption this ceases to be a correct formulation. The correspondence between the values attached to the sources of future income and their costs is then no longer dependent on the cost of reproducing the same amounts and types of capital goods as previously made it possible to produce a certain future income.

Additional investment, in the sense that total output is reduced for a time in order to increase it at a later date, may take place, even though the quantity of capital is simultaneously reduced. Breaks in the even flow of conI Expressed as a multiple of the income of any arbitrarily chosen period.

OH.XXV " Saving " and " Investment " 341 sumers' goods, which, if disturbances are to be avoided, necessitate corresponding changes in the attitudes of the consumers, will occur only if the quantity of capital is not maintained at whatever level is required, under the conditions prevailing at the moment, to provide such a constant flow of income. As will be easily seen, the ultimate test for the corre spondence between saving and investment in the relevant sense is really whether the current demand and the current supply of consumers' goods are so Be-statement of eon matched that there is no inducement either diilons when" sav-ing" will be equal to to increase or to decrease this current "Investment" supply at the expense or in favour of the provision of the future. And this correspondence between the supply of current consumers' goods and the demand for them will therefore have to be expressed by measuring them both in terms of the alternatives open to consumers and pro ducers in the given circumstances of the moment. 1 To do this it seems necessary entirely to abandon the concepts of saving and investment as referring to some thing beyond and outside the normal process of main taining capital quantitatively intact. We need to sub stitute an analysis which does not try to separate" old"

and" new" investment and" new" and" maintained" saving as distinguishable phenomena. 2 Or, if we want to 1 It might appear that all this could have been explained in simpler fashion by comparing the cost of output of consumers' goods coming on the market during a given period with the expenditure on this out put (or by comparing the share of all the factors of production which have contributed to the output of a given period with the share of their income which they spend on the output). This would be quite satis factory if it were not for the fact that the concept of cost (and, of course, income) is itself dependent on the concept of maintaining capital intact. This way of stating the relation would be adequate only if we counted the cost (in terms of present consumption) which is required, not to keep capital intact in some quantitative sense, but to provide sources of just so much future income as consumers wish to buy at prices covering costs.

2 It should perhaps again be pointed out that the concepts of " gross" saving and investment as commonly used provide no way 342 Oapitalistic Production under Oompetition PT. III retain the familiar terms and to use them without any reference to changes in the quantity of capital, we might formulate the condition of equality as follows: "savings" correspond to "investment" when the value of existing capital goods (in terms of existing consumers' goods) is such that it becomes profitable to replace them by the capital goods that are required to produce the income in the expectation of which people have decided currently to consume as much as they do. It is perhaps necessary to remind the reader that we are here not yet concerned with differences between savings and investment which are brought about by th t III dl monetary causes. Just as differences beCauses a w sturb this correspond-tween the demand for and the supply of ence any commodity may be brought about either by a mere shift in demand or by the appearance of an entirely new monetary demand, thus differences "in the demand for and supply of present (or future) goods generally may be brought about either by shifts in demand or by monetary changes. And just as in the case of a change in the demand for any commodity the effects will be different according to whether this change is due to a mere shift in demand or whether it is due to a monetary change, so the consequences of a difference between " saving" and "investing" will be different according out of this difficulty. There is no reason why the amounts of particular kinds of goods produced, in particular of durable goods, should move in any strict proportion with the part of current resources which are devoted to provide for future as distinguished from present needs; nor is there any reason why that part of gross money receipts (" gross income ") of the members of society which they do not devote to current consumption should always move in the same way as that part of their total resources which they want to devote to provision for the future. In order to give these concepts of gross saving and gross investment any definite meaning, one would have to make ex plicitly some very definite and unrealistic assumptions about the relations between the stream of money payments and the flow of goods, somewhat on the lines of the assumptions which underlie my own analysis in Prices and Production (2nd ed., 1935, pp. 43-45 and 120122).

CR. XXV " Saving" and " Investment" 343 as they are caused by a real or a monetary change. The essence of the difference, to mention it here briefly, is that monetary changes are bound to set up expectations which will inevitably be disappointed. This, however, is not the place to consider more fully the errors of entre preneurs which will be caused by such monetary changes and which are probably the main cause of industrial fluctuations. These problems will be briefly considered in the final part of the present study. While, however, disturbances of this sort which are specially connected with monetary causes can be adequately discussed only against the background of a systematic consideration of the whole monetary mechanism such as cannot be provided here, there are certain other causes which may bring about somewhat similar results. A short discussion of these may therefore fittingly con clude our consideration of the "real" aspects of these phenomena.

Entrepreneurs will on the whole base their anticipa tions about the relative demand for consumers' goods and . capital goods in the future on their observations of the situation in the present. Among the factors which may bring about changes, and therefore make their expectations false, is the willingness of people to save certain pro portions of a given income; but this is not very likely to change abruptly and unexpectedly. It is more probable that there may be a rather abrupt change in the ability to save of certain classes of people. This may result from a cimnge in the distribution of incomes brought about either by a change in the external data or - and this is the factor which is more likely to affect a very substantial part of the population - by the action of the Government or of monopolistic groups. Any considerable redistribu tion of the command over the existing resources 1 will 1 We shall see presently that it is not only a redistribution of net income in the usual sense which is likely to be of importance in this connection.

344 Capitalistic Production under Competition PT. ill cause a change in the proportion in which consumers' goods and capital assets (or present income and sources of future income) will be demanded. A disproportion in the way in which consumers divide their incomes and the way in which entrepreneurs have divided their resources between the provision of con Savings exceeding sumers' goods and the provision of capital expectation. goods may of course arise in either direction. The case where the demand for consumers' goods proves to be lower, and the supply of funds for investment higher, than entrepreneurs expected seems on the whole to be the one that is less likely to occur and certainly the one which is less apt to create serious difficulties. This is not the place to go into all the arguments of the under consumption theories which attempt to prove that a reduction in the demand for consumers' goods is bound to block the outlets for further investment. Even if we consider the most unfavourable (and most unlikely) case where the reduction in the demand for consumers' goods affects all kinds of consumers' goods simultaneously and to the same extent, there is no reason ·why this should make further investment generally unprofitable. We have already observed that any saving which has not been foreseen, and therefore has not led to a corresponding anticipatory rearrangement of resources, will lead to a temporary accumulation of stocks. But there seems to be no reason why an increase in the rate of saving, within that order of magnitude which merits practical considera tion, should reduce the receipts that may be expected from the sale of consumers' goods by an amount which camiot be more than offset by a reduction of the rate of interest and the changes in the technique of production which this makes profitable. No doubt there will always be some goods, like stocks of perishable products, which, because of their high specificity cannot be shifted to production for later dates, and on which, therefore, considerable loss will be made. But on the whole it is nearly always OR. XXV " Saving" and " Investment" 345 possible to change from shorter to longer processes of production, even if only by keeping larger stocks, without incurring any substantial expense; and one of the most important cost elements in this connection, the rate of interest, will be reduced in consequence of this very increase in saving.

The situation is, however, very different in the opposite case where the demand for consumers' goods proves to be higher, and the willingness to hold capital assets lower, than corresponds to the relative costs of Savings failing ahort the quantities of these two kinds of assets or expectatlonl which entrepreneurs have actually provided. It is here that the irreversibility of time, which at the beginning of this study we found to be the source of all the peculiar difficulties connected with capital, creates considerable differences between what seem formally to be very similar cases. The crux of the whole capital problem is that while it is almost always possible to postpone the use of things now ready or almost ready for consumption, it is in many cases impossible to anticipate returns which were intended to become available at a later date. The consequence is that, while a relative deficiency in the demand for consumers' goods compared with supply will cause only comparatively minor losses, a relative excess of this demand is apt to have much more serious effects.!

It will make it altogether impossible to use some resources which are destined to give a consumable return only in the more distant future but will do so· only in collabora tion with other resources . which are now more profitably 1 Cf, Wicksell, Lectures, vol. i, pp. 186-187: "The volume of fixed capital, on the other hand, can, in the long run, be increased by the conversion of circulating into fixed capital-in so far as this is gener. ally profitable - but it cannot be appreciably diminished - the reverse operation being usually impossible. Hence it is, in most respects, on the same level as the unchanging original productive factors, labour and land. This circumstance is sometimes in evidence during booms, when large quantities of circulating capital are converted into fixed capital, and it is not possible to replace the former quickly enough."

346 Capitalistic Production under Competition PT. m used to provide consumables for the more immediate future. This case of an unforeseen relative increase in the demand for consumers' goods is not only the more dis turbing case; it is (apart from monetary complications) also the case much more likely to occur and - - may mean an actllal consumption to assume considerable proportions. In the olcapltal modern world the two causes of more or less sudden changes in the distribution of income (Govern ment interference and mopopolistic extortion), to which we referred previously as likely to affect the relative demand for consumers' goods and capital goods, are apt to operate on a large scale against the capitalist class, and may effect a redistribution of much more than net income proper. This means that they will on the whole tend not only to decrease the rate of net saving in the usual sense, but may actually lead to a transfer to con sumption of funds which ought to be reinvested if income is to be kept on the present level.

For the understanding of such a process of " capital consumption" it is essential to bear in mind that it is not only the capitalists who may be responsible for the consumption of their capital. Once capital is definitely and irrevocably committed to a certain purpose, any of the co-operating factors are capable, through monopolistic combination, of forcing the capitalists to pass on to them part of the gross returns which ought to be reinvested but which, if paid out as income to non-capitalists, will be mostly consumed. This as well as a considerable com pulsory transfer of income from capitalists to other classes will tend to increase the demand for consumers' goods and to decrease the funds that will be availa,ble for investment relatively to the costs (in terms of each other) of the quantities of consumers' goods and of capital goods which will be available. A rise of wages enforced by combinations of labour gives rise to exceedingly complicated problems which are CR. XXV " Saving" and " Investment " 347 better left to more specialised studies. l It sets up con flicting tendencies which are very difficult to disentangle.

In so far as it leads to an increase in the aggregate demand for consumers' goods it tends to The elleet of an en bring about a consumption of capital. (orced rise o( wages But in so far as labour succeeds in securing for itself a larger share of the output and in raising real wages it will tend to bring about a substitution of capital for labour or a transition to more capitalistic methods of production. The net effect would probably be that fewer workmen would be employed with more capital per head, that is, that the capital structure would grow in height but shrink in breadth at the same time. Although this would probably be accompanied by some destruction of capital, that is, by a reduction of the level at which output could be permanently kept, it would scarcely show the typical symptoms of a simple " consumption of capital". For our present purposes it will be better to leave this special case out of account and to concentrate on the effects of an unexpected increase in the aggregate con sumers' demand which is not accompanied by an increase in the rate of real wages, but which is caused either by a compulsory transfer of income from saving to non-saving classes, or by an increase of aggregate money incomes financed by credit expansion.

There is no need at this stage of our exposition to re state why an increase in the demand for consumers' goods (which on our assumptions can only mean an increase of demand and of their prices in terms of all other resources and of capital goods in particular) will make some investment activities unprofitable and will 1 An attempt which the present author made some years ago in this direction (1932b) has not really taken account of the difficulty mentioned in the text - apart from its being still made in terms of changes in the absolute quantity of capital instead of, as it ought to be, in terms of correspondence or non-correspondence between the proportions in which capital goods and consumers' goods are supplied and demanded. Cf. also Machlup, 1935d, and E. Schiff, 1933.

348 Oapitalistic Production under Oompetition PT. III lead to a transition to less capitalistic methods of pro duction. The only point which we want to stress here is that nearly all the characteristic phenomena of such a The symptoms usu ally associated with a .. consumption of capUal .. Independent of absolute changes of quaullty of capital process will appear whenever the demand for consumers' goods increases relatively to the supply, whether this demand is actually higher than is compatible with maintaining income permanently at the present level, or whether it is merely above the level for which entrepreneurs have planned. Losses on old invest ments will occur on a large scale, and production of capital goods will have to be reduced irrespective of whether we have what might be described as an actual consumption of capital, or whether people are merely unwilling to reduce consumption sufficiently to enable entrepreneurs to complete the investment processes upon which they have embarked.

The only peculiarity of a process of capital consump tion proper, that is, where consumption is in excess of the level which can be permanently maintained, is that such But an absolute re-a process has a tendency to become cumu duction of capital has lative. Once a community has started to a tendency to become cumulative live beyond its income and thereby to reducp, its nonpermanent resources below what is required to maintain the present level of income permanently, every day this process continues means that, in order to bring it to a stop, consumptiDn will have to be IDwered further. And a cDmmunity which has at first resisted a reduction of its standard of life, made necessary by events such as the destruction of a war, is very unlikely, once it becomes aware of the inevitability of such a reductiDn, to make it to the increased extent which has become necessary because of the delay. I believe that the history .of EurDpe since the last war .offers impDrtant examples .of countries which have been caught in this viciDus spiral of delay in a necessary adjustment of their standard .of life, and which consequently have passed CR. XXV " Saving " and " Investment " 349 through prolonged periods of consumption of capital in the absolute sense of the term.

In the discussion of long-term developments of this kind the use of the concept of absolute increases and decreases of the quantity of capital is comparatively innocuous and will lead to more or less Although useful In the same results as the more correct cel1aln contexts, the analysis. It is in connection with more concepts of accumulation and decumulashort-term changes, like those occurring in tlon of capital have to be used with caution the course of industrial fluctuations, that the difference between the analysis in terms of absolute and in terms of relative concepts is likely to be most significant. We could in this connection certainly not do more than speak of changes which ceteris paribus would lead to increases or decreases of the quantity of capital. But this way of speaking is rather misleading since it inevitably tempts one to assume that even in a changing world they will normally have that effect.

And it certainly seems advisable to refrain from basing any distinction used in the explanation of dynamic phenomena on supposed net -changes in the quantity of capital. ffhe phenomenon of the trade cycle in particular is probably largely conn"ected with changes in that region of indeterminateness between clear increases and decreases of the quantity of capital where the concept of an absolute change has no meaning. But it probably remains true that net accumulations and net de cumulations of capital in the usual sense are likely to cause phenomena similar to booms and depressions. At any rate this will be so if - as is very likely to happen - real accumulation pro ceeds faster, and real de cumulation proceeds more slowly, than corresponds to the rate 'of saving and dissav ing respectively. It appears that the difficulties facing analysis of these problems were already seen by Ricardo when he wrote that" the distress which proceeds from a revulsion of trade is often mistaken for that which 350 Capitalistic Production under Competition PT. III accompanies a diminution of the national capital and a retrograde state of society; and it would perhaps be difficult to point out any marks by which they may be accurately distinguished".l 1 Principles, chap. xix, in Works, edition McCulloch, p. 160.

PART IV THE RATE OF INTEREST IN A MONEY ECONOMY CIIAPTER XXVI FACTORS AFFECTING THE RATE OF INTEREST IN THE SHORT RUN THE task of the first three Parts of this book has been to show, by the same general method as is used by equi librium analysis to explain the prices of different com modities at· a given moment, why there The" rate of Inter will be certain differences between the est" In equilibrium . analysis and the prices of the factors of production and the money rate of Interest expected prices of the products, and why these differences will stand in a certain uniform relationship to the time intervals which separate the dates when these prices are paid. In conformity with an old-established practice, we have described these price differences, which can be ex pressed in terms of a time rate, as the rate of interest. But, as we have warned the reader early in this book, this " rate of interest " is not identical with the price for money loans to which this term is applied in a money economy. I t is not a price-paid for any particular thing, but a rate of differences between prices which pervades the whole price structure. In so far as the money rate of interest is concerned, our rate of interest is merely one of the factors which helps to determine it, and is the pheno menon most l!-early corresponding to it which we can find in our imaginary moneyless economy. But if it were not for the well-established usage, it would probably have been better to refer to this "real " phenomenon either, as the English classical economists did, as the rate of profit, or by some such term as the German Urzins.