§1. Eligible and Ineligible Options

THE essential point of the preceding chapter is that the possibility of more than one use of our resources affords opportunity to invest by substituting one such use for another. Whenever there is such a choice of alternatives, as for instance by changing from the "mining" to the "farming" use of one's land, as per Table 3, there is a differential sacrifice or investment of income during the earlier years for the sake of a differential return later. The fact that such alternative uses of labor, land, and capital exist, introduces on the scene the whole subject of "productivity".

Böhm-Bawerk was profoundly right when he wrote:

"The statement of how the productivity of capital works into and together with the other two grounds of the higher valuation of present goods, I consider one of the most difficult points in the theory of interest, and, at the same time, the one which must decide the fate of that theory."61

I have generally avoided the term productivity of capital because it may be used ambiguously to mean physical productivity, or value return, or return over costs; and because it suggests that capital produces income value instead of the reverse; and because it attributes the Edition: current; Page: [151] value of manufactured things to the cost of production, instead of to their discounted future services.

I prefer the term investment opportunity. It has some of the demerits as well as the merits belonging to any new term. It is unfamiliar and therefore requires precise definition. The concept of investment opportunity rests on that of an "option." An option is any possible income stream open to an individual by utilizing his resources, capital, labor, land, money, to produce or secure said income stream. An investment opportunity is the opportunity to shift from one such option, or optional income stream, to another.

It includes all possible opportunities to invest—those that can yield only negative returns upon the investment as well as those which are capable of yielding very large surpluses over the amount of the investment or cost.

The first (A) of the two investment opportunity principles specifies a given range of choice of optional income streams. Some of the optional income streams, however, would never be chosen, because none of their respective present values could possibly be the maximum. We have seen that the land, in our example, would be most profitably employed for farming, for mining, or for forestry, according to the rate of interest. But it would not be employed, let us say, for a quarry, no matter what might be the rate of interest.

The optional uses which are thus out of the question, whatever be the rate of interest, are called ineligible. The rest are the eligible options. We need to consider the eligible ones—any one of which might be made to have the maximum present value, given the right rate of interest to make it so.

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