§1. Opportunity Reduced to Lowest Terms

SINCE the second approximation contains the heart of the theory of interest, a further brief summary and discussion of the steps already taken will be helpful before proceeding to the third approximation.

Any opportunity to invest simply reduces itself to this: for a time there is more labor or less satisfaction than there would be in the absence of such opportunity, while there is expected later less labor or more satisfaction. The earlier item of labor or abstinence is less than the expected satisfaction or labor saving. This picture of temporary labor exerted, or abstinence from satisfactions which would otherwise be enjoyed, for the sake of later satisfaction or labor saving is the ultimate picture of cost and return.

When thus reduced to these lowest terms of labor and satisfaction, not only is our picture simplified, but with the simplification, we have rid it of a certain suspicion of begging the question of the interest problem. That is, as long as interactions, capital, and money were in the investment opportunity picture, interest was already implied in each of their valuations and there might remain a haunting fear that this new rate of return over cost as an interest-determining factor was simply involving us in a circle. The question might be asked: Is Edition: current; Page: [179] the rate of return a new influence? Is there really any important distinction between the rate realized on a bond, which is interest pure and simple, and the rate realized on any other investment? Are they not all simply interest, and is there anything else behind this interest besides human impatience? Is not the sum invested simply the discounted value of the return expected with due regard to the risk element, which has not yet been considered?

The answer, as should now be clear, is that the rate of return over cost really is a new element, not included in the first approximation, however mixed that element may be, in practice, with the elements considered earlier. When labor and satisfactions are concerned there is something more than exchange. The labor of planting a fruit tree is not the same thing as the discounted value of the fruit yielded by the tree, even though the value of the labor and the value of the fruit may be equal at a given time. The satisfaction from eating fruit is pleasure and the labor of planting it is pain, and these can be directly compared, despite the fact that in practice they are usually compared only indirectly in terms of their exchange equivalents.

Instinctively we feel the presence of this factor of rate of return over cost whenever we invest in a new enterprise. To invest in the original telephone enterprise, or in a railway under construction, seems somehow different from today buying telephone or railway securities. In the latter transactions we feel we are dealing with men—trading; in the former we feel we are dealing with Nature or our technical environment—exploiting. In fact, I came near selecting the term exploitation for a suitable catch word rather than investment opportunity to express the Edition: current; Page: [180] objective factor of a return over cost. Of course, even after the period of early exploitation is passed there are plenty of opportunities within the industry for variation in the rates of return over cost, but they are no longer so conspicuous.

Even when there is no exchange possible, as with Robinson Crusoe alone on his island, there will be dealings with Nature. Crusoe may plant trees or build a boat and balance his immediate labor against his future satisfactions without the presence of any exchange process. It would have been possible, of course, to have begun the presentation with Robinson Crusoe instead of ending with him. In that case, we should have first considered the primitive facts of labor exerted for the sake of future satisfaction, or their equivalent in berries. We could then bring in Man Friday, and proceed step by step to the complications of modern civilization. We should have seen how the primitive cost and return typified by labor and satisfaction became gradually hidden in a mass of exchanges until today we think of both in terms of money. The capitalist of today, instead of laboring for a future satisfaction, may simply abstain temporarily from a part of the satisfactions he could otherwise enjoy and, with the money which he would have spent for them, buy the labor to build a railway. The laborer is no longer the one who has to wait for the satisfactions to follow the completion of the railway. He is paid in advance and converts his pay into real wages very speedily, while the capitalist waits and receives the rewards for waiting.

In all these and the other manifold exchange relations the terms are partly set by the principles of discount in relation to impatience. But the primitive ingredients Edition: current; Page: [181] of labor and satisfaction, or their cost of living equivalents, with a time interval between, are never shuffled out of existence, however much they may be shuffled out of sight. They are ever present and exert their influence just as truly as they did with Robinson Crusoe.

In making the first of these two adjustments, the individual is not trading with other human beings, but is, as it were, trading with his environment—Nature and the Arts. That is why industry today maintains laboratories of research. These aim to improve products and service by scientific means, to develop new fields of application in by-products and materials, and to evolve new products and methods and so new investment opportunities. Trading with the environment is making the most of investment opportunity—of the future income returned per unit of present income sacrificed. Trading with mankind is making the most of impatience—of the preference for a unit of present income over a unit of future income.

When the individual sets out to trade with the environment he finds that the rate of return over cost varies with the extent to which he pushes this trading; he adjusts the trading so as to harmonize the marginal rate of return with the rate of interest. In his trading with other human beings, on the contrary, he finds the terms of the contract interest fixed, so far as any effort by him is concerned, but impatience varies with the extent to which he pushes this trading.