§2. Interest Rates and Values of Services

As to the influence of the rate of interest on the price of services, we first observe that services may be either final or intermediate.1 The value of a dinner about to be eaten involves no time of waiting and so no discount or interest. Nor does the irksomeness of labor about to be undertaken involve discount to the laborer. Both the dinner or its enjoyment and the labor are final items of income, the one positive and the other negative. The value of intermediate services ("interactions") is derived from the succeeding future services to which they lead. For instance, the value to a farmer of the services of his land in affording pasture for sheep will depend upon the discounted value of the services of the flock in producing wool. If he rents the land, he will calculate what he can afford to pay for it on the basis of the value of the wool which he would expect to obtain from his flock. In like manner, the value of the wool output to the woolen manufacturer is in turn influenced by the discounted value of the output of woolen cloth to which it contributes. In the next stage the value of the production of woolen cloth will depend upon the discounted value of the woolen clothing to which that cloth contributes. Finally, the value of the last named will depend upon the expected real income which the clothing will bring Edition: current; Page: [327] to those who wear it, in other words, upon the use or "wear" of the clothes.

Thus the final services, consisting of the use of the clothes, will have an influence on the value of all the anterior services of tailoring, manufacturing cloth, producing wool, and pasturing sheep, while each of these anterior services, when discounted, will give the value of the respective capitals which yield them, namely, the clothes, cloth, wool, sheep, and pasture land. The values, not only of all articles of wealth, but also of all intermediate services which they render, are dependent upon the values of final enjoyable uses. Capital values and values of final uses are linked by the rate of interest. A rise or fall in the rate of interest will be felt most by the links most distant from these final services. A change in the rate of interest will tend to affect but slightly the price of making clothing, but it will tend to affect considerably the price of pasturing sheep.

The theory of prices, so far as it can be separated into parts, includes: (1) explanation of the prices of final services on which the prices of anterior interactions depend; (2) explanation of the prices of intermediate interactions, as dependent, through the rate of interest, on the final services; (3) explanation of the prices of capital instruments as dependent, through the rate of interest, upon the prices of their final services. The first study, which seeks merely to determine the laws regulating the price of final services, is independent of the rate of interest.2

The second and third problems, which seek to show the dependence on final services of the intermediate services Edition: current; Page: [328] and of the capital which bears them, involve the rate of interest. Under this second study will fall, as a special case, the study of the determination of economic rent, the rent both of land and of other instruments of wealth. The rent of a pasture consists of the value of the services of pasturing. This value, in accordance with the principles expounded in Chapter I, is dependent through the rate of interest upon the discounted value of the future final services to which the pasturing contributes. It is clear, then, that the rent of the land is partly dependent upon the rate of interest, and that the same dependence applies to the rent of any other instrument.