§3. Conclusions

We must, therefore, give up as a bad job any attempt to formulate completely the influences which really determine the rate of interest. We can say that the system of equations which has been employed would fully determine the rate of interest were it not for disturbing factors; that it does do so in combination with those disturbing factors; and that this amounts to saying that it expresses the fundamental tendencies underlying those disturbing factors.

In short, the theory of interest in this book merely covers the simple rational part of the causes actually in operation. The other or disturbing causes are those incapable of being so simply and rationally formulated. Some of them may be empirically studied and will be treated in Chapter XIX. They pertain to statistics rather than to pure economics. Rational and empirical laws in economics are thus analogous to rational and empirical laws of physics or astronomy. Just as we may consider the actual behavior of the tides as a composite result of the rational Newtonian law of attraction of the moon and the empirical disturbances of continents, islands, inlets, and so forth, so we may consider the actual behavior of the rates of interest in New York City as a composite of the rational laws of our second approximation and the empirical disturbances of Federal Reserve policy together with numberless other institutional, historical, legal, and Edition: current; Page: [322] practical factors. All of these are worthy of careful study but are not within the scope of the main problem of this book.

In some cases, as in the theory of the moon's motions, the perturbations may be worked out with a high approximation to reality by combining rationally a number of elementary influences. Such resolution of empirical problems represents the highest ideal of applied science. But until that stage is reached there remains a wide gap between rational and empirical science, and the two have to be pursued by somewhat different methods. That is the case with economic science in most of its problems today.32

In respect to our present problem, while there is a great field for research, the only perturbing influence of transcendent importance is that of an unstable monetary standard, and, as was seen in Chapter II, even that would make nothing more than a nominal difference in the results if it were not for the "money illusion."

But with respect to this disturbance, theory and practice are miles apart. The disturbances of unstable money often reverse the normal operation of those supposedly fundamental forces which determine the rate of interest and are the chief subject of our study in this book.

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