§5. The Double Adjustment Discussed

In such a double adjustment, P1, the point of tangency on the Investment Opportunity line, has to be found first and Q1, the point of tangency on a W1 line last, for there is only one Opportunity line and only one point on it at which the slope corresponds to the rate of interest; while there are an infinite number of W lines with a point on each having that slope or direction.10

It is worth noting that the point P1 thus located on the Opportunity line will be quite different from the Point R on that line shown in Chart 37 when the individual was assumed to be cut off from loans.11 The two may differ in either direction.

It is also to be noted that the W1 lines always say the last word, that is, fix the final income position at Q1, the point of tangency of the M line to a W1 line. All other income positions represent points reviewed in Individual 1's mind but rejected in favor of Q1. The point P on any individual's Opportunity line is merely a point in transit toward Q, which is the final point of equilibrium.

If we wish to be even more realistic, our individual need Edition: current; Page: [273] not be pictured as traveling along the Opportunity line at all, even on a non-stop flight to Q1. He may, more properly, be pictured as making a more direct jump, across lots, directly from O1' his income position on the Opportunity line to Q1.

The reader may, starting at O1', trace the individual by small steps of combined $100 investments and loans. Thus the first $100 step would carry him from O1' to B. Successive investments and borrowings of equal amounts would increase the individual's next year's income while leaving his present year's income the same as before. On the chart his income position would move first from O1' to B and then step by step in a vertical line above B. But he will not necessarily confine his borrowings to the amount of his investments. The chart represents a man whose impatience leads him to borrow for this year's consumption the amount represented by CF. His borrowings represented by the horizontal difference between O1' and P1 (that is the distance CE) is what is often called a productive loan, while the horizontal difference between O1' and Q1 (that is the distance CF) is what is called a consumption or convenience or personal loan.12

Properly speaking, however, no part of the loan is itself productive. It is the investment which is properly to be called productive. To shift along the M line adds nothing to the total present worth of the individual, for it merely substitutes $110 next year for $100 this year, or a series of such sums, and each $110 next year has the Edition: current; Page: [274] same present worth as $100 this year. A shift along the Opportunity line, however, does add to a man's present worth. Up to the last $100 invested, each $100 yields more than $110 next year and so possesses a greater present worth, reckoned at 10 per cent, than $100.

The sole advantage of any shift along the M line alone is to gain not more market worth, but to gain in convenience—to reach a greater total desirability. This is true in both the first approximation and the second. Every loan, merely as such, is a shift on the M line alone, and is in itself always a convenience loan. Strictly speaking, no loan, as such, is "productive."

It is only in so far as the loan makes a difference in the other shift, that along the O line, that it can claim to be called a productive loan, and it is quite true, in the case pictured, that the loan does make such a difference. That is, we call the loan productive because, without it, the investment would not be made, or would not be so great—because it would be inconvenient (or even impossible) to invest so much out of this year's income.

The essential effect of a so-called productive loan is to enable the individual (under our hypothesis of perfect fluidity and no risk) to disregard entirely what has been called the time shape of the income stream P, that is, the proportion of this to next year's income represented by P. It enables him to push P as far to the left as he wishes without threatening him with starvation, or causing him any inconvenience. He need practice no abstinence. For whatever P lacks in this year's income may be made up by loans, that is, by use of the Market line. In fact, P may be pushed even to the left of the vertical axis, a position of negative this year's income, which is physically impossible except as simultaneously offset by a loan so as Edition: current; Page: [275] to bring him back again to a position of real income this year.

In short the investment, or O shift, affects the size of income as measured in present worth of the entire income position while the loan, or M shift, affects its final shape.

The Chart 38 is evidently only one type among many and the reader who wishes to pursue the subject into special cases will find it easy to do so by varying the curves to suit himself.13