§ 9. The interest rate and waiting. Let us now review some familiar facts to see the interrelations of abstinence, capitalization, and the rate of interest, and the dynamic effect that the choice of technical methods of production eventually has in a community.
Individual rates of time-preference unite into a market rate of time-price expressed primarily, in the case of durative agents, by the capitalization of the series of incomes. The capitalization of a series of incomes treated as perpetual is exactly in the ratio of the years' purchase. The rate of in terest that arithmetically corresponds with this is the recip rocal of the years' purchase (e.g., = .05). Practically by the law of substitution as applied to investments, interest rates and capitalization rates are brought into correspondence.
With each reduction of the time-price goes an identical arith metic change in the rate of interest and a reciprocal increase in the capital sum, and a proportional decrease in the frac tion of capital investment coming to the owner as income. The greater the degree of abstinence, the smaller the fraction of investment value that owners must take as income, the longer they must wait for an income bearing a given propor tion of the capital, or equal to it, to accrue. The number of years' purchase, therefore, might well, in this connection, be called the waiting time, or waiting-period. (See Figure 60.) Now let the time-price rate be twelve and corresponding with that would be a rate of interest on money loans of twelve, and a capitalization of $8.33 for each $1 of income. If the spirit of abstinence grows and extends in the community from whatever combination of favoring conditions, so that the time price rate of 10 (or any lower figure) results, the change is registered in a corresponding rate of interest of 10 per cent and the capitalization of each dollar of income at $10. This shows itself first in the capitalization of all existing incomes (capable of capitalization), and would do so if there were no technical, productive process whatever, merely a limited num ber of incomes. All future durative uses attributable to agents are marked up in present price. There are "takers" for cap ital now that will yield incomes but of its face, or what is the same thing, that are willing to have the same income spread over longer time (1% years more, instead of 8%).
This must cause some transfers of capital, for not all indi viduals have reduced their time-preference rate, and they will yield to the temptation to get $10 of present capital, whereas they could have resisted the offer of $8.33. The lower the interest rate the greater the temptation for the less abstinent members of the community to relinquish to the more abstinent the guardianship of future incomes with its task of wait ing.
§ 10. Duplicate agents and slower processes. Another effect must show itself in the technical methods of production. The time-price signals that there are investors ready to wait longer for the same income from a given investment. There are investors willing to divert more present goods into future uses, and to impart to future uses still more of futurity. This adjustment at once begins in the economies of all individuals where time-preference is in accord with the new rate. One mode of adjusting productive processes is to multiply the tools and agents already used. Duplicates are placed wherever it will be most convenient. Where formerly the use of a second agent did not justify its cost of making, now it can be made to earn the smaller income 2 needed to balance its capital value.
Another mode is to let the old processes go on a little longer, 2 This is a net income, of course. The new tool yielding less urgent (marginal) uses than the first one, yet requires some shelter and re pairs, and has as great or greater liability to rust, decay, go out of style, etc. With the multiplication of like tools, the added units are less often used, and for less urgent purposes, yet the cost of repairs and maintenance grows greater, leaving a smaller net income with each increasing agent (see above, under usance). The more duplicate agents one has, the greater the forethought, punctuality, and watchfulness re quired to keep them in good condition. If the farmer has but one hoe and one ax, they rarely rust; if a woman has but one dress it can not be eaten by moths. The point of best economic equilibrium, however, is shifted by the change of time-price here under consideration.