4 Trade secrets, patents, and temporary monopoly privileges, where the better process is limited to one enterprise or to a few, affect individual profits at first rather than the general economic level.
isting factors—labor and material resources—are taken up, put into use, before these are reached. The limit is set by the existing rate of time-price, reflected in the rate of interest. As the rate of time-preference in the individual's choice, so the rate of interest in the community, draws a line among the vari ous technical processes analogous to the isothermal line, mark ing off those that yield incomes at a lower from those that yield at a higher time-rate .° § 13. Newly discovered process; effect upon interest-rate. What effect would the adoption of a newly discovered process have upon the time-price rate? ° If it takes a smaller equip ment than the old, its effect is that of releasing some produc tive agents for other processes before excluded; that is, it enables a community with the same abstinence to resort to longer processes and thus lower the time-price. Or if the new method gives increase in product with the same invest ment, the result is a fall in the price of the product, and a recapitalizing of the sources of the materials, etc., to bring in come and capital value into accord with the prevailing rate. Then the question becomes: What effect will this have on the prevailing rate of time-preference? As the total income of the members of the community increases with the more bountiful 5 Among the processes always waiting on the borders of utilization, known but not adopted, must always be many which are technically more indirect than those before in use; but they have been rejected not at all because of their technical indirectness, but because they involved either too large or too long an investment. If the indirectness involves initial cost—as for materials to make the complex parte then that influences time-choice by increasing the investment; if it involves cost of operation because of complexity of parts and difficulty of repairs, this influences time-choice by reducing the net income expected. Given a certain investment, and a certain income in the future, and time-difference is the only factor that influences choice; technical indirectness is a merely incidental element.
6 Observe that we are considering the case not of a better technical method already known, and now first adopted because of a fall in the interest rate, but the case of a new method adopted while the old rate of interest still prevails.
production, and their present desires are better provided for they should find it easier to abstain. In itself this should result in more saving and a lower interest rate. But the final result so depends on changes in the standard of living, educa tion, etc.,* which are themselves usually elevated by more bountiful production, that the answer is not easy. The ex perience of the past two centuries shows that our progressive economic societies are constantly incorporating into their processes great improvements which raise the total produc tion of objective goods per capita, while they maintain about the same rate of interest from generation to generation. Both present and future expected incomes are more bountiful than they were in the past, but the ratio of their time-valuation re mains substantially unchanged.
§ 14. Railroad betterments and the rate of interest. The railroads in America have given a good illustration of the relation of the interest rate to improvements. In railroad financing, cost of operation is compared with fixed charges, i.e., the interest on the bonds needed to make an improvement that reduces costs. Our main lines in America were built when the interest rate was high (before 1873). Expensive improvements, the straightening of curves, the tunneling of mountains, the reducing of grades, the replacement of lighter by heavier rails, accompanied a fall in the rate of interest. A fall in the interest rate disturbs the equilibrium that has been arrived at, between the cost of operation (the amount paid for wages, coal, etc.) and the income on permanent investment. If the rate of interest has been 5 per cent and falls to 4 per cent, many permanent improvements before unwise become economical. A net gain may result from increasing the cap ital investment in order to reduce the cost of operation per unit of traffic. One thousand dollars paid annually in wages balances a 5 per cent interest charge on a capital investment of $20,000; it balances a 4 per cent interest charge on $25, 000. It thus becomes profitable for the railroad to abandon or 7 See on abstinence, see. 8, above, and ch. 24.