At the time of making these contracts, these eco nomic shares are not definitely determinable, either as to quantity or as to money value. The value of a particular workman's share of a year's product might amount to, say, $1,500 or to only $900; granting that the probable value is $1,200. Were the workman to wait until the product was sold to ascertain his share and take it, the amount would be uncertain and might be considerably below the probable value of $1,200. Workmen, even if able to wait, would probably take something less than the probable value of their eco nomic contributions, something less than they could average in the long run, in order to 'make the amount certain; in the present instance the workman might be willing to forego the chance of getting $1,500 and with it the chance of getting only $900 for a guaranty of, say, $1,100, even tho he were to wait until the product was ready for the market to receive this sum. In like manner the lessor of equipment and of land is willing to take something less than the probable value of the product economically attributable to his equipment or his land in order to eliminate the ele ment of uncertainty. And the business man's cau tion makes him unwilling to guarantee the values of these shares unless the guaranteed amount is less than their probable values. Therpfore the business man is a risk taker, and in the contract- guarantees that relieve these other factors of their risks, a margin of contract price under probable value is left that in the long run leaves him a profit.
Not only does the business man guarantee the values of the other factors' shares but in most cases pays for those shares in advance of their sale and be fore their appearance in a completed product. The workman receives his wages monthly or weekly; his product is not finished until weeks, even months, later. The same is true of the rental paid for a leased machine; in the case of the purchased machine the equipment builder receives most of his pay years in advance of the appearance and sale of the product. Much of the money rental of leased land is also paid somewhat in advance of the appearance of the prod uct and in the case of purchased land the economic product is paid for entirely in advance. This means that money wages are practically advanced out of cap ital, and that a considerable part of the land rent and equipment rent is also so advanced.
6. Interest.—The fact of these advances brings an other force to depress contract wages, contract equip ment rent, contract land rent, or the contract prices of equipment and land below the probable values of their economic contributions to the total product— and this force is interest or the discounting of future values.
Interest is due to two sets of facts; viz.: (1) be cause of a lack of imagination most people cannot ap preciate their future wants as greatly as like wants of the present moment ; (2 ) unless altered by borrowing or saving, most people's present and prospective in come is not uniform but variable in flow so that pres ent wants and wants of various degrees of futurity are not equally provided for.
The second is probably the more important group of fact. Many persons, in their prime, have compara tively large present incomes and, due to probable fail ure of earning power as they grow old, much smaller incomes in prospect. Some have fairly uniform in comes in prospect. Many, perhaps, just beginning business life, have comparatively small incomes at present with much larger incomes in prospect. The first class contributes most of the savers; these sub tract from present enjoyable income to supplement the future. The last class furnishes most of the bor rowers for consumption purposes and for self-im provement, and probably a large share of the bor rowers for business purposes; they subtract from pros pective future enjoyable incomes in order to add to the income of the present.
Now it is a fact of human experience that the larger one's income • is during a given period the less im portant is a unit of it, and the smaller one's income the greater is the importance of a unit of it. This is because of the variation in the intensity and impor tance of the various wants. At any given rate of exchange of present dollars for future dollars of any given degree of futurity, as the saver subtracts dollar after dollar from his present means, the utility of a unit of what remains rises, and the utility of the suc cessive increments to his prospective future income falls. He will tend to save up to the point at which the utility of the last decrement from present income just equals the utility of the corresponding increment to the future income. And in the case of the bor rower, as he adds dollar after dollar to present enjoy able income, the utility of the successive increments falls while the utility of a unit of the remaining future income rises. He will tend to borrow up to that point at which the utility of the last increment to present enjoyable income just equals the utility of the last decrement from the future enjoyable income.
At any given rate of exchange between present in come and future enjoyable income of a given degree of futurity—a year hence, five years hence—the savers will tend to save a certain amount, the borrowers will tend to borrow a certain amount; but at an arbitrarily chosen rate of exchange the two amounts will not be equal. If the borrowers want more than the savers are willing to save at that rate, the former will bid up the rate and induce more sav ing. If the savers are willing to save more than the borrowers are willing to take at that rate, competition among the savers will bid down the rate. Competi tion among savers and lenders and bargaining tends to fix a rate of exchange at which the rate of saving just equals the rate of borrowing—"supply equals de mand." 7. How interest contributes to past ex perience this rate of exchange of present for future enjoyable income has been one in which the future income exceeded in amount the present income for which it was exchanged. This excess or premium is called interest. When it is expressed as a percent age of the present income exchanged, it is called the rate of interest for the period of time involved.