A collection of scholarly works about individual liberty and free markets. A project of Liberty Fund, Inc.

- Author: Irving Fisher

*The Theory of Interest, as determined by Impatience to Spend Income and Opportunity to Invest it* (New York: Macmillan, 1930).
http://oll.libertyfund.org/titles/1416

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Fisher was one of America’s greatest mathematical economists. This book is still used a textbook and is an outstanding example of clearly written economic theory.

The text is in the public domain.

This material is put online to further the educational goals of Liberty Fund, Inc. Unless otherwise stated in the Copyright Information section above, this material may be used freely for educational and academic purposes. It may not be used in any way for profit.

- CONTENTS
- ERRATA
- PREFACE
- SUGGESTIONS TO READERS
- PART I.: INTRODUCTION
- PART I, CHAPTER I: INCOME AND CAPITAL2
- §1. Subjective, or Enjoyment, Income
- §2. Objective, or Real, Income (Our "Living")
- §3. Cost of Living, a Measure of Real Income
- §4. Cost of an Article vs. Cost of Its Use
- §5. Measuring at the Domestic Threshold
- §6. Money Income
- §7. Capital Value
- §8. The Rate of Interest
- §9. Discounting is Fundamental
- §10. Costs, or Negative Income
- §11. The Discount Principle Applied
- §12. Double Entry Bookkeeping
- §13. Simplicity Underlying Complications
- §14. Capital Gain not Income
- §15. Capital-Income Relations
- §16. Application to this Book
- §17. Confusions to be Avoided
- §18. A Working Concept of the Rate of Interest
- PART I, CHAPTER II: MONEY INTEREST AND REAL INTEREST
- §1. Introduction
- §2. Assuming Foresight
- §3. Limitations of Theory
- §4. Real and Money Interest
- PART I, CHAPTER III: SOME COMMON PITFALLS
- §1. Introduction
- §2. The Exploitation Explanation of Interest
- §3. Interest Taking Survives all Opposition
- §4. Naïve Productivity Explanations
- §5. Two Other Pitfalls
- PART II.: THE THEORY IN WORDS
- PART II, CHAPTER IV: TIME PREFERENCE (HUMAN IMPATIENCE)
- §1. Preference for Present over Future Income
- §2. Reduction to Enjoyment Income
- §3. Impatience Depends on Income
- §4. Interest and Price Theory
- §5. Specifications of Income
- §6. The Influence of Mere Size
- §7. The Influence of Time Shape
- §8. The Influence of Risk
- §9. The Personal Factor
- §10. The Personal Factor Summarized
- §11. Income Rather Than Capital in the Leading Rôle
- §12. Impatience Schedules
- PART II, CHAPTER V: FIRST APPROXIMATION TO THE THEORY OF INTEREST Assuming Each Person's Income Stream Foreknown and Unchangeable Except by Loans
- §1. Hypotheses of First Approximation
- §2. Income Prescribed
- §3. Equalization of Impatience
- §4. Altering Income by Loans
- §5. Altering Income by Sale
- §6. Interest Ineradicable
- §7. "Marginal" Principle Is "Maximum" Principle
- §8. Market Equilibrium
- §9. Four Principles
- THE TWO IMPATIENCE PRINCIPLES
- A. Empirical Principle
- B. Principle of Maximum Desirability
- THE TWO MARKET PRINCIPLES
- A. Principle of Clearing the Market
- B. Principle of Repayment
- PART II, CHAPTER VI: SECOND APPROXIMATION TO THE THEORY OF INTEREST Assuming Income Modifiable (1) by loans and (2) by other means
- §1. The New Hypothesis
- §2. Optional Income Streams
- §3. The Two Kinds of Choice
- §4. Opportunity to Invest by Change of Use of Capital
- §5. The Reasoning not "Circular"
- §6. Summary
- THE TWO INVESTMENT OPPORTUNITY PRINCIPLES
- A. Empirical Principle
- B. Principle of Maximum Present Worth
- THE TWO IMPATIENCE PRINCIPLES
- A. Empirical Principle
- B. Principle of Maximum Desirability
- THE TWO MARKET PRINCIPLES
- A. Principle of Clearing the Market
- B. Principle of Repayment
- PART II, CHAPTER VII: THE INVESTMENT OPPORTUNITY PRINCIPLES
- §1. Eligible and Ineligible Options
- §2. The Method of Comparative Advantage
- §3. The Concept of Rate of Return Over Cost
- §4. The Principle of Return over Cost
- §5. Marginal Rate of Return Over Cost
- §6. The Illustration of Cutting a Forest
- §7. Other Similar Illustrations
- §8. The Case of Perpetual Returns
- §9. The General Case
- §10. Range of Choice Depends on Interest Rate
- §11. The Investment Opportunity Principles Summarized
- The Principle of Maximum Present Value.
- The Principle of Comparative Advantage.
- The Principle of Return over Cost.
- The Same Principle when the Options Differ by Continuous Gradations.
- §12. Interrelation of Human Impatience and Investment Opportunity
- PART II, CHAPTER VIII: DISCUSSION OF THE SECOND APPROXIMATION
- §1. Opportunity Reduced to Lowest Terms
- §2. Investment Opportunity Essential
- §3. Options Differing in Time Shape Only
- §4. The Imaginary "Hard-Tack" Illustration
- §5. The Imaginary "Figs" Example
- §6. The Imaginary "Sheep" Example
- §7. Opportunities as to Repairs, Renewals, Betterments
- §8. Opportunity to Change the Application of Labor
- §9. Fluctuations in Interest Rates Self-Corrective
- §10. Wide Opportunities Stabilize Interest
- PART II, CHAPTER IX: THIRD APPROXIMATION TO THE THEORY OF INTEREST Assuming Income Uncertain
- §1. More than One Rate of Interest
- §2. Relations Between the Various Rates
- §3. Limitations on Loans
- §4. Risk and Small Loans
- §5. Salability as a Safeguard
- §6. General Income Risks
- §7. Securities Classified as to Risk
- §8. Effect of Risk on the Six Principles
- THE TWO PRINCIPLES AS TO INVESTMENT OPPORTUNITY
- A. Empirical Principle
- B. Principle of Maximum Present Value
- THE TWO PRINCIPLES AS TO IMPATIENCE
- A. Empirical Principle
- B. The Principle of Maximum Desirability
- THE TWO MARKET PRINCIPLES
- A. Principle of Clearing the Market
- B. Principle of Repayment
- PART III.: THE THEORY IN MATHEMATICS
- PART III, CHAPTER X: FIRST APPROXIMATION IN GEOMETRIC TERMS
- §1. Introduction
- §2. The Map of This Year's and Next Year's Income
- §3. The Market Line
- §4. The Willingness Line
- §5. The Two Lines Compared
- §6. The Whole Family of Market Lines
- §7. Many Families of Willingness Lines
- §8. A Typical Family of Willingness Lines
- §9. Time Preference May be Negative
- §10. The Personal and Impersonal Influences on Impatience
- §11. Deciding Whether to Borrow or to Lend
- §12. Interest Fixed for an Individual
- §13. How an Individual Adjusts his Income Position to the Market
- §14. Market Equilibrium
- §15. The Four Principles as Charted
- §16. The Geometric Method
- §17. Relation to Supply and Demand
- PART III, CHAPTER XI: SECOND APPROXIMATION IN GEOMETRIC TERMS
- §1. Introduction
- §2. The Investment Opportunity Line
- §3. The Individual's Adjustment Without Loans
- §4. Individual Adjustment with Loans
- §5. The Double Adjustment Discussed
- §6. Market Equilibrium
- §7. The Nature of the Opportunity Line Discussed
- §8. Investment Opportunity and Impatience
- §9. Can Interest Disappear?
- §10. Does Interest Stimulate Saving?
- §11. Relation to Supply and Demand Curves
- PART III, CHAPTER XII: FIRST APPROXIMATION IN TERMS OF FORMULAS
- §1. Case of Two Years and Three Individuals
- §2. Impatience Principle A (Three Equations)
- §3. Impatience Principle B (Three Equations)
- §4. Market Principle A (Two Equations)
- §5. Market Principle B (Three Equations)
- §6. Counting Equations and Unknowns
- §7. Case of m Years and n Individuals
- §8. Impatience Principle A (n(m - 1) Equations)
- §9. Impatience Principle B (n(m - 1) Equations)
- §10. Market Principle A (m Equations)
- §11. Market Principle B (n Equations)
- §12. Counting Equations and Unknowns
- §13. Different Rates of Interest for Different Years
- PART III, CHAPTER XIII: SECOND APPROXIMATION IN TERMS OF FORMULAS
- §1. Introduction
- §2. Impatience Principle A. (n(m—1) Equations)
- §3. Impatience Principle B (n(m - 1) Equations)
- §4. Market Principle A. (m Equations)
- §5. Market Principle B. (n Equations)
- §6. Investment Opportunity Principle A. (n Equations)
- §7. Opportunity Principle B. (n(m—1) Equations)
- §8. Counting the Equations and Unknowns
- §9. Reconciling the Numbers of Equations and Unknowns
- §10. Zero or Negative Rates of Interest
- §11. The Formula Method Helpful
- PART III, CHAPTER XIV: THE THIRD APPROXIMATION UNADAPTED TO MATHEMATICAL FORMULATION
- §1. Introduction
- §2. The Six Sets of Formulas Incomplete
- §3. Conclusions
- PART IV.: FURTHER DISCUSSION
- PART IV, CHAPTER XV: THE PLACE OF INTEREST IN ECONOMICS
- §1. Interest Rates and Values of Goods
- §2. Interest Rates and Values of Services
- §3. Interest Rates and Wages
- §4. Interest and Functional Distribution
- §5. Interest and Personal Distribution
- §6. The Loan Market Is a Highway for Re-Distribution
- PART IV, CHAPTER XVI: RELATION OF DISCOVERY AND INVENTION TO INTEREST RATES
- §1. The First Effect of Each Important Discovery and Invention Is to Increase the Rate of Interest
- §2. Invention Causes Dispersion of Interest Rates
- §3. Invention Causes Revaluation of Capital
- §4. The Ultimate Effects of Invention on Interest Rate
- §5. The Present an Age of Invention
- §6. Mass Production of Inventions
- §7. Effects on Investment
- §8. Importance of Invention
- PART IV, CHAPTER XVII: PERSONAL AND BUSINESS LOANS
- §1. Personal Loans
- §2. Business Loans
- §3. Short Term Loans
- §4. Long Term Loans
- §5. Business vs. Personal Loans
- §6. Purpose of Borrowing to Increase Present Income
- §7. Public Loans
- PART IV, CHAPTER XVIII: SOME ILLUSTRATIVE FACTS
- §1. Introduction
- §2. Examples of Influence of Personal Characteristics
- §3. Examples of Influence of Poverty
- §4. Examples of Influence of Composition of Income
- §5. Examples of Influence of Risk
- §6. Examples of Influence of Time Shape
- §7. Rising Income Means High Interest Rates
- §8. Effect of Catastrophes on Interest
- §9. Examples of Influence of Periodicity of Income
- §10. Summary
- PART IV, CHAPTER XIX: THE RELATION OF INTEREST TO MONEY AND PRICES
- §1. Price Changes and Interest Rates
- §2. United States Coin and Currency Bonds
- §3. Gold and Rupee Bonds
- §4. Money Interest and Real Interest
- §5. Real Interest Varies More Than Money Interest
- §6. Interest Rates and Rates of Price Change
- §7. Short Term Interest Rates and Prices in the United States
- §8. Interest Rates and Price Indexes
- §9. Elimination of Trends
- §10. Relations of Prices and Interest Interpreted
- §11. Relations of Interest to Business and Prices
- §12. Interest Rates and Bank Reserves
- §13. Summary
- PART IV, CHAPTER XX: OBJECTIONS CONSIDERED73
- §1. Introduction
- §2. Income and Capital
- §3. Cost of Production as a Determinant of Capital Value
- §4. Impatience as Determinant of the Interest Rate
- §5. Productivity as a Determinant of Interest Rates
- §6. Technical Superiority of Present Goods
- §7. Interest as a Cost
- §8. Empirical and Institutional Influences on Interest Rates
- §9. Conclusion
- PART IV, CHAPTER XXI: SUMMARY
- §1. Interest and Purchasing Power of Money
- §2. The Six Principles
- §3. The Nature of Investment Opportunity
- §4. Investment Opportunity for Society as a Whole
- §5. Time Preference
- §6. Conclusion
- §7. The Future
- APPENDIX TO CHAPTER I
- §1 (to Ch. I, § 1) Quotations from Professor Canning's book
- APPENDIX TO CHAPTER X
- §1 (to Ch. X, § 2) [Geometric representation of incomes for three years]
- APPENDIX TO CHAPTER XII
- §1 (to Ch. XII, § 1) Algebraic expression of rate of time preference
- §2 (to Ch. XII,§3) Equality of marginal rate of time preference and rate of interest implies that desirability of income stream is made a maximum
- APPENDIX TO CHAPTER XIII
- §1 (to Ch. XIII, § 9) Rate of return over cost expressed in the notation of the calculus
- §2 (to Ch. XIII, § 9) Rate of return over cost derived by differential equations
- §3 (to Ch. XIII. § 7, also § 9) Mathematical proof that the principle of maximum present value is identical with the principle that the marginal rate of return over cost is equal to the rate of interest.
- §4 (to Ch. XIII, § 9) Geometrical explanation of the proposition expounded in § 3 of this Appendix
- §5 (to Ch. XIII, § 9) Maximum total desirability is found when rate of time preference is equal to the rate of interest
- §6 (to Ch. XIII, § 9) Walras and Pareto
- APPENDIX TO CHAPTER XIX
- §1 (to Ch. XIX, § 4) Tables giving basic data
- §2 (to Ch. XIX, § 6) Tables of interest rates
- APPENDIX TO CHAPTER XX
- §1 (to Ch. XX, § 17) Waiting as a Cost
- BIBLIOGRAPHY
- I. WORKS ON INTEREST THEORY.
- 1. Books:
- 2. Articles:
- II. OTHER WORKS DEALING WITH INTEREST.
- 1. Books:
- 2. Articles: