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| 394 | “scientia„ |
lending evidently affect the time-shape of the incomes of borrower and lender; and since the time-shape of their incomes affects their rate of impatience, such a modification of time-shape will react upon and modify their rate of impatience and bring" the market into equilibrium.
For if, for any particular individual, the rate of impatience differs from the market rate, he will, if he can, adjust the time-shape of his income-stream so as to harmonize his rate of impatience with the interest rate. For instance, those who, for a given income-stream, have a rate of impatience above the market rate, will sell some of their surplus future income to obtain (i. e. « borrow ») an addition to their present meagre income. This will have the effect of enhancing the value of the future income and decreasing that of the present. The process will continue until the rate of impatience of this individual is equal to the rate of interest. In other words, a person whose impatience-rate exceeds the current rate of interest will borrow up to the point which will make the two rates equal. Reversely, those who, with a given income-stream, have a rate of impatience below the market rate, will sell (i. e. « lend ») some of their abundant present income to eke out the future, the effect being to increase their rate of impatience until it also harmonizes with the rate of interest.
To put the matter in figures, let us suppose the rate of interest is 5 per cent, whereas the rate of impatience of a particular individual is at first 10 per cent. Then, by hypothesis, the individual is willing to sacrifice 1.10 of next year’s income in exchange for 1 dollar of this year’s. But in the market he is able to obtain 1 dollar for this year by spending only 1.05 of next year. This ratio is, to him, a cheap price. He therefore borrows, say, 100 dollars for a year, agreeing to return 105 dollars; that is, he contracts a loan at 5 per cent when he is willing to pay 10 per cent. This loan, by increasing his present income and decreasing his future, tends to reduce his rate of impatience from 10 per cent to, say, 8 per cent.
Under these circumstances he will borrow another 100 dollars being now willing to pay 8 per cent, but having to pay only 5 per cent. This loan will still further reduce his rate of impatience. He will continue to borrow until his rate of
