§ 8. Time-price without loans. It is clear then that discounts of future uses are necessarily involved in an individual's valuations of all his own goods which have any durative-ness whatever - necessarily whether the person is conscious of it or not. The expression of this discount on the future (or premium on the present) may be and often is inexact and variable, but the fact of the discount (or premium) is always there. If this were not so and present uses in technical processes were not on the whole treated as more important than future uses, labor and resources of all kinds would be distributed impartially over the most distant periods of time. In the extreme case one might starve himself to death in youth while producing goods for his old age.

Now if these discounts are involved in valuations, they must play their part in determining the prices at which trades of objects containing different time-periods are made. Time-value bears the same relation to time-price that value of direct commodities does to their price. (See Chapter 7.) Generically the time-price problem is the same as the problem of commodity-price, and of usance-price (rent) ; specifically it is different only in as much as the particular value is that due to time. Collectively the valuations are the basis of price, but severally the valuations are socialized and modified by price. That is, the existence of the market gives new conditions of substitution of goods in point of time, and presents new motives and possibilities of using wealth.

Let us see how an arithmetic rate is involved in such trades, when the prices are expressed in money-terms. Trader A has a steer ready to market that will sell now for $100; he trades it to B for five calves that will sell for $102 each in three years, meantime costing to keep, including allowance for labor and trouble, $25 a year each (counted at the end of each year). A gives $100 now, plus $125 a year hence, plus $125 two years hence, plus $125 three years hence, total $475, to get a capital of $510 at the end of three years.2 In this trade there is involved a premium on the investment at the rate of 5 per cent. Do the two parties need to know this when they trade? Not exactly as an arithmetic expression, but approximately as to the outcome.

2 Of course there are other reasons why the trade may be made, such as the better means that A has for feeding calves, the special use B has for fat steers, etc. Attention is limited here to the time-price problem, in cases where the prices and costs are the same to both parties.

§ 9. Present price and the discount on future uses.

Every exchange of a durable agent involves an estimate, rough and imperfect it may be, of that agent's future. The practical traders, who in agreeing upon a price are thus involving a rate of capitalization of goods, are usually only dimly conscious of the logical nature of the process. In merely occasional trades the process usually goes on in a very empirical way, by the method of trial and error. The future changes are only roughly, not accurately, estimated. What each tries to do is to get as much as he can and give as little as he must, and, comparing one line of trades with another, shifts back and forth to the line that gives the best results. But the shrewd bargainer is the one who foresees more clearly than his fellows the complex changes to come or shows an intuitive sense of the net result that the common mind lacks. The ability and the inability to foresee such changes make men rich and poor. In all this bidding for capital the logical basis of the present value is the series of expected incomes. When the agent is bought outright, the very concluding of the bargain fixes a relation between the expected value of the income and the value of the capital invested. This discount on the future incomes (which is involved in the lower present price) evolves, as the agent is kept and yields the expected income, as a rate of premium on the purchase price, that is, as a rate per cent on the amount of invested capital.

There are, of course, different markets for time as for other things at the same moment and near each other. In these the time-rate varies, being high in poor economies and low in good ones. Temporarily, as in time of war, or a panic, the rate may become very high, as shown by the abrupt fall of prices in commercial centers, when prices throughout the country are but slightly affected. The communication between the different markets for investments is imperfect, and the adjustment between them of the rates of discount on future incomes is always more or less incomplete.

In the next chapter we shall see how the various kinds of monetary incomes are capitalized in the business world, how thus continuously a price on investments, or rate of return, prevails, and expresses a ratio of exchange between present and future capital (and incomes) in the market.