UP TO THIS POINT WE have analyzed the determination of the rate of interest and of the prices of productive factors on the market. We have also discussed the role of entrepreneurship in the changing world and the consequences of changes in saving and investment. We now return to analysis of the particular ultimate factors—labor and land—and to a more detailed discussion of entrepreneurial incomes. Our analysis of general factor pricing in chapter 7 treated prices as they would be in the ERE, a state toward which they are always tending.

Net saving, as we have seen, increases gross investment in the economy. This increase in gross investment at first accrues as profits to the firms doing the increased business. These profits will accrue particularly in the higher stages, toward which old capital is shifting and in which new capital is invested. An accrual of profits to a firm increases, by that amount, the capital value of its assets, just as the losses decrease the capital value.

We have been demonstrating that investment lengthens the structure of production. Now we may consider some criticisms of this approach.

At any given time, then, there will be a shelf of available and more productive techniques that remain unused by many firms continuing with older methods. What determines the extent to which these firms adopt new and more productive techniques?

We have seen that an increase in saving and investment causes an increase in the real incomes of owners of labor and land factors. The latter is reflected in increases in the capital value of ground lands. The benefits to land factors, however, accrue only to particular lands. Other lands may lose in value, although there is an aggregate gain. This is so because usually lands are relatively specific factors. For the nonspecific factor par excellence, namely, labor, there is, on the contrary, a very general rise in real wages.

It is clear that a feature of the progressing economy must necessarily be a fall in the pure rate of interest. We have seen that in order for more capital to be invested, there must be a fall in the pure rate of interest, reflecting general declines in time preferences. If the pure rate remains the same, this is an indication that there will be no new investment or disinvestment, that time preferences are generally stable, and that the economy is stationary. A fall in the pure rate of interest is a corollary of a drop in time preferences and a rise in gross investment.

In the ERE, as we have seen, the interest rate throughout the economy will be uniform. In the real world there is an additional entrepreneurial (or “risk”) component, which adds to the interest rate in particularly risky ventures, and in accordance with the degree of risk. (Since “risk” has an actuarially “certain” connotation, we may better call it “degree of uncertainty.”) Thus, suppose that the basic social time-preference rate, or pure rate of interest, in the economy is 5 percent.

Entrepreneurship deals with the inevitable uncertainty of the future. Some forms of uncertainty, however, can be converted into actuarial risk.

HAVING DEVELOPED IN THE PREVIOUS chapters our basic analysis of the market economy, we now proceed to discuss more dynamic and specific applications, as well as the consequences of intervention in the market.

Having considered the ERE and its relation to specific entrepreneurial profit and loss, let us now turn to the problem: When will there be aggregate profits or losses in the economy? This is connected with the question: What is the effect of a change in the level of aggregate saving or investment in the economy?