Value & Capital, CHAPTER XIV, Section 4

This section continues -- seemingly in mid-paragraph -- the discussion of the previous section, by beginning, "For consider what happens, first, if interest rates are expected to change."  In this case, the author argues, "a definition based upon constancy of money capital becomes unsatisfactory."  He then constructs a numerical example in which the interest rate becomes fixed in the second time period at a rate that is twice the rate in the first period (and it remains at the second-period rate thereafter).  In his example, the individual can make the stream of expenditures

 £10, £20, £20, £20, ...  

and maintain his same quantity of capital, whereas that quantity of capital being available at the beginning of the second time period allows the individual to spend the stream

 £20, £20, £20, £20, ...  

The author notes that "It will ordinarily be reasonable to say that a person with the latter prospect is better off than one with the former."

Accordingly, the author arrives at the definition he calls "Income No. 2."  Namely, it is "the maximum amount the individual can spend this week, and still expect to be able to spend the same amount in each ensuing week."  For constant interest rates, this definition is the same as Income No. 1, but not when interest rates are expected to change.  The author concludes, "Income No. 2 is then a closer approximation to the central concept than Income No. 1 is."