In this first section of Chapter XVII, the author, Sir John Hicks, describes the topic that the chapter will address, namely the effects that interest-rate changes have on production plans. As he explains, his discussion in the previous chapter on the effects of changes in prices "had no new major principles to annunciate." When it comes to the effects of interest-rate changes, however, the situation is different: "there is no such body of doctrine which is settled and easily acceptable." Hicks mentions Böhm-Bawerk's "classical" theory (to which he alluded earlier in the book) as well as Frank Knight's "sketch of an opposition theory," but he judges the classical theory's validity to be "widely questioned" and the opposition theory to be "largely unresolved." He concludes that "the field is therefore open for us to try to discover a new theory."
Hicks proposes to set out such a theory in this chapter by applying the same method used to investigate price-changes. He explains that "the theory of interest-changes is ... much more difficult than the theory of price-changes" because a change in the interest rate does not result in simple proportional changes of the sort that result from price-changes. Instead, as he notes,
A change in interest rates which is expected to be permanent implies a proportionate change in the discount ratio per week for loans of all durations; and this does not lead to a proportionate change in discounted prices—the prices which are relevant to the determination of the plan. ... [T]he discounted prices of the outputs and inputs further ahead in time are regularly affected more than the discounted prices of the nearer outputs and inputs.
As a consequence, the only feasible approach to deriving relevant propositions for a theory of interest-rate changes is "by splitting up the general change in interest rates into a number of particular changes in particular rates (just as we split up the general change in prices and price-expectations into a number of particular changes in expectations)." In a sense, then, Hicks's use of this method in the previous chapter was a bit of a warm-up for its required use in the current chapter. It wasn't actually necessary for analyzing the effects of price-changes, although, as he notes "we got some illumination from this splitting-up." When it comes to analyzing interest-rate changes, however, "it is the only line of attack we have open."
