ABSTRACT
This chapter deals with costs and with the risk element in the rate of interest in particular. It presents the distinction between case-probable and class-probable judgements. The chapter contains a realist approach to the analysis of human action under uncertainty. It explains the impact of risk on the return on capital by applying this approach. The chapter discusses the significance of the findings for the theory of costs. The conventional way to integrate risk into economic analysis is fatally flawed in the very way it conceives of the problem. The implicit assumption is that risk is something 'out there' which can be studied by economists and other scholars, and which sooner or later will also be discovered by all other rational decision-makers. Most present-day economists consider observable interest rates to be the arithmetic sum of a pure interest rate, a risk premium, and a price premium, each of which can be determined in separation from the others.
