Saturday, September 29, 2007

Interest

Historically anarchists have been opposed to interest, as well as rent and other things. One particularly interesting anarchist to me is Benjamin Tucker. It was his contention that in a world without a banking monopoly (read as "free market"), interest rates would practically fall to the cost of administration, tracking, and collecting on the loans. I'd like to believe he was right, but don't see how it's possible.

There is only so much capital in the world, only so much that can be loaned out, and only so much willingness to loan it out to the future at the expense of the present. The demand for this capital, by contrast, is practically infinite. There is an opportunity cost for lending money out of a finite supply of savings. Some of the things credit would be spent on will be more productive of wealth than others. I hate to use a hypothetical situation with absurd circumstances to demonstrate a principle, but it's easy to do, so I will.

Let us suppose that most people are using most of their wealth to satisfy their present needs, and they either can't or refuse to save any more and a bank has only $10,000 to loan.

Enterprise A has done calculations and predicts that total profits from the increase in production would exceed $10,000 in six months if it gets that $10,000 now. Enterprise B has similarly reached the conclusion that the money can be used to increase profits to a total of $10,000 one year from now. Enterprise C has found an exceptional opportunity that it believes will allow it to meet it's expenses and have $20,000 in profit in 3 months. One enterprise will create a $10,000 surplus in 6 months, another create a $10,000 surplus in 1 year, the third will create a $20,000 surplus in 3 months. It should be obvious enough which enterprise should receive the money if they can't all get it.

Without interest, whoever got to the lender first would get the capital, irrespective of the actual results. The lender has no incentive to hold out on Enterprise B to see if Enterprise A or Enterprise C might come along and promise better results. But Enterprise C has much more to gain than either of the other enterprises, and will be willing to pay more than the administration costs to ensure that he secures that $10,000 this moment. And so an excess is created that would be considered interest.

Now, in reality, it's unlikely that such high rates of return will be so frequent that loans must be considered at that interest rate. In the above hypothetical situation, an interest rate of 101% per year will cause Enterprise B to not want the loan, and an interest rate of 101% per six months will cause Enterprise A to turn it down. In the real world we've got much more credit to put toward much less lucrative opportunities, but we have, nonetheless, a limited amount of capital today, and infinite opportunities to use it, ranging from creating a surplus of value (investing in a business) to creating a negative return (getting into debt over a fifth vacation home on the Hawaiian shoreline for instance), that nonetheless, people will want.

Consider the impossibility of building a computer in agrarian times. They could not take out enough capital to build a computer, for enough didn't even exist in the world at the time. If everyone were to put all their effort toward building a computer back then, they still would not have a computer, and would run out of food before they were done figuring out magnets, and would have been generally unhappy while doing so, being hungry, thirsty, tired, and so forth. It is not possible to invest more toward the future than exists in the present. And most of what exists in the present is used to satisfy present needs. To a degree, people will give up their present needs in favor of future goods, depending on how much better the future good will be and how far in the future it can be had.

Decisions as to how limited savings will be used have to be made, and while I certainly admit that other ways of doing it can exist, interest seems the most sensible way to coordinate the two in a continuous way.

So while I'm against rent (as in, you're better off owning than renting), and against wage slavery (as in, you're better off as an entrepreneur), I really don't see it as reasonable to be opposed to interest.

A potential problem that interest might present is that it is a positive feedback system that has the potential to eventually dominate, like the bacterium which, under ideal conditions and having infinite resources, would expand to flood the earth in bacteria in a year, and destroy everything else.

But I think in a freed market the banks would be paying almost as much in interest to those who put their savings in that bank as it would be taking in from those who are indebted to the bank, ultimately spreading the profits to anybody who is willing to save. And for anybody who didn't save and fell behind economically as the rest of the economy advanced, an opportunity would exist to take advantage of the surrounding infrastructure built by others, the rewards for advancing would far exceed the cost of the loan, and once the debt was cleared and their hands more productive, they could easily be right back on par with the rest of society. I might have to elaborate on this later though, because it's still kinda fuzzy to me.

At least that's my take on it.

1 Comments:

Blogger Ineffabelle said...

Hoppe has a pretty convincing argument that the natural rate of interest would continually fall in a free market. Basically, the demand for capital competes with the demand for consumption. As capital accumulates, more people are willing to loan it out and people are less in need of borrowing as opposed to saving (As return on labor goes up as capital is applied to labor, it makes sense that saving becomes more and more effective over time.)
I don't think interest would disappear altogether but it would definitely go down and down over time.

Now what's interesting is that if you take the austrians literally in their model of profit formation, it seems to me that other than sporadic gains due to good guessing by entrepreneurs, the overall rate of profit would tend to get bid down to just above the overall rate of interest. (as capital would chase demand)
I think you can see where I'm going with this, and why your last post (about equality) makes a lot of sense to me.

1:27 AM  

Post a Comment

<< Home