Re: Explanation of interest (was: Re: [ox-en] Apple trees (aka capitalism) are bad. What about barter exchange?)
- From: Michel Bauwens <michelsub2004 gmail.com>
- Date: Thu, 30 Apr 2009 10:54:24 +0700
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If you want to remove interest -
I dont want to remove interest
what is the problem with interest?
The essential problem is the following: interest in a debt based system
becomes compound interest. This means you always need to pay back more than
you got, typically doubling every 20 years or so.
There are two scenarios:
- in a static economy, you have to take that surplus from somebody else, and
that would destroy a static economy, which is why interest was outlawed in
every precapitalist society
- the other solution is growth, that way you take it from a growing pie, the
higher the interest, the more you need to grow,and it's really a system that
needs very high growth rates; you can't stagnate without going bust ... but
infinite growth is a problem in a finite environment
Fractional reserve banking, creating debt without any true collateral,
compounds that problem, creating lots of debt that has no real possiblity of
being paid back in the real economy. The financial casino becomes eventually
more interesting than the real productive economy, which is what happened in
the last 30 years.
The political issue is the following: interest breeds accumulation, since it
becomes interesting to keep your money, so that creates political power by
those able to accumulate. Why has social-democratic reform become so
difficult since neoliberalism, because whenever you want to change
something, capital flight occurs, and your economy is bankrupt.
Another issue: if you have interest, investing your money in other money
becomes interesting; and you need to have very high return to do anything
else; this favours short-termism; if you have negative interest, your money
is worth less in the future, this favours investment, especially long term
investment. An example are the gothic cathedrals, built in a period of
demurrage, such long term thinking and value investment is impossible in an
interest-based system.
here's the perspective of herman daly:
*One hundred percent reserves would put our money supply back under the
control of the government rather than the private banking sector. Money
would be a true public utility, rather than the by-product of commercial
lending and borrowing in pursuit of growth. Under the existing fractional
reserve system the money supply expands during a boom, and contracts during
a slump, reinforcing the cyclical tendency of the economy. The profit
(seigniorage) from creating (at negligible cost) and being the first to
spend new money and receive its full exchange value, would accrue to the
public rather than the private sector. The reserve requirement, something
the Central Bank manipulates anyway, could be raised from current very low
levels gradually to 100%. Commercial banks would make their income by
financial intermediation (lending savers’ money for them) as well as by
service charges on checking accounts, rather than by lending at interest
money they create out of nothing. Lending only money that has actually been
saved by someone reestablishes the classical balance between abstinence and
investment. This extra discipline in lending and borrowing likely would
prevent such debacles as the current “sub-prime mortgage” crisis. 100%
reserves would both stabilize the economy and slow down the Ponzi-like
credit leveraging.*
*A SSE should not have a system of national income accounts, GDP, in which
nothing is ever subtracted. Ideally we should have two accounts, one that
measures the benefits of physical growth in scale, and one that measures the
costs of that growth. Our policy should be to stop growing where marginal
costs equal marginal benefits. Or if we want to maintain the single national
income concept we should adopt Nobel laureate economist J. R. Hicks’ concept
of income, namely, the maximum amount that a community can consume in a
year, and still be able to produce and consume the same amount next year. In
other words, income is the maximum that can be consumed while keeping
productive capacity (capital) intact. Any consumption of capital, manmade or
natural, must be subtracted in the calculation of income. Also we must stop
the asymmetry of adding to GDP the production of anti-bads without first
having subtracted the generation of the bads that made the anti-bads
necessary. Note that Hicks’ conception of income is sustainable by
definition. National accounts in a sustainable economy should try to
approximate Hicksian income and abandon GDP. Correcting GDP to measure
income is less ambitious than converting it into a measure of welfare,
discussed earlier*.”
(
http://blog.p2pfoundation.net/herman-daly-on-why-a-steady-state-economy-requires-100-reserve-requirements/2008/10/24
)
--
Diego Saravia
Diego.Saravia gmail.com
NO FUNCIONA->dsa unsa.edu.ar
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