Interests Rates

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Contents 1 Definition 2 Historical 3 Bibliography 4 Notes

Definition

For the payer, interest is the cost of purchasing now relative to purchasing in the future. For the payee, interest is the reward of deferring purchase until the future.

It's key to see both sides of the equation. One commonly hears that interest "is the cost of money" (i.e., the cost of borrowing money), but this only looks at one side of the equation. It may cost 5% to take out a loan, but if I'm making 10% on investments--factoring in risk, etc.--then I'm better off borrowing.

Historical

The historical perspective on interest in the West was put forward by Plato and Aristotle who held that interest was unnatural as money did not having any generative power of it's own. They failed to grasp the idea that the lender is deferring their own purchases and saw interest as "money for nothing".

While this view is less true in modern society, and certainly had negative consequences on European finances from the Middle Ages right through to the Renaissance.^{[notes 1]} However, I would argue that the view was relatively more correct in the past, and was probably the (absolute) correct view in Ancient Greece.^{[notes 2]}

The modern view is predicated on a society which values the individual and has the infrastructure and capital necessary for mass participation in economic markets. On the other hand, the Greek social values and level of economic and bureaucratic development put less of a value on the individual and a greater value on society.

The only lenders (for their was no infrastructure for aggregate deposit lending as we have with banks) were rich individuals whose captured capital was greater than they themselves could do anything useful with. For them, interest was really "money for nothing" because there was nothing more they could do with their money.^{[notes 3]}

Compare this to the i industrious poor farmer who is both willing and able to combine sweat equity with capital improvements to expand their farm, then the Greeks would say: "Lending the money costs the wealthy individual nothing. However, the farmer will aid not only himself, but the state because he will increase production and perhaps his own status, thus improving his ability to serve in the military and political realms."

The point being that how me choose to move money around society has real implications beyond those of purely finance based economics. Admittedly, the proper response is clearly to limit abuses and find a fair interest rate (which is never actually zero), so in that sense, the Greeks were wrong. However, it is important to understand that he view was based on the demonstrable realities of their socio-cultural values system and--while not being ideal--were reasonable.

Of course, by the time you get to the Dark Ages and apply the idea to a completely different society with vastly different demographics, values, and structure, the results were disastrous. For that time and those people, it was an unquestionably stupid idea that stalled the development of commerce and general progress of the culture. However, the lion's share of the blame should go not to the Greeks, but to the intellectual laziness that blindly applied ideas ill-understood ideas to the wrong time and wrong place.

Again, no question that the Greeks could have done better, but they were doing well enough for their time. My point is that it wasn't the ideas themselves, or even that Plato and Aristotle didn't understand economics^{[notes 4]} that was the problem. The problem was inflexibility and slavish veneration of "ancient ideas".

Bibliography

• Dean Baim Economics 160 UCLA lectures, October 2007

Notes

1. ↑ I wonder if anyone's put tried to put a number on this, such as, "killing 100 years of progress".
2. ↑ I also hold that this point is actually important since we, in America, are in a period where the middle class is shrinking and returning to one in which there's a huge gap between the rich (who can lend) and the poor who must borrow.
3. ↑ I'm speaking here somewhat from a Greek perspective. It is true buying another gold chalice would have helped the gold smith economy, and there is value in that. But the Greeks abhorred excessive wealth to begin with, so if one has so much wealth that the only thing other than investment (lending) one can do is buy things that display that wealth, then the Greeks would have dismissed that as a value-less transaction.
4. ↑ In fact, from a utility theory of economics, they probably understood them as well as anyone did, and from that perspective, they're understanding is entirely valid and true for themselves at their time. They certainly understood the utility of economic actions in ancient Greece better than first year economic students do, despite their naive understanding of the nature of usury.