This is a strange article. It’s by Michel Bauwens (founder of the P2P Foundation).
He claims:
“If you ask for interest in a static pre-modern society and you need to repay more than you have borrowed, then you can only take it from someone else, thereby destroying the social fabric of non-growing societies.”
What – so a country’s legal and educational systems collapse because someone pays interest to someone else? I’m baffled. Anyway, the next sentence reads:
“This is why interest is forbidden in Islam . . . . Indeed, the only way you can pay back more than that you borrow without taking it directly from others, is by endlessly growing the economy.”
I’m baffled (for a second time).
In a “non-growing” economy, as long as interest earners spend the money they get from interest, that money just keeps circulating. I.e. a non-growing economy is perfectly compatible with interest.
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Hi Ralph!
ReplyDeleteI've been thinking of the same with regards to interest and its physical implications on a country's economy and resources.
You mention at the end that "In a “non-growing” economy, as long as interest earners spend the money they get from interest, that money just keeps circulating. I.e. a non-growing economy is perfectly compatible with interest."
But, I think, where will the interest givers/providers provide for this interest? I think either from cutting their costs to allocate more money towards paying that interest or somehow growing their income to pay the interest. If its the latter, I can then think of 3 ways - increasing the price of the goods and/or service while maintaining the same amount of them, increasing the amount of goods and/or services and decreasing the price, or increasing both. All of these will result in an aggregate increase in the value of goods and services which will result in a growing economy.
This is what I've grasped from my reading.
I would be really interested in discussing this as this issue has been on my mind for quite some days and I'm not an economics expert.
Thanks for the informative posts on your blog. :)
Take the simplest possible example. A lends £B to C. Let’s say A would have spent the £B during the following 12 months had A not lent the money. That just means C spends the money instead of A. As to interest, C sends A £Y of interest near the end of the year let’s say. That means A spends the interest instead of C. I.e. had there been no interest, C would have spent the “interest money”. But C has sent that money to A, so C can’t spend it. So there is no need for a change in GDP.
DeleteHaving said that, the effect of increased lending ACTUALLY IS TO increase GDP somewhat. And likewise, the opposite of increased lending (i.e. so called “deleveraging”) is to reduce GDP. The exact reasons are complicated and for the most part above my pretty little head, but Steve Keen has gone into this. I think he claims the stimulatory effect is related not to increased lending, but the “rate of increase of the increase”. My maths is very rusty, but that’s the “second derivative” isn’t it?
Steve Keen’s blog:
http://www.debtdeflation.com/blogs/