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I = S - M

The modern way of thinking about economics has been I = M - S Where I is the I as in me, M is what is 'mine' and S is what ...


What is interest?

Classical economics saw interest as the value of capital. It was the value at which supply of and demand for capital would find balance. In this way of thinking of interest any intervention that changed the supply conditions such as monetary policy would distort and confuse underlying valuations of capital. Hence the classical insistence of hands-off economics. Capital is appropriately used when its real value is clearly exposed. Its value is reflected in the interest. Messing with interest is tantamount to a sin.

As everyone knows classical economics and its hands-off approach meant that historically during depressions, those inevitable downturns of the trade cycle, millions of people would be jobless, homeless, hungry and in misery. This was the history of western economics until John Maynard Keynes.

John Maynard Keynes revolutionized economics by seeing interest as the value of money. New capital forms a very small part of the market for money so Keynes explained interest in terms of the balance between the supply of and demand for money. Seen in this light monetary policy or even fiscal policy does not cause distortions in capital. Money in the sense of modern fiat money (not backed by gold) can be sensitively modified to improve overall performance and in the case of crises such as the depression, fiscal policy can be brought in powerfully to effect a massive change in conditions. Neither distorts capital and can and have been used effectively to ease suffering.

We are grateful to Keynes for improving the lot of the common human. Millions upon millions of children would have died or never have been born without Keynes' revolution.

However the revolution was only partial. To be complete we must match means and ends. As Gandhiji once said, "Means and Ends are convertible terms." Keynes created a system where new means (monetary and fiscal policy) were created to meet the ends of preserving the very system that created the imbalance and suffering in the first place! Think about it in 5 easy to understand steps:

1. You have a system based on bad economics.

2. This system inevitably creates cyclical crises.

3. The crises cause untold suffering.

4. Classical economists say, "Hands-off, all this suffering cleanses the system of bad blood!"

5. Keynes brings humanity into the system by redefining interest, eases suffering somewhat.

Both systems preserve the system based on bad economics. Means and ends are not convertible!

Any system that involves senseless suffering of people is a system that we should no longer accept. We can not even let ourselves be hoodwinked into accepting it as a means to a lofty end. We must develop a new system where means and ends are convertible, where joyful work, wholeness, a spirit of community, peace and laughter are are means and also our ends.

In the previous blog post I ponder one small way of making a beginning in rethinking the concept of interest.

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