Tuesday, June 28, 2011

The Importance Of Delimitation Of Interest

While economists may be willing to concede that their institution of interest, generally, and that of its validity, social implications, and public policy projections in particular, leaves much to be desired, they in practice assume the amoral stance of accepting what exists. Haberler states that 'the theory of interest has for a long time been a weak spot in the science of economics', but little fundamental analysis of this persistent confusion and how it can be overcome is available. One of the major stumbling blocks is the confusion which exists to this delay between profit and interest. There has been a consistent blurring of socio-economic objectives dictated by enforced identification between profit and interest, which is only partially reflected in the frequency of misuse of the word 'profit' in the meaning of interest. This loosens our grasp on issues relevant to distributional justice and deprives us of the capability to identify or analyze, much less overcome, exploitative manifestations which prima facie, appear to flow primarily out of one of these two categories. The confusion between interest and profit, and the misdirection of public policy which this confusion entails, is the fundamental support on which the entire superstructure of various economic disequilibria rests. In any social arrangement in which both nectar and poison are equally available and equally valued to the extent that the word 'nectar' means both what it should and also its opposite, the likelihood of healthy survival of that community cannot exceed 50 percent.

In such a situation it is not a matter of surprise that billions of dollars are spent on curtailing agricultural production while millions die of hunger and malnutrition every year, nor that unemployment is so pervasive notwithstanding endless unsatisfied human wants, nor the situation that all our efforts to overcome it only inflict inflation without creating an enduring dent.

Until we know what is the difference between profit and interest and insist on keeping their substantially antithetical significance under proper spotlight, we cannot have an answer to the endemic friction between growth and stability, we do not have it. We cannot have an answer to the problem of unemployment, not the limping ones of which we have any number, but the two-legged one which may ensure its extinction, and we do not have it. We cannot have a real answer to the problem of inflation, and we do not have it. We cannot have an explanation for the coexistence of the vast installed capacity of idle machinery and of unsatisfied demands that the working of inactive mills could have met, and we do not have it. We cannot explain the trade cycle, much less overcome it, notwithstanding our success in containing its amplitude, but the areas of uncertainty and unawareness refuse to shrink. We cannot explain or overcome the plight of the Third World, unless we know what interest has done to it. The fact is that no creative macroeconomic policy formulation is possible without our understanding of the role of interest, in contradistinction from that of profit. Without delineating the difference between these two, theoretical appraisal would be as sterile as any enunciation of public policy, regardless of which compartment of economics we are dealing with at a given point of time. Policies relating to consumption, production and distribution directly, and the ones relating to exchange indirectly, hinge on the understanding of this differentiation and clarity of its comprehension.


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