Topic: Growth, Interest and Wage Inequality - To the austrian economists here (Read 6013 times)

Here are so many good people ^^
Many good analysis
Your comments and comments are so great
Need to learn more, Very nice ^^

This is the service the money owner is getting for free. I just bring it up to legitimate demurrage.


No. You're paying interest with every item you purchase. Not only on the liquidity needed to market it, but also the capital yields of the factories. One could think that while factories yield any profit, more factories are going to be build, but no. Building a factory takes money, and no one will exchange his money for a factory that yields less than what money can yield as a trade enabler. Not only your purchasing power is reduced, but also your wage, since consumers of wathever you produce have to pay for all this too.


That's not the main concern.
The fact that the money holder can hoard and save wild cards insted of products (everything at no cost), make him ask interest when uses money for enable trade.


It's going to be hard to make my point with 10 people, since they could easily rely on barter when money ask for its tribute, but let's have fixed production and fixed monetary base.


Good example. P equals B, so the money holders when P takes place are benefited and the holders at B (they don't have to be the same people).
Richguy has valuable information (when those events take place) that can sell. But again, this is not my point against interest.


I prefer to keep the deflation discussion in its own thread.

Here's my story:

We have many islands each with a Robinson in it.
At first every Robinson captures his own fish and builds his own nets.
But there's different fishes with different flavors and colors and barter emerges.
Since not everybody wants to build a boat, some Robinsons specialize and become merchants. Producers sacrifice part of their production to pay the merchants wages. If merchants wages are too high, more Robinsons will become merchants, if too low, some will quit the profession.
A wants to save but doesn't want his fish to rot. B wants to build his house so borrows the surplus of A, while he's building it. Interest could be zero, because A doesn't want his fish to rot. It will depend on supply and demand of credit, but there's no low limit above the rot rate. If A ask too much, next time B would prefer to save its own fish before his old house is broken to have time the build the new one.  
The utility extracted from "capitals" (the nets, the boats, the houses) just need to be equal to the costs, "capital" yields can drop to zero.
Everything's fine.
Builderguy builds houses. People sometimes give him materials and paid them a wage during construction.
Other times he save enough for the materials and his needs during construction and then rents the house. That was very profitable at first, but when more people began to do it and rents fell, that became just equivalent to build for a wage.
The only difference was when you received the fish. Some people who didn't know how to build houses employed him to build a house and rented it later, not for the profit, but because they had too much fish now and wanted to receive it periodically later. That's what happened to cleverguy when he invented a new net with a stick.
He got high profits at first that wants to preserve. Now that everybody has a net like his, there's no difference with other fishermen, their wage are equivalent again.
Everything's fine.

Then scarce everlasting money appears.
To be fair, every island contains the same amount of gold (say 10oz) and no one invents it, all Robinsons agree to use it at the same time.
With money, they become even more specialized and more complex production projects that needed higher degrees of collaboration are now possible. But their invention, although inanimate, doesn't perform its function for free.
Many Crusoes (like they used to do) save by storing things that doesn't rot and they will always be able and want to consume, let's say salt, wine, etc.
Since money is more useful for merchants than for other inhabitants of the archipelago, they start give their gold to merchants, who are accumulating no other thing than credit.
They know they've make a mistake when some merchants offer low prices to producers that have no money and can't wait to buy certain things.
Workerguy thinks "if they can abuse that way, is because there's a lack of merchants, I will become a merchant, eventually an equilibrium will be reached again".
All he needs is money, that he can get in the financial market just like they used to do when the loans were on fish.
He remembered that there were lower interest rates back then, but he things: "This is because of growth, the factory-ships that money has allowed us to build. The profits on investments are high and thus the demand for money. They will drop when profits do."

But when he enters the commerce market he finds out that the wealthiest merchants weren't the better qualified merchants, those had just a higher wage. The wealthiest merchants were the ones that had and lend more money. The firsts who exploited the liquidity needs of both producers and other merchants.  
The wealthiest guy is Capitalguy, who didn't ever renounce to his first 10 oz, he preferred sell first and and buy later, whenever he saved, he did it in money, he was the first to lend it, he was one of the first merchants that realized that he can charge his customers, not only his services as merchant, but also the "time-value" of the money he's using to move wares from island to island. The difference between the price they pay the producers for the wares and what they charge consumers must be higher now and the increase must be equal to the interest on money lending. It didn't matter if they had borrowed it or not when they do their calculations. Those merchants who didn't understand that went out of business.
Builderguy 2 has noticed that rents have rise, because the no they are no longer build until the the total gains in rents are equivalent to the construction costs. Now they are build only until the annual gains in rents are equivalent to the annual gains in money lending for a given cost of construction. Well the house needs to yield more since, unlike gold, it doesn't last forever.    
Cleverguy 2, who invented the factory-ship thought that you can't profit forever from a good idea, but with this factory-ship is different.
With the nets, nets were made for every fisherman and the profit from owning the nets dropped. But now the profit from owning factory-ships never drops below the interest, since no one would spend his money in an investments that yields less than the interest. Some fishermen don't find a job because there's not enough factory-ships for all them to work. Some of them have to leave the sector like happened when the nets were invented. But with barter more nets are done while the yield of the net is positive. Now production of factory-ships stops when their yield go below the interest.

maybe I got it now. in contrast to barter, money is slightly "overvalued" because it is more flexible than say a goat. WIth money I can buy anything, with a goat I can only buy products that are offered by a guy acceting goats. I agree. Lets consider the case where I sell one month of work for a certain wage and buy stuff with that money, spending everything. Would you agree, that in this case the "money-premium" is irrelevant? I think the problem you are talking about arises when people are hording money, right? So they need an incentive to spend it (e.g. freigeld).

Lets see what happends in a village of ten people with a fixed amount of money:

10 people
different goods, a,b c, fix production!!
using money they agreed upon, say shells
fixed amount of shells: 1000 shells
There is constant demand and supply of a,b and c giving prices p_a, p_b and p_c.
Now I claim the following: If 500 shells are destroyed (and no new shells can be found), all three prices will double. this implies that you have to pay double and that you earn double when selling a good.

Now consider there is one rich guy who achieved to own 590 shells, but he saves/hordes the money and only uses 90 for his daily business. There is one thing happening that is in my opionion not considered by Gesell: With hording of half the shells (forever) the prices and wages double as in the above example. The richdom of richguy is theoretically double but he does not use it so everyday life of the 10 people is unchanged. Actually the other 9 had a profit "P" because the prices decreased due to richguys savings. Now lets say richguy wants to use the money before he dies and buys more goods than usual. If he spends all his money, the prices will go up depending on how many "productionperiod" he needs to spend everything. In an extreme case, he buys almost all of the  goods but the few that are needed for the other 9 to survive. But independet of the strategy of spending (one period all money vs. 10 periods 10% of the money), he does not get the goods for the halfed price and is in sum always paying a Premium "B". To understand that, keep in mind, that the production is fixed! I claim "P" equals "B". So richguy gets his well-deserved amount of goods that costed 500 shells in the beginning and nothing more.

So I claim, that hording is irrelevant, moneypremium is irrelevant and Gesell is irrelevant We could of course discuss, what happens on a larger scale, when we also consider that inflation and deflation takes some time to take place. Nowadays this gives central banks, banks and companies an advantage because we life in an inflationary world. This discriminates the ones farthest from the tap, e.g. pensioners and workers. I think yours and Gesells problem disappears when this problem disappears, which is when we life in a world with a fix amount of money which implies, that this money deflationates with the rate of economic growth. If your wage is constant but money deflationates, you can buy x% more goods, x being the rate of growth. So everybody participates in the growth with the same rate. In the real world, you at first don't participate in growth and also your wage is devaluated by the inflationrate i, so if you (as an worker or pensioner) can claim your fair wage/pension after say a year, then you where "taxed" (1+x)(1+i). Nowadays this is something between 5 and 8 percent. Its of course lower, if wages are adjusted faster. So actually I would say the third solution is a fixed amount of money.

I would say "the cost of the price going down to get rid of the goods".
The service that is paying for is going from the producer to the consumer without the need of direct barter.
If the ware doesn't pay that tribute to money, it get stuck with barter. Money doesn't have anything to lose, it doesn't need to flow; the wares are the ones in a hurry to get to the consumer.

Uups, I'm sorry, Those -------------- aren't supposed to appear.
I have edited my last post.

Before we get to solutions...
What is this highway tax? Is it the cost of transporting goods, the cost to recoup storing goods, or the cost of the price going down to get rid of the goods because they are taking up space? The only way I know of that a producer can "push" products out is by lowering the price until it is both, lower than the competitor's price, and lower than the costumer's "utility" price (I won't pay for something if I don't need it). I still don't understand what serviceexactly this tribute is paying for?

They aren't produced.


Even if the selling price is below the production costs.


Yes, they don't need profit, but they need to pay the interest to be traded within the market. You could see interest as a distribution cost.


Yes, but not only that, even if the wares don't expire they are something that the producer doesn't want. They must find their way to the customer and they have to pay the "highway" tax.
The selling price must include the production costs, the proportional wage of the merchant and the tribute to money for letting all this happen. If the game stops, money is the only one immune, so it can exact a profit from its privilege.
There's two solutions:

1) A negative incentive to money for not stopping the game, Gesell's proposal.    
2) Don't let money stop commerce, that is non scarce money like LETS or Ripple.

I think we should use both to have a more diverse and resilience monetary system.
Gesell only saw the first possibility, and though that government was the only one who could issue his freigeld.
Bernard Lietaer's Terra could be implemented privately and it has a demurrage that covers the storage costs.
I like Terra as a stable reference currency for contracts, but I don't like the "storage of a basket of assets" to back a currency concept.
In fact, I don't like the concept of backing a currency. Money doesn't need to be backed. The "intrinsic value" of gold is not needed.
The block chain shows us that private hands can issue "fiat" money. By fiat I mean unbacked here, "let it be" (that's what fiat means), not that is empowered by a state.
That's what I think is the best of bitcoin. Is a "fiat" money that doesn't "belong" to any state. And private currencies were usually backed before. I think there's also local currencies that are issued through charities.
I think non mutual credit (scarce) moneys should be all this way.
And I also think that between scarce moneys, wares would chose free moneys to not pay interest and be sold for less and faster. Faster, because the buyer has an incentive to think faster (or before having even sold his own wares) what he wants in exchange for (indirectly) his production.
By the way, money does not represent any particular ware/labor, it's like a wild card.

I'm stuck in the mindset that if wares don't cover fixed and variable costs (costs of producing the wares), they aren't sold. If they do, they are sold even if profit is $0, simply because wares produce a benefit by their existence/use value. Interest doesn't come into this at all...


So, essentially, a representation of a good or a representation of someone's time/work can be stored in a medium that lasts for ever at no cost. I think I'm getting this part, but where is the profit coming from? The difference between the retained value of money, and the decreased value of the expiring good it used to represent?

Money can take the basic interest from the wares. If the wares don't pay the interest, they aren't sold. And the wares lower its price until they're sold, that's their nature.
The supply of money is scarce (or that money concrete money dies by hyperinflation) and no sector has produced it (forget our current regulated financial system): the whole community has given it the value.
Money takes profit because its scarce and it (unlike wares and the time of workers) last forever at no cost.

This! ^^^  That right there is the part that keeps making me go "What?" What do you mean by "money making profit?" Money by itself doesn't make profit, and money lent makes profit that is equal to interest based on the borrowers risk rate and the supply of available money to be lent. Is the second part, the supply of available money, the part you are calling "money profit" that you are against?

I didn't meant that part.


With this I mean that the existence of capital yield for a given type of capital proves that the demand for that capital is not fully satisfied and that capital yields aren't profits, because if they were, competition would vanish them.


Here again, if they were profits they would tend to disappear or remain only when there's growth as you claim. If it can't go to zero by competition, I would prefer to not call it profit or that we pick another word to distinguish that kind of profit (the one that tends to zero).
If the basic interest/liquidity premium/liquidity profit is equal to the average growth of the economy, Why must money profit as much as the average growth without risk?


I agree with those claims, although I would say that is necessary that the growth comes somehow from innovation.
What I don't agree with is that the interest would disappear without growth.


Yes. Somewhere I said something like "That basic interest exists within depressions proves that doesn't need growth to be there".
Correct me if I'm wrong.
Is your argument that we've never had a global depression and that the interest only came from the growth in other countries?

Combining the three statements, you say:

capital yield > interest > capital yield > 0
Which can't be.



I pretty much agree with the gross interest consisting of risk premium and profit. The aggregate profit I would call growth of economy. If there is nothing to grow (Japan by the way is a great example, as mentioned here before!), profits of all firms tend to zero (a few may last a bit longer and grow faster and quickly reach the equilibirum). So one could assume, the interest still consists of the risk premium. This is theoretically correct, but if there are no borrowers, there is also no risk premium. Also it becomes almost inifitely easy to pay back loans, since interest tends to zero. So both components of interest tend to zero. Imagine a market where nobody wants any money! There can neither be interest nor can there be use for the money-owners.
One could loosen the assumptions here and say "in reality, it never reaches zero", because of several reasons:
-there is always some rate of technological development
-there is always someone who needs money because he did miscalculation within his budget
-there is always someone who thinks he can make money from investment even if he can't

Nevertheless, the implications of my theory remain valid: Higher growth rates lead to higher wage gap, higher wealth gap and to a higher worth of money and education.
Japan actually is a really nice example because some "numbers" of japan appear at the top of some ranking, e.g. Japan in the 90's was the second most equal contry of the world (only highly redistributing denmark had a lower gini coefficient).
japan has the highest government debt in the world. this might have different reasons, but the reason the debt remains is, that due to low interest its somehow irrelevant.
japan has the worlds highest wealth per capita (200.000$). Fits in my theory. Wealth isnt s valueable within a low interest framework, so you need more to provide for the future AND that high wealth did not lead to higher gap in income as one could assume in a high interest environment.

I am lazy but somewhere you wrote something like "how can there be interest while a depression".
I am not sure if we ever had a worldwide recession at a time where we also surveyed data about interest and growth. In the latest recession there still was economic growth in the average world (I think around 4%). The only thing that makes my model somewhat unrealistic is, that large differences in interestrates are possible between countries. e.g. why doenst china suck up all the low interest money of japan and US and boost their growth a little? interestrates should then converge; again this is somewhat prohibited by customs and central bank policies. Maybe this is already happening on a larger scale as I think and it just takes its time.

You were arguing that the capitalist somehow deserves to profit forever from owning money, an invention he didn't made.
If you prefer, consider the whole community the owners and the money holder just a tenant. But in this case, the tenant is not charged and he rents the property for profit. 


No, is free as in freedom (freigeld in german). It may or may not be free to borrow. I didn't invent the term nor made the translation to English.
But I think he means free for trade:
"If the mediator of exchange, the capitalist, is deprived of the power of interrupting the exchange of wares for the purpose of exacting basic interest - as is achieved by Free-Money - money must give its services free of cost and the wares can be exchanged as in barter, without the payment of interest."
I guess he would consider Ripple and LETS free money too.


No, merchants take their cost plus interest, just because they can.
As proof, merchants that borrow the money they need can pay the interest to their lender and still compete with merchants who own their own money.
"If a commodity is to be burdened with basic interest it must of course be capable of bearing this burden, that is, it must meet with market conditions permitting the payment of its cost price, plus basic interest, out of its selling price"


No. The basic interest is discounted from their wages.
From the same short text:
"Wares collect basic interest from the consumer, not for the producer but for the possessor of money (medium of exchange), somewhat as a postman collects the price of a cash-on-delivery parcel."


So the liquidity premium/basic interest doesn't exist? It's only profit that tends to zero by competition, inflation and risk premiums for money?
Do you at least agree that it would cause (if it existed) the undesirable effects I'm describing?

But why does it matter who printed the money, if it's just a tool of exchange for work I produce, and I am the one who decides how to use it and what interest to charge on lending it?


Every time you say "free money" it makes me cringe. You mean specifically "free to borrow" money, right? I still don't know how that could work, since those who have will always charge rent to whose who don't...



And this is the part that I just don't get. Money itself yields nothing, unless it's put to work producing goods or services. Merchants take what they feel they deserve for providing services such as manufacture, storage, and transportation. Workers only sacrifice if they buy on credit, and only what their banks believe is their risk premium. If you take the gross interest, and subtract assumed inflation rate and the risk premium, the only thing left would be profit, which in our vastly large, liquid, and competitive currency market, is pretty much 0. That's profit on just currency lending alone. But most profit comes from either sale of services or goods. Paper itself doesn't give a profit other than through someone else's work, and that someone else is free to chose where they get their paper in an extremely competitive and saturated market. So I just can't wrap my head around this claim. Where is this hidden, and seemingly impossible, profit coming from? Is it a relic of when banks were few, information wasn't easily exchanged, and banks could get away with charging you way more for the loan than your risk called for?

No. The rental car agency has produced or bought the car. The money owner has bought the money, but nobody (but the state?) can produce the money on its own.
Even if the state produces it, we could still reject it.
If you're thinking about gold-money, you can mine gold, but you need the whole society to treat it as money.  


Yes. Liquidity is very important, that's what I said. With free money you still have liquidity, but nobody profits from it.


Is it important that is my definition or Gesell's ?
Liquidity premium = basic interest:
1) A component of the gross interest, when you subtract the inflation and risk premiums.
2) The mother of all capital yields. The yield of money.
3) What merchants can take from the wares.
4) What workers have to sacrifice to exchange their products for what they need/want.


Well, that chapter is almost at the end of the book. He assumes that you have read the previous parts.
Mathematicians and philosophers do it too. First define concepts and then make more complex propositions based on those concepts.
I find his style pretty clear though.
You could read the whole book but you don't have to: you can ask me whatever you don't understand and I'll try to explain it to you.
You haven't quoted any false sentence from the chapter. Do you agree with everything?

By the way, you don't even have to read the first two parts on land to understand free money. In the Spanish translation, the first two parts were at the end, and I didn't noticed that until I saw the English translation.    

Is that like "rental car provides the service, rental car agency that maintains the fleet or cars take the profit?"


But, without liquidity, economic activity would grind to a slow pace, since everyone who needs capital for whatever purpose will have to wait a long time until their request for such is fulfilled (like putting a buy price at MtGox, and waiting for hours until your order is filled, if it ever does)


Very good question.
The easy answer (just like the borrowers would do it) doesn't apply here, because we're supposing that we're in a recession environment in which no borrower can make any investment that yields more than the liquidity premium in any sector of the economy. A very extreme scenario, by the way, I bet impossible within capitalism.
That's what merchants do. They make profit on liquidity through the wares. If they're borrowers, they pay it to their lender.
[/quote]

Using exact definitions of the words, a "liquidity premium" is basically what the money holder can get on a spread in a currency market. If no one is borrowing/buying money (no trading of currency), the spread will be irrelevant, and thus might as well be 0. What's your definition of this liquidity premium? I think mis-communication as to what you mean by that is what may be causing problems in this discussion.
By the way, I've come to the conclusion that Gesell is a TERRIBLE writer, since the book tends to have a lot of words with little explanation regarding the assumptions behind them. What is YOUR definition and explanation of it?

Money provides the service, lenders take the profit. Also they enable other "capitalists" to take it too.
Since money impedes the yield of other capitals to drop below the liquidity premium you don't have to be a lender to enjoy the privilege of profit without contributing.


I focus on it because I don't want to attack the risk premium.
No, liquidity is so important that influences all the economy and capital accumulation.


Very good question.
The easy answer (just like the borrowers would do it) doesn't apply here, because we're supposing that we're in a recession environment in which no borrower can make any investment that yields more than the liquidity premium in any sector of the economy. A very extreme scenario, by the way, I bet impossible within capitalism.
That's what merchants do. They make profit on liquidity through the wares. If they're borrowers, they pay it to their lender.

Probably it would be simpler if you quote the sentences that you consider false in Gesell's book directly.
That chapter is not long and talks precisely about what we're talking here right now.

So, which is it? Money holders/lenders don't provide any service, or money holders/lenders enable commerce?

You are also apparently focusing in on the "liquidity premium" as the main evil of interest. Is liquidity, aka easy access to capital, a useless/worthless service?


How can you make a profit on liquidity without lending???

Ok, let it be a product then. But the bus company produces the tickets, its value (by giving a service) and takes the profits from selling it.
Money, on the other hand can be produced by nature (gold), by a state (national currencies) or by a free software program (bitcoin). Is the whole community of users who "produces" the value of money (by offering goods and services in exchange) but only the money owner takes the profits from it.
Money provides the service of finding a path (of value transfers) between the buyer and the seller. By by the implied contract of accepting money, all its users can be directly connected.
Money, as you said, serves as a substitute for direct barter. But the capitalist doesn't produce anything of value by lending money, he just gets the yield of a capital "produced" by the society as a whole.
Well, that's not very accurate. The banker provides a services and must charge to, at least cover his costs of operation. This includes the risk premium, that can be reduced with collateral.
But lenders take the liquidity premium without providing any service to society. The money holder has the power to enable commerce and he will exploit this advantage in his favor.
The mistake was for the society to tell the money holder when he received it: "You have a certificate that the society as a whole owes you something. You can redeem it for whatever you want and whenever you want. Now you have the ability (at zero cost) to impede the ability of others to give something of value to society through this mechanism. You can exploit this necessity of others members. Now you can charge the liquidity premium".
A capitalist with enough funds can live his whole live (no matter if there's growth or depression) without providing any service to society and still have his fund untouched.
He can't do it because is his right, but because we allow him to do it, we give him that power through the way we've designed money. We got to take this power back.


So do you agree that the capital yield not being zero is a prove that the demand of that type of capital is not fully satisfied?


By scarce I mean that it cannot be produced on demand by anyone who needs it. Although Bernanke makes that USD look abundant, they're still scarce in that sense.
I mean scarcity as opposed of the abundance of mutual credit systems like LETS or Ripple. So that scarcity is not solved through monetary inflation.


The Fed can lend at zero by increasing the money supply. Normally you would be a fool if you don't charge the liquidity premium when lending the money you own. But they don't own it, they just create it.
But the real saver asks for his liquidity premium. These measures distort the financial market destroying partially the information that you were talking about earlier, but don't end with the liquidity premium.
They lead to more catastrophic effects than the basic interest itself (which they don't eliminate because they cheat the financial market without completely destroying it).


I know. There's no (meaningful) division of labor without money. But, like with intellectual property, I don't think that someone has to specially profit from this invention. Math is also an "incredible service" but I can create all the numbers I want in my notebook while I cannot create money.
I need society for my money to have value, but the concept of money is not scarce.


I have heard that no one would accept a currency with demurrage many times in the forum. I guess I can't do anything but to provide examples of working systems with demurrage for that.
Then we just can try it and see what happens. I just don't want to start freicoin while I'm the only one in the world that believes in the block chain and demurrage at the same time.
Anyway I'm more concerned with the belief that it would have a negative impact to the economy like creating poverty.


Cool. I think Ripple can eliminate the liquidity premium too.
I have heard that Ripple would create inflation and though you may think the same. It doesn't make much sense to me because ripple IOUs can be denominated in anything, including "the dollar in 1920" (calculating inflation), and reference currencies similar to terra.


There's many example of such currencies in the list. I can't tell how many because the list is huge. In the "Cost-Recovery Mechanism" they have descriptions like the ones I told you.

http://www.chiemgauer.info/
http://augusta-regional.de/
http://www.regiogeld.de/
http://www.dreyecker.de/

They're mostly in Germany and, as far as I know, are all local complementary currencies.


Well, you can think in the old gold system if you prefer it. I still think that Bernanke's actions don't eliminate the liquidity premium and create other problems.
I agree. A problem in the present system is the way money is distributed and managed.


That makes perfect sense.
The problem is that we can't reach the point where nobody borrows because there's no capital to invest in. Before reaching that point we reach the point where nobody lends, because holders can make more profit from their liquidity than what they could get from borrowers.
That point, even with no growth, is well above 0% (2%, 3%?).

Money is a product because it produces a service. Just like a bus ticket allows me to take the bus, money allows me to trade with other people. Money is just a product. The fact that the product raises from social interaction as a kind of implied contract or agreement does not change the fact that money is a product.


No exactly with all the rest, but yeah, there are level of substitution.


Depends on the system. If you mean in the present monetary system, no, money is not artificially scarce (except in some puntual moments), the problem is the distribution and management.


Well, the Fed has the federal fund rate at 0 right now... The thing is that the yields of nothing never get to 0. Its a tendency.


See, this is where you have it wrong. Money produces a service of very important value. It allows people to trade (avoiding barter). This is an incredible service that I think you take for granted, but without it developed human civilizations could not exist.


I was assuming that a working currency changes to Freicoin system. If it has to start from zero, I dont think it would be widely adopted, maybe only by ideology. And in case it was adopted by ideology competition would end up taking over.


Maybe I have the system wrong, but monetizes a service or a product. If I give you a product, now I have credit with you at Ripple. Now I can use that credit with someone that thinks you are trustworthy. Well, yeah, you are monetizing the debt. Its still fine. There is nothing wrong on trading the debts.


Youll have to be more specific. The list is huge.


See above.


Actually no. The interest are not mantained artificially high. The problem in the present system is the way money is distributed and managed. Again, the Fed has the fed fund rate at 0%.


I think you are getting it upside down. Money produces a yield because there are people willing to borrow it. If nobody borrows money does not produce interest.

Now if there are no real world projects that are profitable at a certain interest rate, nobody will borrow. Therefore money will yield absolutely nothing. What savers will do (through the financial system) is lower interest rates until they find someone willing to borrow, meaning that the yield of capital will be higher than the interest of money. Does that makes sense?

You've mentioned very different commodities. Gold is still money, so you can lend it at interest too.
Oil contains energy, which is not a form of capital but an spendable resource.
I'm not sure is very accurate to say that commodities have yield, but let's concentrate in steel as a form of capital.
For example, when you have a machine made of steel, you could say that is real capital that you will recycle later.
In that case, the reason why its yield cannot drop below the liquidity premium is again because of its competition against money.
If the "yield" you're talking about is the one produced by its changes in price, I would say it's not yield but profit, and drop to zero when an equilibrium is reached.

It doesn't matter that they're traded on contracts and they're scarce because of nature, not because their users have decided so.

They produce things of value when used as capital: a steel made robot arm produces, for example, cars.

They have the potential to stop capital accumulation. But the hoarders think that they will be more valuable in the future, they're putting an incentive on recycling and mining in some sense.
Investors in commodities are providing a service of arbitrage.
Being scarce, natural resources limit us naturally and not artificially.
In a free monetary market, the money users accept the properties of the money, and new moneys can be created to correct their deficiencies. Money can be made of paper and bits without the intervention of a state.

Good for us that they can last forever, that will allow us to mine the dumps in the future.
But is not good for us that most moneys last forever and at the same time are scarce because that's what produces the liquidity premium.

Pretty much everything you said there is equally applicable to any kind of scarce resource, like oil, steel, or gold. They are all:

• traded on contracts
• are all scarce
• all "don't produce anything of value" (they can be used as ingredients in production, but are not productions of value in themselves)
• Their yields can not drop to zero by competition (way more demand than supply)
• All have the potential stop accumulation of other types of capital when opportunities to invest in these commodities exists

And like money, many of these commodities can last almost for ever, too.

Is not immoral to charge interest on money lending, is just the way money works as it is today.
But money is not a product, is more like a contract between all its users. And that contract can be flawed and lead to undesirable effects.


Exactly. And the same could happen with happen with capital yields. Only when some lack of a certain capital good is in place can that capital produce yield.
If the demand for that capital was fully satisfied, the capital yield would tend to zero.
By competition between the capitals of the same type, the yield would drop to zero, but capital not only has to compete with the capitals of its same type, but with all the capital.
Money is artificially scarce and is the only capital whose yields cannot drop to zero by competition. Ironically is also the only capital that doesn't produce anything of value.


Freicoin would start with no value at all, just like bitcoin did. I don't believe you can expect inflation from there.
You believe that no one would accept it, but if some people did; How would it produce poverty?
Why demurrage is not producing poverty in the communities that operate with it? 


Ehm...It's a system that monetizes mostly debt, but everyone can do it to the extend their partners trust them, not only banks.
I hope I can contribute with the implementation soon.


Fair enough, but there's examples of free money operating right now, look at how many times "Liquidity Tax", "Circulation Incentive", "Demurrage" or "circulation-protection fee" appears in this list.


You're judging freicoin without having even started so I guess that we can.


The difference is that profits disappear by competition and capital yields are artificially maintained "high" by the current design of money.


Simply by competing "dishonestly" with other capitals. The accumulation of every type of capital stops when that type of capital yields less than money itself (which as said doesn't produce any good or service on its own).

You have not answered why you think its ok to earn a profit by renouncing to use a car (f.e.) for some time but its not ok if its money.


They dont drop to cero naturally. They tend to zero because of competition, but then new products or improvements on previous products appear which allow someone to charge more for a while... and again and again.


But I though interest rates were bad? Anyway, freicoin would not have low interest rates. While it lasted the lack of demand for the money would push price inflation up thus interest rates up. Then freicoin would disappear as people choosed another currency.

Ripple is fine. Its a system that monetizes real goods. I have not followed the project and I dont know why it has not developed more but its a shame that it hasnt.


2 issues. 1) During the Great Depression there was a contraction on credit and alternative currencies help mitigate the lack of cash. Almost any alternative method of payment would have helped. 2) It did not last. Monetary events take years and decades to develop. You can not judge a currency for a few years opperating, dont you think?


Why? The same could be said from any kind of activity that produces profit.


Why? Im guessing he will say that it pushes money into a few hands thus money does not circulate and the economy does not perform good enough.

That's exactly my point. Money is not a product.


Just enough houses to meet demand. Just enough houses to drop the capital yields to zero like profits do naturally.
With freicoin, for example, you would still have interest rates and information, but they would be around zero instead of around 3, 4, 5 or whatever you consider natural.


I don't want the government to regulate the financial system. Not only the interest rates have been lowered by monetizing debt and money creation (which leads to missallocation of capital) but also the risk of lending had been suppressed by the government.
The subprime mortgages would have existed even with a high interest rates, because many borrowers weren't concerned at all by the interest or their ability to pay the loan back.
I recommend a documentary called "overdose". But I'm not talking about money creation nor a public company taking the losses of unpaid loans.


I totally agree. It should be free in that sense too. No one is forcing their users to accept the Chiemgauer, for example.



Then I should ask if you think that Ripple would lead to economic problems due to its non scarcity or not.
Again, you haven't explained why, for example, freicoin would lead to "economic discordination" and poverty.
Why was good in Worgl during the great deppression and many neighboring villages wanted to copy the system (until the central bank prohibited it)?
Why is it working well in germany and other places?
The idea of Gesell wasn't the more money circulation the more wealth. His idea was "what goes to interest and capital yields doesn't go to wages and profits" and "Interest artificially limits capital accumulation".


For a few reasons.
First, interest of money is the real source of all capital yields, which I think are the wrong thing with capitalism, and lead to inequalities that are not legitimate like profits and differences in wages are.
Second, it leads to short term financial thinking, which makes our society unsustainable. 

Yes, so? The issue is still the same, you are getting compensated by renouncing for its use for a while in both cases. Why do you think its ok in one case and not in the other.


Im ok with any voluntary system. The problem is, as stated above, that the ideas of Gessel would lead to discordination and poverty. The problem with Gessel is that he had no idea of capital structure and had this idea that the more the money circulates the richer everybody is, which is evidently false (if it is not evident to you, then comment).

Can you elaborate on this "discordination in the economy" and how it would lead to poverty?
You're ok with Ripple then?


With the example of the car, you're not only renouncing to its use for a while. The car will eventually crash after X miles/kilometers. Even a building has a limited lifetime. Money doesn't. With free money, you would still rent your money, but just at the risk premium, the basic interest would not exist.
The main difference is that more houses could be produced to lower the rental price, but "money cannot be produced". If it's produced, its production costs have nothing to do with its use as a value symbol, that's why money can be made of paper and bits. It's just a symbol, an agreement, not a commodity.
Why the costs of production of houses is not near the earns of its lifetime rentals? Because that's not enough for capital. Houses must be at least as profitable as money. Therefore we can't build that many houses because the financial market won't allow it.
Money, the highway of commerce should be free. We shouldn't pay a tribute to money with every trade we make.

Yes, the problem is that the systems you propose (money that rots f.e.) produce discordination in the economy and if imposed exclusively would lead to poverty.

There is nothing bad in interests. If you have a car and rent it, you are getting a profit because you are renouncing to its use for a while. Same with money. You rent it out and get a profit because you are renouncing to its use for a while. I fail to see the difference and why you consider one ok and the other not.

To do it, we could imagine that there's many colors and flavors for the fish and that each fish needs a different net and a different amount of time to be captured.
My point is that with money interest will never go to zero.


Without money the nets must be profitable compared with producing other goods, but with money that is not enough. Let me try with an example.
Without money:
If Robinson can capture 10 fish a day without a net, 20 with net, it takes 4 days to make the net and it breaks after two days of use.
The net just need to save a little time or produce just one more fish to be profitable.
With money:
The network has to pay the interest to be profitable. The money owner will never lend it at zero interest because money lasts forever. Also, the fishermen must sell their fish for money before  the fish rots. The money owner can exploit that situation and profit from it.
Everybody needs money to trade and invest and the money owner rents the tool for commerce just like the constructor rents the highway to drivers.
But the constructor needs to maintain the highway while money lasts forever. Every investment needs to pay interest. And you pay interest with every good you purchase, because every business have to pay its financing costs. Even if the entrepreneur uses its own money, he should get the interest from his money, besides the business profit.    


Then why there's interest within depressions?
Why would the money owner ignore his power and rent it for free?
If you can ruin someone else by doing nothing, that person has an incentive to convince you to do something.
It doesn't matter how much cost you to obtain the money, all that matters is how much the other person needs it.
Basic interest is the profits derived from the scarce and everlasting money we have.
It's not about morality, it's about profiting for the privilege you have as money owner. That's why religions have failed when trying to just prohibit interest.
If you want to avoid interest you either need free money (money that rots) or non scarce money (mutual credit money like LETS or Ripple).


I agree. The profits of the entrepreneur are a legitimate source of inequality, just like the bigger wage of a more skilled worker.
The state is a great source of inequality and comes from the monopoly of violence.
Basic interest (which I claim won't disappear with zero or negative growth) is another source of inequality.
Money is kind of agreement or contract within the whole society and its terms can be changed.

0 interest, 0 growth?
Sounds like Japan done did it even before you thought it up
Maybe you should check out their historic GINI's.

We could easily introduce money in the story, there is just no need because there is only two goods at a time.


Exactly! In a developed economy where nets are invented, the return of producing nets must be higher than the return of money. This however means it has to be sufficently profitable compared to producing OTHER goods. So you can always break down the whole time preference thing to production and goods. Money is just the medium of exchange. Prices reflect barter rates, interest reflects growth.


Yes, thats the point. In my fishexample interest in fact goes to zero, because there are no other goods than fish and massages and no more options to grow.
If you imagine the - highly hypothetical - situation when there is no economic growth (on average) in the whole world, what is going to happen?
Let there be a few companies that still make profits while the rest of the economy stagnates. All companies which are not growing will pay back (or already have paid back) there debts because paying back means say 4% profit (avoidance of loss) compared to 0%. So there is almost noone borrowing money so interest will be very low.
The last few companies growing can now very quickly and cheaply get money at the market and max out their growth potential. De facto, the stock prices will go up almost infinitely to take the low interest into account, and the companies can easily issue stocks for high prices. After this short phase, the whole economy would on average stagnate. Of course there are wages, depriciation etc BUT there is no need for a money market. You still need money for trading and stuff but you dont need loans and savings at bank so there would be no interest. 
In this admittedly hypothetical situation, I can't see how "at least little interest" can remain. In reality we would, if at all, come close to zero, because there alway is some fluctuation (population growth and demographic changes, changes in education, nature and of course bernanke and the chinese.

On the other hand, if one accepts the hypothetical situation, he could also accept a few meaningful statements like:

- A certain amount of economic unequality is temporary (this somehow is a constant situation, but the inequality of industralisation was the reduction of poverty today and the inequality of the internet age is tomorrows reduction of poverty)
- This part of inequality is somehow "fair" and does not harm anyone (except the coachman who can easily switch to driving a car within some weeks)
- Every attempt to intervene at that part of inequality (regulations, intellectual property rights, minimum wages) prolongs the process that the current inequality wave(s) benefit to fight tomorrows poverty

I even want to try a really provocative statement:
Besides this cause of inequality, most inequality is caused by the state (or other mafia-like institutions like the mafia or warlords)

Nice story, cartman. Simple examples help.
Note a few things:
 
-There's no money in our example and that's why "interest" can go to zero. In fact, one could say that there's no such interest but a sharing of profits.
The basic interest of money doesn't ever goes to zero, no matter how little the growth is. Interest stays there even within a recession.
-For some reason, cleverguy prefers to pay 100% "interest" instead of saving the fish himself.
-Since there's no surplus, lenders must hunger and that may be a reason why they reclaim interest. If there were surplus of production, people could lend fish at no interest because their fish would rot otherwise.
-Within capitalism, the nets would need to yield at least as much as "money does", taking it first from profits and then from wages. The production of nets would have stop when that yield is compromised (until some nets break or the tribe gets bigger) instead of when the demand is met. In your example, there's free market but there's no capitalism.

But in general, yes, it seems that the liquidity premium gets higher when there's very profitable investments to make.
On the other hand, after the initial profits move to wages, people can save more, decreasing the basic interest.

Um... yes. Which isn't the same as each worker now making 5/4th as much, as you stated earlier. Though I may have misunderstood (lack of sleep here. sorry)

A currency that its not monetarely inflationary is considered price deflationary because of the increase in production due to raise in productivity. If there is not an incrase in productivity prices dont change. So the wages of the workers do not go down becuase the lower prices come from increase productivity (each worker now produces more stuff).

I was thinking of it as being within an inflationary or deflationary money system. People get raises, cost of capital goes up, price of products goes up, people demand higher wages, people get raises, etc. Reverse in deflation: price of products goes down, revenues go down, cost of capital is reduced to follow revenue, meaning wages go down, consumption decreases due to lower wages, price of goods follows. (Depending on how efficient the adjustments are, it may or may not be a deflationary spiral. Could just be a steady-state, slowly deflating system. So I'm not using this as an argument against deflation).

If economy grows, and money doesn't grow in time with it, it's just the fewer dollars chasing the same goods thing, where goods are both product prices and human capital. So if economy expands by 25% but the money remains the same, cost of capital goes up 25%, revenues decrease, wages decrease, and prices follow. That "same money" that the employee earns has to come from somewhere, and since the entire economic cycle is locked in a... cycle...

Hm. I dont think so. If he would get 750 this would mean, that he has the same purchase power after the growth of the economy and all benefit goes to the employer. In my example, everyone participates in the growth with the same percentage. Joe can buy 25% more goods. The employer earns the same money (5/4 goods * 4/5 price) and pays the same wages, so nominal company profit is the same but has 25% more worth.
A change in the wage implies, that the profit is suddenly differntly distributed between employer and employee. This seems a bit strange because usually we think in the context of inflation or stable prices and not a constant deflation rate. You could also take money out of the equation and just think in goods. First 100 goods are produced, only wage costs, 10% profit: 90 for the workers 10 for the employer, then 120 goods are produced, the 9:1 quota held constant its 108 for the workers, 12 for the employer. Anything else requires changes in the bargaining powers of the two parties.

don't forget that with a drop in revenue from goods, you'll have a drop in earnings as well. So after that economic growth, Joe will also only be earning $750

thanks! I read some reviews and it partly sounds like what I need. Indeed I need academic texts.

Exactly. I think its helpful to assume a fix amount of money in the system. So when more goods have been produced, your money is worth more. imho the additional money value should equal the growth of production (velocity of money assumed constant and demand-price-curves for all goods have equal slopes; else, the additional purchase power depends on the composition of your consumer basket).
The bonus on purchase power can now be distributed to additional savings and spendings. So you could maintain your former consumption and save the left over money. or you could partly or fully consume the additional purchase power. However, lets say, 10% more produced goods in the long run somehow implies, that 10% more goods are being bought. As an aggregate, this leaves the savings/spendings quota unaffected.
Example: You earn 1000$, save 200, consume 8 goods for 100 each. Now production grows 25% -> money stays the same -> prices are p0*0.75
On average, Joe now buys 10 goods for 75 each = 750 and saves 250 (=200*(1+growth))

This assumes of course an average rate of stock-holding or at least this holds longterm.



I will try a story and formalize a little bit: ATTENTION!!! took me an hour to write

t0: The tribe, 10 people, produces 100 fish by fishing with a fishing rod, everybody catches and eats 10 fish, no inequality, interest is 0.

One guy is very clever and claims he can build a fishingnet to catch 40 fish but needs one fishingperiod time to knot it, so he proposes: Everybode give me one fish, so we all have 9 and after that I can catch 40 fish every period. The others agree, but they want some profit from sparing their fish: two additional fish in t1. everybody hungers with his 9 fish, the net is built. Interest is 100%.

t1: The tribe, 10 people, produce 90+40=130 fish with 9 fishing rods and 1 fishing net. "cleverguy" catches 40 but has to give 9*2=18 Fishes and is left over with 22, the rest has 12 fishes each. There was 30% growth, there is some interest and now there is inequality.

t2: cleverguy has 40 fish for himself (debt paid), he can eat 20 of his 40 fishes and give 20 to another tribemember "workerguy" to allow him to stop fishing and build another net. He will happily agree because of the 10 bonus fish. Now there is more inequality because workerguy earns double. Also there is some interest.

t3: Production is 120 fish (economy shrunk for the investment), cleverguy hat 40 fish and a net to sell, since he can only use one net at once. 8 Members have 10 fish each, workerguy has 20 fishes and might buy cleverguys net or build his own net (by the way this assumes, fish is still eatable after one period of time). Lets say workerguy buys the net for a bit more than 10 fish. Cleverguy now has a bit more than 50 fish and pays two workers to knot a net. More inequality, some interest.

t4: Production is around 140 fish, workerguy now also has 40 fish and cleverguy hast 2 nets. now cleverguy and workerguy compete for workers. btw there is more fish than the tribe can eat, so cleverguy and workerguy can pay some tribemembers to massage their feet.

t5: There are several nets, prices for nets fall, no need to produce 400 fish

t6: there are 4 fishers with nets, everybody eats 16 fish and gets fat and healthy, the other 6 dont need to fish but serve the tribes needs (foot massages). notice: at the end of this process, everybody will have the same purchase power for fish and massages, because its pretty easy to enter the fishingindustry with another net in case fish gets to expensive for the benefit of the fishers. So "wages" of fishers and massagers converge!! -> Equality is back.

Now to sum that up. In the beginning there was no inequality. At the time, where the new technology arrived, inequality started to rise, it started to fall again when the growth rate maxed and at the point of maximum exploitation of the new technology equality came back. (This assumes however that there are no other goods like weapons and mercenaries to buy for cleverguy...)

Now back to your statement:


I think it is not "at the same time" but FIRST it increases demand for money. AFTER the highest growth-rate within that "kontrdiev-cycle" is passed, the newly available ressources/money (supply) outweigh the demand (=your "offer" if I got it right). At the end of the cycle there is even a lot of supply, so interest falls (in my extreme case above it falls to zero) and wages converge.

Ok, sounds a bit artificial but consider this on a larger scale with 100 or 1000 people, where it is a lot easier that due to some entrepreneur, a "money/fish-market" emerges.
In reality there are of course other factors like regulation, central bank/inflation and there always is some rate of innovation unequal to zero so it is hard to see a clean reverse u-shape curve my theory describes. But: The other factors do not interfer with my causal relationship but all the effects sum up. So other factors held constant, it should be possible to make this empirical relation visible.

The difference is the trend. By lowered prices I mean prices that has become low, but won't keep on going down.
By falling prices a mean a predictable price deflation.
Of course, nobody knows what will happen in the future for sure.


I think I've get it. The increase in saving doesn't comes from a reduction in consumption but from a reduction in spending (while maintaining consumption). That makes sense.
I'm still confused about the relation between growth and interest rates. Doesn't seem obvious because there's a few factors.
At the same time growth increases the offer and the demand for money.

I dont see the difference. If prices are going down, they are lowered.


Maybe, but they did not know. The probably just saw something cheap and bought it.


Yes, but this does not mean a reduction on consumption.


Once people have their basic needs covered they can start thinking more about the future, meaning they can start saving more, which in turn lowers interest rates. When production grows, f.e. there is more or better food, prices go down, people can access those basic goods cheaper. With what they have left they can increase consumption, increase savings (thus lowering interest rates and promoting investment) or a combination of both.

If we forget Bernanke, growth leads to price deflation. Right?
Also high capital yields encourage investments.


Lowered prices don't stop consumption, falling prices do. Maybe the people who spend their bitcoins when their price in dollars rose were expecting the price to go down again.
You said yourself that falling prices promote saving.

On the other hand, as you say, lowered prices (or more valuable products) lead to consumption.
I don't understand how can growth lower interest rates.
It is really a complex topic.

On the subject of growth springing inequalities, I agree that some innovations can in fact eliminate those inequalities.
I can't watch the video right now but, for example, I'm very excited about Arduino and Google's ADK, and I believe that many small business will emerge.

The text you tried to read assumes you've read the whole book.
Maybe you should read this (skipping the first two parts about land) to understand it properly.
I think you're confusing the basic interest with the inflation premium (Hausse-premium).
The basic interest would be, on your words, selling your money's time, which is only possible because money never rots (nominally).
My point was that basic interest puts an upper limit to capital accumulation by putting a lower limit in real capital yields. For Crussoe that lower limit is zero, but with non free money, that lower limit is the basic interest. Also the yield of money (not a real capital) is this basic interest and is subtracted from other capitals yields and from wages, because money doesn't produce anything on its own, it's just a symbol of value.
Anyway, I'm sure Gesell can explain you this better than me. I hope you read the book.

And thats why they dont invent anything else of worth anymore. 

But seriously, when I talk about inventions Im not talking necesarely about discovering how to produce fision energy. Im talking about this kind of stuff: http://uk.reuters.com/video/2011/07/11/bringing-light-to-the-poor-one-liter-at?videoId=216968892&videoChannel=82 Really fulfilling the needs of the people with the resources available.

From what I've been reading regarding recent explosive growth in BRIC, Brasil is an example of what you're saying, where the high inequality is mainly due to high regulation, with lower income people just not having the connections, resources, or will to deal with the bureaucracy to move up. China, despite being communist, seems to have a cultural reason, where people are just used to doing what they have been doing (like farming), so they are left behind while others keep going up. And Russia is just pretty much corruption-based... And sure, there are people who are ingenious, and they'll end up wealthy, but not everyone will move up the wealth ladder with them. That's kind of the point.
As for the last sentence, even free market entrepreneur types prefer to partner up with people who have the paperwork to prove that they know what the heck they are talking about. Brilliant inventor types do happen, but they're very rare, and once they do invent, they usually look for people with good VCs to implement their ideas

There is more demand and less supply for skilled labour, no?

Yes, but what I am saying is that the type of growth that you are getting or the distribution of such growth is because of politics. Im saying that the inequality is not inherent to growth, but to the politics that are happening.

If you study the USA XIX century you will be surprised by how resourceful and ingenious some people without studies can be (and I have an engineering degree, so Im not saying this out of ego) if they dont have regulations on their way. The problem about regulations like licenses and controls is that it stops and discourages people with ideas but not much credibility from being able to try new things. F.e. the plane was invented by some guys in a bycicle shop, when there were re-known people trying. Studies is only a factor if you are judged by your CV, but not if you opperate in a free market.

Why? I dont think growth necesarely leads to a specific change in the balance between investing and consuming. It can go anyway.


As I said, I dont think the balance between savings and consuming needs to change in a pre-determined way. In general growth leads to lower interest rates because there is more resources available (and this can happen even if the relation between savings and consumption has not changed because the overall production is bigger). The only case where growth does not lead to more savings is if all the increase goes to consumption.


High interest rates yes, falling prices not necesarely. In fact, you have an empirical evidence with Bitcoin. The merchants have reported that when the exchange usd-btc was raising for bitcoin people spent more in the Bitcoin economy lured by the lower prices. The meme about lower prices stopping consumption is just false.


Savings.

Sorry, I tried reading that, but it's rather convoluted. It sounds like it's "interest" that the lender charges only because they expect the borrower's product prices to grow, so the lender wants a chunk of that profit, too? Can you maybe give a simpler example of this interest?
From my perspective (and I guess biased business college training), I charge interest for taking on risk and for selling my money's time (money worth more in my hands now than later), and I'm competing with others based on their level of risk tolerance and worth of money. So... I am just having a really hard time wrapping my head around this.

In those cases it actually is due to growth, simply because the growth is not due to politics repressing people, but certain people really outgrowing others in a "free" market. There are kids getting education and experience, starting up businesses and starting to earn a lot of money, while their parents are still basically middle-age farmers or random stuff (leather, kitch, etc) makers. I think the only "political" effect here is the distance: the new technology and business practices these wealthy people are learning and taking advantage of were just too far and unknown to them.
Even in a US economy, though, entrepreneurs who seized on the Internet opportunities are millionaires, and compared to their income, the rest of us are dirt poor Though the level of inequality is just not as blatantly obvious here as it is in BRIC countries.

But if growth also leads (apart from an increase in demand for money to invest) to lower prices (or more valuable products) which promotes spending over saving. Doesn't it also leads to high interest?
On the other hand, high interests and falling prices incentive saving.
What promotes falling prices? Saving, spending or both?

I should have been more specific. I meant basic interest (or liquidity premium) as described by Gesell, that is, the interest of money when you subtract the risk and inflation premiums to the gross interest.
Money doesn't produce anything by itself, that's why it shouldn't be capital. It "steals" this basic interest from the financing costs of all other capitals.


I see.
So the basic interest/liquidity premium increases with innovations and growth because more people demands money to invest in those capitals with high returns.
Thank you for the explanation.
Now I have to think deeply how growth would affect a Ripple based economy and about the implications of this for the free money theory.
I think Gesell thought that the basic interest remained approximately constant through history.

Well, Im asuming a free market. Bernanke changes the game.

I think you are missing one point though. If people decide to consume more or less at some point, it will change the money they can save and therefore the money there will be availabel for investment. In an extreme case if people got fed up of saving and increased consumption a lot, therefore not being able to save interest rates could raise even when growth was happening. Obviously, since people is consuming like crazy and not investing for the future, future growth would suffer, but theoretically you could have interest rates raising infront of strong growth. But such a change in behaviour from everybody at the same time is not probable at all (in a free market).


I still think that saying development always leads to higher inequality is too broad. It can go one way or the other depending on the effect of the new technology.


In my opinion, austrian economics has the most developed theory about how interest rates affect the economy. Interest rates give information to entrepreneurs about what type of business society wants/needs/can afford. Higher interest rates signals less savings which means business man will start more business that are closer to the consumer, while lower interest rates signals more savings, more resources available, so long term projects, that are father away from the consumer become viable.

Its quite academical but if you want to read about interest rates and how they affect the economy I would recommend you "Time and Money" from Garrison.


But you are assuming that the inequality is due to the growth and not to the political reality of the country. In my opinion is a big stretch. There are very poor and underdeveloped countries with big inequalities.

You're right. I guess in my example, you would call the "unskilled" people "skilled in use of telephones technology," similarly to how a manager of an engineering firm may actually earn less than the highly skilled engineers. The German problem is also somewhat evident in India and Russia, where they have a lot of idle high-degree types, or people with master's degrees running middle-management of call centers. The scary thing about that is that due to their volume their wages are way lower than ones in USA/Europe, and all they really need is someone with business and entrepreneurial sense to put them to work producing some REALLY high level products for very little money, which would result in educated Europe being underpriced, and very under-uneducated USA being just wiped out...

Can you elaborate on this a bit? In my understanding, interest is a return on productive business, and money can only return interest if invested in a productive business. It can't return interest just by itself, and banks/owners of money won't loan it to anyone unless they expect that someone to be productive, and thus provide the "money interest" through their own work.



The other side of the equation is the risk involved, with some companies being more risky, and some investors being more averse to risk, but in a large economy, the $ per extra "unit" of risk tends to trend to a preset equilibrium, too, so, overall, every company's interest rate is basically based on the amount of risk they have. i.e. what you're saying is true, and works in an efficient economy, but there is A LOT of noise there (Google may offer 20% and be very low risk, but if I think it's too good to be true without doing my research, I still won't invest).
Though if you just want to simplify the model with the assumption that efficient markets will correctly price interest, you can ignore all this


Only example I can think of with this is, again, the risk factor. People may hoard more, reducing the supply, if they think the economy is at risk and they'll need more money soon, or they may spend and invest more if they fear that their money may be at risk, and is best invested elsewhere.

I would argue, that the abundant mid-level manager would penetrate the more thriving unskilled-market, so that the wages in the two sectors can at a max converge. For germany for example I can tell how the labor market changed after the so called "Bildungsexpansion" lit: education-expansion. The government put a lot of effort to get the masses to get higher educational degrees, resulting in 50% people with higher school certificate (Abitur) and tenfold the number of university students. One result is, that people with medium education replaced the unskilled workforce which now has a much higher risk of being unemployed. A lot of people with a masters degree dont do any academic job. This is also somehow dissatisfying, because everybody feels a bit unchallanged. But this gets too far into politics (equal opportunities) and away from theoretical considerations I think.

exactly. What my theorey would predict is, that every time, a great invention is made, there is a phase of higher inequality until the full potential is reached. After that, you have enough programmers, special engineers etc. I would name this a Kondratiev wave of inequality. 


Its perfectly related I think:

All entrepreneurs and businessmen decide, how much capital they need and what price they are willig to pay (maximum their expected returns of investment). When there is a lot of growth in the economy - probably due to a new sector emerging - there is a lot of demand for money in the market. The price (interest) is given by supply and demand. Imagine Google offering 20% interest if you give them your money, this would convince a lot of people to supply their beloved money for some time. So some really profitable entrepreneur is always given money if he can "outbid your timepreference".
Here you can also derive the growth-interest-relation. If there are 9 companies having returns of 5% and one company having a return of 4%, the latter might be outbidden by the others when interest rate climbs towards 5%. As 5% ist reached, there is an equilibrium in the moneymarket and the 9 companies won't borrow more money, unless supply increases (and interest frate drops) or their expected return rises beyond 5%. So growth determines the interest rates (as long as central banks leave their noses out) into an equilibrium where there are only companies beyond that interest rate. One could disagree and point out to the moneysupply as the second determinant, but I somehow assume the supply curve to be fix and supply is determined by demand, because I dont have an idea yet, how supply would be varied exogenously in a theoretical freemarket framework. (Maybe this assumes a natural savings rate curve) This might be a problem if inventions and growth opportunities also affect saving behavior. but this argument might be circular.

Very interesting topic.
It seems that growth leads to inequalities, but they're later reduced by competition and by workers moving to other sectors.
If certain skill (human capital) like programming becomes very valuable, people invest in that new capital with high returns (study it) until that capital has a similar return that other capitals. I would say that all capital returns satellite around the the one of main capital, which is money. Money return is interest.
Interest is the rock bottom of all capital returns: if a sector, the investments in that sector stops until (by deterioration of capital or an increase in demand of what that capital produces) it returns more than the money itself again.

The relationship between growth and interest is not trivial for me. Can you elaborate on this?
How is this related with the time preference theory?

I'm not an Austrian economist, nor do I know any books where you can get quotes, but what you are saying is indeed fact, and is readily evident in our emerging economies, such as China, India, and Brasil, where rapid growth has created an ever widening wage inequality between those who are educated (either formally, or just with personal experience in management/business) and those who aren't. Though a simpler explanation for all this is just supply-demand. If demand for skilled/educated workers is high, their wages will go up. Uneducated, untrained workers are available en masse, so their wages are generally very low. Though, China and India are now reaching a point where they are actually running out of unskilled cheap labor to hire, so wages for unskilled labor are starting to go up alarmingly fast, too.

India actually has a very... strange issue. In their job culture it is actually assumed that you will be allowed to grow very fast and become a manager within a year or two. If that's not the case, then the job is not worth it, and so the employee turnover for low-level service jobs is very high. If this trend actually continues, and the companies go along with it, they may end up with a situation where mid-level (self-described, not necessarily skillful) managers are abundant, but low-level workers who are skilled in basics such as answering phones are in lower supply, which may (though unlikely) result is unskilled low-level workers being in higher demand and earning more than the skilled but overly abundant mid-level managers.

thanks for your thoughts.

I assume a strong longterm relationship between growth and interest, since at a certain rate "r" of interest, only firms with higher growth expactation than "r" would borrow money to expand. Furthermore I assume, with more and more investments, the return of investments lessens. So despite other factors affecting interest, growth is the one, which determines an equilibrium around which the interest rates should theoretically fluctuate (fluctuation is probably mostly because of bernanke and his colleagues).

The next step I take is to assume, that human capital investment like other investments must follow the same trace along the growth path. Aquiring human capital must be profitable, else one would do 3 years of work instead of a bachelor degree and leave some of the money in stocks and bonds or something. In fact there are studies which claim the return of human capital investment to be around 6-7.5% per year of schooling. This is pretty much the average interest rates of the past decades plus some compensation for the years where no income could be obtained.


I will try to break down the invention thing to the micro level:

- some new invention is made (steam engine, railroad, car, electronics, pc, internet)
- from now on, the economy might grow by exploiting the new invention
- there are some entrepreneurs (e.g. a railroad company, ibm, volkswagen, google) who are able to generate tremendous profits (far more than rate "r")
- those will pay above average wages to people willing to enter this sector and if neccessary adopt new skills
- on the other hand some workers of the "old sector" might even get unemployed (the only potentially negative part)
- other sectors will also grow (but at a lower rate) and pay higher wages because the new high-paid workforce of ibm, volkswagen, google has more purchasing power

You wrote: "When unqualified workers have access to new machinery they produce more and can bargain for better wages."

This is exactly how I think inequality of wages arises. Workers of IBM, Google etc. can bargain for way higher wages. But I guess you are right if some invention can easily be exploited by untrained or former low-income workforce (railroad might be an example or three-field (crop) rotation) and not only by trained people (like in electronics or it). Actually, measured with the Gini-coefficient, inequality almost always drops when some random wages rise! not sure if the gini is a proper measurement then

But to come back to the original question for a moment: The relationship between growth and interest seems so trivial, that it must be mentioned by some austrian economist. Any idea in which book to look that up? Reason is I need some sources of quotes from where to start with my ideas. Furthermore it would be neat to have some austrian texts about human capital.

Interesting topic, lets speculate a bit.


True most of the time (growth tends to increase savings, which in turn determines interest rates), but its not the only factor that affects interest rates.


Without giving it too much though, I would say that such situation would produce a halt to the development of the specialization and the division of labour. But not necesarely reduce inequality. You have to think that scientific and technological advances produce growth and also can help mitigate inequality instead of creating more. When unqualified workers have access to new machinery they produce more and can bargain for better wages. In fact, technological development a lot of times eliminates the need for a set of qualified workers (usually by creating another type of qualified workers).

It dont think its as easy as you paint it. It can go both ways.

Hi all,

one night I came up with the following idea: Interest is strongly determined by economic growth. So Interest is bound to returns of capital investments but also returns of human capital investments. If there was no growth and no interest, the wage spread between trained and untrained workers would partly vanish, since education costs (credit costs) are (near) zero and returns of human capital tend to be zero. So growth actually is causal for part of wage inequality (in a not harmful way).

Of course I like to debate about this topic if you highly disagree but primarily I would like to ask this (uniquely well read in austrian economics) community, whether and where a similar line of thought can be found in the vast literature of austrian economics because I don't want to claim this my own briliant idea, if it is know for hundred years

any hint appreciated!