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Interest, profit, and money: An inquiry into their nature and significance
Abstract
It was only in the aftermath of the industrial revolution that profits became a controversial issue and were confused with interest. Economists confused the two because both are surplus values; both are incomes from ownership, not from labor, and both are flow concepts. The hallmark difference between the two, however, which is also the reason why interest is a problem, is that interest is a contractual permanent income that is derived from ever-changing, transitory profits. The transaction cost economics approach shows that equity financing must be the rule and not the last resort. A property-right approach shows that interest-based contracts lead to the overlapping of property rights between the lender and the borrower, and that efficiency is not property-right neutral. The introduction of interest brings about a tax-like affect upon investment. The emergence of profit is conditional upon the occurrence of a dynamic change that brings about an uncertainty (a nonmeasurable risk) about the future. Profits are generated by the expenditures of households whose incomes are not the liability of the firm (or the private sector in general). The monopolistic nature of contractual interest is traceable to the peculiar nature of money. Pesek and Saving's idea that "money is wealth" is neither valid nor necessary to establish a case for a "wealth-affect" argument and monetary policy. It cannot be used as a justification for charging interest on lent money either. Money has some properties of a public good. It would be inefficient to impose an outside constraint to its use like interest charges. The nature of the modern financial system further complicates the issue of money and interest. This system demands and supplies the same asset (money). Money is its ultimate goal. This may cause banks to be dichotomized from the real sector.
Subject Area
Business costs|Finance|Economic theory
Recommended Citation
Uthman, Usamah Ahmed, "Interest, profit, and money: An inquiry into their nature and significance" (1989). ETD collection for University of Nebraska-Lincoln. AAI8918566.
https://digitalcommons.unl.edu/dissertations/AAI8918566