I go over what "interest" means in economic terms and remind people that it's not a boogeyman.

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Transcript

What is interest?

The topic of interest is a contentious one because so many have a negative association with the concept.

But is “interest” really a bad thing? And what does it truly represent?

Interest is the rate of profit a lender desires for lending currency or money to another.

Most are familiar with interest in their daily lives, whether it’s the interest rate on a credit card, the interest rate on a mortgage, or the interest on an auto loan.

The reason why interest rates are charged is because whenever someone gives up use of their resources, they are not able to use those resources for their own productive ends.

For example, let’s say you loan a friend $100 and ask that they pay you back $110 in a month.

The $10 is a 10 percent interest return rate as $10 is 10 percent of the $100 lent.

If you had the $100 in your hands during that month, you could have used the $100 for other things, like buying sneakers, going out to eat, or for something productive like buying a vintage shirt at a garage sale and selling it higher online.

By asking for $10 extra for lending your friend the $100, you’re saying that you’re willingly giving up your ability to presently use $100 in the interest of getting an extra $10 in future potential value that you can then leverage.

Your friend is willing to take on this debt because they value the $100 present more than giving up $110 in the future.

Why might this be the case?

A friend may want to get a limited-edition item at a store, but they don’t get their paycheck until 2 weeks later. They value getting the rare item presently more than spending the extra $10 later.

Your friend may be having car trouble, and they need to replace a part so they can get to work and then pay you back later.

Whatever it is, people choose to take on loans with interest based on their subjective needs and circumstances.

When the government tries to control interest rates, they are intervening and setting limits on what people can do to help meet their wants and needs.

This call to control interest rates often comes in the form of banning “usury,” a term meant to denigrate interest as an evil.

The ban on interest rates has come in many forms throughout history, from the English Statute of the Jewry in 1275, which banned most forms of lending by Jewish people, to the banning of Usury in Islam, called “riba” in the Quaran, which limits the enforceability of interest contracts in countries where Sharia is practiced, like in Saudi Arabia.

What is missed in this calculation is that, by banning lending with interest, or limiting interest, it prevents people from meeting needs and taking risks to both help take care of themselves and provide value to others, whether it is someone taking a short-term loan to cover an emergency, to an entrepreneur willing to take on a higher-interest loan to expand business.

Government control denies these opportunities for people to meet their needs and expand their productivity, especially, when the government artificially controls interest rates or bans lending outright.

Much of the concerns people have about high interest rates are a product of government limiting competition in the lending market.

When the government limits entrants and rates, then the ability for people to get lower rates is curtailed because there are fewer people offering options and competing to give others the best rate possible.

When a free market in lending is enabled, interest rate options come down in the same way that we see prices come down for goods and services when there are more competing options.

Profiting from interest should not be strange, especially when considering profit in other areas of business.

A seller of goods, like a clothing store, may make a 50% profit on each t-shirt sold.

What a seller chooses to sell an item for to a willing buyer, even if the cost of the shirt is only $10 and is then sold for $20, should not be controlled by the state, just like a willing loan recipient may be willing to pay a 50 percent interest on a loan if they believe they will be made better off by taking on the loan.

As you can see, interest is not a boogeyman.

It’s a wonderful tool for people to get their wants and needs met as some people prefer the present use of resources greater than others.

When we have a free market in lending, we all win with more abundant opportunities and better rates in a competitive market.

Sources

What Is “Originary Interest”?
https://mises.org/mises-daily/what-originary-interest

#interest #interestrate #inflation #money #libertarian<