Sat, 17 Apr 2004

Interest

Interested in interest? Good! It seems that every major religion is interested in interest as well. They call interest usury, and condemn it. Some religions only condemn excessive interest; some continue to condemn any interest at all. The trouble with doing this is that a desire to be compensated for a loan seems to be a part of human nature.

Economists assume that if all other things are equal, people value an economic good (that is, a scarce product or service) now rather than later. If you want to use something that someone else owns, they will want something from you. In the case of neighbors, this will most likely simply be goodwill, or an expectation of a similar lending in the reverse direction. In market transactions, this is called originary interest.

Interest and rent are the same thing. I'll only talk about interest here, but all the aspects pertain to rent as well.

When you pay "Interest", you're paying for more than just originary interest. Interest also covers other costs. It covers the risk that the good willl not be returned. It covers any damage to the good, or, if money, it covers the possibility that the value of money will change over the course of the transaction. There are some types of loans where those risks are so small as to be inconsequential. Originary interest remains.

What about zero-interest loans, such as have been made in Japan in recent years? These loans still have originary interest. Their currency was deflating at the time, so the lenders were willing to be paid back less money plus originary interest, which added up to the same amount they were loaning.

What about a zero-interest loan such as one Muslim might make to another when selling a house? The loan still has originary interest, but it's being forsaken by the first Muslim, just as it was forsaken by the person who sold it to him. The person who built the house originally got screwed. They had to save their money while simultaneously paying interest in the form of rent (no, it doesn't make any sense).

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