Mr. Monbiot

Can someone explain to me what Goerge is getting at here?

The issue is that capitalism involves lending money at interest. If you lend at 5%, then one of two things must happen. Either the money supply must increase by 5%, or the velocity of circulation must increase by 5%. In either case, if this growth is not met by a concomitant increase in the supply of goods and services, it becomes inflationary and the system collapses.

I quite seriously cannot make head nor tail of what he means here. Even if you had an entirely static economy, with a stable money supply and a stable velocity of circulation, you would still have interest: for there is still risk of repayment and still a time value to money.

No?

The second part, that an increase in the money supply (or the velocity of circulation) without an increase in goods and services will inevitably lead to inflation is of course Milton Friedman: monetarism pure and simple. Nice to see that George has caught up there at least.

But why does the practice of lending at interest lead to this? Anyone?

But a perpetual increase in the supply of goods and services will eventually destroy the biosphere.

That, of course, is not what we\’re trying to do at all. We\’re trying to get an increase in the value of goods and services provided, not volume. That is how economic growth is calculated after all.

5 thoughts on “Mr. Monbiot”

  1. Interest is the “rent” you pay for borrowing money, much like the rent you pay for borrowing a house or a car. Does the existence of those latter rents increase the supply of houses and cars?

  2. Tim, why are you bothering to comment on the blatherings of that chap? If you enjoy it so much I can forward onto you the odd newsletters I receive from Lyndon Larouche which describe how Queen Elizabeth’s Jewish henchmen print fake greenbacks and so on. It would bear as much resemblance to reality.

    Tim adds: Because, for better or worse, George has an influence on the politics of our country: LaRouche does not.

  3. dearieme:

    The terms “rent” and “interest” have somewhat different meanings in the precise language of economics than in common usage. And each (taken in its common usage), when considered from the economic view, can be seen to be be comprised of entirely dissimilar quantities–subsumed under common usage.

    What we generall y refer to as “interest” refers to a rate on some loan market which is a composite of: 1. the “core” interest, sometimes called “agio” or “time preference,” or (by Austrian economists “originary interest”) and is simply the relationship between the value of any good in the present moment with its value at some specified moment in the future and the difference divided by the time concerned; 2.) a premium (theoretically either positive or negative) included for perceived chance of loss at some time during the period; and, 3.) another premium included to defray the likelihood that the common valuation used to establish the future valuation could be subject to more than time-induced alteration over the course of the period. A common premium of the second type is that included for non-payment, including risk of degradation of collateral, difficulty and costs in enforcing claims, etc. The third type is an allowance made most typically for anticipated monetary inflation during the course the loan must run.

    On the various loan markets, of course, all we see and make note of is the combined or gross rate. But one more component must be recognized in any loan: the entrepreneurial component, which simply translates into that difference between what the lender expected of the result of the loan and that which actually can be observed to have materialized at any time between when the loan is made and when it is repaid (or not); in other words, every loan involves profit or loss–quite apart from the agio, the risk, or the inflation-premium.

    “Rent” meaning what is to be paid for the temporary command over an economic good–derives from the ancient idea of the rent paid for the use of a particular piece of land. But modern economics does not recognize this concept; indeed, it could be said that the dawn of modern economics occurred when it was realized (Ricardo) that no rent whatever could be derived from “marginal” land and that the entirety of “rent” was to be seen in the degree to which a particular piece of land was more productive to the marginal. “Rent” (in a modern economic sense) is entirely a phenomenon of superiority in some wise and for some use and can be observed in many other instances than
    land. The popularity of a particular singer earns him a differential above another–even another qualified performer of the very same song. “Good will” and “brand names” are potential sources of rent for their owners.

    But the common word “rent,” as still applied to the temporary use of a piece of land or a dwelling–has no specific economic significance. Rather, it is composed of other elements, including “rent” in the economic sense–the amount paid for its superiority over another similar item, risk (of the tenant deliberately or negligently decreasing the value of the property, cost of averaged wear, tear, necessary maintenance, and, finally of gross interest. And, of course, to the degree that the landlord has correctly (or not) anticipated the entirety of the economic changes occurring during the period of the tenancy, there is profit (or loss).

    As to your question whether rents will increase the supply of the rented good, I can only answer that on a conditional basis.

    Forget the interest and the risk and inflation premiums for a moment–whether in the loan market or in the market for rental property.

    If those “in the business” see their operations as “profitable” and to such a degree that no other allocation of their resources offers the same degree of return and safety, then, yes–they will enlarge the scope of their operations.
    And, to any degree that they do not, any other entrepreneurial individuals who perceive the same thing–the greater returns to be had in that enterprise than in others–will move into that field. TO MAINTAIN OTHERWISE IS TO INSIST THAT PROFIT-SEEKING INDIVIDUALS DO NOT EXIST. And, likewise the same rationale tells us that, where supply (and competition) are NOT increasing, the existing returns are perceived inadequate (compared to other employments) by both those in the field and others who can appreciate their activities OR there must be another reason for the dearth (such as government restriction).

  4. Bejus, perfessor. That’s quite the comment, above.

    “Rent” and “interest” are the returns received for two different factors of production. Books can and have been written on the semantics betwixt the two terms, but in practical usage, dearieme is correct. Or, at least, I agree with her interpretation of the meanings.

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