In which Ritchie denies the time value of money

Aristotle was right: you can’t make money out of money

Amazing really: entirely missing the point that we all did start making money around 1750 when we did realise that as money has a time value you can indeed make money out of money.

Next week, Ritchie\’s GP wife lectures us on why Galen is the way forward for medicine.

9 thoughts on “In which Ritchie denies the time value of money”

  1. Not quite clear what he is trying to say here. Is Murphy adopting the old Christian/current Muslim argument that charging interest for borrowed money is immoral?

  2. “Finance should be the servant of the economy, in which role it is absolutely fundamentally important… Aristotle was right: you can’t make money out of money”

    Or is he saying that banking doesn’t have a value? Banks clearly do make money out of money, yet he does preceed it by saying that banks are “absolutely fundamentally important”. I think he’s just confused, as usual.

  3. He may be right.

    If you leave a couple tenners in a shoebox, then I don’t think that they will reproduce.
    However…
    If you take the same couple of tenners and invest them with someone you may earn some money.

    Your work is deciding who to risk that money with, transferring that money to them and, if you’ve any sense, keeping an eye on it.

    The person you gave the money to has to do something with the money, that is also work.

    Or have I got it wrong?

  4. 555PPS – it doesn’t even need the borrower to do something productive with the money.

    If I want fifty quid to spend on booze now, rather than having to wait until payday at the end of the month, then to me that fifty quid now might be worth paying sixty quid on payday.

    So if someone lends me fifty quid now, charging me a fiver interest, I am still happier with my fifty quid now than if I had waited for fifty five quid at the end of the month.

    So lending has increased wealth (both mine and the lender’s), even though no-one has invested the money in anything productive.

  5. It’s the same old business of moving things from low value to high value use.

    If I find a horrible old vase in the attic, it is of little value to me. But it could give great joy to a collector of horrible old vases. So if I flog it on e-bay it moves from a low-value use to a high-value one. The buyer benefits from enjoying the horrible vase, I benefit from the money.

    The vase remains the same (unless the Royal Mail drops it on the way), but by moving it the wealth of both parties – and therefore the overall wealth of the world – has increased.

    Finance is often just the same; the financier is moving money from a lower value use (me on pay-day, when I will have plenty of the stuff) to a high value use (me now, when I want to buy a bottle of champagne to impress that girl at the other end of the bar).

    The money is the same, just as the horrible vase is. But the subjective, personal, value of it has changed.

  6. So Much For Subtlety

    Presumably he is suggesting we ban interest.

    But the branch [of the art of wealth getting, tékhnê khrêmatistiké] connected with exchange [metablêtiké] is justly discredited [psegoménê, “blamed,” “censured”] (for it is not in accordance with nature [ou katà phýsin], but involves men’s taking things from one another). As this is so, usury [obolostatiké, “obol weighing”] is most reasonably hated, because its gain comes from money [nómisma] itself and not from that for the sake of which money was invented. For money was brought into existence for the purpose of exchange, but interest [tókos] increases the amount of the money itself; consequently this form of the business of getting wealth [khrêmatismós] is of all forms the most contrary to nature.

    Aristotle, Politics, Book I, Chapter 3 (H. Rackham, Loeb Classical Library, 1950, 1998, p. 51)

    Or, alternatively, Richie has no idea what Aristotle was getting at and is just name dropping to big note himself. But it sounds a little bit to me like he does know – and lending at interest is something he condemns.

  7. So Much For Subtlety

    Yep. Just had a look through the comments. Loved this exchange:

    #
    Greg
    January 11th, 2011 at 16:38 | #5
    Reply | Quote

    sickoftaxdodgers :“Finance should be the servant of the economy, in which role it is absolutely fundamentally important. But when finance rules an economy that economy is virtually bound to fail. Aristotle was right: you can’t make money out of money and that game will surely fail, again. it is just a matter of when.”
    Exactly. Are there any right wingers reading this blog who’d like to explain why, when their philosophy is that people should stand on their own two feet, not expect benefits from the state, and obey the rule of law, none of this applies to the bankers?
    Not only is this economically unsustainable, it also makes a mockery of democracy. What is the point of voting if, as an ordinary person, the politicians refuse to hold to account those responsible for bringing the economy to it’s knees, and instead dump the cost onto you?
    Welcome to the bankocracy of Britain.

    I wouldn’t call myself a right winger (however i’m definitely not hard left!) but with regard to your questions, which laws do not apply to bankers? As far as I’m aware i’ve not seen any bankers break the law, but would be happy to be proven wrong.
    #
    Richard Murphy
    January 11th, 2011 at 16:41 | #6
    Reply | Quote

    @Greg

    You may not be a right-winger, but you most certainly provide grossly misleading answers to questions and I am inclined to let reason to block your future contributions to this site as they are almost always negative

    This is a case in point. Bankers do not need to break the law to abuse the law. The opportunities for international arbitrage that they exploit may be legal, but that does not mean that they are compliant, a fact that you well know, I am sure.

    You may, of course, apologise for abuse, but not here.

    You have been warned
    #
    Greg
    January 11th, 2011 at 16:55 | #7
    Reply | Quote

    @Richard Murphy

    Well if sickoftaxdodgers didnt actually mean break the law, but instead meant as you describe, then why limit things to bankers? Let’s face it, accountants and lawyers are just as heavily to blame yet everyone focuses on bankers. In reality most of the banking that takes place in the UK is well within the law.
    #
    Richard Murphy
    January 11th, 2011 at 17:01 | #8
    Reply | Quote

    @Greg

    Again, respectfully, a not very helpful comment

    Of course most banking is, most of the time, compliant. If it was not then we would have no banks left. We’re not worried about the mainstream that is compliant. What we are worried about is the margins which may be not, and if they are material (and some think they might be) then that is enough in itself to be an issue.

    But I stress, compliant may be legal, but unacceptable.

    Although I expect you know that
    #
    Greg
    January 11th, 2011 at 17:23 | #9
    Reply | Quote

    @Richard Murphy

    Richard, i’m sorry if you perceive these comments to be unhelpful. What I am getting at is there is a huge backlash in general (sickoftaxdodgers post is a perfect example) towards bankers which results in inaccurate statements. His/her post implies that bankers seem not to obey the law, which I believe is hugely incorrect. As you state, most banking is legally compliant (both technically and within the spirit of the law).

    And as for Aristotle’s theory, surely one can make money out of money by lending that money to someone else and charging interest?
    #
    Richard Murphy
    January 11th, 2011 at 17:48 | #10
    Reply | Quote

    @Greg

    In most cultures throughout history usury (that’s lending at interest, not just excessive interest) has been considered abusive

    And like it or not there is good reason for that, because as we see time and again, it is abused

    Little Richard seems to define abuse as not buying into his delusional alternative reality. So much so that he is working himself up to banning someone who is not abusive, but just not “helpful”. And there at the end we see it – our leading accountant thinks interest is morally wrong.

  8. Richard –

    The situations you described involved the owner of the wealth doing some work by putting their wealth to work. Indeed you may be right that some situations may not be described as productive but work (energy expended?) was done nevertheless.

    Going to the loft and putting a vase on E-bay is work. Making a decision about who to lend money to, and collecting it again is work.

    I think the point is that money cannot earn money without intervention by some sort of human process (work?). I am yet to understand how money makes money. People earn money and some people take that money and work it.

  9. ‘Way too much misinformed (and under-informed) discussion of the matter). The way to understanding is Mises’ THEORY OF MONEY AND CREDIT (circa 1912) or the appropriate passages in the MUCH more recent HUMAN ACTION.

    But, just for starters, there’s a fundamental difference between MONEY-LENDING and BANKING. The former, known from ancient times, is a straightforward, honest business proposition (though also decried for heartlessness as “usury”) in which the money-lender gives up (and risks, by the way) any use he might have had of his own money for the period in question. The “interest” charged is actually a composite, including: 1.) risk of non-repayment (due to failure or fraudulent intent on the part of the borrower, possibly somewhat offset by the nature of collateral; 2.) the prospect that the money to be repaid will, at time of repayment, be lower in purchasing power than at the time of the loan; and, 3.) the actual (a “psychic” value) diminution
    in value attached to the sum at the repayment time when compared to the present.

    Although only the last-mentioned can properly be termed “interest” and characterized by an interest
    “rate,” common parlance combines all three into a “cost of borrowing” or “market rate of interest.”
    Thus, it can be clearly seen that the money-lender belongs squarely in the category “entrepreneur” and, what is more, may certainly be one of the most important forms of entrepreneur extant, especially recognizing that many of the most promising and potentially beneficial effects of innovation and enterprise must be foregone (or realized only at much later time) in the absence of such function. Moreover, the successful ventures financed by the money-lender devolve not only into a profit for himself and his debtor but, as well, into widespread benefit to the broad class of consumers (they get something combining two out of the three characteristics: “better,” “faster,”
    “cheaper”). This is true whether the money-lender loans only his own funds or, perhaps, combines them with the funds of others, essentially partners in the risks and costs faced. In modern times, the role of money-lender is played chiefly by “investment bankers” but also by holders of bonds and debentures.

    The business of “banking,” although also involved in the making of loans, is substantially different and consists, typically, of loaning out funds that have been loaned to the bank by “depositors.” Thus, the bank is essentially a broker–borrowing at one rate and loaning at higher rate, reaping a gross profit equal to the difference in rates. However, banks (in the bye-and-bye England) observed that most depositors left their money in the bank and rarely withdrew it, intent on making their interest; and, further, that IOUs of the bank tended to circulate and be spendable as “money” and might not even be brought back for redemption for relatively long periods except when presented outside the normal regional area in which that bank operated. And, since the same problem occurred to all the banks, it wasn’t long before some entered into agreements to honor one anothers’ “paper” and, then, further, for all of them to be cartelized in like fashion, and–voila!–the Bank of England. What had occurred was the legitimization of “fractional reserve banking,” in which “mo’ money” is created simply by the loan than had existed in the prior instant. Unlike the loan granted by the money-lender, the loan granted by the fractional-reserve bank has immediate and far-reaching effects–effects that are being felt now (and have been felt before in recessions and depressions) and have even the potential of destroying some of the most important bases of modern civilization.

    But, to understand, you’ll at least have to become familiar with Austrian monetary theory.

    One thing I should add. In earlier times, the potential negative effects of fractional-reserve banking were understood to the extent that laws expressly forbade the combination of “investment banking” with ordinary (fractional-reserve) banking. Those walls and dams have been breached, though just when I don’t recall, so that now, the abuses meant to have been prevented may occur regularly.

    As far as I can see, we’re all fucked,–some a bit more than others.

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