These arguments are hard for me to follow. My approach to a theory of interest starts with a theory of profits ("operating profit," in accounting language). After all, it is operating profit that makes payment of interest possible. Next, a theory explaining all profits (individual or micro, aggregate or macro) must center on a monetary expression. In my mind, there is no consistent way to think of profit (or interest) as anything other than the difference between business revenues and business expenditures over a specified period. (Sales minus costs.) How do we explain the existence of profit at the level of an entire economy? George Reisman ("Capitalism") presents a unique theory of profit and interest, which is the most satisfying I have seen. Thanks for a thoughtful post.
"How do we explain the existence of profit at the level of an entire economy?"
Basically, this is the old question already discussed by Marx: "How does money become more-money?" To avoid a lengthy explanation at this point, here is a partial answer: in a static environment it is impossible to answer this question satisfactorily. One reason for this is that, however good and efficient production may be, it does not generate money. Well, in Marx's time - when there was still a gold currency - production from gold mines could be cited as a reason for more money, but such excuses no longer exist in FIAT-money. What Keynes said with his "(near) zero production elasticity of money" applies here: production does not create money.
A correct answer can be obtained by looking at this question over time in an economy that is modeled by successive production processes and which also takes into account that these processes have a longer lifetime than just one period (5 in this case). As soon as you start to think "out of the box", these problems, which are unsolvable in a static context, dissolve. One of the simplest representations that takes all of the above aspects into account looks like this:
On page 722 of Reisman's book, I found an attempt to explain how a global profit rate can arise. This is clearly - to put it politely - under-complex. The model shown above alone has around 25 relationships, which are also intertemporally intertwined. And this is the simplest version; there is practically no upper limit, even if the principle always remains the same. And once you have grasped the whole thing, it becomes clear that the question "How does money become more-money?" must actually be: "Why does it look like money becomes more-money?" This also renders obsolete answers that claim that profit can only arise through the creation of more money and that the monetary system must therefore necessarily expand infinitely. With this model, the "mathematically inevitable end of the FIAT-money system" has been canceled; it does not have to happen, but it can happen if people make stupid mistakes - which is always possible.
All of this is completely consistent with the fact that defaulted loans, i.e. defaulted receivables, can only be compensated for by profits...
Think you mis-read. GR does not render obsolete the prospect that money creation is the source of profit. It is one source of three he identifies. The three sources of profit are: "net consumption" (I'll let you read it); net investment; and inflation, which he defines as an increase in the quantity of money caused by government.
These arguments are hard for me to follow. My approach to a theory of interest starts with a theory of profits ("operating profit," in accounting language). After all, it is operating profit that makes payment of interest possible. Next, a theory explaining all profits (individual or micro, aggregate or macro) must center on a monetary expression. In my mind, there is no consistent way to think of profit (or interest) as anything other than the difference between business revenues and business expenditures over a specified period. (Sales minus costs.) How do we explain the existence of profit at the level of an entire economy? George Reisman ("Capitalism") presents a unique theory of profit and interest, which is the most satisfying I have seen. Thanks for a thoughtful post.
"Sales minus costs." Of course, what else?
"How do we explain the existence of profit at the level of an entire economy?"
Basically, this is the old question already discussed by Marx: "How does money become more-money?" To avoid a lengthy explanation at this point, here is a partial answer: in a static environment it is impossible to answer this question satisfactorily. One reason for this is that, however good and efficient production may be, it does not generate money. Well, in Marx's time - when there was still a gold currency - production from gold mines could be cited as a reason for more money, but such excuses no longer exist in FIAT-money. What Keynes said with his "(near) zero production elasticity of money" applies here: production does not create money.
A correct answer can be obtained by looking at this question over time in an economy that is modeled by successive production processes and which also takes into account that these processes have a longer lifetime than just one period (5 in this case). As soon as you start to think "out of the box", these problems, which are unsolvable in a static context, dissolve. One of the simplest representations that takes all of the above aspects into account looks like this:
https://www.dropbox.com/scl/fi/go1dfkai3tgk1qnan34a3/simple-circuit.jpg?rlkey=vrk0ocvwtv6oq5x0n5gvh3xsg&dl=0
On page 722 of Reisman's book, I found an attempt to explain how a global profit rate can arise. This is clearly - to put it politely - under-complex. The model shown above alone has around 25 relationships, which are also intertemporally intertwined. And this is the simplest version; there is practically no upper limit, even if the principle always remains the same. And once you have grasped the whole thing, it becomes clear that the question "How does money become more-money?" must actually be: "Why does it look like money becomes more-money?" This also renders obsolete answers that claim that profit can only arise through the creation of more money and that the monetary system must therefore necessarily expand infinitely. With this model, the "mathematically inevitable end of the FIAT-money system" has been canceled; it does not have to happen, but it can happen if people make stupid mistakes - which is always possible.
All of this is completely consistent with the fact that defaulted loans, i.e. defaulted receivables, can only be compensated for by profits...
Think you mis-read. GR does not render obsolete the prospect that money creation is the source of profit. It is one source of three he identifies. The three sources of profit are: "net consumption" (I'll let you read it); net investment; and inflation, which he defines as an increase in the quantity of money caused by government.