On 3/28/07, raghu <[EMAIL PROTECTED]> wrote:
If resources are limited (e.g. labor and raw materials) some
consumptions should be postponed to accomodate others. Interest is
supposed to be compensation for consumption postponed. (Because
consumption today has greater utility than the promise of consumption
tomorrow, I should receive more tomorrow than I lend today.)
This explanation makes a lot of sense -- until the amounts become too
large and then this argument is nonsense.
"interest is supposed to be compensation today for consumption
postponed," but both theory and data suggest that people will save
pretty much the same percentage of their incomes even if the interest
rate equals zero. That is, rises of interest rates do not simply have
the incentive effect (the reward for saving) but a wealth effect:
rising rates mean that current wealth pays better, so that less saving
is needed to attain retirement savings goals and the like, largely or
completely canceling out the incentive effect.
I agree with Keynes, who saw interest as more an example of a scarcity
rent: it's a reward for what people would do anyway. Raghu is
absolutely right that this argument gets stronger when people are
rich: these folks earn so much income that they have a hard time
spending it all and when they do spend it, they usually buy existing
assets such as houses, stock certificates, etc.
Interest does play a role in financial intermediation, but it's really
just a matter of the "spread" between interest paid to depositors
(usually close to zero) and that earned by banks on loans. This spread
is more of a fee for financial intermediation than a reward for
"waiting."
--
Jim Devine / "Segui il tuo corso, e lascia dir le genti." (Go your own
way and let
people talk.) -- Karl, paraphrasing Dante.
