Often, questions about things we take for granted, things that are institutionalized, don’t go far enough. We commonly question whether interest rates are too high or too low, but never really get to the heart of the matter: is interest a normal function of a truly free market or a result of outside force in a controlled marketplace?
We need an understanding of what interest actually is to even begin to question its validity. There are many definitions. The most widely accepted probably is the Austrian view that interest is a time preference choice made subjectively. The problem with this overly simplistic view is that it “assumes” the validity of interest and then proceeds to explain why it is valid. Austrian logic states in a circular manner that because interest is based on a “subjective” choice, that necessarily eliminates any need to challenge this choice. Choice signifies only that more than one option exists, not that the chooser is acting completely free and without the influences of force.
Interest is also justified based on laws of supply and demand. What must be justified is not the supply and demand of anything, but whether the supply and demand freely exists or is a result of force. Again, supply and demand can also exist within a framework of force and coercion.
Interest is truly a question of “possession”. The ownership or title to capital, to the exclusion of others, allows the owner to ask and receive a payment in return for a temporary transfer of title to the capital. Where does this “right” to ownership originate?
If it is inseparably linked to capital, then it must originate alongside capital. Capital can only be created through production. And, capital can only be “drawn” from the surplus of production. Without a surplus, that which is above and beyond the immediate needs from either the demand side of production or the immediate needs of the production process itself, there is NO capital. Capital is left over, the remains.
But, this definition itself is a bit confusing. What is it that can be “left over”, not possess any neither immediate use nor value to its owner and yet have immediate use and value to others? But, it is fundamentally this condition, surplus value that has no use to its owner that allows it to be available to others.
Getting back to the origin of capital, the production process, what exactly is this “surplus”? In a true free market, not what is out there and referred to as a “free market”, the surplus can never represent itself in the product. Surplus product in a pure market would always lower demand and price, creating a point of equilibrium. In other words, as long as product has any use value to people, it can never be surplus. It will simply find its proper price and be utilized.
Same goes for labor in a true free market; if the production process produces surplus labor, the cost of wage declines, which also lowers product price and demand until equilibrium is reached. So, while capital must originate within the production process by definition, it does not originate, at least in a free market, from either overproduction or surplus labor. Marx’s observations were not observations of a true free market. Surplus labor value cannot exist in a free market, only in a market controlled by force.
If this surplus that becomes capital is actually fact rather than fiction, then it must occur during the production process, yet it must have its origin somewhere other than the product or labor. The “value” of the product must somehow become greater than the sum of its parts. This “extra value” must materialize into the surplus we refer to as capital.
But, is this possible? To be possible, those that “value” the product at a level exceeding its cost must be willing to give extra value to that product. But, that extra value must also come from the production process, as there is no other “real” place for value to be created. Another area of the production process must be “devalued” in order for surplus value to be devoted to one area and capital to be created and subsequently owned.
While this might seem to fly in the face of conventional economic logic that as the production process grows more and more value is created, it doesn’t at all. What it challenges is the assumption that more and more “surplus” value is created which in turn justifies the existence and ownership of capital and the phenomenon of interest. Surplus value is a completely different breed of animal than value. It must exist above and beyond the value and the cost of our standard measure of value.
Even if we assume that this extra added surplus value can be possible, it would extremely fleeting in a free market. Would there be any reason other than force that competitors wouldn’t flock to areas of the economy producing surplus value and quickly drive down returns back to cost? Production of capital and surplus value certainly could exist at times, but competition would surely drive the surplus value back down to the level of actual value or cost.
So, the real question becomes why would anyone engage in any action that would produce excess value and allow that excess value to be collected by someone else if we completely remove force from the equation?
The Austrians have claimed time preference might be a reason, but does time preference even exist in free exchange? It can only exist if we believe that it is somehow more valuable to all of us for some of us to receive payment for their goods or service in the future rather than now and to receive a greater payment than we would in the present. If this isn’t the case, then time preference has little to do with anything other than freedom of choice and doesn’t hold any substantial reward for those who wait.
Even if time preference is a factor, we have again forgotten free competition. If greater value is rewarded to those who wait, wouldn’t enough of us wait in order to receive the greater return, which would result in driving the rewards of waiting back down very close to actual cost, again resulting in equilibrium? After all, if economic laws are true, they must have the ability to be applied equally to all situations, regardless of what it tells us about the outcome and regardless of who ends up at the top of the pile.
The existence of interest other than to cover the actual cost of the transfer of capital, seems to be founded more upon outside force and fictional economics than true free exchange. Even capital, at least as we know it, would seem to be threatened by a truly free market. This shouldn’t be that surprising. Imaging a free world takes just that: imagination.