4

Organisations such as JAK and Rentevrij argue that economic interest is fundamentally unsustainable, because it requires perpetual exponential economic growth, something impossible in a finite ecological system.

Can interest and sustainability co-exist in the long run?

6
  • Given the plethora of crankonomics sites on the web that spread all sorts of nonsense about the nature of money, I rather fear that this question will quickly be non-constructive. If an Economics Stack Exchange gets revived, it might be a good question there, and there would at least be more macro-economists on hand.
    – 410 gone
    Jan 30 '13 at 9:37
  • 1
    @EnergyNumbers JAK has been running an interest-free bank for decades, so I think it's demonstrably not nonsense; but that would indeed be an economics question. My question is explicitly about the sustainability aspect. As for whether or not it is on-topic, see this meta discussion.
    – gerrit
    Jan 30 '13 at 9:43
  • 1
    Oh, interest-free banking is also sustainable, don't get me wrong: what's nonsense is this idea that interest requires perpetual exponential economic growth.
    – 410 gone
    Jan 30 '13 at 9:44
  • This is an important topic, but this question is far, far to broad to produce a useful answer in the Stack Exchange format.
    – Jay Bazuzi
    Jan 31 '13 at 1:02
  • @EnergyNumbers, interest on the issuance of currency requires perpetual economic growth. Your right, the charging of interest on direct lending does not. It's fractional reserve lending that dictates a money supply grow exponentially in the absence of a total monopoly on lending. Good point EnergyNumbers!
    – OCDtech
    Feb 21 '13 at 20:18
4

Yes, interest and sustainability can co-exist in the long run. Interest has already survived for millennia, so it's probably one of the best-tested sustainable mechanisms we have as a civilisation.

And interest does not require perpetual exponential growth, neither for savings nor for debt. We've had plenty of periods of history where we haven't had exponential economic growth, and we have had interest.

Money and resources are different things

Don't confuse money with resources: they are exchangeable, at always-varying rates, but they are not the same thing. Money can be created at the push of a Central Banker's button - that's what Quantitative Easing is. And debt / savings can be eliminated at the push of a button too - that's what debt cancellation is. And both of these things are happening around us right now.

Interest is a real price, in a real market

Furthermore, interest represents a real price - the price of credit. If you've got a sum of money that you can access now, you can choose to spend it now, or you can choose to spend it later. If you've got the same sum of money, but you can only access it in one year's time, then you can spend it any time after 1 year, but at no point between now and then. So, by definition, that money that is locked away for a year is worth less than money available now, because you can do less with it. And the price of that is what interest represents - the price of credit.

Credit has a real price, and to hide that real price, would distort the market for credit, creating long-term distortions, and actually worsening economic efficiency and thus economic sustainability. Now, economic sustainability is by no means the only kind - there's social sustainability, resource sustainability, and so on. And they are all important.

3

If I understand you correctly, you are mixing two concepts. Sustainable living can exist regardless of the economic climate. Prices rising does not mean that the value of assets is rising. It mean that you need more paper money to buy those assets.

I am no economist, but at the moment it seems that the central banks are charging interest on the money they give out. Which means they will have to print more money to give to you to pay the interest. But this money again will have interest on it... This setup leads to more money is accounted for than actually exists until the central bank decides to cancel your debt, for services, assets, or just because they like you.

Now, the finiteness assumption about this earth's resources could probably lead to a more sustainable model of economy, but this is a different question, and probably more suited for Economy SE (which seems not to exist any longer).

In response to @EnergyNumbers's comment, I should add that interest your normal bank charges can exist in a sustainable model of economy. Charging for the service of lending you money is just like charging for cooking a meal. In that sense interest is perfectly sustainable (in the economic sense).

10
  • No, it does not mean that more money is accounted for than actually exist: money circulates. When you spend it, it doesn't cease to exist - it circulates. Money doesn't get used up, by being used.
    – 410 gone
    Jan 30 '13 at 9:33
  • @EnergyNumbers Yes, but imagine a world where no money exists. I, the central bank, then decide to issue money. You wish to get money from me. I give you $100, but tell you that in a year you have to pay me $120. Where will you get the extra $20 (in a world where only you have money)? From me, directly or indirectly, through someone else I gave money to... I am not talking about interest that normal banks charge, I am talking about the interest central banks charge on their issued money. I'll add that (FWIW).
    – Earthliŋ
    Jan 30 '13 at 9:40
  • Money and value are different things. There are lots of things that have value, that are exchangeable for money. For example, time. So, to take your example, I could work for the Central Bank for an hour. It pays me $20 for my time. And now I can pay the interest. As you correctly identify in your first paragraph of your answer, money is just the measure of the value of assets, it's not the only asset.
    – 410 gone
    Jan 30 '13 at 9:42
  • 1
    @EnergyNumbers Yes, but the central bank doesn't issue new money to pay you. For the few expenses, like paying staff, it receives money from someone else's interest and pays you. There is no new money introduced into the system. Which is why more money is accounted for ($120) than exists ($100).
    – Earthliŋ
    Jan 30 '13 at 9:47
  • 1
    Money gets created. For a growing economy more money is necessary. (Else, saving money would make your money worth more.) Money gets destroyed through debt cancellation, but I cannot estimate how much debt is being cancelled. As long as the economy is regulated to correspond to economic growth, the system is sustainable. In any case, money is only related to value because we choose to give it value. (By accepting $2 for a gallon milk.) But it is not related to value intrinsically...
    – Earthliŋ
    Jan 30 '13 at 21:04
2

In the era of material money the interest was bound with resource consumption growth. But now we have a virtual economy, and money that you have in the bank in reality doesn't exist. The interest is the increase of value, that doesn't exist in the real world.

Note also the inflation. When money was "real", inflation means at least an increase in money printing; yet even that isn't necessary. So you can have a deep crisis and high inflation, and still have interest; but, the value of your money will decrease.

Taking into account non-material goods, there's also the possibility that the growth of virtual money could be paired with a growth in non-material goods volume, while the usage of resources will remain constant or decrease.

In other words, it is possible that the prices will go higher, and the people eat less. This is how a virtual economy works.

So now, the direct relation between money and resource consumption doesn't exist anymore. There's still a correlation.

Not the answer you're looking for? Browse other questions tagged or ask your own question.