Interest And Selfinterest The Working Of The Profit Motive

The practice of paying and receiving interest on borrowed capital was condemned as usury by the Roman Catholic Church until 1830, and is still condemned by Islam today. But it is a crucial part of the modern capitalist economy. Suppose, for simplicity, that I operate a one-man industry. The basis for that industry will be a certain level of investment in what is called capital stock—machinery, buildings, and so on. In order to provide this capital stock, I will have to invest money in it. If I borrow £1,000 at a 10 per cent interest rate I will have to find an extra £100 to pay to my creditors in a year's time.

The only way of finding that extra £100—other than reducing my own savings or salary—is to make sure that I make a profit from the venture. Essentially, this means that I must sell my output. And this leads to one of two things: either the total economic output in the country increases. Or else my output is sold only at the expense of a drop in someone else's output. So if my riches are not to make another poorer, then the profitability of my investment demands growth at the national level. If I fail to make a profit, I will be unable to pay off my capital, my creditors will demand compensation, and I will find myself out of business—unemployed.

What makes the situation worse is that I must continue to invest in my business. Thermodynamics insists that my capital stock cannot be maintained without the injection of new resources. So that next year, I will have to invest more money in my factory and increase my output further, if I am to make the interest payments. But increasing my output will in itself make new demands for capital stock, and this larger stock of capital will require a greater input of investment funds to maintain it. And so the situation continues year by year. If I do not grow, I do not survive. At the micro-economic level, the industrialist can only maintain his or her profitability by expanding output and by cutting costs. Historically speaking, industrial employers have vigorously pursued one particular means of reducing costs: improved labour productivity. These improvements lead to the macro-economic difficulties which I have already discussed.

Here then is the root of the problem. The structural stability of the industrial economy depends implicitly on increasing the economic output of the economy: economic growth is crucial to survival. What ties the two inextricably together is the practice of paying and receiving interest on capital.

But if this is the case, why could we not just do without interest? Why could we not re-endorse the age-old religious distrust of usury? In the long run, perhaps we could envisage that as a solution. In the short run, the problem is not so easily dismissed, for several reasons.

First, the most obvious practical measure in the direction of outlawing usury would be to reduce the interest rate. And ironically, this may well have a completely perverse effect. Reducing the interest rate would provide a two-way incentive for additional capital investment. For a start, capital would be cheaper for borrowers, who would therefore be tempted to borrow more, and invest more heavily in capital stock. Next, lenders would face reduced profits from the same outlay and would therefore be forced to expand their financial markets to include more borrowers if they wanted to survive. The overall impact of this reduction in interest rate might be to increase economic growth for a while. But it would do nothing to relieve the 'virtuous circle' of economic growth or the 'vicious cycle' of economic depression.

The simple response might be to advocate a zero rate of interest: to stipulate that no profit at all is derivable from lending out money. This would certainly cut the Gordian knot. Capital would be 'free' in a sense to borrowers. But no investor would lend under these conditions. At a stroke, the entire financial market would be rendered redundant. The systemic impacts would be potentially catastrophic. The structure of the global market-place is now tied firmly into the trade in capital. In many cases, it is the financial services sector of the developed economies which are growing fastest. And the development of the global political economy is really characterised by nothing more nor less than the extension of this same paradigm to every country in the globe.

The trouble is that, in the competitive, profit-driven market economy, growth operates in a Darwinian way. Only the fastest growing businesses and nations survive, and the alternative to growth in such an economic system is no longer the stable steady-state economies of pre-industrialisation, but economic collapse: a downward spiral of low output, underinvestment and unemployment.

In the late twentieth century, the economic forces governing the industrial economy are basically the same as those operating in the period of proto-industrialisation in Britain in the early eighteenth century. But the context in which those economic forces operate has profoundly changed. The pressures on industry to improve labour productivity remain unabated. But the reduced labour demand which these innovations foster is no longer cushioned by monopoly markets overseas. Unemployment rises. Social disintegration follows. Suddenly the future of the industrial economy is itself in question. The European Union—one of the most powerful trading blocs in the world—is talking of 'reversing the disastrous course which our society, bedevilled by unemployment, is taking'.12 And the threat comes not so much from without as from within. The same driving forces which once created the conditions for industrial expansion are the ones which are now driving us towards economic and social collapse. The pursuit of economic profit forces us relentlessly onwards, and Adam Smith's invisible hand seems incapable of curbing its ill effects.

When orthodox economists allow us to question them on why we have developed and become so heavily implicated in such a system, the answer is remarkably straightforward. Profit is what makes us tick. It provides the engine for progress. It is the motor of development. Take away the profit motive and you take away the driving mechanism of human development, the raison d'être of civilisation.

In a sense, this reply takes us right back to where we started from at the beginning of the industrial revolution. This is the old, old, classical economic argument that self-interest is the motivator for human progress. This is the thesis which Smith first denounced (see Chapter 2) as 'holy [sic] pernicious' and later incorporated into the theory of the invisible hand. According to the classical economic argument, it is self-interest which prompts us to raise our collective standard of living, to harness new industrial resources, to expand our material horizons, and to improve our quality of life.

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