The Socialist Interest Free Economy (Republicae)

The opposition to loan Interest rests in a misconception of what Interest really is and how it functions within an economy. Under the assumptions that wealth would increase under an interest-free economy, there are few examples of such prosperity under Interest Free economies. The reason behind the lack of prosperity is that Interest Free money is, for a lack of a better word: unemployed and barren. Barren or unemployed monies perform no productive function within a vibrant economy.

Within the Interest Free community, including those of the Marxist persuasion, there is the misconception that the borrower is being defrauded by paying interest; nothing could be farther from the truth. The truth is that in an Interest Free society, the lender would be cheated and defrauded, for who would hand over the fruit of their own labor to another while taking the risk of no return on the money that represents the fruit of their labor.

Why does anyone consent to pay Interest for money? Why does a tenant agree to pay rent for the use of land or other property? The primary source for such consent is a private contract between two parties without the intervention of government, whether by prohibition or regulation. Now, for those who advocate an Interest Free society there must, by necessity, be both heavy government intervention and legal regulation to impede the principle of a private contract, as well as private property rights.

Those who advocate a prohibition of Interest in our economy ignore the most basic principle of not only a free market, but individual freedom. They deny the primary justification of Interest and that justification is the right of property which the creditor has in his money.

Does not a person, a business or a lending institution, by the virtue of an inviolable right to dispose and use his money as he will, lay conditions on that money if it is loaned out to another? Essentially, Interest is the price of time, but contrary to the current managed market, in a free market the price of time is set by market forces instead of manipulated by a central bank, which will always, without exception distort the market of capital.

The Interest Free advocates follow a very specific view of economic production, an egalitarian view that equalizes all goods and services by the exclusion of interest. It is a “value-based” economic system that has been propagated by Socialist under the name of the Exploitation Theory. Incidentally, socialist economists have always considered Interest as nothing but exploitation and not, as it really is, a private property right based on the fact that money is property that represents a portion of the owner’s life and energy in labor.

The Socialist Exploitation Theory goes something like this: “All goods that have value are the product of human labor, and indeed, economically considered, is exclusively the product of human labor. The Laborers, however, do not retain the whole product which they alone have produced; for the capitalist take advantage of their command over the indispensable means of production, as secured to them by the institution of private property, to secure to themselves part of the laborers’ product. The means of doing so are supplied by the wage contract, in which the laborers are compelled by hunger to sell their labor power to the capitalists for a part of what they, the laborer, produce, while the remainder of the product falls as profits into the hands of the capitalists, without any exertion on their part. Interest is thus a portion of the product of other people’s labor, obtained by exploited the necessitous condition of the laborer.”

"But one man is superior to another physically or mentally and so supplies more labor in the same time, or can labor for a longer time...equal right is an unequal for unequal labor... In a higher phase of communist society, after the enslaving subordination of the individual to the division of labor, and with it also the antithesis between mental and physical labor, has vanished, after labor has become not only a livelihood but life's prime want, after the productive forces have also increased with the all-round development of the individual, and all the springs of cooperative wealth flow more abundantly -- only then can the narrow horizon of bourgeois right be crossed in its entirety and society can inscribe on its banners: From each according to his abilities, to each according to his needs." Karl Marx

“Free, unimpeded barter allowed people to produce to natural capacities; and to obtain for our own production whatever we deemed to be equal, undiminished measures of the production of others… Because no one takes from the trade anything but the equal of what they contribute to it, each party receives the full, self-determined equivalent of their contribution to the overall pool of their wealth. We have in effect two conflicting philosophies. One wants earnings for its work equivalent to its work. The other wants unearned gain which can only be taken at the cost of earning equivalent to real work... We mature beyond the era of unearned gain… Like cannibalism, unearned monetary gain and all the manipulation which goes with it will one day disappear from history forever after.” Mike Montange’s People for Mathematically Perfect Economy.

“Usury centralizes money wealth, where the means of production are disjointed. It does not alter the mode of production but attaches itself to it as a parasite, and makes it miserable." Marx

Here is yet another utopian visionary who has come to the conclusion that if only interest was completely eliminated that everything would be wonderful.

“Envision a world without poverty or economic oppression, a place where humankind can attain its potential amidst the rest of the world, without hunger or homelessness, where educated societies enjoy all the fruits of their labors. In such a society it wouldn’t be necessary to hand over your hard-earned dollars to the government to pay ever-increasing taxes. Could you learn to live in a place where budgets were balanced, homes were affordable, and you kept all the money you earned?” Jacques Jaikaran.

Like Montagne, Jaikaran adheres to the doctrine of an Interest Free society. I remember reading similar promises from the lips of Marx, Lenin, Trotsky and a long list of Socialists, who also advocated an interest free society where the “capitalist parasites” would be restricted from preying on the hapless proletariat.

The pedigree of this theory, this prohibition of Interest is almost purely Marxian in origin. As the free market economist George Reisman stated: “For more than a century, one of the most popular economic doctrines in the world has been the exploitation theory. According to this theory, capitalism is a system of virtual slavery, serving the narrow interests of a comparative handful of businessmen and capitalists, who, driven by insatiable greed and power lust, exist as parasites upon the labor of the masses.”

Interest, like money, arose from a need and it is vital to a free market economy, without it you not only would not have a free market you couldn’t have a free market. The workings of a free market are so dependent on the vital functions that interest accrual provides that it would be impossible for the economy to work.

This Interest Free concept also stems for a total lack of understanding of what money is and what it represents. People work, they labor and part of the fruit of their labor is the money they earn in compensation for the time and effort they put into their jobs. In the most essential meaning money represents a portion of a person’s life. Now, if you earn money by your time and that money represents the time you took out of your life to earn it, is your life worth nothing if you lend it out in the form of money as opposed to the time you lend out in the form of work?

Interest, under a Gold Monetary system is a vital function of monetary economics, not only domestically but also concerning the balance of trade. It provides so many signals, so many influences within the economy that it is almost impossible to explain given the space we have here. In fact, volumes have been written on the subject of how a free market economy is completely dependent for its health and for prosperity on interest value assessed by the time preference of money.

So, how would an Interest Free economy work and how would you transition toward such an economy? Well, Das Capital gives a great deal of information on that subject in its Ideology of Dialectic Materialism. You want to read about an Interest Free economy, read Das Capital. You want to see Interest Free societies, look at some of the Socialistic societies which have impeded market forces by forbidding interest from their economic systems. In fact, it would take a massive STATE to both enforce it and to prop up the economy since the economy would have no gauge, no ability to self-regulate.

There would be absolutely no incentive to lend money under such a system. Indeed, you would have to allow the massive STATE bureaucracy to expand to an extraordinary scope just to make the economy function to any degree at all and like Montagne advocates you would have to have the Government continue to maintain power over a Fiat Currency.

“I suggest that money should be endowed with value based on the wealth that it represents. In my example, I assume the service life of the home is 40 years. The value is consumed (depreciation) in balance with the payments. In this system, every cent of the circulation is used to pay for the value of the original assets as they are consumed; thus the elimination of inflation or deflation which results when there is too little or not enough circulation.” Montagne

Once again, that concept is taken, almost directly from Marx and his Monetary Expression of Value. Marx rejected the Credit theories of Money, in other words Interest and sought to bring about a Value Based Monetary system, which sounds eerily like that which Montagne supports.

Montagne proposes an Interest Free society where “promise certificates” are provided throughout the economy for what amounts to IOUs. I find it very interesting, as well as completely unworkable since the supply chain would be filled with these promises to pay. Since there would be no incentive to lend, at any level, the producer of the most basic product would be forced to wait on payment from another up the line who would also be forced to wait on payment and so on. How would homes be built under an Interest Free economy, who would lend money for free? How would the suppliers be paid down the production ladder, would they, could they only accept a certificate of promise? How would any suppliers get operational capital?

Under an Interest Free utopian economic model how do you suppose that anyone, whether it is an institutional lender, a small business extending credit, or anyone extending credit would be willing to voluntarily give up consumption [based on the money they have on hand] today in anticipation of consuming [the money they receive for lending their money] in the future without a corresponding compensation for the value [price] of time?

What would be the incentive for anyone to lend under such circumstances?

Now, in a free market, Interest rates are not only determined like other prices through the interaction of supply and demand, but it also is a determinate factor in providing both present and future supply and demand along with a stimulus for productivity, a vital timing signal and risk evaluator. Without Interest how will all those factors come into play in the “economy”? The answer is that there would be no mechanism to perform such functions in an Interest free economy.

It all boils down to what money is and how money acts within a given economy, questions that you don’t address because you can’t address such questions in your economic modeling. Money, particularly asset money, provides a store of both present and future economic energy therefore there is a definite time value and time preference to money. Now, based on the assumptions of an Interest Free economy, it would take away elements of time value and time preference by the rejection of interest in such an economic model. There is therefore, no way to account for the lack of such vital elements and the effects such a lack will have on economic flows, both in active states of the market and in rest states of the market.

Think about savers, what incentive to they have in an Interest Free economy and if there is no interest what about investments which pay, in the form of dividends, a type of interest on the investor’s money based on corporate earnings. Apparently such dividends must also be banned in a “mathematically perfect, interest free utopian economy”.

Concerning savings, when a person places money in savings what he is doing is transferring real current resources or at least the means to purchase current resources to a bank or other entity with the anticipation that his money will have just as much or more, due to the Interest accrued on the savings account, more future purchasing power than when he deposited his money. How would an Interest Free economy provide incentives for savings? It could not.

Savings, by the way, especially in a sound monetary economy, are the backbone for capital production, without it how would the economy function? How would the balances between savings, investment and capital production be achieved under an Interest Free economy? What mechanisms would you put into place to replace the vital role that interest plays between those balances?

The same is true of someone lending money, when someone is willing to transfer his funds in the form of a loan, the basis of that loan if the promise of the borrower of those current resources to return those resources to the lender at a future time; in an Interest Free economy, the lender would not be compensated from the time value of his money and therefore there would be absolutely no incentive for anyone to lend present resources that could be readily placed into economic service today for those same resources at a future date without an expression of time value on those funds. In this case you are saying that there is no need in an economy for either time value or time preferences that would be a major and massive hindrance for any economic movement or productivity.

Those who advocate such an Interest Free economy miss the entire premise of lending, of time value, time preference and the productivity associated with lending using interest as a measure of future value and timed usage. The borrower assesses risk based on the rate of Interest and a certain degree of faith in his ability to repay the loan. The borrower is using current resources of the lender in the belief that he will be able to produce future goods and or services to the extent that he will not only have enough to pay back the lender both principle and Interest, but that he will, through the process and his business acumen also have a profit at the end of the process. How therefore, do you deal with the transfer of qualified demand in such cases? The answer is you can't.

If there is no incentive for such practices, and apparently under the Interest Free “style” of economy such incentives would be banned by law. In such Usury Free economies, a person or lender would naturally keep their resources to themselves for present productive activities from which they could profit instead of lending those resources for a future return with no profit whatsoever. I mean if I were a lender who could make a profit today within my money, why would I lend it for 1 year, 5 years, 10, 15, 20 or 30 years with no return at all on it? Sorry, but few people would take such a risk with not hope of a return on the time value of their hard-earned money.

I would assume that since there would be no Interest [which is nothing more than rent on money] allowed in an Interest Free economy that the practice of charging rent would also need be banned, since it is also interest on property. Rent is a form of Interest after all, you are lending out land, or merchandise or real estate in the estimation that you will get a return on those properties plus an excess if the property complete with clear title or not. The rental of money is no different than the rental of other properties that you own.

Also, on a practical matter, how would you enforce an Interest Free economy, there would have to be a massive government machine to enforce this law, what will it be? It would be much more intrussive than anything we currently have today and it would have powers that would, by shear necessity, involve itself into every financial trasaction that took place in an Interest Free economy.

Also, what role would the government have to take in terms of economic intervention since you are removing some of the most basic functions with an economy, primarily the role that interest plays in a vital economy? The government would replace the role of Interest in an economy otherwise such an economy would not function since all incentive is taken out of the system, time preference and time value will be no more. What mechanism would be used: government.

Well, I can tell you that if you propose an Interest Free economy and a fiat monetary system along with it then you will definitely not have a prosperous future. The only way that can happen is if the government is completely restored to Constitutional Order, limited and severely restricted to its delegated powers as enumerated in the Constitution. A sound monetary system restored which will automatically limit the expansion and power of the government, restraining the politicians and eliminating special interest powers, monopoly favors and regulatory license. A free-market without any intrusion of government is just as important as the restoration of Constitutional Order, without economic freedom, the Right of Private Property and the Right of Private Contract then we will not have prosperity.

In a free market, sound monetary system, the most wonderful thing happens to banks; they suddenly become responsible to their clients. Their fiduciary responsibility makes them compete and therefore keep their policies and practices above board. In a free market banks are allowed to fail just like any other business would be allowed to fail it they made bad business decisions.

The key to understanding any economic proposal is what effect it actually has on the Rights of the Individual, the Right of Private Contract and the Right of Property. If it sounds too good to be true, it probably is nothing more than a wolf in sheep’s clothing.

In Liberty and Eternal Vigilance,
Republicae