Crusoe has finished planting his most fertile fields and is preparing to plant his remaining seed in the less fertile adjoining land when the stranger arrives.
S: I have found some excellent fields, too far from your home here to be of any use to you, but which will serve me well; and I need only some seed. I see you have some excess, which will be much more productive in my fields than in yours; might I borrow it, and easily repay after harvest?
RC: How much seed will you repay me, for each I lend you now?
S: One seed for each; my religion would forbid any other arrangement.
RC: The land I intend to plant them in is not so lush, but even so I expect to reap many times the seed I plant. Where is my self-interest in placing it where it will yield less?
Moral: some goods decay, but others can compound themselves—or, more often, create other goods that can create other goods in a long chain that ends with more of the first good.
The role of money is to make such long chains implicit; a positive real interest rate reflects that such chains are possible for most goods, and any exceptions will increase in price faster than interest accumulates.
I love your counter-parable. It does an awesome job of showing what massively complicated thing we are discussing. Land, money, consumables, exponentionables(your seeds), all have very different characteristics and drivers. Interest, investment, production, savings all are slightly different ways of talking about some of the same concepts.
I’m trying to get to the bottom of this statement and am having some issues:
The role of money is to make such long chains implicit; a positive real interest rate reflects that such chains are possible for most goods, and any exceptions will increase in price faster than interest accumulates.
Could you unpack it some more?
You can correct me where I’m wrong, but I think what you are getting at is that the current abstraction of money and the idea of interest paid for borrowing it is optimal enough to reward the people that put up the cash for the value that it creates? And if a good isn’t one of those exponential type things, the price just keeps going up faster than the interest rate because of its implicit limitedness?
Do you think RC would be more willing to make the more productive choice if he could benefit from all of the upside that lending the seeds produces or only the amount that is agreed upon? I think what I’m trying to get at with hypercapitalism is that we want RC to seek out the best use today instead of the best use tomorrow because if he waits until tomorrow all the work that could have happened to day can never be redone.
You can’t plant a pie and grow two pies, and in fact it will go bad quickly, but you might be able to trade the pie for seeds, grow them, and reap enough to trade for two pies. If no one with seeds wants a pie, you might have to make a chain of trades, e.g.trade the pie to the cobbler for shoes and trade the shoes for seeds.
Even if you don’t want to grow seeds yourself, you might trade the pie for farm tools, then trade those to the farmer in exchange for seeds at harvest, then trade the seeds for more pies.
Now it’s not guaranteed that these sets of trades are possible. It could turn out that the best deals you can get will leave you with half a pie at the end. But usually, if some goods can be used to make more goods, and baking pies isn’t going to get any harder in the future, exchanging pie today for pie tomorrow will get you more pie.
Money and financial institutions abstract trade chains away, so you can sell your pie, put the money in the bank, they’ll make loans to people who can pay back more in the future, pay you interest, and then you can buy more pie. The interest isn’t a distortion caused by money; it reflects a possible set of trades that might not be obvious but would be possible. If such a set of trades doesn’t exist, you won’t have positive real interest (real interest is the published interest rate minus inflation).
If you give all of the upside of the loan to RC there’s nothing left for the stranger and no reason for him to bother. If they’re able to negotiate an interest rate, they’ll find a deal that works for both of them. An equity arrangement where RC gets a defined percentage of the stranger’s harvest instead of a fixed amount of grain is also something they could negotiate in traditional capitalism, if such a deal were preferable to both parties.
In your story RC incurs no opportunity cost for planting seed in and tending a less efficient field. There should be an interest rate as a function for lending the last Nth percent of the seed based on the opportunity cost of planting and harvesting the less efficient field, which at some point crosses 0 and becomes negative. The interest rate drops even more quickly once his next expected yield will be more than he can eat or store for more than a single planting season.
If RC is currently in the situation where his desired interest rate is still positive for his last unplanted seed then his capital is constrained and he should instead ask for investment seed from S, for which he would be willing to pay interest.
In order not to starve RC should aim to grow sufficient grain such that his probability of having too little is lower than some risk threshold. In most cases this will leave him with excess seeds at every harvest (beyond the extra seeds required to avoid starvation risk) which he can lend. Depending on his assessment of the loan risk, he may even be able to save himself time and trouble by growing less grain to produce fewer seeds with the expectation that his loan will be repaid, which would allow him to realize a profit on an otherwise zero-interest loan.
Likewise, money below a certain threshold should compound; beyond that threshold it represents unacceptable opportunity costs for exercising its power as if it had been used to purchase excess goods. Investing/loaning those purchased goods should be the basis for money’s value beyond the threshold.
The map is not the territory. Money that doesn’t decay isn’t representing something real. And when this happens someone ends up holding the bag.
Positive interest is beneficial to bankers.
Give this parable a read: http://www.altruists.org/f245
But you can also write the opposite parable:
Crusoe has finished planting his most fertile fields and is preparing to plant his remaining seed in the less fertile adjoining land when the stranger arrives.
S: I have found some excellent fields, too far from your home here to be of any use to you, but which will serve me well; and I need only some seed. I see you have some excess, which will be much more productive in my fields than in yours; might I borrow it, and easily repay after harvest?
RC: How much seed will you repay me, for each I lend you now?
S: One seed for each; my religion would forbid any other arrangement.
RC: The land I intend to plant them in is not so lush, but even so I expect to reap many times the seed I plant. Where is my self-interest in placing it where it will yield less?
Moral: some goods decay, but others can compound themselves—or, more often, create other goods that can create other goods in a long chain that ends with more of the first good.
The role of money is to make such long chains implicit; a positive real interest rate reflects that such chains are possible for most goods, and any exceptions will increase in price faster than interest accumulates.
This is a great comment and I’ve been thinking about it for most of the day. Just wanted to let you know I’m thinking on it and will respond in a bit.
I love your counter-parable. It does an awesome job of showing what massively complicated thing we are discussing. Land, money, consumables, exponentionables(your seeds), all have very different characteristics and drivers. Interest, investment, production, savings all are slightly different ways of talking about some of the same concepts.
I’m trying to get to the bottom of this statement and am having some issues:
Could you unpack it some more?
You can correct me where I’m wrong, but I think what you are getting at is that the current abstraction of money and the idea of interest paid for borrowing it is optimal enough to reward the people that put up the cash for the value that it creates? And if a good isn’t one of those exponential type things, the price just keeps going up faster than the interest rate because of its implicit limitedness?
Do you think RC would be more willing to make the more productive choice if he could benefit from all of the upside that lending the seeds produces or only the amount that is agreed upon? I think what I’m trying to get at with hypercapitalism is that we want RC to seek out the best use today instead of the best use tomorrow because if he waits until tomorrow all the work that could have happened to day can never be redone.
You can’t plant a pie and grow two pies, and in fact it will go bad quickly, but you might be able to trade the pie for seeds, grow them, and reap enough to trade for two pies. If no one with seeds wants a pie, you might have to make a chain of trades, e.g.trade the pie to the cobbler for shoes and trade the shoes for seeds.
Even if you don’t want to grow seeds yourself, you might trade the pie for farm tools, then trade those to the farmer in exchange for seeds at harvest, then trade the seeds for more pies.
Now it’s not guaranteed that these sets of trades are possible. It could turn out that the best deals you can get will leave you with half a pie at the end. But usually, if some goods can be used to make more goods, and baking pies isn’t going to get any harder in the future, exchanging pie today for pie tomorrow will get you more pie.
Money and financial institutions abstract trade chains away, so you can sell your pie, put the money in the bank, they’ll make loans to people who can pay back more in the future, pay you interest, and then you can buy more pie. The interest isn’t a distortion caused by money; it reflects a possible set of trades that might not be obvious but would be possible. If such a set of trades doesn’t exist, you won’t have positive real interest (real interest is the published interest rate minus inflation).
If you give all of the upside of the loan to RC there’s nothing left for the stranger and no reason for him to bother. If they’re able to negotiate an interest rate, they’ll find a deal that works for both of them. An equity arrangement where RC gets a defined percentage of the stranger’s harvest instead of a fixed amount of grain is also something they could negotiate in traditional capitalism, if such a deal were preferable to both parties.
In your story RC incurs no opportunity cost for planting seed in and tending a less efficient field. There should be an interest rate as a function for lending the last Nth percent of the seed based on the opportunity cost of planting and harvesting the less efficient field, which at some point crosses 0 and becomes negative. The interest rate drops even more quickly once his next expected yield will be more than he can eat or store for more than a single planting season.
If RC is currently in the situation where his desired interest rate is still positive for his last unplanted seed then his capital is constrained and he should instead ask for investment seed from S, for which he would be willing to pay interest.
In order not to starve RC should aim to grow sufficient grain such that his probability of having too little is lower than some risk threshold. In most cases this will leave him with excess seeds at every harvest (beyond the extra seeds required to avoid starvation risk) which he can lend. Depending on his assessment of the loan risk, he may even be able to save himself time and trouble by growing less grain to produce fewer seeds with the expectation that his loan will be repaid, which would allow him to realize a profit on an otherwise zero-interest loan.
Likewise, money below a certain threshold should compound; beyond that threshold it represents unacceptable opportunity costs for exercising its power as if it had been used to purchase excess goods. Investing/loaning those purchased goods should be the basis for money’s value beyond the threshold.
Interesting. Thanks for the link.