I’m teaching exponential relationships to my class tomorrow morning and one of the applications of this understanding is obviously debt.
We just got finished discussing linear relationships last week, and it got me thinking: why is the accumulation of interest not linear? You’ve only borrowed the principal, so in my mind, if you’re going to have interest, it would be proportional to the amount of the principal you haven’t paid off yet.
Thinking like a lib (or maybe not since I can’t understand the way it actually works), the lender would be unable to access a certain amount of money that they previously did have access to, and thus would be privy to a proportion of that amount. As you pay on the principal, that amount should go down because they have more access to the money they previously had access to.
What purpose does your interest creating more interest serve other than simply to siphon money from the ones that need to borrow and those that have enough to lend?
Obviously that is the reason, but I’m just curious if there’s an actual reason they have, or if they really are just that blatant.
“Compound interest pleases the Economy.”
From what I recall in investment class in college it’s all about risk vs reward. If you don’t provide enough reward with the compounding interest then no one would be silly enough to take on the risk of loaning the money because it would take too long to get a worthwhile return.
But fuck the system tbh. Life shouldn’t be about accumulating the most, it should be about everyone living well together.
it’s something that can be traced since Babylonia. Michael Hudson has a book specifically about this subject, the collapse of antiquity i think. I haven’t read it tho but i remember him promoting the book once in a ben norton podcast.
IMO it adds pressure to pay the loan, a simple interest does not generate pressure. in typical fashion, banks pay bondholders simple interest (depends), but they charge compound interests on their loans.
I haven’t read them yet either, but that was the first book in the trilogy he’s writing, …and forgive them their debts. The second book, The Collapse of Antiquity, is about how antiquity’s wisdom of debt forgiveness was dispensed with.
It describes how the dynamics of interest-bearing debt led to the rise of rentier oligarchies in classical Greece and Rome. This caused economic polarization, widespread austerity, revolts, wars and ultimately the collapse of Rome into serfdom and feudalism. That collapse bequeathed to the subsequent Western civilization a pro-creditor legal philosophy that has led to today’s creditor oligarchies.
He’s working on the third book now, about the middle ages.
That is an interesting question. It is taken as an axiom so I never even questioned it until now.
Since money-lending is a practice with long history, I wonder if interest always was compound or if it was linear before a certain period of time.
I imagine it depended on region, but FWIW interest was not even always a given (all three major Abrahamic religions historically/textually prohibited it, in Judaism’s case however only among fellow Jews). Debt forgiveness, something seen as unimaginable to modern western societies, also were a occasional thing in history- ancient Jewish society in particular having the debt “jubilee” (the origin of the word jubilee), or in many other societies, it happening in an infrequent manner to quell peasant revolts.
The reason for using compound interest is that the economy moves exponentially rather than linearly. Well, the shape is actually an s-curve, but standards tend to be set on the basis of the initial exponential part rather than the slowing down part.
Since population, especially in an early capitalist economy grows exponentially, the labor-value of the capital stock also does. The growth of capital stock represents the growth of wealth for capitalists, so when they give out loans, they do so against a baseline comparison of exponential capital stock growth.
Whenever it comes to capitalist economies, you should always start your thinking with population and its growth. That tends to be a key determiner of long-term capitalist dynamics.
