What Doth it Profit a Man?

The profit motive is a cornerstone of capitalism.  Adam Smith claimed that each individual’s pursuit of his own self-interest led to optimal social outcomes through what he called the “invisible hand” of the market.  Capitalists have repeatedly had recourse to this argument against collectivists who denounce profit as a social evil.

We must, however, be careful about what we mean by “profit.”  If we mean that the entrepreneur seeks financial compensation for their work, then of course profit is a positive thing.  The problem with the profit motive is the tendency for capital to pursue unlimited growth.  This was noticed by Marx in his equations of exchange.  Exchange starts with barter, which may be represented as C –> C, where C represents a commodity.  Commodities are exchanged for other commodities perceived to be of equivalent value.  Money helps facilitate this exchange by standing in for other commodities and representing value.  Thus, exchange becomes C –> M –> C, where M represents money.  Marx noted that for the capitalist, this is reversed, such that we have M –> C –> M’, where money is invested in commodities in order to reap more money(represented by M’), thus earning a profit.  The process goes on indefinitely to continually accumulate more and more profit.

A Matter of Interest

It’s been a while since my last post, but I thought I’d throw out another interesting idea I’ve been studying.  I’ve made posts about monetary reform here, and talked about the idea of debt-free money, as advocated by the American Monetary Institute.  However, while that proposal tackles the debt problem, it still takes interest as a given.  It’s come to my attention recently that interest needn’t be an essential part of the monetary system.

Under the current monetary system, most of the money supply is created as debt.  When banks create loans, they take a fraction of their deposits to loan out.  But after they loan  the money out, that money stays in their ledger as money to lend out further.  Essentially, that money has been duplicated – created out of nothing but debt.  But banks only create the principal for the loan, while charging interest on it.  Where does the money come from to pay off the interest?  It has to come from other loans.  Thus, we have a game of musical chairs in which debt must be paid off with more debt.  So long as the music keeps playing, the cycle can continue.  But if a shock occurs in the system, as it inevitably does with the 18-year land cycle, money is literally destroyed as people default on their debts.  Wealth is then transferred to the lenders as people who default on their debts have their wealth repossessed.