Friday, April 11, 2014

Profit versus Interest

Buried deep within JW Mason's The Puzzle of Profits lies a simple insight:

One other thing to clear up first: profit versus interest. Both refer to money tomorrow you receive by virtue of possessing money today. The difference is that in the case of profit, you must purchase and sell commodities in between.

It's an important difference. In the case of profit, you have to come out of the world of finance and deal in the world of real products. Things get done. Things get built. Things get made. GDP expands. Income grows. Wealth increases. All of that.

I take from Milton Friedman the idea that "money" should grow in proportion to "output", and not faster. When things get done and built and made, output expands. And when output expands, it's okay if the quantity of money grows, too. Not a hard and fast rule, but a good conceptual one.

So, when profit is being made, output is increasing and money, one hopes, along with it.

But when interest is being earned, nobody said anything about output.


I'm leaving out important things here. I'm leaving out that Friedman didn't clearly define "money". I'm leaving out that money shouldn't grow slower than output, either. And I'm leaving out the one that's so hard for the "money is debt" people to understand -- that when the money grows, the portion of it that costs interest should not grow faster than the portion that doesn't cost interest.

Yeah, I left out those things. But I only left them out of the post. Others leave them out of their explanations of the world.

I left them out because I want you to distinguish between interest and profit.

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