THE THEORY OF INTEREST.

Auckland Star, Volume LXV, Issue 39, 15 February 1934, Page 23

THE THEORY OF INTEREST.

The letters appearing on this subject are very interesting, but all fail to show a proper grip of the problem. The orthodox theory of interest is compounded of two main ideas, namely, that interest is due to capital because "capi-1 tal is productive," and becausc the use of capital involves "waiting." The validity of these contentions may be granted, yet neither singly nor in combination do they supply an explanation of interest. Capital is "productive" in the purely physical sense, but this physical productivity is no explanation of interest. Thus the fact that a flour mill is an efficient means of producing flour is no explanation of why shares in a flour mill should return a rate of interest. Similarly the use of capital involves "waiting," but this theory so naively advanced by "Economist" is inadequate as. an explanation of interest. It is also true that the rate of interest serves to equate the supply of and the demand for capital, and although this fact may serve to discomfort the Douglas Creditor, it is rather amusing to find Mr. Haddow advancing it as an explanation of interest. The truth about interest was mentioned by one of your correspondents, and has been glimpsed by many thinkers who have found in the private ownership of land the crux of the matter. But the truth goes further, and I contend that the orthodox theory of interest contains within itself the admission that private land ownership is the key to the problem, because the emphasis is placed, quite correctly, upon "time" or "waiting." Now, land is the only capital good which will wait, or keep, indefinitely, and therefore those economists who so complacently regard this ancient controversy are really under the obligation of explaining what happens to their own theoay of interest m the absence of private land ownership. Clearly the rate of interest would be affected. The field of investment, as disi tinct from the field of private enterprise, would shrink and interest would fall to i its true rate, while continuing to disi charge its economic function as a point • of equilibrium governing the supply of and the demand for capital. Private land » ownership is the key to allied pros blems of interest and distribution. I J. C. rlrl-uAx.