The Declining Interest Rate Cap

By Alasdair Macleod – Re-Blogged From

Believe it or not, one of the topics in economics that confuses macroeconomists is the actual role of interest rates. For the most part they just assume that an interest rate is the cost of money, the price of money, or even the transfer of the fruits of production from producers to idle capitalists. This last assumption appears to have been Keynes’s motivation for his dislike of savers, or rentiers as he disparagingly labelled them. The thought that workers slave for a master who then pays interest to capitalists energises Marxism as well.

In a free market, consumption comes in two basic forms: that which is consumed today, and that which is postponed into the future. Deferred consumption is saving, and Keynes’s target was the saver, even “looking forward to the rentier’s euthanasia” as he put it in his General Theory.

Denying Say’s Law or the law of the markets allowed Keynes, in his own mind anyway, to replace the saver with the state as the principal source of funding for industrial investment. That he came to this conclusion can only be the result of moral principles unsupported by reasoned theory. But once you launch yourself down what amounts to the slipway of prejudice, there is no knowing where it will all end. In Keynes’s case, it produced a following which has become the mainspring of today’s macroeconomic mainstream. We play this down, commonly saying that the reason for discouraging saving is to encourage current consumption. This is an error, and everyone who utters this knows or should know it. All Keynes’s work, from his Tract on Monetary Reform onwards hints at his true desire, to eliminate idle savers as an economic factor.

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