Occasional X: Clueless economists / Interest (II)

“So you literally have no economic explanation of how interest emerges :-D. Wtf is homo economicus? :-D” (Inclamiente) Economics has defined itself as a social science and accordingly has been based on subjective/behavioral assumptions/axioms. This is the methodological ur-mistake. The major approaches (Walrasianism, Keynesianism, Marxianism, Austrianism, and their derivatives) are mutually contradictory, axiomatically false, and materially/formally inconsistent. They all got profit wrong. When the subject's foundational concepts are inconsistent, the entire analytical superstructure is scientifically worthless. The methodologically correct approach is summarized in table AXEC240a ⇓. Microfoundations are methodologically false; therefore, the elementary production-consumption economy is given with three macroeconomic axioms in lines 1, 2, 3. Under the initial analytical conditions of market-clearing, i.e., X=O, and budget-balancing, i.e., Ec=Yw, this yields the price P in line 5. For a start, the price is the dependent variable here. This is a starting condition that is lifted later. In the initial state, the price is equal to unit wage costs W/R in line 5. The workers get the whole product O. The profit Qm for the business sector as a whole is zero. Now, the condition of budget balancing is lifted, i.e., nominal demand is not determined by income. The market-clearing price P is now co-determined in line 9 by the expenditure ratio ρE, i.e., ρE1<1 means saving of the household sector as a whole. Dissaving, i.e., ρE1>1, means that the household sector takes a credit from the Central Bank. The Central Bank stands here for the banking system. Dissaving also means that the business sector makes a profit in line 11 and accordingly has demand deposits at the Central Bank. From the difference between the interest on credit and the interest on deposits, the banking system pays its wages. The difference in the interest rates must be sufficient for the banking system to make at least zero profit. Not “the” interest rate, but the difference between the two interest rates is the key variable of the Theory of Money. If the household sector saves, the business sector makes a loss in line 11. Accordingly, the household sector gets interest on demand deposits and the business sector pays interest on overdrafts. This has been inter-sectoral macroeconomic saving, but there is also intra-sectoral individualistic saving/lending. In lines 15 and 16, there are two households. Household 2 dissaves, i.e., it increases its consumption expenditures Ec1 in the current period and wants to reduce its consumption expenditures in the next period and intends to pay the loan back in the next period. Obviously, it needs a household with complementary preferences. Household 1 saves in the current period (line 15) and intends to dissave in the next period, i.e., to increase its consumption expenditures with the loan payback. In both periods, total sectoral saving/dissaving is zero. In effect, it is a complementary intertemporal consumption transfer. Household 2 consumes more than its period income in the first period and less in the second period; household 1 consumes less than its period income in the first period and more in the second period. Saving and dissaving cancel out in both periods. In the accustomed language, household 2 has a high time preference and household 1 has a low time preference. It is usually assumed that household 2 pays interest to household 1. This is not necessarily the case. If only physical time transfer is possible, household 2 pays interest in the form of storage costs to get consumption goods from one period to the next. Analogously, it is logically possible that the saver pays interest to the lender depending on the relative urgency of the complementary time preferences. For this reason, interest cannot be justified in principle with individualistic high time preference. This is only half of the story. In the limiting case, with perfectly complementary time preferences (and no risks), the individualistic interest rate is zero. In real terms, household 1 gives stuff to household 2 in period 1 and gets it back in period 2 when he needs it. The temporal exchange is beneficial for both parties. Ultimately, interest is not justified individually, but because the banking system has to pay its wages and loan defaults from the difference between interest on loans and interest on deposits.

— AXEC (@EgmontHandtke) November 4, 2026