EPS Blog

Money is medium of exchange so is traded in all markets. All prices, therefore, are monetary prices. This is a wonderful thing, because monetary prices allow entrepreneurs to calculate profit and loss. They are able to tally the costs of production and compare them to the expected price of their output and determine the wisdom of producing a certain product.

The beauty of the free-market price system is that these same objective monetary prices are manifestations of people’s subjective preferences. The free-market monetary price system provides a way for economic decision makers to rationally allocate scarce land, labor, and capital goods to their most productive uses, as determined by members of society. 

Economic calculation allows, therefore, the flourishing of an extensive, complex division of labor, which is vastly more productive than production for direct use. It is this increased productivity that increases our standard of living even as our population grows. It also fosters enough leisure time for culture to develop.

Without economic calculation, there would be no economic activity, only chaos. There would be massive waste and social disintegration resulting in starvation, death, and cultural ossification. The history of all hard core socialist experiments bears this out. 

Capital and interest should be no more suspect than any other things over which we are made stewards. In fact capital is very important for us to fulfill the cultural mandate. We are called to be fruitful and multiply, fill the earth, subdue it and rule over it. How do we do that in our fallen world without either starving to death or killing one another? An important part of the answer is to be productive. Sustaining a growing population, for example, requires increases in productivity.

Capital greatly enhances our productive capacity. For example, it is estimated that in 15th-Century France a farmer could produce approximately 3.25 lbs of wheat per man-hour. In 2004 the average farmer could produce 857 lbs. per man-hour. This is not because farmers today work harder than their 15^th Century counterparts. In fact, a case could be made that they do not have to work as hard. This is because capital goods are helping them produce so much more. As the old tractor advertisement said, “Ford farming means less work and more income per acre.” Consequently, the accumulation of capital goods allows us to produce more and increase our standard of living.

Accumulating and using capital, however, requires productive activity funded by savings. It takes time to produce capital goods, so this productive activity must be enabled by people refraining from consumption and investing saved resources toward the accumulation of capital. Technological advance also requires savings and investment in research and development.

A person’s willingness to save is constrained by how willing he is to put off present consumption in order to have more consumption in the future. To agree to invest money now, people require a premium to compensate them for the waiting time they must endure. This additional positive investment return is called interest and is income earned by saving and investing. Therefore, economics teaches that the saver/capitalist provides a great social benefit, because he funds investment and provides for the accumulation of capital which makes us more productive, raising our standard of living. Interest, therefore, is a person’s meaningful reward for sacrificing present consumption as his contribution to social productivity.