A thought experiment

[Camino LS6]

*NOTE* : Please don't make this political, I really want some input on this and I can't get that if the thread gets locked.

What I'm looking for here is a bit of brainstorming on a concept I've been thinking about. I'm not sure where it will lead me yet, but I want to hear some reactions.

Imagine a society in which all forms of lending for profit are illegal, and the law is strictly enforced. Investment would be legal as would interest-free loans, as in "hey, can I borrow five bucks 'til payday?".

What I'm interested in is what this society would be like. How would it work? What would be the unintended consequences? How would social norms be affected? Just, well, everything.

Picture it for me.

Edited May 8, 2011 by Camino LS6

[Drew Dowdell]

Muslim societies have laws like this in place now.

[Camino LS6]

That's interesting, and a source of some info. I wasn't aware of...

[Croc]

Well for one, there'd be virtually no lending. Money now in your pocket is inherently more valuable than theoretical money that someone is promising to give you (back) at some future point in time. That's why there's interest.

[Camino LS6]

Well for one, there'd be virtually no lending. Money now in your pocket is inherently more valuable than theoretical money that someone is promising to give you (back) at some future point in time. That's why there's interest.

OK, but that doesn't tell me what this society might be like.

I'm sort of looking for a "day in the life" picture here.

[Camino LS6]

Olds' post got me thinking, and I was going to say that you could couch your answers in terms of any political or social system, but the better way may be to answer in general terms that would apply to whatever system might be in place. That way, it would get to the heart of things immediately.

In other words, what would such a reality require of a society?

Edited May 8, 2011 by Camino LS6

[Camino LS6]

A sample of what I'm looking for:

At first blush, you'd think that there wouldn't be any banks. But that's probably not the case, they'd just be different. You'd pay them a fee for safe storage of valuables, and likley a fee to send money, etc.

I'm interested in small stuff as well as big under this premise.

[SAmadei]

Muslim societies have laws like this in place now.

Yeah, but they are kinda of skirting the terms of usury. For example, an Islamic mortgage is done by the bank buying the property and reselling it at a profit to the buyer in installments. Sure, no interest is charged, but profit is still there... along with procedures to take the property back.

The larger question is going to require more thought... but I think much of how the world would work would be like before credit became quite so commonplace... assuming home, car or other big purchases where handled as "payment plans", other purchasing would simply have to be within people's means. Like it was a century and a half ago.

I assume this lending law would apply to the government... that means the government would have a lot of debt to get rid of.

[Camino LS6]

Thanks for the input so far!

Please continue, but don't restrict yourself to thinking of this in terms of the USA.

Just call it country "X".

[loki]

well... if the system is close to what we have now a central bank with actually .25% interest (practically zero) either money creation (and destruction) would be rampant and could lead to a bartering for day to day things (maybe not big purchases if many people were "rich"), or money creation would have to be held tighter (practically 0)

interest is basically a time preference tool, yes? lets look at what it means

In economics, time preference (or "discounting") pertains to how large a premium a consumer places on enjoyment nearer in time over more remote enjoyment.

....

In the neoclassical theory of interest due to Irving Fisher, the interest rate determines the relative price of present and future consumption. Time preference, in conjunction with relative levels of present and future consumption, determines the marginal rate of substitution between present and future consumption. These two rates must necessarily be equal, and this equilibrium is brought about by the relative prices of present and future consumption.

....

The Austrian School sees time as the root of uncertainty within economics.

In Human Action (chapter 18), Mises discusses time inconsistency: that sooner-occurring future intervals are valued more highly than later-occurring future intervals. This observation has been observed in behavioral economics.

if it a tool for consumption(investment) decisions and it is taken away, this would lead to less entrepreneurship, or poorer quality...

this would lead to lower productivity and generally make the society poorer than it might otherwise be.

what think you?

oh and just so you know, the Libyan rebels, if they hold to a 0% interest rate... they supposedly started their own central bank a few weeks ago, atleast... saw a news report of that for information reasons.

Edited May 8, 2011 by loki

[Camino LS6]

well... if the system is close to what we have now a central bank with actually .25% interest (practically zero) either money creation (and destruction) would be rampant and could lead to a bartering for day to day things (maybe not big purchases if many people were "rich"), or money creation would have to be held tighter (practically 0)

interest is basically a time preference tool, yes? lets look at what it means

In economics, time preference (or "discounting") pertains to how large a premium a consumer places on enjoyment nearer in time over more remote enjoyment.

....

In the neoclassical theory of interest due to Irving Fisher, the interest rate determines the relative price of present and future consumption. Time preference, in conjunction with relative levels of present and future consumption, determines the marginal rate of substitution between present and future consumption. These two rates must necessarily be equal, and this equilibrium is brought about by the relative prices of present and future consumption.

....

The Austrian School sees time as the root of uncertainty within economics.

In Human Action (chapter 18), Mises discusses time inconsistency: that sooner-occurring future intervals are valued more highly than later-occurring future intervals. This observation has been observed in behavioral economics.

if it a tool for consumption(investment) decisions and it is taken away, this would lead to less entrepreneurship, or poorer quality...

this would lead to lower productivity and generally make the society poorer than it might otherwise be.

what think you?

I think there are some big assumptions in your conclusion, but this bit interests me:

"The Austrian School sees time as the root of uncertainty within economics."

[loki]

I assume this lending law would apply to the government... that means the government would have a lot of debt to get rid of.

and since they create central banks(if it's not multi-national)...have an indefinite time to pay it back, potentially.

Edited May 8, 2011 by loki

[Camino LS6]

Loki, your post raises some good questions in my mind.

Would country "X" have a central bank?

How would it issue currency?

Would the currency be backed by real assets, or not?

Would country "X" have legally binding balanced budget provision in its constitution?

Lots to think about there.

[Camino LS6]

oh and just so you know, the Libyan rebels, if they hold to a 0% interest rate... they supposedly started their own central bank a few weeks ago, atleast... saw a news report of that for information reasons.

This could be worth looking into as well.

Good tip, thanks.

[Oracle of Delphi]

It's called The United Federation of Planets ...

[loki]

I think there are some big assumptions in your conclusion, but this bit interests me:

"The Austrian School sees time as the root of uncertainty within economics."

i recently got a small pamphlet that describes a basic of Austrian views compared to other "schools". and a highlighted comment in there is how entrepreneurs should predict the future and not economists (basically). it does make sense because economists don't have their "skin" in the game in everyday things, the ones that are out in the business world pay attention to trends that would wreck havoc if left unnoticed and taken into account.

[loki]

Loki, your post raises some good questions in my mind.

Would country "X" have a central bank?

How would it issue currency?

Would the currency be backed by real assets, or not?

Would country "X" have legally binding balanced budget provision in its constitution?

Lots to think about there.

a central bank would only come about by the gov making it, since it's a monopoly.

issue currency, depends, fiat or sound?

depends if the gov ever wants to espouse militarism or welfareism...

depends...

yes, but to simplify it, just take the 2 extremes. that's how everyone else does it.

[loki]

It's called The United Federation of Planets ...

can't have interest rates if you don't use money.

[Camino LS6]

I think I'm looking for something other than the two extremes.

Just gave myself the wikipedia short course in "Islamic Bamking" and "Full Reserve Banking".

I found both wanting.

[loki]

I think I'm looking for something other than the two extremes.

Just gave myself the wikipedia short course in "Islamic Bamking" and "Full Reserve Banking".

I found both wanting.

well, would you get rid of FDIC?

[Camino LS6]

Quit thinking USA, Loki.

[loki]

well, the fdic was just an example, not sure there are programs like it in other countries,....?

cause i'm thinking of the things we do wrong compared to your example. full reserve requirements keep banks from lawsuits good or bad, if there's a run on the bank. banks that would make bad investments and their members knew about it, could want to move their money to a better bank, screwing the ones that were slow out of their money, if the bank didn't use full reserve practices. with the fdic the bad money that was loaned out was lost, but it had to come from somewhere and if the bank fails, that money has to be created to refund the one's that lost money.

can you try to set up an example and we'll try to work through it, one at a time?

[Camino LS6]

You're sort of missing the point a bit.

The technicalities of this are really secondary to what I'm going for here.

What would things be like on Main St in country "X" ?

How would parents plan for educating their kids?

What might that education cost?

What would the car business be like?

How would spending habits look without credit cards?

Would interpersonal relationships be dramatically different?

What would the impact on the environment be?

Would charities be run differently?

Would life be less stressful?

That sort of thing is what I'm wondering about.

[FAPTurbo]

I'd envision a very stagnant society. There would be little initiative to invest in big ideas because the large sum of money for ventures would not be there. The money would not be there, because no profit motive for lending money would exist.

You would end up with a lot of jobless individuals under a capitalist system. However, it would likely translate into a co-operative, Anarchist society, where everyone is on a level field in terms of wealth and possessions. But the socio-economic bar would be quite low.

[loki]

ok, gotcha.

these are way over my head....way to complex, and i might have to add that anyone that thinks they know a good ansswer to this is either bull$h!ting you or is God.

because...

1. earlier you were asking governmental questions, and now your example questions say nothing about it.

2. assuming even a gov that upheld contract law and other things perfectly, or close to it, is a freemarketer's dream(w/o mention of the interest main point)

if these 2 statements are even close to correct, and a quite freemarket could exist, i don't think we could imagine what it would look like....something like sci-fi in a good way...cause we have good examples of the other end(not free markets/people) of the spectrum throughout our whole history.

[Blake Noble]

Hmmmm ... so let me get this straight (and by that I mean sum it up in my own words and walk myself through this). Country X has outlawed loaning money that accrues interest and has a long term frame of payment. The only loans that are legal are short term (terms would be, at the longest, 12 to 24 months) and cannot accrue interest and would be considered as simple investments in an individual's pursuits.

Sound correct so far?

Well, people living in that country would not be financing, let's say, the complete purchase price of a car including things such as sales tax. So, for the purposes of this example we'll assume the person purchasing the car had to finance $25,500 including all fees and tax. If any money had to be financed on a major purchase like that, it would only be a fraction of that price, probably no larger than 1/4 of it, with most of that money coming out of the purchaser's back pocket.

Because you could no longer go out and buy that vehicle just by taking out an 84 month loan on it, I could also see it being harder and taking much longer for anyone in Country X getting an early start on life by assuming ownership of major purchases like that simply by paying on it by month for however long the purchaser saw fit and the bank would allow.

I hope I'm being coherent ... I'm pretty tired.

[loki]

I'd envision a very stagnant society. There would be little initiative to invest in big ideas because the large sum of money for ventures would not be there. The money would not be there, because no profit motive for lending money would exist.

You would end up with a lot of jobless individuals under a capitalist system. However, it would likely translate into a co-operative, Anarchist society, where everyone is on a level field in terms of wealth and possessions. But the socio-economic bar would be quite low.

how do you define capitalist system? if you think the US is right now, you'd be right, but we're not a capitalist system, it's typically called mixed.

[Camino LS6]

Fappster: What you outline might indeed be the result if an economy like our own tried to convert wholesale, but I'm not so sure that it would be so bleak in an economy in which it grew organically along with the society itself.

Loki: It isn't all that complicated if you just take one small aspect and imagine how thaat one small thing might be without credit/commercial loans.

[Camino LS6]

Hmmmm ... so let me get this straight (and by that I mean sum it up in my own words and walk myself through this). Country X has outlawed loaning money that accrues interest and has a long term frame of payment. The only loans that are legal are short term (terms would be, at the longest, 12 to 24 months) and cannot accrue interest and would be considered as simple investments in an individual's pursuits.

Sound correct so far?

Well, people living in that country would not be financing, let's say, the complete purchase price of a car including things such as sales tax. So, for the purposes of this example we'll assume the person purchasing the car had to finance $25,500 including all fees and tax. If any money had to be financed on a major purchase like that, it would only be a fraction of that price, probably no larger than 1/4 of it, with most of that money coming out of the purchaser's back pocket.

Because you could no longer go out and buy that vehicle just by taking out an 84 month loan on it, I could also see it being harder and taking much longer for anyone in Country X getting an early start on life by assuming ownership of major purchases like that simply by paying on it by month for however long the purchaser saw fit and the bank would allow.

I hope I'm being coherent ... I'm pretty tired.

I'm pretty tired too (should be sleeping at this point), but I think that you get the jist of it.

I would say that loans wouldn't necessarily have to be short-term.

For ventures, rather than purchases, I'd say that they key term would be investment.

For your car purchase, perhaps the dealer could offer interest-free payments over a period of time. I suspect that this term would be shorter and require a higher downpayment than we are used to. He might also offer a discount for a cash deal. Either way, I expect the price of the car would be lower.

Now I'm going to crash in the hope that you guys will have some new insights that will twist my brain tomorrow.

Thanks for playing along!

[loki]

Fappster: What you outline might indeed be the result if an economy like our own tried to convert wholesale, but I'm not so sure that it would be so bleak in an economy in which it grew organically along with the society itself.

Loki: It isn't all that complicated if you just take one small aspect and imagine how thaat one small thing might be without credit/commercial loans.

well, then lets take education. "everyone" is going to college because of loans that are available, which also pushes the price up.

in your example, prices might be where they were at for, say, my parents. at the local college per hour it's about$250, i think. during thier time it maxed out at less than $200 for the whole semester, if i remember correctly. or it is/was w/i 100 of those numbers. *college would be less ubiquitous in the population*.

good example?

[FAPTurbo]

how do you define capitalist system? if you think the US is right now, you'd be right, but we're not a capitalist system, it's typically called mixed.

For simplicity's sake, I call the economy we know to be 'capitalist,' as it is as capitalist as we'll ever know. Governments will always need to purchase/provide goods, and services, as well as intervene in areas where markets fail.

Fappster: What you outline might indeed be the result if an economy like our own tried to convert wholesale, but I'm not so sure that it would be so bleak in an economy in which it grew organically along with the society itself.

I was looking at it from both sides, and I believe my 'equal society' would be the logical result in both situations.

Really, if a society started that way, I doubt much would change. Any sort of development requiring capital would need many individuals to invest. So, a company that wants to build an office complex would need to reach out to thousands of individuals. But since there would be no financial compensation from the loans, the company would need to provide a pitch, like 'it will provide more jobs' and have to really convince the population.

This would democratize the economy. But then that means people would need to constantly convene, and determine what necessities or infrastructure is to be built. So the aforementioned company would find itself at the mercy of a population that would continuously squabble over what needs to be done or whether the project is worth the long-term monetary loss, without any substantial gain after recouping said loss. The beauty of the current system of lending is that it allows companies and individuals to speculate, and not consult a large swath of the population.

As for the car industry, I doubt there would be one, at all. I would imagine that work would be quite localized, perhaps agricultural. The investment required to build a vehicle is considerable. A community would need to first decide that a vehicle is required. If it is, then money would need to be collected. But even if hundreds paid up, only several people may end up using the vehicle a day. The majority would need to determine if the vehicle, which would be used only by a few, is a worthwhile investment. It would need to raise productivity, or allow for more leisure time. If it offers neither, then no dice.

Anarchists, and Communists believe this to be an idyllic community, and in a lot of ways it is. But realistically, I doubt it would be feasible outside of say, a small village or something like a Kibbutz.

[Robert Hall]

It's called The United Federation of Planets ...

can't have interest rates if you don't use money.

UFP has 'credits'...don't know how that model is supposed to work, though..

[Z-06]

Camino, to understand where the society would lead to for having to charge no profit for lending, one has to go back to how profit from lending started, which consequently led to capitalism.

In the 15th-16th century Europe Jewish merchants started charging interests to sailors and traders getting shipments from Eastern India and East Indies for the items they were importing. The society was introduced to the fact that money can keep on growing. It was a revolutionary concept then, mainly derided by population, Shakespeare's in "Merchant of Venice" was a prime example of such derision. The modern day core capitalism value of indefinite growth of money that Adam Smith and et. al, developed, was based on this notion. Is it really fair to imagine that ANYTHING will constantly keep on growing indefinitely?

If the answer is No, then how do you keep check and balance of the growth with reduction? Some will say that Universe is growing indefinitely. But that is in broader concept, Black Holes are actually shrinking some parts of the Universe, albeit with a lesser degree. But who is to hypothesize that rate of shrinking from Black Holes can actually exceed the rate of growth of Universe eventually to act as a balance? So even the Universe has a check and balance to curtail indefinite growth. There may be three ways to curtail the rampant, uncontrolled growth of capitalism, which should answer your question of not charging interests for profit.

First - Through Social Enlightenment

Second - Through Political Curtailment

Third - Through Economic Innovation

I will elaborate on those three later, but those three form the pillars of modern day democratic society. Note here, I am not against capitalism, but here the fundamentals of capitalism should be upgraded to make it relevant again. It just bothers me as Oldsmoboi posted in other thread that few hundred people control 33% of our Nation's wealth. What has changed compared to the Feudal society of the Medival when it comes to who controls the economic interests of a society? The rules have (democracy vs. king's law) but the ideology has not. However, democracy has given "opportunity" to be a feudal lord.

Two examples in history where economy and ideas still flourished, contrary to Fappin's fear, despite of no opportunity to profit from lending were:

1. Genghis Khan's regime.

2. 4th-2nd Century BC India, a time when Kautilya (Chanakya) wrote an epic - Arthashastra (Economics), which can still be considered relevant in modern day society with some modifications.

[loki]

Fap. that's way too simple i think... considering all the subsidies, taxes, minimum wage law......from wiki: "There is, however, little controversy that private ownership of the means of production, creation of goods or services for profit in a market, and prices and wages are elements of capitalism." there is way to much intervention to call our system capitalism. but this is getting away from just trying to think of what would change in this "scenario".

nice post Z. dont' forget about the intellectual power the islamic world had during the "dark ages" in europe. your "The rules have (democracy vs. king's law) but the ideology has not. However, democracy has given "opportunity" to be a feudal lord." here's a good quote to add to that for clarification "Democracy - and its implied assertion that ruling each other is a human right intrinsic to the human experience - can be dangerous to the mind and spirit." - from a mises.org link on FB.

Edited May 8, 2011 by loki

[Camino LS6]

Congratulations!

You guys have successfully twisted my thinking yet again.

Thanks, and feel free to add new twists!

[loki]

camino, i would think some feedback from you would help further explore this "experiment"....or we just wait for Z......... anyone else thinking of responding?

[Camino LS6]

OK.

What I'm doing here is trying to think through an idea for a fictional setting for a story I have in mind to write.

That's why I want to brainstorm the everyday things in such a society.

The big stuff helps too.

[Z-06]

Give me sometime to write about the three prong attack to the solution. Working for a corporation sucks when it comes to doing things like these.

[Camino LS6]

Take all the time you like, I'll be chewing on this idea for quite some time.