Interest rate: where it comes from?

Abstract

The paper is an extended version of the report at the conference “Economics, Society and Culture: Adam Smith's Legacy and Modernity”. The subject is interest (rate) (“loan interest”), to which Adam Smith paid a lot of attention. The purpose is to substantiate the unrealistic assumption that the origin of interest (rate) is rooted in the behavior of individuals, and to propose an alternative version. Objectives of the work are: (1) to consider the specifics of individuals’ interest space on a particular example; (2) to argue the incompatibility of interest rate with the hyperbolic nature of intertemporal preferences at the individual level; (3) to put forward and substantiate the hypothesis of the connection of interest (rate) with the long-term interest in the self-preservation of communities. The introduction shows the connection of the purpose of the work with Adam Smith’s scientific heritage in “Inquiry into the nature and causes of the wealth of nations”. The first section considers the specifics of individuals’ space of interests on the example of the introduction of seat belts. The second section compares qualitative differences between exponential and hyperbolic discounting. The third section substantiates a possible correlation between primitive nomadic communities and the emergence of interest rate phenomenon. Main conclusions: (1) in the space of individuals’ interests, there are partially competing interests (short-term — saving time and long-term — prolonging life); ( 2) interest rate is incompatible with a hyperbolic nature of intertemporal preferences at the level of individuals; (3) the basis for the hypothesis on interest rate connection with the long-term interest in self-preservation of primitive communities is the specificity of the totemic form of social self-identification. The results obtained can be used in economics textbooks.