Interest (redirected from simple interest)

interest, charge for the use of credit or money, usually figured as a percentage of the principal and computed annually. Simple interest is computed annually on the principal. Compound interest, paid by some savings banks, computes the interest on the principal as well as on any previous interest that has been added to the principal.

Such charges have been made since ancient times, and they early fell into disrepute. In Greece, Solon forbade selling men into slavery for unpaid interest. The Jews, the Christian Church, and Islam forbade interest charges, or usury, as it was called, among their own groups. The merchant princes of Italy and elsewhere evaded such restrictions, even though the medieval churchmen considered money barren, or unable to produce wealth. Gradually the distinction was made between low interest rates and high ones, which came to be known, and condemned, as usury. England in 1545 removed the prohibition on interest charges and fixed a legal maximum interest; other countries followed.

In modern economics, a number of different theories regarding interest have been influential. The classical theory of interest, developed by Adam Smith and David Ricardo and expanded by others in later years, posited the interest rate as the force which balanced savings with investment. Marxist economic theory argued against the classical view that saw interest rates as a function of natural market forces, contending instead that interest was purely exploitative, because no service was rendered and it benefited only the capitalist class.

Abstinence theory, developed by Nassau Senior and later expanded upon by Eugen Böhm-Bawerk's productivity theory, argued that interest was a reward for saving money (in an interest-earning bank account) rather than spending it on commodities. Greater returns were available to those who saved, and interest rates were the deciding force in saving or spending. Irving Fisher advanced productivity theory by adding human capital to the understanding of interest rates. He explored the willingness (or lack thereof) of individuals to give up their present income for a future income, which may be significantly greater, as an important factor in the decision to invest. John Maynard Keynes took a much different approach, arguing that interest rates were a sort of reward for giving up liquidity, and varying interest rates were the significant force in a decision to invest. This new model was fundamental to the understanding of fluctuating interest rates, stepping beyond the focus of classical economics on equilibrium rates.

In recent years, the problem of inflation has been the paramount issue for interest theory. In the United States, the individual states are responsible for setting a legal rate at which debts may be assessed if they have come due and remain unpaid, and for setting the maximum rate allowed in a contract. In 1981, when rates soared to record highs, many legislatures increased or abolished such maximum rates in order to attract businesses involved in lending. In Great Britain legal interest rates are not fixed by the government, but courts can determine whether a given rate is injurious.

High interest rates can dampen the economy by making it more difficult for consumers, businesses, and home buyers to secure loans, as happened in 1981 when the prime rate—the rate that banks charge their best customers—climbed past 20%. Economists differed over the causes of such extraordinary rates, but inflationary expectations, federal budget deficits, and the restrictive monetary policies of the Federal Reserve System were important factors. Interest rates fell in the latter half of the 1980s and stayed low into the 2000s. In 2001–3, during recession and subsequent slow growth, the Federal Reserve lowered its short-term rates to levels not seen since the 1960s and late 1950s, but the low rates produced the desired economic growth only gradually. In mid-2004 the Federal Reserve began gradually but steadily raising rates until mid-2006, when the short-term rate reached 5.25%.

Bibliography

See D. Dewey, Modern Capital Theory (1965); D. Patinkin, Money, Interest, and Prices (1989); C. Rogers, Money, Interest and Capital (1989).

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interest

Price paid for the use of credit or money. It is usually figured as a percentage of the money borrowed and is computed annually. Interest is charged by the lender as payment for the loss of his or her money for a period of time. The interest rate reflects the risk of lending and is higher for loans that are considered higher-risk, a relationship known as the risk/return tradeoff. Like the prices of goods and services, interest rates are responsive to supply and demand. Theories explaining the need for interest include the time-preference theory, according to which interest is the inducement to engage in time-consuming but more productive activities, and the liquidity-preference theory of John Maynard Keynes, according to which interest is the inducement to sacrifice a desired degree of liquidity for a nonliquid contractual obligation. Interest rates may also be used as a tool for implementing monetary policy (see discount rate). High interest rates may dampen the economy by making it difficult for consumers, businesses, and home buyers to secure loans, while lower rates tend to stimulate the economy and encourage both investment and consumption.

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Interest 

the real cause of social actions, events, and achievements, lying behind such immediate incentives as the motives, intentions, and ideas of individuals, social groups, and classes participating in these actions.

In the view of G. V. Plekhanov, the 18th-century French materialists C. A. Helvétius, P. Holbach, and D. Diderot made the first comprehensive attempt to explain the life of society in terms of interest. They contrasted people’s interests with both divine predestination and random occurrences of the historical process, viewing interest as the actual basis of morality, politics, and the social structure as a whole. “If the physical world is subject to the law of movement, then the world of the mind is no less subject to the law of interest. On this earth, interest is an omnipotent wizard, which alters before the eyes of all beings the appearance of every object” (C. A. Helvétius, Ob ume, Moscow, 1938, p. 34). However, the French materialists did not go beyond the limits of an idealistic understanding of the life of society, insofar as social interest was viewed by them as merely the sum of individual interests. The latter were inferred from the sensory nature of man, which on the whole remained fixed. From this came Helvétius’ thesis that hunger and love rule the world.

G. Hegel played an important part in developing the theory of interest. As I. Kant before him, Hegel emphasized the irreducibility of interest to raw sensation, to man’s natural state. “Close analysis of history convinces us that the actions of people proceed from their needs, passions, and interests … and only these play a dominant role” (Hegel, Soch., vol. 8, Moscow-Leningrad, 1935, p. 20). People “strive to satisfy their interests, but as a result of this something further is also realized, something which is secretly contained within people, unrecognized and not entering into their intentions” (ibid., p. 27). According to Hegel, interest is something greater than the content of intent and consciousness. This “surplus” manifests itself in the end results of man’s acts and is associated for man with the intricacy of universal reason, with the absolute idea, which realizes itself in history through an endless diversity of needs and interests.

Marxism preserves all of the positive features in interpretations of interest derived throughout the history of social thought; along with this it emphasizes the objective bases of social interest. “Economic relations of each given society,” wrote F. Engels, “are manifested primarily as interests” (K. Marx and F. Engels, Soch., 2nd ed., vol. 18, p. 271). Insofar as economic relations give rise to the division of society into classes, class interests are the most substantial, profound, and determinant interests in the overall diversity of national, group, and individual interests. Social interests are determined by the economic status of various social groups. At the same time such interests cannot be equated with these situations since these interests do not exist apart from their various manifestations as moods, opinions, emotional reactions, ideology, and so on. In contrast to economic materialism, which absolutizes economic interests, Marxism-Leninism proceeds from the fact that the content of fundamental class interests is much broader than the economic needs of that class. The attitudes of a given class or social group toward the aggregate of sociopolitical institutions and material and spiritual values are fixed in social interests.

One of the most significant features of the materialist understanding of history consists of an explanation of the interdependence between interest and ideology. “The ‘idea’ always disgraced itself insofar as it differed from the ‘interest’” (K. Marx and F. Engels, Soch., 2nd ed., vol. 2, p. 89). V. I. Lenin wrote that “people always have been the foolish victims of deception and self-deception in politics, and they always will be until they have learnt to seek out the interests of some class or other behind all moral, religious, political, and social phrases, declarations, and promises” (Poln. sobr. soch., 5th ed., vol. 23, p. 47).

Several very important principles are identified with the question of the classification of interests. Interests are distinguished according to degree of commonality (individual, group, social); area of orientation (economic, political, spiritual); nature of the subject (such as the nation, state, or party); degree to which the interests are conscious (interests that operate spontaneously and those that are based on prepared programs); opportunities for implementation (real and imagined); and the relations of interests with the objective trends of social development (progressive, reactionary, conservative).

A. G. ZDRAVOMYSLOV

In psychology, interest is an attitude of an individual toward an object as something of immediate value and attraction. The content and nature of man’s interests are associated with the structure and dynamics of his motives and needs, as well as with the nature of those cultural forms and means of objective assimilation of reality which he is able to make use of. The formation of a motivational sphere during the process of child development, as well as the assimilation, perfecting, and progressive internalization of means and methods of acting, transform initially instinctive, involuntary, and situational-episodic interests of the child into conscious, voluntary, and stable interests. To the degree that the object is disclosed, interest in the object may develop into an independent need for it (cognitive, aesthetic, or other need). The problem of the purposeful formation of interest, still little developed in contemporary psychology, has great significance for practical work in training and upbringing.

REFERENCES

Marx, K., and F. Engels. “Sviatoe semeistvo.” Soch., 2nd ed., vol. 2.
Marx, K., and F. Engels. “Nemetskaia ideologiia.” Ibid., vol. 3.
Engels, F. “K zhilishchnomu voprosu.” Ibid., vol. 18.
Lenin, V. I. “Karl Marks.” Poln. sobr. soch., 5th ed., vol. 26.
Lenin, V. I. “Tri istochnika i tri sostavnye chasti marksizma.” Ibid., vol. 23.
Oranskii, S. A. Osnovnye voprosy marksistskoi sotsiologii, part 1, 3rd ed. Leningrad, 1931.
Rubinshtein, S. L. Osnovy obshchei psikhologii. 2nd ed. Moscow, 1946.
Zdravomyslov, A. G. Problema interesa v sotsiologicheskoi teorii. Leningrad, 1964.
Leont’ev, A. N. Problemy razvitiia psikhiki. Moscow, 1965.
Aizikovich, A. S. “Vazhnaia sotsiologicheskaia problema.” Voprosy filosofii, 1965, no. 11.
Glezerman, G. E. “Interes kak sotsiologicheskaia kategoriia.” Voprosy filosofii, 1966, no. 10.
Bozhovich, L. I. Lichnost’ i ee formirovanie v detskom vozraste. Moscow, 1968.
Kiknadze, D. A. Potrebnosti, povedenie, vospitanie. Moscow, 1968.
Kniazev, B. V., A. I. Kuftyrev, and A. S. Fetisov. “O prirode interesa kak sotsial’nogo iavleniia.” Vestnik MGU, 1968, no. 4.
Lewin, K. Psychologische Situation bei Lohn und Strafe. Leipzig, 1930.
Lewin, K. A Dynamic Theory of Personality. New York, 1935.

A. A. PUZYREI