We explain what interest is and how economic interest developed in history. Also, what interest rates consist of.
What is interest?
The concept of interest originates from Latin interestand it works to express what makes people care about something . The first meaning of the term is then the one linked to psychology and emotionality, which understands that interest is a feeling that makes one pay attention to an event or a process.
Psychoanalysis believes that interest is in itself a selfish interest (of the self), as opposed to altruism, which is interest in the other. The word is related to the idea of motivation, which means cause of movement. In areas such as school or work, this question of interest is analyzed a lot, and it is considered that There are various motivations that arouse people's interest : the acceptance of the other, the need to feed, cultural honor, idealism, independence, physical activity, power, romance, thrift, social position or revenge.
Detached from the first, there is a pejorative meaning of the term. When a person performs an apparent act of good faith, as said before, he is surely doing it out of some interest. However, when it is said that he explicitly “did out of interest”, it is being implied that the reason that motivated him was not something spiritual and humanitarian (such as solidarity, love, friendship), but something to obtain a specific, immediate or mediate benefit (material goods, money, return of favors).
Interest in economics
In economics, interest is a quantity, usually stated as a percentage (commonly referred to as a “rate”) that a borrower pays for the use of money taken from a lender. In the best known case (that of credit), the interest will be the percentage of money the lender would get as a benefit for the temporary use of your property for a specified amount of time (usually a year).
The question of economic interest has a very distant origin:
- In the Middle Ages. For example, the Church considered interest to be a sin of usury, based on charging a moratorium for time that had elapsed when time was the sole property of God.
- In the Renaissance. The idea of leasing money like any other good arose, since the cost of the passage of time began to be understood as a 'opportunity cost'.
- In the modern era. Classical economics introduced the first studies about the interest rate. Adam Smith was the first exponent of the school that believed that money, as a commodity, was subject to supply and demand, which, at the point of equilibrium, would agree on an interest rate.
Interest rates
The most interesting discussion today regarding the interest rate is the one that understands it as a resource of the States to influence the economy : The Central Banks of the countries establish an interest rate, with which they will give loans to other banks. This rate responds to the macroeconomic policy of a country, understanding that a high rate encourages savings and a low rate encourages consumption. Other factors also influence, such as inflation, production and unemployment.
The interest rate can be classified according to different criteria:
- Simple interest. It is what is obtained when the interest that is produced is made from the initial capital.
- Compound interest It is obtained when the interest produced is periodically added to the initial capital, thus reproducing its profit.
On the other hand, Nominal interest is the percentage agreed upon between the creditor and the borrower which must be added to the capital by the second. Real interest is what subtracts the inflation rate from the nominal interest, so it measures the purchasing power of income with respect to interest.
While the nominal interest will always be positive the real interest can be a negative interest, which brings the investor a negative return, which can lead to negative consequences for the economy.
