We explain what interest is and how economic interest developed in history. Also, what are the interest rates?
What is interest?
The concept interest originates from the Latin interest, and it works to express what makes people care about an issue. The first meaning of the term is then the one linked to the psychology and emotionality, which understands that interest is a feeling that makes one attend to an event or a process.
Psychoanalysis believes that interest is itself an interest selfish (of the self), as opposed to altruism, which is interest in the other. The word is related to the idea of motivation, What does it mean cause of movement. In areas such as school or work, this question of interest is analyzed a lot, and it is considered that the motivations that arouse people's interest are varied: the acceptance of the other, the need to feed, cultural honor, idealism, independence, physical activity, can, the romance, the saving, 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 stated before, surely he is doing it for some interest. However, when it is stated that he explicitly “did out of interest”, It is being implied that the reason that motivated him was not something spiritual and humanitarian (like the solidarity, love, friendship), but something to obtain a concrete, immediate or mediate benefit (material goods, money, return of favors).
Interest in economics
In economy, interest is a magnitude, generally stated as a percentage (commonly referred to as a "rate") that a borrower pays for the use of money it takes from a lender. In the best known case (that of credit), the interest will be the percentage of money that the lender would obtain as a benefit for the temporary use of his property during a certain amount of weather (usually one year).
The question of economic interest has a very distant origin:
- In the Middle Ages. For example, the Church considered interest as a sin of usury, based on charging a moratorium for the time that elapsed when time was the sole property of God.
- At Renaissance. The idea of leasing money like any other good arises, 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 on the interest rate. Adam Smith was the first exponent of the school to believe that money, as a commodity, was subject to offer and the demand, which, at the equilibrium point, 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 state to influence the economy: the Central Banks of the countries establish an interest rate, with which they will give loans to others banks. This rate responds to the macroeconomic policy of a country, understanding that a high rate encourages the saving and a low rate encourages consumption. Other factors, such as inflation, production and unemployment, also play a role.
The interest rate can be classified according to different criteria:
- Simple interest. It is the one obtained when the interests that are produced do so from the capital initial.
- Compound interest. It is the one obtained when the interest produced is periodically added to the initial capital, thus reproducing its gain.
On the other hand, the nominal interest is the percentage agreed between the creditor and the borrower of a loan, which must be added to the capital by the second. The real interest is the one that subtracts the inflation rate from the nominal, so it measures the purchasing power of the 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 cost effectiveness negative, which can lead to negative consequences for the economy.