INTEREST

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INTEREST

Perhaps interest has been the most controversial topic in the whole theory of distribution. Economists have differed regarding the nature of interest as well as how it is determined. In fact, the subject of interest is still an unsettled question of Economics. The very definition of interest depends on the interest theory which one accepts. Those, who believe in the classical or real theory, regard interest as payment for the use of capital goods. They also believe that interest is necessary to induce people to save. The followers of liquidity preference theory believe that interest is a price for surrendering liquidity preference. Still others who accept the loanable funds theory hold that interest is the price paid for the use of loanable funds. Just as rent is a payment for the use of land, similarly interest is a payment for the use of capital. In Marshall’s words, interest is “the price paid for the use of  capital in any market.” I Just as wage is the price of the service of labour. similarly, interest is the price of capital. It is expressed as a percentage return on capital invested after allowing for risks of investment.
Samuelson defines interest thus: “The market rate of interest is that percentage return per year which has to be paid on any safe
loan of money, which has to be yielded by any safe bond or other type of security, and which has to be earned  the value of ny capital asset (such as a machine, a hotel building, a patent right) in any competitive market where there are no risks or where all
risk factors have already been taken care of by special prc miuru payments to protect against risk In this chapter we shall discuss all these divergent views about the nature of interest and determination of its rate, and shall attempt a synthesis among
them.

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INTEREST