HOW INTEREST ARISES
Hence, it is scarcity rather than productivity wick explains interest. Further, if interest depended merely on productivity (not marginal productivity), interest rates should vary in proportion to the productiveness of capital. In actual fact, pure rate of interest tends to be the same in the same market. Moreover, if capital helps labour to produce more, it has to be seen how much of this extra production is due to capital and how much to labour, since capital without labour produces nothing.
Then, what about loans for consumption purposes? They are not productive, but interest has’ to be paid Of them all the
same. Again, it may be pointed out that the productivity theory attempts to explain interest from the side of demand only. It ignores the supply side altogether. It is thus a one-sided explanation. As we shall see later, the above objections can be overcome, if we talk in terms of marginal productivity and not mere productivity of capital. Conclusion. Thus, it is
clear that it is not productivity, as such which exp liens why interest is paid.