V. Interest and Profit Discount This section starts with a well known adage, likely as well known today as hundred years ago, that risk and uncertainty drive a discounting of the future as compared to the present. Interest rates then a re a measure of that future risk but leading to a specific discount factor today. Commons gives the example of a laborer who is in essence also a creditor to a business or any going concern. The laborer is paid in arrears, but in the meantime is working and creating use value for the employer. A business is also doing the same thing on the commodity and debt markets. A business may borrow a certain amount form a bank promising to repay them in a short period of time. The business will factor in repaying the loan and also generating a profit, in essence a interest and profit discount of what they are paying for materials and labor today for use value tomorrow. The business may turn out to right or wrong but this is their best forecast at the mo...
This blog has been setup to explore the ideas and philosophy of the American institutional economist John R. Commons.