I’m teaching exponential relationships to my class tomorrow morning and one of the applications of this understanding is obviously debt.
We just got finished discussing linear relationships last week, and it got me thinking: why is the accumulation of interest not linear? You’ve only borrowed the principal, so in my mind, if you’re going to have interest, it would be proportional to the amount of the principal you haven’t paid off yet.
Thinking like a lib (or maybe not since I can’t understand the way it actually works), the lender would be unable to access a certain amount of money that they previously did have access to, and thus would be privy to a proportion of that amount. As you pay on the principal, that amount should go down because they have more access to the money they previously had access to.
What purpose does your interest creating more interest serve other than simply to siphon money from the ones that need to borrow and those that have enough to lend?
Obviously that is the reason, but I’m just curious if there’s an actual reason they have, or if they really are just that blatant.
The reason for using compound interest is that the economy moves exponentially rather than linearly. Well, the shape is actually an s-curve, but standards tend to be set on the basis of the initial exponential part rather than the slowing down part.
Since population, especially in an early capitalist economy grows exponentially, the labor-value of the capital stock also does. The growth of capital stock represents the growth of wealth for capitalists, so when they give out loans, they do so against a baseline comparison of exponential capital stock growth.
Whenever it comes to capitalist economies, you should always start your thinking with population and its growth. That tends to be a key determiner of long-term capitalist dynamics.