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Interest and stability (III)

Text 22 and 26–27 September 2012, expressing earlier ideas

Contact

Until the moment I finished parts I and II in this subseries (part 12 and part 13 in the full series), there had been no contact with the authors of the Analysis which I wrote about.

However on 25 August at 20:28B I sent an e-mail to Marc Gauvin telling him about my two articles. From then on we had a lively e-mail discussion until 28 August at 16:55B, consisting of some 30 e-mails. We didn't reach an agreement.

Different views

I think (but Marc Gauvin disagrees, even about that) that our differences spring from a different approach to life and to the world:

Marc uses a very theoretical approach, rooted in mathematics, a strict definition of ‘stability’, and control system theory.

My approach is much more pragmatic, looking at practical possibilities and at usefulness weighed against risks.

In Marc’s view, because a loan can get out of hand (viz. if the interest is not paid), the loan is inherently unstable and (although Marc doesn’t say that in so many words) therefore interest-bearing loans are unusable and the whole of society should avoid them.

In my view, most loans are unproblematic because the interest terms (and redemption terms, if agreed) are paid according to schedule. That in some cases the terms are not paid or paid late, is a risk. Measures can be taken (and seen as part of the ‘control system’) to reduce that risk, i.e. to limit the chance of things going wrong and to limit the consequences of their going wrong.

If these reduced risks are outweighed by the usefulness of interest-bearing loans, for society as a whole, then I say: let’s keep them, let’s allow them.

Nothing in this life is totally risk-free. It’s all about deciding what level of risks you consider still acceptable. How much safety is safe enough? If you demand a mathematically provable zero risk, anything becomes unacceptable and should be avoided. That’s because in real life, nothing is totally safe.

Analogies

Some analogies may clarify this point.

Hands on the wheel

If you drive a modern car, and you consistently keep your hands off the steering wheel, it will stay on the road and in the same lane for quite a long while. However, most roads are not perfectly straight, no car has zero side-wind sensitivity, the pressure in all four tyres is never perfectly equal, etc.

So eventually the car won’t stay in its lane, it might hit other cars and leave people wounded or dead, and even in the absence of other traffic, sooner or later you will land off the road and perhaps in a ditch.

I say: simple solution: keep your hands on the wheel and make those small corrections as necessary.

But from a strictly mathematical definition of directional stability, the conclusion should be that any car is inherently direction-unstable, so driving it is intrinsically unsafe, and therefore all car traffic should be avoided and forbidden.

In reality most people appreciate and use cars, or accept that others use them, despite of the fact that terrible accidents with and without casualties happen every day (but hardly ever as a result of someone driving with his hands off the wheel).

Tightrope walker

Crawling on a rope

An experience from my own brief military training (1978–1979):

It is possible to crawl on a rope (during the exercise invariably stretched over water, of course, to make it more spectacular), provided you keep one leg straight down, using only your other leg, and your arms, to move yourself forward.

The longer moment arm (on average) of the weight force of that downward hanging leg, in comparison with the shorter moment arm of the rest of the body, results in the centre of gravity, of the body as a whole, being slightly below the rope. This causes a stable equilibrium, so you can move on quietly, and even pause in the middle, without any risk of falling off that rope.

But as soon as that leg goes up too much, the centre of gravity can move to a point above the rope, the equilibrium will become unstable, so sooner rather than later you will unavoidably roll to a position under the rope, where you need constant muscle power to keep your hands and feet around that rope. That is a much less comfortable position, that will eventually lead to exhaustion.

Tightrope walker

So an unstable equilibrium is undesirable.

However, a tightrope walker is also in an unstable equilibrium, because all body parts are above the rope.

Yet, a skilled and experienced tightrope walker (not me!) can safely walk and even dance on the rope, if he or she has a balancing tool, like a balance pole. That tool enables the walker to make small corrections, so although the situation is inherently unstable, it can be managed and kept safe, with relative ease.

So: inherent instability need not be a problem, as long as corrections are feasible, easy and effective.

Hand-grenades

Another example (not thought of by me):

A hand-grenade is inherently unstable because if somebody pulls the pin and no longer holds the handle, after some time it will explode. Nevertheless, grenades can be stored in an arms depot for years, without anything going wrong. Simple precaution: leave the pin in place and don’t pull it.

It’s not that I recommend having them and using them, but that is a different discussion.

Fire

Yet another example (also not originally my idea):

A fire can be put out and often is, but that does not make it stable. All fires are dangerous. Some fires become uncontrollable, especially bushfires.

Yet, most people accept the use of fire for various purposes, and the ability to use and control fire is widely recognised as one the most important revolutionary inventions by early mankind.

Useful

Likewise, I think the possibility to take out an interest-bearing loan is useful for society as a whole. It means farmers can plough and sow before harvesting. Companies can be started up or enlarged, before the earnings start coming in. Bridges and roads can be built. People can buy a house and live in it already, while they in fact save up the money for it afterwards.

The interest stimulates other people and companies to make their surplus money available for lending.

Problems with loans are not unheard of, but the risks can be limited.

Of course, people, companies and governments should be careful and responsible, and not borrow too much.

When balancing the risks and benefits against each other, I say: let’s keep the facility of borrowing money at interest, and let banks handle it because of their transformation functions.

Next

Next article: Interest and stability (IV).


Copyright © 2012 R. Harmsen. All rights reserved.

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