Austrian School for Investors by Rahim Taghizadegan

Author:Rahim Taghizadegan
Language: eng
Format: epub
Publisher: Mises.at
Published: 2016-05-04T09:24:56+00:00

Profit and Interest

In the course of the debt spiral following the monetary revolution, the old critique of interest has returned. Profits also appear increasingly suspect – after all, losses are ever more often socialized. Bank rescues, insolvencies that leave creditors nearly empty-handed, the negligent delay in declaring the insolvency of public finances and many a bank balance sheet and the discredited profits of many a corporate management, while interest rate arbitrage, leveraged speculation and negative interest rates discredit interest in the eyes of the common man. Is it even morally legitimate to strive for interest and profits? This question is going to be asked ever more frequently, criticism of interest and profit is likely to continue to grow, we must therefore deal with this question. After all, investment would be pretty much superfluous without interest or profit returns. Readers may well be a bit impatient by now in view of all these excursions into the history of ideas. They should however heed the warning that even the best investors in the bubble economy of the last century have been caught napping by the history of ideas.

Profit, or entrepreneurial profit, only exists because people make mistakes and the real economy is not an automatism in equilibrium, but a process of discovery. The world around us is changing all the time, just as we human beings are changing. This is a good thing, standstill equates to death. The future is not predetermined, because people learn, but also because they can always make new mistakes. Almost every progress in knowledge, culture and technology is tied to new errors, some of which are so large that they are giving the lie to talk about progress. This is the price of human liberty. There exist two ideologically motivated exaggerations with regard to how these changes should be handled, which always reinforce each other. On the one hand, there is the reactionary fear of change with its panicked clinging to the existing order and yearning for a romanticized past. On the other hand, there is euphoric techno-optimism, which expects progress to bring salvation from all human defects and evils. Both tendencies are important for investors: the latter strengthens the stock prices of companies which are part of a progressive story, the former reacts with a longing for simpler, more grounded things.

A company produces profits if it closes a gap in the structure of the economy, which exists due to the mistakes made by other actors. The value added is not at the expense of other factors such as labor, but a signal that certain factors have not received their full valuation by the marketplace. Profits tend to lead to their own demise over time, as they represent signals for other companies and investors that incentivize them to correct these mistakes and to pass on all possible value added to the factors involved. The biggest incentive to discover such gaps is personal responsibility. In a politicized world, companies can however even make profits without possessing this intuition:

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