To read the full version of this content please select one of the options below:

The mathematical economics of compound interest: a 4,000‐year overview

Michael Hudson (ISLET (Institute for the Study of Long‐term Economic Trends), Forest Hills, New York, USA)

Journal of Economic Studies

ISSN: 0144-3585

Article publication date: 1 August 2000

Abstract

Sketches the history of economic thought regarding the self‐expanding growth of investments through the accrual of compound interest. Exercises that calculate such growth in terms of “doubling times” have already been found in Babylonian textbooks from c. 2000 BC. Although compound interest was not permitted to be charged in practice (each loan matured at a given date), investors could keep ploughing back their funds into new loans. Through the ages, this essentially logarithmic principle has described how loan capital grows independently of the ability of debtors (or the economy at large) to pay. It has been expressed by dramatists such as Shakespeare, by novelists, and by eighteenth‐century actuaries and economists. Before the contrast between “geometric” and “arithmetic” rates of increase were made famous by Malthus in his description of population growth tendencies, it was formulated with reference to the work on public debt by Richard Price. This principle is incompatible with “equilibrium” theories of self‐regulating debt, or ideas that economies can automatically adjust to its growth over time.

Keywords

Citation

Hudson, M. (2000), "The mathematical economics of compound interest: a 4,000‐year overview", Journal of Economic Studies, Vol. 27 No. 4/5, pp. 344-363. https://doi.org/10.1108/01443580010341853

Publisher

:

MCB UP Ltd

Copyright © 2000, MCB UP Limited