History Of Interest Research Paper

As a central notion for the understanding of human behavior, the concept of interest emerged in early modern political theory. It was part of the sceptical view of human affairs which informed the secular approach to politics and government which arose anew in the Renaissance. In the course of the seventeenth century, the concept entered a variety of other discourses as well, and gained a strategic importance by becoming linked to a theory of civic exchange. This view was subsequently elaborated by political economists and utilitarian philosophers. From the early nineteenth century onwards the conceptual changes have occurred mainly in debates accompanying the formation and the development of academic disciplines. Interest became embedded primarily in economic theories, which have been emulated as well as vividly contested in other disciplines.

1. The Politics Of Interest

The word interest, derived from the Latin inter esse, originally referred to procedures for compensation in Roman law. The expression id quod interest could be applied to a variety of claims in this respect. The meaning of taking rent on loans was directly related to the legal notion of compensation. Interest in this specific sense came into use in many European languages during the fifteenth century, commonly as a euphemism for usury (Fuchs 1976, Hirschman 1992).

The more general meaning of the term emerged in the beginning of the sixteenth century. Interest then referred to the more general sense of advantage and to the human propensity for seeking benefits. It was part of a sceptical anthropology and a nonmetaphysical approach to statecraft, appearing systematically for the first time in the work of Francesco Guicciardini. Guicciardini, one of the most perceptive political theorists of Renaissance Italy, frequently observes in his Ricordi (1512 30) that ‘self-interest’ prevails in nearly all human beings. This applies especially to successful leaders and others who do well in life: they always have their ‘own interest in mind and measure all their actions accordingly.’ Guicciardini adds, however, that ‘true interest’ does not necessarily reside in pecuniary advantage: it pertains, more often, to honor and to the art of knowing how to keep a good reputation.

The general meaning which Guicciardini gives to the term allows him to use it for matters of government as well. Where particular interests are in conflict with the ‘public interest,’ Guicciardini advocates the primacy of the latter. The conceptions of Guicciardini and his contemporary Machiavelli were developed more fully in the reason-of-state literature, which flourished in Europe around 1600. For one of the leading theorists, Giovanni Botero, ‘reason of state’ meant ‘reason of interest,’ and state interest had to be the supreme rule of conduct for princes and statesmen. In this view religious and constitutional matters were to be treated as merely instrumental issues. For the ruler, interest of state is the only legitimate principle of action, and this interest is defined in opposition to both the interests of other states and the passions of the ruler. Control over people demands self-control: passions and other disorderly appetites need to be replaced by a rational use of state interest.

Interests thus came to be seen as the principal motive of human behavior and as the only realistic rule of political conduct. From a predominantly critical concept, directed against ecclesiastic and humanistic virtues, it had gained a more positive meaning. While preserving its amoral connotations, interests appeared to be a more stable and more reliable motive than the passions (Hirschman 1977). The French Huguenot leader Henri de Rohan expressed this view in his influential De l’Interet des Princes et des Etats de la Chretiente (1638) by stating that ‘princes order their people around and interest orders princes around.’ The prince can be deceived, his council can be corrupt, only ‘interest does not lie.’

It was through the translation of Rohan’s work that the term ‘interest’ became established in the political vocabulary in England. And it was from the political scene that the term was then transferred to the market place and came to be applied to private behavior (Gunn 1969).

In the early modern political literature interest was not merely an analytical term. Interests were indeed perceived as the predominant motive of human behavior, but political advisors stressed that interests had to be observed in a rational and calculating way. This was not because human beings were considered to be rational decision makers, but because of the strategic advantages of rational calculation. The prudential weighing of costs and benefits was a behavioral norm for political elites rather than a form of motivational reductionism (Holmes 1995).

2. Contours And Consequences Of Exchange

From the political literature, written by counselors and diplomats, the notion of interest entered other intellectual genres in the course of the seventeenth century (Heilbron 1998, Lazzeri and Reynie 1998). Among these other discourses, natural law and moral philosophy stand out; in both cases interest-driven behavior came to be related to new conceptions of politics and society.

In modern natural law interest was part of a foundational argument. The anthropology of the sceptics had given a seemingly universal role to selfinterest, and more in particular to self-preservation. Natural law theorists treated this factual observation as a natural right. On the basis of the fundamental right to assure one’s self-preservation, they built a system of moral and political obligation which was intended to overcome the relativism of the sceptics.

For natural law theorists such as Thomas Hobbes and Samuel Pufendorf, people are motivated primarily by self-love. But the consequences of their view differed fundamentally. For Hobbes a strong state was the only alternative for permanent and violent conflict between selfish indivuals. Pufendorf constructed more of a historical argument. Human societies arise out of individual needs. Upon this assumption, he proposed a scheme of societal development, culminating in a form of sociability proper to ‘commercial’ society. Commerce at the time referred to exchange or traffic and not specifically to trade. The idea of a ‘commercial’ society designated a relatively pacified order within which various realms of exchange had been established. Contrary to Hobbes, Pufendorf thus envisioned a form of sociability based essentially on the ties of self-interested exchange (Hont 1987).

The very idea of a social order emerging out of the self-interested acts of individuals is found more explicitly in seventeenth-century French moral philosophy. In a number of remarkable essays of the 1670s, collected in his Essais de morale (1671–78), the Jansenist moralist Pierre Nicole explained how human society could be well ordered and prosperous without assuming religious duties or prescribing any secular virtues.

Jansenist theology made a strict distinction between the ‘city of man’ and the ‘city of God.’ The radically separated realms were founded on two mutually exclusive drives: self-love and love of God. Nicole and some other Jansenists sought somehow to adapt their uncompromising outlook to the demands of worldly life. Especially in his moral essays, Nicole tried to define a modus vivendi for Christians who were forced to live in a corrupt world. Looking for an intermediary route between pious retreat and worldly corruption, he proposed what is probably the first consistent model of commercial society.

The Hobbesian image of a war of all against all, Nicole argued, is valid only in the very beginning of humankind. Since each human being is a threat to the other and no one wants to be a victim, people unite with other people. To affirm their union, laws are established and punishment is instituted for those who violate the laws. Fear of death is therefore the first restraint on self-love. Once open violence is excluded, human beings are forced to use artificial means to satisfy their desires. These artificial means are all forms of exchange. The result of this process is a civil society, which—given the corrupt human nature after the Fall—could not be better organized, even if true religion is banned. Human traffic alone, established and regulated by self-love, had produced this result.

From the point of view of God human society meant corruption, but from the point of view of human beings themselves, the establishment of human civility is the best possible achievement. Given the fact that very few people are prepared to withdraw from society, Nicole added that ‘enlightened self-love’ was the most effective policy in human affairs.

For Nicole and his fellow Jansenists, human beings could not be credited with any virtue. As in the maxims of La Rochefoucauld, they depicted what seemed virtuous (courage, love, friendship) as being a refined expression of self-interest. Since human virtue is a kind of narcissistic illusion, self-interested exchange was the most realistic alternative for the threat of civil war and a sufficient basis for an orderly society.

3. Political Economy And Utilitarianism

Many of the economic and the utilitarian arguments advanced in the eighteenth century were derived from these seventeenth-century writings. Mandeville’s tale about private vices and public benefits, for example, originated in the work of French moralists like Nicole. It was not disinterestedness or self-denial which produced civil society, but vanity, avarice, and ambition. Adam Smith’s famous phrase that it is not from the benevolence of the butcher that we expect our dinner, but from his ‘regard to his own interest’ was poignant but historically hardly original. The same may be said of his affirmations that ‘society may subsist among different men, as among merchants, from a sense of its utility, without any mutual love or affection.’

Classical political economists like Smith transformed the argument about self-interested exchange into an economic theory of self-regulating markets. When the general argument about exchange narrowed down to a mechanism of economic markets, the political questions implied in the doctrine of interest reemerged. Utilitarianism was one of the attempts to rethink the political issues involved.

Emerging in the eighteenth century and becoming an intellectual movement with Jeremy Bentham and James Mill, the utilitarian system was built on the principle that every human being seeks pleasure and avoids pain. Human conduct is universally guided by the ideas and feelings which are associated with either one of these emotions. This behavioral principle was applied not only to individuals, but extended to the polity as a whole. Like individuals, governments should promote the amount of happiness and reduce the amount of pain. Moral arithmetic, based on the principle of the greatest amount of happiness of the greatest number, thus provided the means for assessing the utility of public institutions and initiating political reform.

The rise of political economy and utilitarian philosophy provoked several intellectual countermovements in the decades around 1800. In their opposition to the French revolution and the ensuing waves of democratic reform, conservatives appealed to the lustre of tradition to counter the cold-blooded politics of interest. Romantics similarly found ways to reaffirm the power of the passions.

4. Disciplinary Social Science And Interdisciplinarity

When the social sciences during the nineteenth century gradually became university disciplines, theories of interest were associated specifically with economic theories which—with the exception of Marxism—were increasingly separated from other social concerns. John Stuart Mill redefined the status of political economy by arguing that while different causes operate in society, some of the more powerful causes need to be studied separately. Political economy was legitimately restricted to the phenomena based on the desire of wealth and the law that a greater gain is preferred to a smaller. In Mill’s view political economists do not deny other motives, but merely abstract from them; self-interest is more a methodological construct than a behavioral reality.

During the ‘marginalist revolution’ the plea for scientific abstraction was combined with the postulate of instrumental rationality (Demeulenaere 1996, Hausman 1992). Economic behavior was modeled as rational calculation aimed at maximizing utility. This approach, which formed the heart of the neoclassical program, allowed much of the formal and technical developments that have characterized mainstream economics ever since. The notion of interest turned into a mathematical technique of maximization under constraint. With Pareto the domain of economics was redefined as the study of choice or optimization, and in Lionel Robbins’s definition economists study ‘human behavior as a relationship between ends and scarce means that have alternative uses.’

While this definition is, in principle, applicable to all forms of human behavior, many economists during the beginning of the twentienth century were well aware of the limits of their approach. For Vilfredo Pareto neoclassical economics had a limited validity since many aspects of human behavior do not meet the conditions of rational calculation. Many other sociologists also reacted critically to the abstract and formal nature of homo economicus. Emile Durkheim and Francois Simiand argued against the ‘unrealistic abstractions’ of economic theory, advocating a positive and more empirical approach which was not unlike that of institutional economics. Max Weber proposed a broader understanding of interest and rationality and integrated these in a general typology of social action. Weber reintroduced what he called ‘ideal interests’ besides material interests, and distinguished instrumental rationality from value rationality. In addition to affective and traditional action, instrumental rationality refers to a means–end relationship, while value rationality pertains to choice as derived from values.

While the academic division of labor between the various social sciences became more strict during many decades, it has been increasingly contested since the 1960s. Economic theories and modeling procedures expanded into many areas which were previously seen as the territory of other disciplines. In political science and sociology economic approaches have become part of the mainstream. Game theory has provided a tool for modeling problems of interactive choice; and rational choice, more generally, became the common denominator for a broad area of interdisciplinary work (Heap et al. 1992).

The progressive expansion of economics was accompanied by a movement in the opposite direction: sociologists, psychologists, organization theorists, and anthropologists have gradually invaded the domain of economics, proposing alternative accounts of core issues of economic theory. Diverse and varied as these contributions may be, they have at least demonstrated that the technical sophistication of economics depends on assumptions which can reasonably be questioned on empirical as well as on theoretical grounds.

5. Enduring Ambiguities

Since its early uses in Renaissance political theory, the concept of interest and its terminological derivatives (self-interest, group interest, public interest) have been part of what may be called the materialist tradition in the social sciences. But this general, realistic and hardnosed orientation is divided over a number of fundamental issues. The development of the notion of interest uncovers at least three enduring ambiguities.

First, the term interest can be used for interpretative purposes in accounting for observable behavior; it can also be used in a normative way for defining what rational behavior is. In the former sense interest generally refers to an explanatory principle; in the latter it merely designates a logically possible and perhaps desirable course of action. The ambiguity of serving both descriptive and prescriptive functions has persisted ever since the origins of the term in political theory. Second, interest refers to material advantages as well as to political, cultural, and symbolic benefits. If the broader understanding of interest is accepted, the idea of maximization becomes problematic, since it is unclear how costs and benefits in the various domains could be calculated and compared with one another. Third, actors may pursue their interests by relying on rational calculation, but they may also do so on the basis of a process of socialization in which choice is not ‘rational’ in the economists’ sense, but bound up with habitualization leading to the practical mastery of a social game (Bourdieu 1990). In the former case interest is part a rational choice theory, in the latter it is not.

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