FINANCE VS OWNERSHIP: MILL'S TWO ABSTINENCES AND THE LINK BETWEEN PROFIT AND INTEREST

The difference between profit and interest was never clarified by the early classicalists, but J. S. Mill provided a partial answer: It was based on his two concepts of "abstinence". Interest was the reward for anonymous or "contract" personal saving without ownership--savings' financial function--while profit was the reward for personal saving to increase ownership. Although he focused on abstinence in the Seniorian tradition, Mill emphasized personal, not business, saving, as did Senior. Furthermore, Mill's "abstinence theory of interest and profit" has never been taken seriously as a complete theory, as has Senior's. This was because of his "loanable" funds' theory of interest, which was taken up by later writers. It is shown that this theory predicted that net profits and interest would vary indirectly. It used the net profit to help determine the interest rate, so it perpetuated the confusion between these two rates. Copyright 2006, Oxford University Press.