What Truly Governs the Market: Interest or Rent/Profit?

The Invisible Hand of the Market and the Trace of Real Value

İsmail ÖZSOY*

 

Introduction

In the modern financial system, interest is often presented as a natural and inevitable component of the market. However, upon closer examination, interest is not a primary economic variable, but rather a secondary reflection built upon more fundamental economic values such as rent and profit, wages inclusive. This article explores how interest rates are actually shaped by the dynamics of real goods and services markets and how, behind this seemingly abstract concept, lies a concrete value chain.

I. Interest: A Visible but Derivative Value

At first glance, interest is defined as the "time value of money" — a purely abstract notion. However, we must remember that money itself is not a good; its value only becomes meaningful when indexed to a good.

Today, interest rates — from housing loans to bonds, from commercial debt to personal finance — are shaped by factors such as:

• Average rental prices in the real estate market
• Average profit margins and productivity rates in the real economy
• Production costs and supply–demand balances
• The potential future appreciation of assets

Thus, the trajectory of interest rates is determined by these variables. In short, the interest rate is a shadow of rent, wages and profit.

II. Rent: The Real Value of Use

Rent is the compensation for making an asset — especially real estate — available for use. By its nature, rent is:

• Time-bound
• Non-transferable in ownership
• A real payment in exchange for utility

When we examine interest-bearing mortgage systems, consumers often act under the following psychology:

“I live in this house and pay monthly installments; it feels like rent.”

This intuition should not be underestimated, because the payment:

• Corresponds to the right of shelter
• Is proportional to the real usage value of the house
• Can be compared to alternative rent payments

Thus, even though the payment is labeled “interest,” it corresponds in reality to a rent-like real value. Only the naming differs — the essence may be quite similar.

III. Profit: The Return from Transfer of Ownership

Profit is the legitimate gain obtained through the sale or production of goods. When bank interest rates exceed the average profit margins in the market, entrepreneurs are discouraged from borrowing for productive activity. Conversely, when interest rates are too low, people are drawn toward unproductive profit paths through borrowing.

This indicates that the interest rate follows the real profit rate:

• If average trade profitability is 15%, interest will remain around 10%
• If average profit falls to 4%, interest will likewise decline

Thus, interest is not an alternative to profit but a secondary function of it. The interest system grows or contracts in the shadow of profit.

IV. What Really Determines Interest Rates?

Contrary to popular belief, interest rates are not determined solely by formulas such as “inflation + risk premium.” Instead, the foundational real-world values are:

• The utility value of a good (rent)
• The profitability of holding a good
• The future value projection of the good (appreciation potential)

Interest emerges as a synthetic indicator derived from the expectations built on these three values. If a good offers higher rent or profit potential, interest rises; if not, it falls.

V. Therefore, Neither Interest is Essential, Nor is it Fundamental

What truly matters is the relationship between benefit and ownership. The abstract ratios found in interest-based systems merely echo what the real market is silently expressing: the rental price, the profit potential — interest merely follows their trail.

So we must ask:

• If what we call “interest” is already a reflection of rent and profit, why not base our systems directly on these real values?
• Why convert this real exchange — intuitively understood by all — into an abstract debt relationship under the name of interest?

Conclusion

Interest appears to be a technical instrument, but in reality, it is a shadow of real benefit. Its foundation lies in rent and profit. In the market, the true drivers are the movements of these two values — interest is merely a schematic expression of their sum.

Therefore:

• Not interest, but benefit should be discussed.
• Not interest, but the relationship between goods and use should be the foundation.

This is the path to genuine justice and a truly real economy.

Summary

The current interest rate is an instant indicator of the productivity of all production factors in the market.
This rate:

• When applied to forward-looking loans, becomes illegitimate interest;
• When applied to durable capital goods (e.g., housing, equipment), becomes legitimate rent;
• When applied in equity partnerships, becomes legitimate profit sharing ratio.

Thus, it is not feasible to simply abolish interest. The real issue is not prohibition, but rather understanding the nature of the relationship that generates interest — whether it arises from a real good, a service, or risk-sharing.

 

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* Prof. Dr.