In 1937 the English economist Joan Robinson proposed that “when capitalism is rightly understood, the rate of interest will be set at zero and the major evils of capitalism will disappear”. John Maynard Keynes, who had taught Robinson, suggested something similar a year earlier in slightly more qualified and technical terms, arguing that this would be “the most sensible way of gradually getting rid of many of the objectionable features of capitalism”.

Robinson and Keynes were writing during the great depression, when spending and investment were moribund and interest rates seemed like a stranglehold on the economy. Unlike the sort of temporary measure we saw from 2009-21 when rates were close to zero, they believed interest rates should be set at zero permanently as a way to purge capitalism of its most objectionable and destabilising features.

This was a time when the Soviet Union was challenging the western model of prosperity. Indeed, Robinson’s argument was in response to a Marxist, proposing it would lead to “even better results than the revolutionist theory”.

With interest rates rising steeply in the past couple of years and capitalism deeply unpopular among younger generations, it is worth returning to this idea. So what was the logic and how would it work?

The rationale

Inflation is sustained by consumers, businesses and governments spending in excess of the supply of goods and services. Central banks raise interest rates to reduce demand by discouraging borrowing and spending. This aims to restore equilibrium between supply and demand, and reduces inflationary pressure.

A major problem – setting aside the question of how well it works – is that this distributes the cost of curbing inflation very unevenly. A recent report by the Royal Bank of Canada said higher interest rates disproportionately hurt poorer and younger people, such as renters and first-time homebuyers. Anyone borrowing out of financial distress is likely to be in trouble with rising rates.