Part I: The definition of the village
Part II: Value and cost
Part III: The plow
Part IV: Material bottlenecks
Part V: Capital
Part VI: Credit
Credit is one of the most mysterious and yet fundamentally essential features of capitalism. It is fair to say that without credit you don't have capitalism, and that if you do have capitalism you must have credit. Credit is possible only when a society constructs the notion of ownership of money, and credit is the only way that an owner of money can derive value from his ownership.
Credit is not, in a global sense, "living beyond one's means" or "borrowing from the future." In a global sense, these ideas are not physically possible: one cannot consume in the present commodities that will be created in the future.
To understand how credit works in a capitalist system, we can use to good effect the invention of the plow in our toy model of Village Economics.
To recap: Under normal conditions, the socially necessary time to produce "life support", represented for simplicity as pounds of food, is one hour of labor for one pound of food. When we invent the plow, we can reduce the socially necessary time to produce a pound of food to 0.9 hours; the plow reduces the cost of food, therefore the plow has objective* measurable value (use-value). A plow also has its own cost: The socially necessary time to produce a plow is 90 hours, plus a one-time "start-up" cost of 10,000 hours.
*To be precise, an objective relationship to the subjective value of food.
The start-up cost forms the underlying justification for credit. The family learning how to make plows must be fed for a few years before they actually produce anything of value, so other families must produce that food and give it to our plow-makers. Furthermore, if only one family learns to make plows it will be about 900 days (about three years) before everyone has their first plow, so the introduction of the plow will initially create more inequality.
Credit is not physically necessary to fund the start-up costs and smooth out the inequalities of supplying the whole village with plows. Since there's slack in food productivity, the village can raise its average production by a little over 1%. Those who initially receive the first plows can distribute a portion of the extra productivity either to those families still awaiting plows, or can fund additional families to make plows to distribute the production. Since everyone benefits, there is no fundamental reason why the start-up costs need to be paid back. Everyone contributes to the start-up costs, and everyone is repaid by by getting actual plows.
When you add credit to the equation, though, and the ownership of credit, the situation changes dramatically. Credit is a symbolic representation of surplus value: It represents the actuality of more commodities than are required for equilibrium, or the ability to produce those surplus commodities.
In our village, we can assume that there's a normal distribution of productivity: Some families can produce more food per hour than others. So some families will work 11 hours per day (the maximum sustainable) to produce 9 pounds of food per day (the minimum sustainable); others might work 9 hours per day to produce 11 pounds of food. Even though there's a difference in productivity, and there are local surpluses, credit is still irrelevant. Those with surpluses have nothing they want from those without surpluses, and those without surpluses have nothing to give in exchange for others' surpluses.
But the invention of the plow changes the dynamic. Not everyone can raise their production even 1%: Those at the absolute limit of productivity don't have even 1% slack. If we make the uniform percentage 2%, there will be those who can raise their productivity only 1%. There is no single percentage that can be uniformly applied to all families, even all families that have some surplus productive ability. So we have to implement a progressive "tax" to finance the plow.
"But wait!" the half-dozen most productive families say, "We'll pay all the start-up costs, if you'll promise pay us back later for those costs. And not only can you pay us back later, we'll let you pay us only a portion of the extra production you'll get from the plow. It's a win-win situation all around: you don't have to work extra for three years, it's easy for us to increase our production 10% (and very hard for those at the lower end to increase production 1%). You'll be getting plows for free."
So the most productive finance the start-up costs, and sell plows for more than their socially necessary labor time to make up for the start-up costs. If these nascent capitalists are honest, fair people, concerned with good of their fellow villagers, they will ask only that the actual start-up costs be paid back; once they're paid back, acquisition of plows can be put on a direct equivalent basis (i.e. the farmer pays the plow maker as much food as he can produce (using a plow) in the same amount of time the plow maker takes to make a plow.)
But there's a hidden danger in this supposedly win-win deal: It requires promises, and for a statement to be a promise it must be coercively enforced. It makes no sense to just hand someone a plow if you can't make them give you even the actual cost of the plow, much less make them pay the start-up costs. It's not that everyone would refuse to pay, most people are honest, but it's entirely plausible that one person might refuse to pay... and it took real resources to make that plow, resources that everyone else then has to pay for, violating our intuitive moral sense of fairness.
Once you have this coercive structure in place, there are now a range of rational prices for a plow: from ~10 pounds of food, the minimum of the socially necessary time (including start-up costs amortized over the plow-maker's productive lifetime) to ~810 pounds of food, the the total surplus value a plow will produce. It's rational to demand any price within that range; it's rational to pay it; any price in that range is mutually beneficial.
It's not only possible but highly desirable for about a half dozen of these nascent capitalist families to do no additional work whatsoever and do so in perpetuity. By raising the productivity of the rest of the village by 10%, they can take 9% (or 9.5% or 9.9999%) of that surplus forever and still leave everyone else something more than they had before.
But this arrangement is possible only with a coercive apparatus. Once the start-up costs have been paid for (much less paid back), there's simply no incentive to continue supporting these non-working families.