Hypotheticals Don’t Exist
March 4, 2009 § 13 Comments
One of the things that Paul Cella laments about the current economic crisis is all of the abstractions. There are certainly a great many abstract and complex structures involved. At the same time we’ve learned (I only just learned) that Aquinas viewed lending money at interest as morally wrong because it involves, in his view, selling something which does not exist.
We confidently reply (as thoroughgoing capitalist moderns) that contra Aquinas, money has a time value. It turns out upon reflection, though, that while it is true that (contra Aquinas) money has a time value, it is true in an equivocal sense: that is, it is sometimes actually true that money has a time value, and it is sometimes only hypothetically true that money has a time value.
Our reasoning for money having a time value in general goes something like this: If I did not lend my money to Bob (I say hypothetically, ahem) then I could invest it in General Electric Corp bonds (ahem) or a savings account, and draw interest on that money. Therefore if I loan the money to Bob, Bob owes me compensation for the opportunity cost: for the money I could have made if I had, hypothetically, done something different with it.
But as the title of the post indicates, and as is hopefully uncontroversially true, hypotheticals are not real. They don’t exist. So if, when I lend my money at interest, I charge that interest based on an opportunity cost, I am charging my “customer” for something which isn’t real. And if I am charging my customer for something which isn’t real, that is almost certainly unjust.
On the other hand, when I hand over the money to Bob and he invests it in something productive, that is, in an endeavor which produces a profit, that money has an actual time value: it actually, and not merely hypothetically, does produce profits and grow over time. So in that kind of case it is perfectly just for me to expect a share of those profits, whether in the form of a dividend, an equity stake giving me a proportion of the profits, or a fixed interest giving me first claim to a fixed share of the profit.
The Papal Encyclical Vix Pervenit, promulgated on November 1, 1745 by Pope Benedict XIV says:
”But by this [prohibition of lending for interest] it is not at all denied that sometimes there can perhaps occur certain other titles, as they say, together with the contract of lending, and these not at all innate or intrinsic to the nature of a loan, from which there arise a just and entirely legitimate cause of rightly demanding something more above the principal than is due from the loan. Likewise, it is not denied that many times one’s own money can be rightly invested and expended in other contracts of a different nature from the nature of lending, either to secure an annual income for oneself, or also to practice legitimate commerce and business, and thus procure an honest profit.”
Now I’ve mentioned a few times that I am only just starting to look at usury in depth for the first time. So I haven’t reached any hard and fast conclusion, where I can say with confidence that I think that such-and-such a model of the moral lending of money is true.
But one thing I do think is that as modern people we might have been a bit too quick to dismiss the wisdom of the ages when it comes to the subject of usury.
You might want to check out Belloc’s take on usury. He deals with it at the end of his book, < HREF="http://www.amazon.com/Economics-Helen-Hilaire-Belloc/dp/1932528032" REL="nofollow">Economics for Helen<>.
Hah. Can’t hide the ball on you, Peter. The background of this post is me working to reconcile Aquinas’ and Belloc’s concepts of usury in the threads of the postings at < HREF="http://www.whatswrongwiththeworld.net/" REL="nofollow">What’s Wrong with the World<>. (I’ve read Belloc’s essay on usury but not <>Economics for Helen<>. Thx for adding to my reading list 🙂
If on the other hand, Bob loses his shirt on the investment he makes with the money he borrowed from you, do you still charge him for the imaginary profit he hoped to make, or for the imaginary profit you gave up by making the loan? Do you compensate him for his very real loss by writing off the debt? It doesn’t seem that the justicification for usury based on outcome is valid, unless it works both ways.
Well, Rodak, this is an exploratory thing for me so I don’t really have an actual answer. In my reading of the traditional view of usury, the borrower is (morally) on the hook for the principal unless otherwise arranged, though there are clearly limits to enforcing that justly. What is at issue is the <>interest<>. So my thought at this time is that if the business goes bust Bob is <>morally<> on the hook for the principal (unless otherwise arranged) but never the interest. If the accumulated principal-plus-interest exceeds the enterprise value of the business at bankruptcy, tough cookies for the lender on the interest. Bob has no moral obligation to pay above and beyond the greater of the enterprise value of the business or the principal under any circumstances, which is to say, attempting to collect more that that from him is usury.
I think that we all agree that when John as an individual invests $100 with Bob who has a business idea, and receives “stock” for that $100, then John is not “lending” at all. He becomes part owner. If Bob loses his shirt on the business, he owes nothing at all to John. But if Bob rakes in the dough, he cannot limit John’s share of the proceeds to some pre-determined percentage, like 7% or something. John’s interest is a proportionate share of <> everything <> the business does. >>If, on the other hand, John doesn’t quite want to get that deeply involved, he may be willing instead to float Bob’s business by “buying” a bond. The bond is simply a debt instrument, that has set payments, usually interest only for a period with a final payoff of the principal. In the event of a bankruptcy, the bond-holder will be paid off their principal before any stock-holders get a dime in return for their investment. In this way John’s risk of loss of the invested amount is a little less, but he gives up all opportunity at higher profits. In the capitalist system, it seems generally agreed that the loss of opportunity of participation in such high profits needs to be offset, and paying a pre-determined amount of interest (i.e. an amount above principal) seems to be the only way to do that. (I am not saying I agree completely with this – just trying to point out the assumption). >>We also all pretty much agree that at least in principle, a bank is (or should be, if it has a right to exist at all, and as consistent with Paul Cella’s article), a way of taking a lot of small bits of amounts from John and Mary, pooling them, and making the collected amounts available to Bob in a manner similar to the bond Bob might sell. Normally, the bank doesn’t want stock in Bob’s business – its savings customers don’t wish for quite that much risk of their principal – they usually cannot afford that much risk. It wants a different slice of a pie: it wants a lower risk involvement in the operation, and accepts a lower amount of the benefits thereof. But it could not accept a lower return without an offset, and this offset is a promise of <> some <> guaranteed return above principal regardless of whether the profits hoped-for actually materialize. In other words, the bank is merely a collectivized way of doing what John could do with a bond. Whatever is licit in lending with bonds should be licit at banking. >>That said, is it really true that the bond should pay interest above principal in order to offset a limitation on the returns? >>To try to pose the question more in Aquinas’s terminology (perhaps unsuccessfully): is it true that the <> limitation on participation in business return<> something distinct from the loan of the money itself, so as to be something which can be charged separately from the principal itself. I am not clear on this.
A loan is basically a contract. Some things can’t be contracted for (e.g. I may not pay you money to murder someone), but within the realm of permissible actions there are various types of contracts that can be made.>>If you and I enter a contract in which you loan me money, the essential element of the contract–that you give me money and I promise to return it–can be embellished with any codicils we like, so long as they do not amount to usury or some other immorality.>>It isn’t immoral for me to promise you some of my profits, for the reasons that Zippy gives about actual income. I make a conditional promise–<>if<> my project prospers (i.e. produces actual wealth), I promise you a percentage of its produce. This is not the same as interest, because the payments made have nothing to do with the loan, but with my business.>>A think an analogous case is that of a printer who enters a contract with an author, paying the author a flat sum and a royalty per books sold. If the printing house folds, or for whatever reason the book cannot be printed, the author is still owed the flat sum, but he cannot in his rights claim any of the “would-have-been” royalties.
The Blackadder Says: >>Since as you yourself admit, Zippy, this isn’t a matter you’ve studied up on, why not do so now? If you did, I think you’d find that the Church does allow the charging of interest based on opportunity costs. >>Surely you, of all people, should recognize that relying on your own speculations rather that hundreds of years of Catholic tradition is probably not a good idea.
Blackadder:><>I think you’d find that the Church does allow the charging of interest based on opportunity costs.<>>>If you are going to claim that the Church teaches that charging interest specifically based on opportunity costs is permissible, why not show specifically where the Church teaches that? If you know that, why not pass on the reference rather than suggesting that I find it?>>Right now I’m mainly looking at Belloc, Aquinas, and everything Magisterial indexed in Denzinger under “usury”. Denzinger indexes Magisterial sources up to Pius XII. If you have other Magisterial sources specifically addressing usury that you want to add to the pile, maybe something post Pius XII of which I am unaware saying that charging interest based on opportunity costs is not usury, I’m certainly interested in seeing them. I am also interested in the ideas that various commenters are expressing. And I will of course continue to explore the subject matter as my other interests, time, and resources permit.
<> A think an analogous case is that of a printer who enters a contract with an author, paying the author a flat sum and a royalty per books sold. If the printing house folds, or for whatever reason the book cannot be printed, the author is still owed the flat sum, but he cannot in his rights claim any of the “would-have-been” royalties. <> >>Actually, under bankruptcy law, if the printing house folds, the author will NOT be given the flat amount, not unless all creditors have been paid – the court will not recognize him as a creditor in that sense. So there is a defect in the analogy. But the court could give him back his book rights, if it could not find a buyer of the company’s assets, which assets include the book rights.
This depends largely on the money you are using.
With sound money, it is true, there is only a hypothetical lost value to money. With fiat currencies, this is not true.
For example, the US dollar is under a constant inflationary rate of 4-5% (optimistically. It is probably far worse right now). Even if I did nothing with my money at all, my money will be worth 4-5% less in a year. That is not a cost of opportunity. Money later is worth less. I’m better off buying something that would hold value — than keeping it liquid in order to lend it to you.
Thus, I advocate sound money, so that the situations where usury is justified would be minimized or negated. Unsound money makes us do weird things with economics, since the value of money is not real.
The following link has a great historical overview and summary of the Church teaching on usury:
< HREF="http://frcoulter.com/presentations/usury/index.html" REL="nofollow">The Church and Usury<>
[…] Usurious lending is when there is no underlying asset, or when the contract permits recovery of more than just the specified collateral assets; but the lender charges rent (profitable interest) anyway. The lender is literally charging rent for no-thing, for non-being, for something which does not exist. Invoking “opportunity cost” does not solve the problem, because opportunity cost is not ontologically real. […]
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