Profiting from decay
February 3, 2016 § 12 Comments
Why doesn’t the mutuum borrower owe at least enough interest to compensate for inflation?
It is often said that money now is worth more than money later, and a common argument is that this justifies charging interest on mutuum loans: at least enough interest to compensate for the effects of inflation or currency devaluation.
As is typical of modern anti-realist views of property (see Question 10 for a realist view), this gets things almost exactly backwards. In fact if the argument from counterfactuals or opportunity cost were valid in the first place, what would follow is that the lender should pay interest to the borrower.
Property in itself is always subject to decay. Suppose you lend me fresh peaches, and I personally guarantee to give you the same number of fresh peaches six months from now.
In order to provide you with fresh peaches six months from now I have to take risks and invest more capital and labor. If I just hang on to your peaches and return them to you they will be rotten, because the peaches you lent to me are subject to decay. You should pay me interest, since when I give you fresh peaches in six months you are getting a greater value back than what you gave. I personally guaranteed you fresh peaches in six months, and took all of the risk and labor of providing them upon myself.
Guaranteed fresh peaches later requires investment, labor, and risk. (Question 48 is pertinent). Peaches in a bucket right now require none of those things. If any interest based on counterfactuals is justifiable at all it should go to the party who takes on the task and the risk of providing fresh peaches in six months: the borrower.
And the same is true of money, or any property. If entropy or decay (for example inflation) justifies charging interest on a mutuum loan at all, the interest it justifies is due to the borrower not the lender; because the borrower is the person who has taken on all of the risk and expense of preserving the lender’s capital.
The borrower should be compensated for the expenses the lender would have incurred if the lender had kept his capital locked (for a fee) in a safe deposit box rather than giving it to the borrower for preservation and safekeeping. If the borrower is providing a service roughly equivalent to a safe deposit box, interest should flow the opposite direction from what the usurer proposes. Safe deposit boxes have to be rented for a reason.
The fallacy in all of this is in the notion that opportunity costs are compensable in mutuum lending in the first place (see Question 14), and the idea that mutuum lending is ever morally licit as a means to economic gain – where wealth preservation is a kind of gain – as opposed to an act of charity or friendship.
But once we grant the premise that opportunity costs are compensable for the sake of argument, the lender should be paying interest to the borrower. The borrower’s story about counterfactual might-have-beens is more in touch with reality than the lender’s story about counterfactual might-have-beens, because preserving and maintaining property against the forces of entropy always requires risk, work, and investment.