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.

§ 12 Responses to Profiting from decay

  • Zippy says:

    At this point I’ve done quite a lot of editing of the Usury FAQ. Constructive comments and criticisms are welcome and appreciated, as always. Trolls will be shot on sight.

  • Pilgrim of the East says:

    Can’t agree with this.
    Peaches are subject to decay but gold isn’t – and safebox argument? You can just bury it in the ground…
    Even the peaches argument is wrong – you aren’t getting necessarily bigger value by being delivered fresh peaches in six months – you may be just as well getting lower (good harvest) value. And what’s more you are risking you don’t get back anything at all (that’s why I call BS on notion that borrower is the one who takes the main risk)

    Can you explain why was master in parable of 10 minas unhappy about just getting his mina back? By your logic slave did deliver value by keeping it safe, right? And master instead scolded him that he should have deposited it to a bank so he would get it back with interest…

    What I took from your talking about usury is that only moral and economically sensible way to lend is lending something that appreciates in time (so some commodities, stock etc, definitely not money), but then it of course begs the question if the borrower seeing expenses connected to exchanging borrowed stuff to money and back wouldn’t actually prefer to pay some small interest instead…

  • Zippy says:

    Pilgrim of the East:

    Peaches are subject to decay but gold isn’t – and safebox argument?

    Gold has to be protected from theft, can lose contextual value because of market forces, and requires labor to move around and look after.

    Furthermore, there is no single fixed measure of material wealth in the first place. “Wealth” – real wealth – refers to all sorts of different and often incommensurable kinds of property situated in all sorts of different contexts, not a single number on a number line.

    Even the peaches argument is wrong …

    It is only wrong because (as I explain in the OP) it stipulates the (false) hypotheticals-as-if-they-were-real frame in the first place. The point of the OP is that even if we accept that (false) frame, the frame which says that a mutuum gives rise to an obligation to cover opportunity costs, the borrower has greater claim to gain – because he absorbs all of the risk, does all the work, etc – than the lender.

    By your logic slave did deliver value by keeping it safe, right?

    Yes. He was chastised because he could have (and by his master’s lights should have) done better. But doing no work at all and just leaving it out on the highway for thieves rather than doing the work he actually did – digging a hole for it and hiding it – would have been worse still. Protecting property from the forces of entropy is not free, ever, let alone does it give rise to the reverse obligation of the usurer.

    What I took from your talking about usury is that only moral and economically sensible way to lend is lending something that appreciates in time (so some commodities, stock etc, definitely not money), but then it of course begs the question if the borrower seeing expenses connected to exchanging borrowed stuff to money and back wouldn’t actually prefer to pay some small interest instead…

    I can’t seem to extract a coherent question or argument from that at all, let alone one that addresses or is in some way related to something I actually claimed. Maybe you’d like to give it another go?

  • Pilgrim of the East says:

    Gold has to be protected from theft, can lose contextual value because of market forces, and requires labor to move around and look after.

    it’s protected from theft by being buried under ground (and chance of somebody finding it is probably far smaller than chance that borrower dies before he’s able to repay). Contextual value can be lost while it’s lent as well, so that’s irrelevant. Labor to move around is there even when you are lending it so again irrelevant and I’d definitely prefer to have to exert myself when wanting to buy something to not being able to buy it at all (due to money being lent).

    For purpose of lending wealth refers to the value system of the lender. He can as well reduce it all to a single number on a number line. Everything else is irrelevant.

    Last paragraph wasn’t question. It was just noting, that only economically sensible thing to do for lender (so he doesn’t in most cases lose money due to inflation etc) is lending only property which he expects to appreciate over time. But that incurs higher costs to borrower who may in such cases prefer just to be lent money and returning more later.

  • Zippy says:

    Pilgrim of the East:

    [Gold is] protected from theft by being buried under ground

    Perhaps in the story you are telling, but not in general. And even then someone must own or rent the ground, and insure that no nefarious people find it, etc.

    Property is always subject to entropy. Even very durable property. Wealth preservation always involves cost, labor, and risk.

    For purpose of lending wealth refers to the value system of the lender. He can as well reduce it all to a single number on a number line. Everything else is irrelevant.

    That is just economic anti-realism, assuming I understand you correctly.

    Also, you seem to be thinking about mutuum lending as something which involves the lender looking after his own economic self interest. But mutuum lending is only morally licit in the first place as an act of charity or friendship.

  • Pilgrim of the East says:

    @Zippy:
    I live in Central Europe and every now and then I read about some old stash of gold being recovered – if it was in ground for 300 years it’s good enough for me. There is definitely lower risk than in lending it.

    I didn’t say it was totally arbitrary, but it’s arbitrary to some degree.

    I don’t think about it as something to do in own economic interest, but that when you do act of charity it sensible not to ignore that economic (self) interest – so it’s better to give money on causes where are they used more efficiently and when lending money even to a friend it’s better when it doesn’t hurt your interests more than obvious fact that you don’t have that money for some time. And that’s why I believe that adjusting for inflation is morally licit (because as I showed in previous example it may be preferable for borrower to the scenario that would be by your criteria (if I understood you correctly) morally licit.

  • Zippy says:

    Pilgrim of the East:

    The fallacy in cherry picking cases ought to be obvious. But even setting that aside I am willing to bet that gold which was buried for 300 years was not recovered by the person who buried it, which seems problematic for your thesis.

    The great thing about conjuring titles from counterfactuals is that we get to write the story from which the titles emerge. I would have won the lottery if I hadn’t lent you that dollar, so you owe me millions.

    Usually the ‘opportunity cost’ storytellers are rhetorically savvy enough to hide the ball behind economic averages and such (e.g. inflation, the Prime rate, or what have you), rather than cherry-picked examples. But that doesn’t make their fictional stories any more real than the gambler’s stories about what he would have won if he hadn’t lent you the money.

  • Pilgrim of the East says:

    Fallacy in cherry picking cases was outright obvious in your case of lending peaches which was far more on extreme side just in opposite direction. Money doesn’t decay and can be generally hidden quite easily and well. If original owner couldn’t return for it, he wouldn’t be able to get money back from the borrower either so you’re again making true but irrelevant observation.

    I didn’t speak about the opportunity costs at all – in scenario I showed you lender doesn’t profit from lending in any way over just keeping it hidden, so thanks for repeated and pointless hammering down that opportunity costs are fairytale etc…

    Once again. Lender believes that lending platinum instead of dollars is better for him because price of platinum did raise and dollar decreased his whole life – it doesn’t matter that you think that’s BS, it’s just what the lender thinks. Changing platinum to money and viceversa has 2% markup fee. Why is in your opinion immoral to refuse offer of potential borrower that lender should instead of platinum borrow him money of equal market value of platinum at that time and that he would return to lender money equal to the market value of platinum in the future?* So far I understood just that interest in mutuum loans is always bad regardless of real effects on borrower and lender and their preferences (you used word “anti-realism” before – I think that it suits here quite well).

    It just occurred to me that you’re kind of pharisee in these economical/moral matters – all you care about is adhering to rule that you partially made up, partially was passed down to and don’t give a flying f*ck about actual people or original reason for these rules.

    P.S.: why is that you comment on anything other that I say instead of on that scenario that was the main point of all my 3 comments? Honestly, it (hopefully wrongly) seems you’re purposefully avoiding it. If you ignore it once more, I’m not going to ask you about it again (or bother you with other arguments), so you can “win” the argument, but I would be kind of disappointment not getting answer/reaction when I wasted time to write it 4 times already…

  • Zippy says:

    Pilgrim of the East:

    Money doesn’t decay and can be generally hidden quite easily and well.

    Nevertheless, like all other property it is subject to entropy. It will in general be lost, stolen, etc if someone does not do work to keep those things from happening.

    It just occurred to me that you’re kind of pharisee in these economical/moral matters – all you care about is adhering to rule that you partially made up, partially was passed down to and don’t give a flying f*ck about actual people or original reason for these rules.

    Have a nice day!

  • Zippy says:

    Keep in mind (again) that mutuum lending is only morally licit as an act of charity or friendship. There are all sorts of non recourse contracts which are licit for looking after your financial interests; but mutuum lending is only licit at all as charity.

    Suppose your best friend needs wheat and can’t afford to buy any. He doesn’t need paper: he needs wheat. You’ve got some excess wheat you could lend him, but you like the way paper futures look better, so you lend him paper just so the thing he owes you back is paper. Or you tell him that you know he needs wheat and you have plenty to lend, but you like paper futures better so you’ll give him wheat, but you want him to repay the wheat you gave him by doing imaginary wheat-to-paper exchanges (imaginary to avoid transaction fees) at the point of borrowing and repayment. That way he ends up owing you back more wheat than you lent, on this mutuum loan – usury.

    It seems to me that your friendship is as imaginary as the wheat-to-paper exchanges. That is no way to treat a friend in need.

    And mutuum lending is only licit as an act of charity or friendship.

    But insisting on charity and friendship as the only licit basis for mutuum lending is, I suppose, pharisaical rule-following.

  • Alex says:

    Zippy, since you are on the subject, as a charity loan, does it make sense to insist that it should be paid by a certain date? I mean, suppose I lend wheat seeds so my friend can plant his fields. I imagine it would be ok to agree the seeds should be repaid after harvesting. However, it wouldn’t make sense to demand that the seeds to be repaid at that time if he had bad luck and lost his crops that year, right? I should be able to wait until next year, or until he is capable of replacing those seeds? Or am I getting this part wrong?

    Also, if I wanted to help him but not simply as charity, it would be fair game to elaborate a contract where, for providing the seeds he needs, he would agree to give me a percentage of his crop, right? Because then I am accepting the risk together with him? (If his crops yield a lot, I stand to make a profit, but if they don’t, I could end up with a crop that is less valuable than the seeds I provided).

  • Zippy says:

    Alex:

    I think you have both parts right.

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