Friendship arbitrage

February 6, 2016 § 26 Comments

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, and you want a guarantee that you won’t lose any buying power when you are doing your best friend a favor.

So you lend him paper (even though he needs wheat, and is just going to exchange the paper for wheat) just so that, as a formality, the kind of 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 (they will be imaginary to avoid transaction fees and taxes) at the point of borrowing and repayment. Because of the excursion into the land of imaginary paper he ends up owing you back more wheat than you lent him 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 morally licit as an act of friendship or charity. It is not morally licit in pursuit of gain. Preservation of market buying power as something guaranteed by someone else is a kind of gain.

If your best friend decides to pay you back more wheat than you loaned him out of gratitude, that is a gift from him to you. There isn’t anything wrong with that. It is even true that he owes you gratitude in a sense. But gratitude between friends is not convertible into a specific dollar amount which he can be said to owe you as a financial matter. No true friend is going to quibble, in dollar terms, as to whether his best friend has been grateful enough in the natural exchange of favors which occurs among friends.

It is possible for friends to do each other injustice in mutuum lending; even to have a falling out and to no longer be friends. Suppose you lent your best friend the wheat, he now has enough to repay you the amount that he borrowed, but he refuses to do so. In that case he is not being a good friend; and he really does owe you back the amount of wheat that he borrowed, as a matter of justice. His refusal to pay it back now that he can is a kind of theft or fraud. You truly are entitled to return of the principal amount, and the falling out of your friendship does not remove that entitlement in justice.

But this does not make mutuum lending morally licit as a wealth preservation investment strategy. There are plenty of ways to look after your own property financially: many different kinds of contracts for preserving and growing wealth are morally permissible.

But the security on those contracts must be property, not personal IOU’s. Otherwise you are unjustly profiting financially from arbitrage over friendship.

§ 26 Responses to Friendship arbitrage

  • Johannes says:

    Dear me. All of this stuff makes my head spin. What if I do not have any wheat to give my friend. Let’s say, I’ve planted all mine and sold what I had from last season, and he has nothing to plant. Could I lend him some money to go buy some and expect that same amount back? Let us say the price of wheat drops, and he really goes into the hole. He cannot afford to pay me back. [ I guess I would just say, “pay me what you can when you can–up until you pay the original amount back.”] So, is it licit to lend him the money and expect it back, given all of these variables.

    Discuss.

  • Zippy says:

    Johannes:
    As far as guidelines go, this is all very, very simple. No spinning heads required.

    Be generous when helping people. Be generous in your gratitude when you are helped by others. Don’t require personal guarantees as security in any contract.

    That may be technically more than the minimum daily requirement. But that is where the complexity comes from: from folks trying to achieve minimum daily requirement Christianity.

  • vishmehr24 says:

    If I lend my friend 100 coins of 24 carat gold and he pays back 100 coins of 22 carat gold, then am I being usorius if I insist in being paid back 9 coins more?

  • Zippy says:

    vishmehr24:
    I don’t think you know what the word “friend” means.

  • I don’t see how this runs afoul of the usury prohibition. If you lend (say) 100 pieces of paper, sell (say) 50 units of wheat for those lent 100 pieces of paper, and then later demand 100 pieces of paper back, that’s not usury. Absent an intervening change in either the cost of producing wheat or the cost of producing paper, there’s no way this could be moral, as it would either involve paying less to the borrower than he deserves for selling you the paper, or would involve you intending* to make an unjust profit by selling the paper later for more than its worth (or both). But it’s not usury.

    *Unless you simply envision a personal future need on your part for paper, and have no intention of making a monetary gain from the process.

  • Zippy says:

    AR:

    Exactly right. (I’m glad someone actually read it).

    This post describes (a perspective on) the reason why usury is wrong, through the examples of a technically-not-usurious contract entered under a ‘usurious mentality’ and an actually usurious contract.

    The transaction described in the first sentence of the second paragraph (unlike the one described later in the same paragraph) is not technically usury, since the lender lends paper and receives the same amount back. It is an illustration of someone being a bad friend, a selfish asshat who should either help his friend out or not instead of being a useless selfish despicable prig soiling his supposed charity through a stingy attitude.

    And friendship or charity is the only licit basis for making a mutuum loan in the first place. If economic self interest is the reason for a contract, that contract should be secured by property not by personal guarantees.

  • Zippy says:

    Let me put it this way:

    Just barely avoiding committing usury on a technicality is like just barely avoiding committing adultery on a technicality.

  • “And friendship or charity is the only licit basis for making a mutuum loan in the first place. If economic self interest is the reason for a contract, that contract should be secured by property not by personal guarantees.”

    I’m not so sure about that. If greed, the desire for amassing wealth you don’t need, is the purpose, then you’re wrong no matter what means you use. On the other hand, if the purpose is legitimate (e.g. you live in a capitalist system and foresee that the “market value” of paper will go up, and you need a reasonably secure source of paper that won’t cost a fortune), then I don’t see it as being intrinsically wrong to secure that using a mutual loan, provided that you don’t charge interest etc.

  • Zippy says:

    AR:

    … the desire for amassing wealth you don’t need …

    Nobody really knows what they are going to end up needing materially in order to perform the good acts to which they are called; and morality cannot be reduced to desire. The vice of greed is a tendency toward committing objectively greedy actions. Vice in general is not merely a conscupiscient desire, but a tendency to act on that desire.

    On the other hand, if the purpose is legitimate …

    That begs the question. By definition a legitimate purpose is legitimate. But mutuum lending is only morally licit as an act of charity or friendship – with a final cause of charity or friendship – as e.g. commanded in Mt 5:42.

    If you are going to be a friend, be a friend. If you are pursuing economic self interest, form a societas and secure your contracts with claims against alienable property, not with personal guarantees.

  • “Nobody really knows what they are going to end up needing materially in order to perform the good acts to which they are called”

    That’s true in an absolute sense, but practically speaking it’s entirely possible to make a reasonable estimation of one’s needs.

    “and morality cannot be reduced to desire. The vice of greed is a tendency toward committing objectively greedy actions. Vice in general is not merely a conscupiscient desire, but a tendency to act on that desire.”

    You’re right. I should have been more clear.

    “That begs the question. By definition a legitimate purpose is legitimate.”

    Not necessarily. Evil means can be used to obtain good ends.

    “But mutuum lending is only morally licit as an act of charity or friendship – with a final cause of charity or friendship – as e.g. commanded in Mt 5:42.”

    Why is this the case? I’ve seen you assert this principle, but I’m not aware of where you have substantiated it.

  • Zippy says:

    AR:

    …practically speaking it’s entirely possible to make a reasonable estimation of one’s needs.

    That is rather preciously naive, frankly.

    Not necessarily. Evil means can be used to obtain good ends.

    By definition a legitimate purpose is a legitimate purpose.

    Obviously mutuum lending is not intrinsically immoral: it is not intrinsically immoral to lend your neighbor a cup of sugar.

    You were begging the question that economic self interest is a legitimate purpose of mutuum lending. It isn’t, because the promise of your friend to repay is not property.

    I’m not aware of where you have substantiated it.

    I can’t vouch for the state of your awareness; but most recently it was the subject of the previous post, linked in the post above. You might object and suggest that promises ought to be treated like property, but once you’ve done that – whether you see it or not – there is really no point in a moral prohibition of either usury or slavery.

  • You can call it naive, but I certainly don’t find the assertion that there’s no such thing as greed (which is were the assertion that you *might* need any amount of money, and therefore are justified in seeking to gain any amount of money, leads) to be reasonable.

    I’m not begging any question. I’m saying that giving someone a mutual loan so that you’ll have a relatively secure (if you’re reasonably certain that they’ll be able to provide the good when you need it) way to get a type of good is not inherently wrong. The fact that a promise isn’t property doesn’t mean you can’t get property out of it.

  • Zippy says:

    AR:

    You can call it naive, but I certainly don’t find the assertion that there’s no such thing as greed (which is were the assertion that you *might* need any amount of money, and therefore are justified in seeking to gain any amount of money, leads) to be reasonable.

    I think you are basically just airing all of your own assumptions here, at this point, and projecting them onto the discussion. Nobody has said that there is no such thing as greed.

    I’m saying that giving someone a mutual loan so that you’ll have a relatively secure (if you’re reasonably certain that they’ll be able to provide the good when you need it) way to get a type of good is not inherently wrong.

    It is ‘mutuum’ loan.

    And you are wrong. That sort of personally guaranteed ‘census’ or futures contract was condemned by Pius V, among others. And I explain why it is wrong, in my own words, in (among other places) the post previous to this one.

  • “Nobody has said that there is no such thing as greed.”

    It is the logical implication of the assumption that there’s no such thing as inordinate desire for wealth.

    “It is ‘mutuum’ loan.”

    I know, autocorrect got me and I didn’t notice.

    “And you are wrong. That sort of personally guaranteed ‘census’ or futures contract was condemned by Pius V, among others. And I explain why it is wrong, in my own words, in (among other places) the post previous to this one.”

    Source?

  • Zippy says:

    AR:

    It is not really possible to have a conversation with someone who sincerely cannot immediately tell the difference between the propositions ‘your statement that you can easily anticipate the material resources you will need throughout your life is naive’ and ‘there is no such thing as greed’.

    And it isn’t productive to have a discussion with someone who actually can tell the difference but feigns incapacity.

  • “your statement that you can easily anticipate the material resources you will need throughout your life is naive”

    I never said that. What I said is that it’s entirely possible to make a reasonable estimation of what one’s needs are. I said nothing about being able to foresee every possible need one might ever have, because that’s not terribly relevant.

    And asserting that one can licit of accumulate as much wealth as one wants on the justification that it’s “possible” that one might need that much money at some indeterminate point in the future, is to effectively deny that greed (the inordinate desire for wealth) is a coherent thing, since it denies that the desire for wealth can be inordinate.

  • Zippy says:

    AR:

    And asserting that one can licit of accumulate as much wealth as one wants on the justification that …

    Good thing you were here to correct the pixies in your mind who asserted that.

  • “Nobody really knows what they are going to end up needing materially in order to perform the good acts to which they are called”

    What exactly was the meaning of this comment, in response to my statement that greed is the desire to amass wealth you don’t need?

    When I said that greed is the desire to amass wealth you don’t need, and you reply that you can’t know how much wealth you might need, how exactly is that statement to be taken?

  • Zippy says:

    AR:
    It means what it says: that when you pretend to anticipate your lifelong material needs, God laughs. How many children do you have? What kind of medical issues do they have? How about all of your other relatives and friends to whom you are connected and for whom you carry various responsibilities? How do you even have any idea what responsibilities you might have 50 years from now?

    Your basic concept of greed is wrong. If being greedy requires us to anticipate our lifelong material needs in the first place, such that greed is a mismatch between our pursuit of material goods and those anticipated lifelong needs, then there can be no such thing as greed. It isn’t my concept of greed which leads to this conclusion; it is yours.

    I already attempted to correct your conception, but you didn’t get it. Greed is a vice. A vice is a tendency to commit particular kinds of concretely immoral acts, not a mismatch between a man’s effort to build material things and his anticipated lifelong material needs. The ‘teleological’ (in JPII’s words) theory of greed upon which your entire commentary rests is wrong from its very foundation.

  • I’ve never claimed that it’s possible to know what all needs you may have in life, or that greed revolve around this.

    What I said is that it’s feasible to know what you need (present tense), and that it is greedy to seek wealth grossly in excess of this.

  • Zippy says:

    AR:

    What I said is that it’s feasible to know what you need (present tense), and that it is greedy to seek wealth grossly in excess of this.

    … which again is manifestly wrong, because you cannot anticipate future need, where the future could well mean five minutes from now after the car accident that changes your life. What experience will eventually teach you is that an opportunity today is often the way Providence provides resources for your responsibilities tomorrow, which you cannot anticipate today.

    Again, your fundamental understanding of greed is simply wrong, and this is leading you into basic errors. Greed is a vice — a tendency toward selfish or ungenerous concrete acts with respect to property. It is not wrong to seek to build material wealth, and there is no moral requirement to place an arbitrary maximum limit on that pursuit based on a naive and precious conceit that you can anticipate what will be needed in the future.

    It is wrong to engage in concretely greedy acts while building material wealth. This will of course result in natural limits on what a good man can achieve in particular circumstances; and of course there are often great temptations to do evil in order to optimize some material gain or other, so pursuit of wealth is (like most human activities) morally fraught.

    But those natural limits on the generous man are a consequence of him choosing concretely generous actions and avoiding concretely greedy actions. The moral limitation is on kinds of actions, not some arbitrary wealth target above which doing more work to achieve it becomes immoral. The moral framework is virtue and vice, not the kind of reverse consequentialism in which you’ve become vapor locked.

    What matters is what a man does with his Talents for the glory of his Master. It is no virtue, in fact is the opposite of virtue, to bury them in the ground.

  • Zippy says:

    None of that should be interpreted as casting aspersion upon those who have the more holy calling to live in vowed poverty, of course, versus the merchant, artisan, professional, etc. That should go without saying, but I’ll say it anyway.

  • Let me put this another way. What would be a way, that a man could acquire* very large amounts of money without violating the moral law?

    *As in, through his own efforts, so not counting gifts and inheritance.

  • Zippy says:

    AR:

    What would be a way, that a man could acquire* very large amounts of [wealth] without violating the moral law?

    By starting, owning, and running a business enterprise which grows and becomes successful.

    I think you have dominated this thread long enough now though. You’ve obviously got some deeply rooted zero-sum ideas about property, greed, etc which from my perspective are completely wrong and which send discussion immediately off into the weeds. I think this stopped being productive some time yesterday when you first begged the question in favor of your (completely wrong) concept of greed and started imputing silly things to me on that basis. I probably should have ended it then, but I am definitely ending it now.

  • Gabe Ruth says:

    AR,
    I think Zippy’s right to critique your definition of greed, but more interesting to me is your petulant demand for an authoritative source for the claim that charity or friendship are the only legitimate grounds for a mutuum loan. If you were new to this blog, that wouldn’t be surprising at all, but for a regular it seems very strange.

    “Preservation of market buying power as something guaranteed by someone else is a kind of gain.”

    It doesn’t get any clearer than that. Preserving wealth on someone else’s back may not be usury if done in a certain way, and it may not even be immoral, but it is not friendship.

    Think of it this way. Charity has to be willing to never see a dime back in the event of the borrower failing in his endeavors. If you lend your retirement to someone in a mutuum loan, just because you’re not charging interest doesn’t mean it’s moral. It is immorally irresponsible, because if you don’t get paid back someone else must support you in your old age.

    The people of the Middle Ages had a healthy attitude toward Fortuna’s wheel. They understood the best insurance against the ravages of time and fate was strong families and good neighbors, not inflation-proof securities and buried gold.

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