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[muse] Usury - Transience Divine
January 15th, 2007
03:09 am

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[muse] Usury
Money is a funny idea. As natural as it seems today, our ancestors rebelled against it for centuries (ask Mutual Aid). Money is an incredibly useful tool, but it has huge social and institutional effects, where the minutest choices in the arbitrary rules surrounding it can have huge differences.

We choose to use a single idea of money as exchange for both items and actions (but not jobs or college admissions), land (but not air), advertising space (but not ideas), institutions (but not people), power (but not freedom), and security (but not safety). Money isn't supposed to be used to buy and sell sex, votes, or ideologies, but it is. We allow money to be given away or held indefinitely, irrespective of the individualness or ephemeralness of its original granting. And we allow those who most directly generate the profitable products and services to get the least money.

But I'm not arguing against money or property today-- they're ideas that work awfully well. Capitalism provides for something like liberty, opportunity, and a high standard of living in a way no other system has come close to. I want to argue against one particularly funky practice: the use of money to make more money-- that is, usury.

Usury is an ill-defined term. Lending is complicated business, and different degrees of justice are served by different limits on interest. The extremes delineations are at zero interest and free-market interest. With proper safety-nets, charging nothing extra seems perfectly just, if not more than just. Similarly, it seems fairly unchallengeable that charging more than what you could get on the free-market is clearly usurious. But there are finer gradations between.

Just up from zero interest is the charge to cover basic assessment and handling of a loan. I'll call this epsilon interest, because I think it's comparatively small (but it doesn't make much difference if it's bigger), and I include it in the other levels. Then there's risk-insurance interest, set at a level to protect its lender from a disinterested party's estimation of the risk of the endeavor. Sure, it's theoretical, but it's useful. Either above or below that level is the current "risk-free interest level", which is whatever return the lender can get investing in risk-free endeavors (corporate finance people scale everything in terms of this interest rate). Finally, there's the combination of risk-insurance, risk-free, and epsilon interest. In theory, the market drives toward that line of justice and interest, but not very well, as evidenced by the recent explosion of payday loans.

Good arguments could be made for crying usury at any level. I'll argue that the limit of unjust interest is at the greater of the risk-free interest or and the risk-insurance interest. Call this the tipping interest.

I claim that the use of money to make its possessor more money is inherently unjust. Money is liquid incentive or liquid power *over other people* (directly or indirectly). If we want to ask if someone has gotten wealth justly, we have to ask, "By what do they *deserve* this wealth?" In a capitalist economy, you can justly exchange your property or use your time, mind, and body to get money, and the perceived worth in your items and actions is reflected in the money you get. You deserve the money for the worth you've provided.

The argument goes that, similarly, lending money is a kind of providing worth for which you should be compensated. But how can the worth of lending the money be greater than the money itself? Lending money is not the same as providing a service. Moreover, money transfer is not made just by all parties agreeing to the same contract. At best, that fact adds no injustice, but the question of deserving still needs to be answered.

At the tipping interest, investors are assured a risk-free level of interest, or the opportunity for more profit on risky endeavors. Why, then, would they loan to anything but the most institutional and conservative projects? The answer is, for *any* other reason, except for the money. The tipping interest ensures that the incentive for investment isn't greater wealth, thereby removing the relentless drive on capitalist systems to sacrifice everything for profit. If only for the smallest reason, investment in a system with the tipping-interest cap is based on values-- the non-monetary gains from the investment.

Allowing money to make money is at best unnecessary. It accelerates economic growth, which drives "poverty and hunger, environmental destruction, resource depletion, urban deterioration, unemployment" (ask Jay Forrester). It entrenches and extremities the economic divisions in society. It builds money-centered thinking into every aspect of life.

Will capping interest levels decrease opportunities for ventures that need capital, or otherwise harm the good things about capitalism? I doubt it. Investors will still have an incentive to invest their money-- just not extra incentive. If this cap means that less money is in circulation, it will only increase the effective worth of those who don't have much of it. It will decrease the worth of owning capital, but the greatness of capitalism is in the freedom, opportunity, and fluidity it provides, not its ability to support an upper-class. The tipping-interest cap equalizes society by decreasing the self-fulfilling power of the powerful and cuts capitalism's bottom-line-is-the-only-line exploitive feedback loop.

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From:g_w_s
Date:January 15th, 2007 01:39 pm (UTC)
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A change seen as harmful to the upper class is going to be met with resistance by the upper class.. who control the system. It's much easier to establish such policies at a financial system's inauguration, but I suppose such things begin in such a distributed fashion that there will always be those that quickly take the advantage.
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From:jrising
Date:January 15th, 2007 08:15 pm (UTC)
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I think this particular change is comparatively easy to enact: convince the government to provide loans at this rate to all comers, and suddenly no one else will find it profitable to try loaning money at any higher rate. Not that that's easy to convince the people in power to do, but they can be forced, if the public sentiment is right.
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From:sasseyfrass
Date:January 15th, 2007 02:22 pm (UTC)

money (usury)

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Interesting post.

I agree with this definition of usury: Interest which exceeds the legal rate charged to a borrower for the use of money". Generally, you see usury in black market and illegal transactions and also in non-certified transactions. However, I think it is also seen in those check cashing and similar businesses. They stay within the legal definition by charging loan fees. I find usury to be abhorrent, HOWEVER I find the normal day-to-day lending of money at reasonable rates to not only be OK, but to be beneficial to our economy.

Unfortunately, the people who tend to need the money the most (lower economic tier) tend to be charged higher interest rates. This is unfortunate, but necessary as those loans generally (but certainly not always) carry the highest risk. Even worse is the next highest tier of interest rates (for new businesses). Again, a very high interest rate, but this time, that high barrier of entry means that an opportunity to increase our economy has been missed. Unfortunately (again), this higher rate for interest is necessary as new businesses failure rate is abysmally high.

Charging anything less on loans than enough to cover the cost of the transaction plus the amount that would be charged for an uber conservative (government bonds, etc...) would be folly for an investor. Why would you give up your hard earned cash to invest in a risky investment? By not allowing higher rates of interest, you would effectively cut off the flow of loans to those that need them the most.

There are low and no interest loans available, but those are usually given by the government or charities. While those entities certainly have their place and this is a laudable and useful endeavor, they cannot take the place of the private investment community without changing away from a capitalist society (which it has been noted allows for the highest standard of living by far).

So I agree that usury should be (and is) illegal, but also discouraged. However, I disagree that money as a tool, should not make money. I think that a fair rate of return is not only, well fair, but also an economic necessity.

-Dave...
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From:jrising
Date:January 15th, 2007 08:34 pm (UTC)

Re: money (usury)

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I agree that loans are incredibly important, as is private investment in general, to the health of a capitalist economy. I object, however, to it as a *business model*. Up to a certain level of interest, loaning money is a lot like providing a service-- usury is when it crosses the line to being a mechanism for exploitation.

Loan and investment funds will still be readily available, if fair interest rates are allowed. Loan-providers should be allowed to charge interest to protect themselves from risk and to cover their expenses. But why is it fair that they charge enough additional interest so that they can expect to make zero-risk interest *on top of that*?
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From:sasseyfrass
Date:January 15th, 2007 09:26 pm (UTC)
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I agree that once they cross the line, usury is disturbing. However, I do believe that many loans and investments for high risk items would be very minimal if loan-providers couldn't charge as much as they do. Otherwise, what would be the incentive of dealing with difficult loans? It is very difficult drains your personnels energy to deal with late payments and defaulted loans.

-Dave...
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From:jducoeur
Date:January 16th, 2007 11:25 pm (UTC)
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I understand what you're saying, and from an airy philosophical viewpoint it makes sense. But it seems to me like you're assuming away the hard problems. In particular, who decides the appropriate risk-insurance level? And *how* do they decide that? The current system has a clear (if sometimes unsatisfying) answer: the market decides, and borrowers should take the lowest rate they can get. Your discussion seems to imply a single all-knowing entity that can figure out the appropriate rate, which feels unrealistic to me...
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From:conana
Date:January 18th, 2007 04:56 am (UTC)
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I've seen some suggestions of how institutions without monopoly can replace central legal oracles. I want to think about this more, since it is directly about when we trust central authority, and when we prefer private parties. But it seems as though you're questioning the calculation of rates, rather than the centralization. Doesn't every actuary try to do this anyway? I thought every insurance company was calculating expected profit against assumed risk.
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From:jducoeur
Date:January 18th, 2007 01:48 pm (UTC)
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Certainly true, but we don't base the whole legal system around those guesses, at least not individually. Those actuaries are set up against their counterparts in other companies, with guesses counterbalancing the *other* guys' guesses so that a rough consensus can emerge. Those who guess too high don't get any business; those who guess too low lose money overall. The competition forces them to keep evolving their understanding of what's plausible.

Really, that competition is the chief elegance of the market model (when it works right, and when people aren't cheating): it explicitly recognizes that no one has the right answer consistently, but that the market as a *whole* tends to achieve reasonably good guesses...
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From:jrising
Date:January 21st, 2007 08:49 pm (UTC)
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I keep wanting to reply to this, but I feel like I don't have a good enough understanding of economics. The market is pretty spectacular in many ways, but I distrust arguments based on the idea that the market settles on any of the rational stability points that you hear about in micro 101. There's no reason to ascribe intelligence to it as a whole, even if it is composed of intelligent actors, and (I think) no evidence for its reliability.

I am suggesting a huge shift in the market system, but not a new one. Publicly traded corporations are a fairly new invention-- how were we to know it would create a system where every aspect of our lives and environment would be exploited for profit?

I do think that a government institution could do a good job of assessing risk, and it could combine loans at non-usurious levels with opportunity-distribution programs. The result would be a market-wide lowering of expected returns on stock, but I don't consider that a bad thing.
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From:jducoeur
Date:January 21st, 2007 10:08 pm (UTC)
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Oh, the market certainly isn't intelligent, and I don't ascribe to it the magical powers that the more extreme Libertarians do. But it *does* tend to function pretty well at balancing concerns, provided that one is paying attention to possibilities of market failure and gently regulating against it.

I confess deep skepticism about the idea of a governmental regulator in this case. Among other things, it's a single point of failure, and that *always* leads to new, creative opportunities for corruption -- when there's only a single institution to bribe, it typically doesn't take more than a decade or two to do so. In this particular case, there's plenty of reason to do so in both directions, depending on how it gets structured. If the government is actually making the loans, then there is strong incentive to corrupt it towards below-reasonable rates, so that businesses can take overly risky chances with everyone else's money. If the government is simply setting rates, then the actual lenders have powerful incentive to corrupt it to raise those rates to unreasonable levels: it's essentially a government-mandated oligopoly, which always gets rather cozy. (This then gets buttressed by reasonable-sounding regulations to make sure that all lenders are "reputable", which locks in the market and prevents anyone else from getting into it.)

The thing is, you apparently trust the government, and I absolutely do not -- I see it as simply another institution that tends towards corruption just as much as the corporations do. That being the case, I strongly prefer a system where those powerful institutions are somewhat adversarial towards each other, and tend to keep each other in check. Giving either side too much control, or allowing them too cozy a relationship, tends to produce bad results for the populace...
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From:jrising
Date:January 23rd, 2007 09:01 pm (UTC)
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Those are good objections, and I hadn't thought much about them. I think there are more distributed ways to change the rules of the market game, but I need to mull over them a while.
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