From Usury Condemned (1643) by John Blaxton
At a seminar yesterday the speaker described his project as one of discovering the conditions for an economy without interest on loans. In other words, what would the financial system of the ideal Islamic state be like? This raised a number of issues for me, which there wasn’t enough time to pursue. I’m wondering if someone conversant in the topic can help.
What’s the ethical basis for a prohibition on usury? Obviously there is nothing uniquely Islamic about it. The doctrine was, as we all know, espoused by Aristotle and subsequently by the scholastics, and was the basis for anti-usury laws in Christendom until about the 16th Century. The original ethical basis is not hard to imagine. Usurers generally took advantage of a monopoly position as money owners and charged exploitative rates to poor people, often sending them to ruin. It runs in the face of our instinctive revulsion to seeing a man kicked when he’s down.
But it seems that Aristotle’s philosophical argument against usury was that that interest is unearned income. However, as Alfred Marshall pointed out, there is no essential difference in this respect between leasing someone a horse and lending him the money to buy a horse. In both cases income is earned by virtue of owning property. Marshall thought the anti-usury doctrine was essentially the same as the Marxist doctrine of surplus value.
As it happens, Marshall rejected both doctrines on the same basis — that interest is the price of a specific scare factor of production, namely ‘waiting’. One might well reject this argument as being no less metaphysical than the theory of surplus value it seeks to repudiate; but the point is, a coherent case against usury should be a case against interest income in general — that is, in Marshall’s sense of ‘net interest’, which is the price of capital (as opposed to gross interest, which includes a risk premium) — whether it’s earned on money capital or physical capital. In short, if you think interest is immoral, you should advocate collective ownership of property.
But my seminar speaker was not proposing the abolition of capitalism, of property income in general, or of interest income in Marshall’s sense. He has no objection to capitalist production, profits or lending, so long as the income is in the form of some kind of profit sharing arrangement (equity, I believe this called) rather than interest. In other words, the prohibition of usury boils down to an insistence that risk be shared to some degree between capital owner and entrepreneur. Loans should be contingent.
Now I’m all for equity finance, as well as income-contingent loans for students, farmers, and various other groups that society might want to shelter from risk either because their activities generate externalities, or as a type of social security.
However, it’s one thing for governments to ensure that people who want to engage in equity financing have opportunities to do so, or indeed to provide contingent loans to certain categories of people; but quite another thing to prohibit consenting adults from borrowing and lending at interest is they so wish. If entrepreneur A has a discovered a way to spin straw into gold, but lacks money to build the machine, and if money owner B is willing to finance it but cannot afford to bear any risk, could there really be a coherent ethical reason to prohibit A from lending to B?
It’s not that I have any fundamental antagonism to nanny-statist interventions where a case can be made that they have a social benefit. I’ll cheer all day long for mandatory bicycle helmets and taxes on nicotine; and, while I’m inclined to legalise drugs, I can at least acknowledge that a coherent argument exists for outlawing them.
I can also see the case for regulating loan sharks and prohibiting excessive leverage if it has the potential to cause system-wide dislocation. I’d also be happy to see an increase in the wage share of global income at the expense of the rentier, until the ‘reward for waiting’ becomes negligible — but this applies, as I’ve already argued, to interest income in general, including imputed interest, and not just to interest on lending.
Now, I stated that the enemies of usury don’t object to the idea of profiting from capital in itself, but I need to qualify that because, when it comes to consumer credit, evidently it is the profit aspect that worries them. (In fact this is a dubious distinction in the first place: you call on credit when the sum of your consumption and your physical investment exceeds your income, so if you are investing at all — and this includes increasing equity in your own house — it’s meaningless to say that the credit finances your consumption rather than your investment.)
According to one Michael Greaney,
Under Aristotelian philosophy (as well as a number of other ethical systems), when someone lends money for consumption purposes, the lender is not due anything back from the borrower except what was borrowed. This is because consumption does not generate a profit; it does not produce a stream of income.
‘This is strict justice’, he maintains. But that’s an arid assertion if ever there was one. One could just as plausibly insist that ‘strict justice’ dictates that a borrower must restore the lender to the level of wealth he or she would have experienced but for the loan. Of course social justice might also demand that the rich subsidise the poor, and waiving interest is one way of doing that, but there are a million other ways to redistribute income from rich to poor, and none of these is ever advocated in the name of anything called ‘strict justice’.
However, it turns out that consumer credit is based not on risk-sharing, but rather on sleight of hand. On the same website it’s explained with the example of a car loan:
[The] bank directly purchases the car from the dealer by its own behalf, thus you will not be liable to pay any penny on the name of any installment or late payment till the delivery of the car. It will make no difference whether you already signed on the agreement for a car or not. After purchasing the car, the Islamic bank will fix a monthly rent of the car and you will be allowed to use that car for a time period as best suit to you by paying that rent. After that, it will be on your choice to purchase the car on a very low market price from the bank or once again handover that to bank.
But that’s just plain old hire-purchase: if the ‘rent’ didn’t include interest implicitly, the bank would be a charity rather then a business.
Actually, when it comes to consumer credit, I would have thought the risk-sharing principle would come into play again. Interest on consumption loans, and perhaps repayment of principal too, would for consistency be contingent on the borrower’s income. A big bank would be able to spread the risk. It wouldn’t be very efficient in allocative terms because good creditors, unwilling to subsidise risky creditors, might be driven out of the market (adverse selection, we call this), bit on the whole such a scheme seems feasible.
Again, I see no reason why this kind of option shouldn’t be available for those who find it suits their needs; and if there is a case for government provision or subsidy of such schemes, in terms of market failure or income distribution, I’d wholeheartedly support it. But criminalising lending at interest is another story altogether.
If an anti-usury law cannot be justified in terms of public reason, then it is just one more theocratic imposition, like a ban on shaving or eating pork, and should be resisted by all people with liberal values. No doubt my comprehension of the whole issue is very shallow and uninformed, but I’d have to say that the defense of usury seems pretty cut and dried to me. My question is: is there some non-theological, ethical basis for prohibiting usury that I’ve overlooked entirely?