Tuesday, July 12, 2011

Reply to Aquinas on usury

Before discussing Aquinas’ argument against usury, a brief recapitulation. My main thesis is that the scholastic complaint against ‘usury’ was unreasonable, and at best uninformed. This requires understanding what they did mean by ‘usury’, on which Aquinas’ argument in the previous post is very clear. Aquinas did not mean that usury was a form of unreasonable charge against a loan, such as administration costs, or simply very high charges over and above a ‘natural’ interest rate. He was not talking about any form of overcharging. He was talking about any form of charge for the use of money itself. Charging for the use of money is to sell the use of a thing whose use consists in its consumption, and is therefore like selling the same thing twice. It is rather like selling wine separately from the use of wine. It is a form of fraud, and is therefore wrong, he argues.

His argument rests on a mistake. Clearly the use of money is like the use of wine. We consume money by spending it. As Aristotle says “the proper and principal use of money is its consumption or alienation whereby it is sunk in exchange". Money is not like a house, which you can live in, nor a car, which you can drive. Its use consists in destroying it.

But the charge for a loan (meaning the ‘risk free charge’) is not a charge for the use. Rather, it is the difference between the value now of a sum of money to be used in the future, and its value then. Giving £95 to you now, in return of a payment of £100 in a year’s time is simply my purchasing something from you, namely the future £100. The £95 is a payment, not a loan. The loan is the two things together: the present payment, and the contract for a future payment. And the ‘charge’ of £5 is not a charge for the use of the £95, but rather the difference between the future value of the future £100, and its present value, which is exactly £95. Thus it is not a charge for use, and thus we are not selling the same thing twice. Rather, the borrower is selling something to me (the future £100) and I am purchasing it from him at its present value (which is £95). One sale, one purchase, which is how things should be.

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6 Comments:

Blogger David Brightly said...

An intriguing argument that neatly side-steps the scholastic objections. But does talk of the 'present value' and 'future value' of £100 make sense? We are used to talking in these terms in the presence of inflation, but let's assume a completely inflation-free economy. It seems to me that the only way that the future value of my £100 pounds could be £105 is if I can invest it risk-free at 5%. But this presupposes a well-developed financial system, which is something we are trying to understand. The explanation, I suspect, is circular.

12:00 pm  
Blogger Edward Ockham said...

>> It seems to me that the only way that the future value of my £100 pounds could be £105 is if I can invest it risk-free at 5%.

Well there is a distinction between future value to an individual, which will vary between individuals, and the implied future value of the whole market. Our starting point is time preference. Suppose zero inflation expectations, and start with a person who wants money now, and expects to get money in the future. If that person sets a low value on future money, he might value the future £100 at £80, say. So he would willingly sell the future £100 for only £80. Or he might set a high value, and would not accept less than £99. Conversely, the would-be purchaser of the future money (the ‘lender’) might set a low value, or a high value, on the future money. For just two of them, it will only work if the purchaser (lender) sets a higher value on the future money than the seller (borrower).

Now assume that there are many people willing to purchase future money from our borrower. He will go round from person to person to try and find the highest price. Even though he might be willing to accept only £80, he will still accept more than that if he can get it, for obvious reasons.

Finally, suppose that other people are trying to sell future money to willing purchasers. This will tend to drive down the current price of the future money. And so there are those who are trying to buy future money, and who are looking for a low price, and those who are trying to sell, and looking for a high price. Market theory suggests an equilibrium price will be reached.

>>But this presupposes a well-developed financial system, which is something we are trying to understand. The explanation, I suspect, is circular.

I don’t think so. The well-developed system means only that we can talk of ‘the’ equilibrium price for purchasing future money, i.e. ‘the’ risk free rate, rather than many different rates arising in a fragmented market.

Or putting your question another way, the only way that the future value of my £100 pounds could be £105 is if there is someone I can find who is willing to sell a future £105 for only £100.

1:04 pm  
Blogger David Brightly said...

>> Or putting your question another way, the only way that the future value of my £100 pounds could be £105 is if there is someone I can find who is willing to sell a future £105 for only £100.

Yes, I agree. It doesn't require a sophisticated financial system. That was too strong. But it does require the willingness of the parties to the contract, and this ultimately is what the preference concept rests on, not some objective time-dependent monetary value that would satisfy the scholastics.

I'd certainly accept your expanded account. But you have moved from talk of value to talk of price. What you are describing is a futures market in money, in which money itself is commoditised, and in doing so I suspect you will fall foul once again of scholastic notions of the 'proper' use of money.

3:06 pm  
Blogger Brandon said...

David is right about the contract/commodity difference here; it's what any Thomist responding to your argument will say, and why anyone accepting Aquinas's argument would regard your response as question-begging. I myself don't have any problem with your argument (but see my second paragraph), but it's important to see that not regarding it as question-begging requires already having accepted a very specific account and understanding of the exchange involved, and one that is not immediately obvious, however much we may take it for granted now.

It's worth keeping in mind, though, how extraordinarily limited your result is. Thomas Aquinas is significant for being the early reference point of the discussion -- not quite the first to discuss the topic, but the first to discuss it in a clear and systematic way that later thinkers could take as a starting point. He is also the single most conservative scholastic on this subject: no other major scholastic contributor to the discussion takes the hard line Aquinas does, although they all attack usury -- and I really do mean no other; I have never come across any scholastic after Aquinas who thinks it as cut and dried as he does. To address "the scholastic complaint against ‘usury’" requires addressing not Aquinas but the School of Salamanca -- Azpilcueta and Molina, primarily -- and possibly the Renaissance banking saints, like Bernardino of Siena and Antonino of Florence. It's they who actually sum up the scholastic complaint against usury, taking into account the whole set of arguments made and sorting them according to how they needed to be modified or qualified and taking into account the question of time preference; Aquinas just standardized some of the basic vocabulary and early problems.

3:35 am  
Blogger Edward Ockham said...

>>David is right about the contract/commodity difference here; it's what any Thomist responding to your argument will say, and why anyone accepting Aquinas's argument would regard your response as question-begging

I was simply responding to the Aristotelian argument that Thomas invokes. The argument presumes that interest (properly so-called) is a rental on the use of money, which it is not. Period.

On what the other scholastics say, you haven't said what they said.

1:05 pm  
Blogger Edward Ockham said...

>>although they all attack usury

I don't know what is meant by 'usury' here. If it means overcharging, I am against it. But the notion of overcharging requires a sense of what the 'correct' charge is. See my most recent post on annuity valuation.

1:07 pm  

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