Wednesday, February 24, 2016

A Review of Usury - Any Interest On Any Amount For any Duration

What Islamic scholars I have tried to engage are generally reticent for whatever reason, contrary to my experience of Moslem hospitality in general.  Perhaps the topic is too hot.

But I can engage Moslem scholarship, and I find a most excellent article here.
The rationale behind the prohibition of interest-based transaction is not beyond the common wisdom. If the funds are borrowed for consumption purposes, then charging of interest is clearly a sign of moral bankruptcy and inhuman behavior. In case the funds are provided for investment purposes, even then the prohibition is rational. It is obvious that such transactions involve a one-sided traffic. The entire burden of risk and uncertainty, being the norm of trade and business, has to be born by the debtor/investor. On the other hand, the creditor/saver is guarantied for a sure return.
I recommend this article for being succinct and comprehensive.

Although the rationale is not beyond common wisdom, there are also reasons beyond common wisdom to abjure usury, as I will note below.

Borrowing money to consume is to stay on a path of diminishing returns.  If you need to borrow money to live, then your life is not ordered to your best options.  Truly there are circumstances which are short term, or long term due to injustice, but to take a loan for consumption is to ignore the signal that something is wrong.  There is the term "deserving poor" in which a lender gives a hand to someone who has been in error and is reforming.  Charging interest distorts this person's recovery by making the lender's demands absolute while the borrower's recovery is relative.

Funds at usury are always available, for there will always be someone who can get more out of your life than you are willing to give, if only they can trap you.  Usury is a trap.  To refuse funds at usury certainly narrows the options for solving a problem, but it is within those very narrow options where one's unique talents are discovered, and the efforts at recovery are made on a most solid basis: you find where you are not only most productive, but where you are the best at what you do.  Usurious loans give a false sense of achievement (I got the loan approved!) versus the grueling trial and error of finding what talent you have which the world will reward.

Anyone making a loan ought to do so limited in scope to an act of charity.  As an act of charity, not only is there the loan, there is the opportunity of offering compassion in the form of advice from one who is doing well to another who is doing poorly.  If the loan cannot be paid back, there is even more opportunity for a charitable act, and that is to forgive the loan.  And non-forgiveness of a loan is a most mild rebuke to a borrower.  The only sanction is to not lend more.  The errant borrower is then obliged to go find another benefactor, from whom he will benefit from another round of instruction and bromide.  He who lent without being any help is improved by the experience that his lending in this instance did no good.

If it is easier to borrow than produce, few people will change their habits in order to be more productive.  Productivity is always measured to the degree you serve others.   "Welfare" is taking borrowed credit, credit someone else will have to pay at some time.  The state steps in and acts as usurer trapping the poor on one hand and obliging future generations with no say on the other hand to make good the loan.  For society to offer welfare is to lure incalculable potential into a dead-end, and leave the tab with lenders who have no say.  As Dorothy Day said, it is amazing hoe much you can get in the way of luxury if you just do without the necessities.  Simply compare the results of welfare when it was the job of mediating institutions with welfare as a state function, and the argument is done.

As to usury on a business loan, first we must follow Noonan in recalling all loans are an act of charity, and a business loan is a chimera.  The article on riba quoted above is correct, but to add to it, anytime "credit" is cheaper and easier up front than other means of finance, the moral hazard of taking easy or cheap or both in the form of credit will trip up the entrepreneur more often than not, and in any event, eventually.

Loans at interest are simply unnecessary to an economy.  The usury-free range of options are sufficient to the task of a prosperous economy.  And here again, the borrower's absolute needs become relative to the lender's desires.  Serving the customer becomes secondary to paying the usurer, this misallocating resources in the enterprise.

The article goes on to eliminate the arguments for usury.  I'll only add the pro-usury arguments depend on terms that upon which few agree, thus winning by obfuscation. Money, credit, profit, rent, capital,  are all terms upon which among economists there is disagreement, even within a given school of thought. Even if within a school there is agreement on the definition of some terms, there will be disagreement on another, making conclusive argument impossible. Since no one has the others understanding of the terms in use, it is not possible to make an argument one way or another.  The practice of usury remains like a evil redoubt, unassailable for a lack of martialing reason to the assault..
Apart from the major differences in sale and usury contracts, and in the nature and functions of physical and financial capital, Islam prohibited the transactions involving interest on moral and social grounds. This is because it develops miserliness, greed and a selfish attitude in the individuals, and destroys the high virtues of kindness, sympathy, help and mutual regard in the society. It create a tendency among the people to earn wealth by hooks or by crooks.... It diverts the flow of investment to the projects offering a high rate of interest irrespective of whether or not these are socially desirable.
These are the rationales not immediately apparent.  Usury frustrates the creative and unitive aspect of commerce, as noted in this paragraph in the forms of misallocation and malinvestment.  This aspect is little appreciated must must be highlighted.
If one steps back and observes, usury is a relatively small part of the economy, that is to say the vast majority of commerce is usury free, with equities and vendor finance taking up the lions share of commerce.  This proves usury is unnecessary.  At the same time, the destructive elements in the economy can be traced to the relatively small portion of the economy that is usury based.  Like an otherwise healthy adult, the body economic can become quite ill over a tiny virus entering the system.

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Anonymous said...

"Loans at interest are simply unnecessary to an economy. The usury-free range of options are sufficient to the task of a prosperous economy."

If there were no loans with interest, how would people buy big, expensive things like cars and houses? What would take the place of home mortgage loans?

John Wiley Spiers said...

The misallocation and malinvestment precipitated by usury makes cars and houses big and expensive. People once paid cash for cars, or were given time payments with no interest. Why buy a house at all, when you can rent for the 20 years you raise a family? Mortgage deduction? Distorts the market.

We no longer have home mortgage loans. We now have deeds of trust. Mortgages were assumable as recently as the 1980s, in which you could just pass a home and its residual payments to someone else, no bank or real estate agent involved.

You need to study how the world was a mere 40 years ago, and see how destructive and unnecessary our current regime is.


Anonymous said...

"Why buy a house at all, when you can rent for the 20 years you raise a family?"


Are you saying it is better to rent than buy a home? I still like having a nice home.

John Wiley Spiers said...

You cannot rent a nice home? Most of the developed world people rent instead of buy....