A Remark on Productive Loans

Everybody knows usury is a sin just as they realize that the post-Reformation order and the rise of economic liberalism conspired to make usury a part of everyday life in the West. Why charging illicit interest on money is sinful is nicely summarized by Fr. Walter Farrell in the third volume of his Companion to the Summa:

Wherever usury is found it is wrong; and its evil is manifest. It is absurdly simple to understand that to charge a man twice for the same thing is always unjust; yet that is precisely what usury does, it sells the same thing twice. The trick is possible only when the thing sold or loaned is consumed in its very first use, things like wine or sandwiches, or money. When we demand, over and above the return of the original sum of money loaned, an added amount for the use of the money, our act is the same as selling a man a glass of wine and then charging him for the privilege of drinking it. If we keep this simple statement of usury in mind, it will not be difficult to understand the absolutely necessary distinction between usury and legitimate interest. The latter is charged not for the mere use of the money as in usury, but on some extrinsic title.

Notice here that Fr. Farrell makes a distinction between usury and legitimate interest, that is, interest that is charge “not for the mere use of money…but on some extrinsic title.” Perhaps the two easiest examples of extrinsic title that come to mind include high-risk loans and loans affected by inflation. With respect to high-risk loans, the Byzantine Empire generally allowed for the charging of interest, particularly for loans regarding the transport of goods by sea (a risky enterprise back in the day). The charging of interest to cover inflation also makes sense and, for the most part, is uncontroversial. Short-term loans for modest sums that are paid back relatively quickly pose no apparent risk and so, historically, have not been granted an exemption to the general rule prohibiting the charging of interest.

What about so-called “productive loans,” which Hilaire Belloc and others have discussed? Productive loans are those that can assist a person in his work, such loaning someone $10,000 in startup money to open an oil-change shop or a bakery. The idea that Belloc advances is that it is legitimate to charge interest (or, rather, receive a payout of dividends) should the business turn a profit. However, should the business not turn a profit or even fail, then the person making the loan would have no additional claim beyond the original sum loaned. A more radical iteration of this approach is that should the business fail, then there is no right to a return on the money loaned. In other words, the investor shares in the risk of the business failing, but also has a right to proportional proceeds over and above the amount loaned should the business succeed.

Here is how Belloc describes productive loans in his work, The Crisis of Civilization.

A man comes to me and says: “I have found upon my property a vein of ore, but it lies deep, so that I shall require a considerable capital—say $100,000—to extract the valuable metal. That metal, when it shall have been extracted, will be worth at least $200,000. But I cannot obtain this advantage until I purchase the instruments for developing the mine and have hired the labor required to work it. Lend me the $100,000 necessary for the operation.” I answer him: “If I do so, you must give me a share in the profit, say half of the total.” He agrees, that without my capital he could not develop the mine; without his ore my capital would not be used. The combination of the two is productive wealth, and we share that wealth. That is a perfectly moral transaction, even if the profit be one of 100 percent or 1000 percent over the original investment; so that if, with my stipulated half profit, I make 50 percent or 500 percent on my original loan, I am in no way to blame. The increment is not properly speaking interest on a loan of money: it is a share of real wealth.

I make mention of this distinction here because it is a common objection of economic liberals that Catholic social teaching and the systems that have been devised to conform with it would not be productive without usurious lending. In their minds, “the market” demands usurious lending as the only mechanism by which businesses can start and grow; innovations will occur; and the material needs of society shall be met. At the same time there are rightly concerned souls who fear that any lending many run afoul of the Church’s classic and immutable stance against usury. That is not necessarily the case. Loan agreements and, indeed, the general laws of a society can be crafted in such a way as to control the types of interest being charged and the circumstances under which it may be permissible.

Strain on the Free Market

Over at First Things, my friend Andrew Strain has a fresh piece up, “Free Markets and Unicorns.” Strain is skeptical of the neoliberal narrative that “the market is a self-regulating mechanism sufficient unto itself, a system naturally suited to achieve the best outcomes overall.” In other words, free markets, according to some contemporary strands of economic ideology, maximize social welfare while public regulation, what with its risk of being captured by special interests, impedes such gains. As Strain, leaning on David Ciepley, points out, the market as we see it today relies on both private initiative and public cooperation with those initiatives. For instance, corporations are, today, considered a “natural” part of the market, though their makeup, character, and liability for potential harms they may cause are calibrated by public law. The entire post is well worth reading.

While I agree with Strain’s position, I can already see the rebuttals on the horizon. Those who lean libertarian will argue that it is unnecessary for there to be public regulation of corporations; corporations should always be the outcome of private initiative secured by contract. To the extent corporations do wrong, those wrongs can and ought to be addressed by private law, specifically tort law or, in certain instances, contract law. For example, a corporation that pollutes a river which causes X amount of damage to homes and farms down that river can be held accountable under a theory of strict liability; if they break it, they buy it. Similarly, if a corporation defrauds shareholders or fails to deliver on a good or service it has contractually obligated itself to, then the terms of the respective contract will dictate the damages to be awarded.

This is not a new position. In one of his early books, Simple Rules for a Complex World, Richard Epstein—arguably the premiere libertarian legal theorist of the last 50 years—sought to dispose of the complex web of public regulatory measures in favor of a comparatively simpler system of private law governed by tort, contract, and property. Whether they know it or not, many libertarians (and neoliberals) hold fast to Epstein’s thesis when pushing back against public regulation; they’re just not as articulate as Epstein is. What Epstein and his epigones miss, however, is that a system of private law, particularly in common-law countries, is not neutral. It is informed by decades, if not centuries, of assumptions and ideologies that tend to shift with the development (or distortion) of social norms. For Epstein’s libertarian schema of private law to work, the freedom of contract must be nearly absolute (coercion and fraud don’t count), as are property rights. But why make either absolute? A pre-legal argument has to be constructed for that, and too often the argument is assumed rather than made.

None of this detracts from Strain’s position, of course. Perhaps in a subsequent piece he will meet these and other lines of criticism that are sure to come on the heels of his piece. Make no mistake about it. Despite the radical shifts in our understanding of the origins of “economic science,” the unpredictability and volatility of global markets, radical shifts in attitude around the world toward capitalism, and the unnerving realization that neoliberalism has failed to unite the world and cease conflict through the establishment of an international marketplace fueled by free trade, neoliberal ideology, in both its moderate and radical forms, remains alive and well.

A Remark on Economics/Political Economy

The Josias recently offered up a fresh translation of Pope Pius XII’s 1941 Pentecost radio address which, inter alia, commemorates the 50th anniversary of Leo XIII’s landmark social encyclical, Rerum Novarum. Patrick Smith, who had a hand in its publication, offers up some thoughts on the address over at his web-log while highlighting Pius XII’s reaffirmation of the Catholic Church’s competence to teach when the social and moral order intersect. That is distinct from teaching on purely practical matters, such as how a society ought to calibrate its competition (antitrust) penalties or design social safety nets. While popes—and indeed the episcopate as a whole—can weigh-in with suggestions, the faithful are not necessarily bound to follow them.

With this noted, it is important to highlight the fact that a great deal of confusion surrounds statements such as, “The Church does/does not have the competence to speak on economics.” Why? Because “economics,” in the widespread understanding, refers to a particular academic discipline which is often regarded as part of the “social sciences.” Economics, in this sense, refers to both a theoretical and practical discipline which, like so many academic disciplines, remains fractured into a series of “schools,” many of which disagree with each other on questions ranging from methodology to normativity. Those wishing to set aside the Church’s social magisterium when it conflicts with the tenets of libertarian or neoliberal ideology are, in a certain sense, correct when they say that the Church has no competence to speak on economics when “economics” is understood as “economic science.” (More on that below.) This is an easy parry, and one that needs to be addressed.

One way to do that is for Catholics who wish to defend the Church’s authentic social magisterium to move away from using the expression “economics” as commonly understood in favor of an older—and more defensible—expression, “political economy,” which does a better job of capturing the policy aspect of economics. Economics is not, as many economists would have it, a “value neutral” science; behind every economic theory or research question lies pre-scientific value judgments over what is to be studied, why, and how. Anthropological assumptions, which have nothing to do with economics per se, animate most branches of the economics discipline, and too often those assumptions are directly at odds with what revelation and natural reason tell us about the human person. Today, however, the economics discipline has cloaked itself in the garb of the physical sciences in order to give itself a prestige which it may not deserve. As the old joke goes, economists love to say that what they do is similar to what physicists and biologists do; but physicists and biologists would never dare say that what they do is similar to what an economist does.

The Concept of Progress

The concept of progress, i.e., an improvement or completion (in modern jargon, a rationalization) became dominant in the eighteenth century, in an age of humanitarian-moral belief. Accordingly, progress meant above all progress in culture, self-determination, and education: moral perfection. In an age of economic or technical thinking, it is self-evident that progress is economic or technical progress. To the extent that anyone is still interested in humanitarian-moral progress, it appears as a byproduct of economic progress. If a domain of thought becomes central, then the problems of other domains are solved in terms of the central domain – they are considered secondary problems, whose solution follows as a matter of course only if the problems of the central domain are solved.

– Carl Schmitt, The Concept of the Political 

In an unintentional manner, Schmitt summarizes well not just the concept of progress generally, but — unintentionally — the ethos of think-tanks such as The Mises Institute, The Cato Institute, and even the Catholic-backed Acton Institute. It is the ethos of the so-called “Washington Consensus” that emerged after 1989, the consensus which gave us the World Trade Organization, NAFTA, and a global investment regime that erodes national sovereignty in the name of economic improvement. “Spread the wealth” via “free trade” and everything will fall into place: peace, security, stability, “human rights,” etc. How quickly has that dream, that myth, unraveled in the wake of the terrible realization that human souls cannot be placated with “stuff” and a life infused with meaning, even demonic meaning, has more power to move mountains than the wealth of every global elite combined.