Usury: Wealth Without Work and Why it Matters

The following is a talk I will give later this week to the American Monetary Institute conference in Chicago.

The great problem a theologian has in discussing usury is that economists regard it as a moral term and therefore exclude it from scientific discourse. In this view, ethics and economics occupy separate ontological realms, and between the two worlds, there can be no real connection or communication. To them, it is positive science that remains the “master discourse,” the true and only description of reality, while ethics occupies the shadowy world of “what ought to be” rather than the real world of “what is.” Ethics and economics, according to economists, can never meet and can never enlighten each other. The question, as the economists see it, is one of science: they are happy to wear the mantle of “positive” science, and leave the “normative” talk to priests, shamans, or whoever else wants the task, just so long as the priests and shamans will leave them alone.

The problem with this view is that it is not scientific. To be precise, the very distinction between a “normative” and “positive” science betrays a misunderstanding of the scientific enterprise in general, and the work of economists in particular. For clearly, economics is a humane science, dependent on the other humane sciences for the very definition of its starting terms; to cast off the humane sciences is to abandon any possibility of being scientific.

In this paper, I will attempt three tasks. The first is to explicate the relationship between normative and positive science and to annihilate the difference between them. The second task is to show the relationship between ethics and economics, or more precisely, between equity and equilibrium. The third task is to show how usury destroys equity, and therefore makes equilibrium impossible. But more importantly, I will attempt to demonstrate that there can be no real quarrel between the moral order and the economic one; to posit such a quarrel merely means that one has either misunderstood ethics, or misunderstood economics.

Science, Normative and Positive

Some wag somewhere has remarked that economists suffer from “physics envy.” One could certainly make that charge against W. S. Jevons (1835-1882), one of the founders of marginal economics, when he wrote that a “perfect system of statistics … is the only … obstacle in the way of making economics an exact science”; once the statistics have been gathered, the generalization of laws from them “will render economics a science as exact as many of the physical sciences.”¹ More than a century has passed since Jevons wrote these words, and in that time there has been a growth of vast bureaucracies, both public and private, devoted to establishing this “perfect system” of statistics. Today, we have access not only to vast amounts of statistics, but to computing power unimaginable in Jevons’ day; still, the models, worked out in great precision and computed on engines of vast power, seem to lack any predictive reliability whatsoever.² Despite these failures, economic orthodoxy clings to the notion of itself as a positive science.

In light of these failures, we can ask if economics really is a positive science. But let me suggest that the question is meaningless. Every science, insofar as it really is a science, is both positive and normative. Every science, insofar as it is a science, must be “normalized” to some criteria of truth. These criteria will arise from two sources, internal and external. The internal criteria involve a science’s proper subject matter and methodology. But such internal criteria alone are insufficient to found any science as a science. In addition, there must be external criteria of truth, and these truths can only come from one or more higher sciences. In the absence of such an external check, the science will merely be circular, dependent on nothing but itself and unconnected with the hierarchy of truth. Thus, for example, biology is responsible to chemistry, chemistry to physics, physics to mathematics and metaphysics. No biologist can violate the laws of chemistry, and no chemist can reach a conclusion contrary to physics. Thus every science is responsible to its own methodology (and therefore “positive”) and to the higher sciences (and therefore “normative”). A scientist’s obligation to be faithful to his proper method does not relieve him of his obligation to higher truths.

It is necessary, then, to determine what the higher sciences are for economics. Now, the physical sciences terminate in physics, but the humane sciences terminate in some view of anthropology derived ultimately from philosophy and theology, with stops along the way for psychology and sociology. It would seem to be self evident that a complete view of man would involve these sciences, yet this view is not generally accepted by economists. How is it possible that a humane science can cut itself off from these indispensable sources of knowledge about humans? The answer lies in the fact that neoclassical and Austrian economists accept as a purely economic truth that which is, in fact, a purely philosophic stance, namely that of Jeremy Bentham’s utilitarianism. Mises's Human Action, for example, merely renames Bentham's hedonistic thesis Praxeology, and claims that is has the same epistemological status as do logic and mathematics, “unconditionally valid for all beings endowed with the logical structure of the human mind.”³ Nevertheless, some of us, clinging to our illogically structured minds, have sought another basis for the understanding of human relationships.

Justice and Economics

If what has been said so far is true, then economics will be critically dependent on certain terms that are beyond the competence of economists to define. Terms like “freedom” (as in “free” markets) or “liberty” or “society” or even “man” are critical to economics, but their precise definition depends on other sciences. But above all the critical terms in economics, the most important is justice. This is because economics is the science that deals with social provisioning, with those human relationships necessary to the material sustenance and continuation of the social order. And the virtue that governs all human relationships is justice, or at least it is according to Aristotle and all the Scholastic thinkers who followed in his wake.

For Aristotle, justice is not just a part of virtue, but “virtue entire, nor is the contrary injustice a part of vice, but vice entire”.⁴ Justice underlies all the virtues and governs all relations of man to man, man to society, and man to himself. It is within this relationship of man to man, that is, within justice, that Aristotle locates economics. He presents a sophisticated analysis that includes a demand function, a distinction between use and exchange values, the function of money as the medium between value and demand, and usury, among other things.

Aristotle discusses justice of two kinds: distributive and corrective. Distributive justice deals with how society distributes its “common goods.” This refers to the common goods of a state, a firm, a partnership, or any cooperative enterprise. For Aristotle, these distributions are proportional to one's contributions. However, different contributions can be valued in different ways. For example, how does one measure the relative contribution to production of, say, the janitor and the engineer? For Aristotle, this is a cultural question, “for democrats identify it with the status of freeman, supporters of oligarchy with wealth (or with noble birth), and supporters of aristocracy with excellence.”⁵

Corrective justice,⁶ on the other hand, deals with “justice in exchange”; that is with transactions between individuals. In this case, justice consists in exchanging equal values, in “having an equal amount before and after the transaction.”⁷ The problem is how to determine what values are equal when dealing with dissimilar products, which is nearly always the case. To use Aristotle’s example, how many pairs of shoes are equal to one house? The only way to know this is by “need,” which many economists understand as the demand function, mediated by money. Thus the demand for houses and shoes can be compared by looking at their prices and the two can be equated in terms of money. Money, however, is a social convention: “this is why it has the name money (nomisma)—because it exists not by nature but by law (nomos).”⁸ Thus the requirement for equality in exchange comes from the natural law, but the method of implementing it is legal or conventional.

It is important to note that distributive justice is a theory of production, and corrective justice a theory of exchange, and hence these are two separate parts of a complete theory. Under distributive justice, what one gets is proportional to what one gives; one's wealth is related to one's work. The Philosopher gives us the following model of an economy: the cobbler receives a number of shoes proportional to his contribution to the production process, while the carpenter receives a certain number of tables and chairs. This is distributive justice. Since neither needs that many shoes or chairs, they then exchange between themselves to correct the imbalance. This is corrective justice. Of course, cobblers and carpenters are paid not with actual shoes and chairs, but with money. Nevertheless, the corrective and distributive principles remain the same.

Up until the 15th century, the unity of distributive and corrective justice was recognized both implicitly and explicitly; economics was essentially a virtuous enterprise. However, in the 16th century, as new forms of ownership and production began to take hold, a more individualistic approach to economics gradually developed. The ethical framework of medieval economics came under attack, but there was little to replace it. Or rather, what sought to replace it was a new concept which preached quite openly that “greed is good.” This idea was most famously expressed in Bernard Mandeville’s The Fable of the Bees: or Private Vices, Publick Benefits (1724) “in which he put forth the seemingly strange paradox that the vices most despised in the older moral code…would result in the greatest public good.”⁹ The locus of economics shifted from the virtuous to the vicious, and it is Mandeville, and not Smith, who is the true founder of modern economics.

In The Wealth of Nations, Adam Smith attempts to include both kinds of justice, but they are disconnected from each other. Smith's “labor theory of value” is about production, and it is inherently a theory of distributive justice, since production is always a social process. The so-called “invisible hand” theory, however, is about exchanges between individuals, and hence falls under corrective justice. Smith could never join the two halves of the theory into a coherent whole. So it is no surprise that after Smith, economic theory bifurcates into two contending traditions, the labor theorists and the utilitarians, each one owing allegiance to a different form of justice. Neither side could offer a complete description of the economic situation, try as they might.

This impasse was broken by the “marginalist revolution,” by which returns to labor and capital were (in theory) priced at their “marginal” contributions to production, and commodity prices driven to the cost of production. The magic by which productivity and price were to be equated was free bargaining. Both worker and capitalist were free to accept or reject any contract offered. By this means, and over time, returns to both capital and labor would be normalized to each other, that is, there would be neither great wealth nor great poverty, prices would be driven to costs, and economic rents eliminated. Therefore, the economy could achieve equilibrium by a pure system of exchanges without recourse to distributive justice; contractual (corrective) justice alone could solve all economic problems. The messy cultural problems of distributive justice could be eliminated entirely, and economics placed on a mathematical basis, thus becoming a “true” science.

The problem with this theory, however, had already been pointed out by Adam Smith a century before the theory was advanced; namely that contracts do not arbitrate productivity, they arbitrate power. Most workers cannot withhold their labor for as much as a month, and few could hold out for a year. On the other hand, the “masters” (as Smith called them) could easily survive for years on their wealth without employing a single hand. Therefore, the capitalist will always have an inherent advantage over the worker, and the wage contract will reflect this advantage, unless something is done to address the imbalance of power between them.¹⁰ That is to say, unless there is some prior institution of distributive justice, corrective justice will be insufficient to relate wages to productivity.

Equity and Equilibrium

There is one simple principle that must apply in any economic theory: in order for there to be economic equilibrium, what one takes out of the economy must be equivalent to what one puts in. That is to say, work and wealth must be equated. Under such conditions, equilibrium is a trivial problem; absent such conditions, equilibrium is impossible. Now, equity need not be perfect because equilibrium need not be perfect. Nevertheless, if there is not a general balance of supply and demand, if there is not a general expectation that markets can be cleared at a price sufficient to cover the costs of production, the economy will grind to a halt. Investors will not invest and wages will be too low to clear the markets. Try as we might, we simply cannot get away from the Aristotelian requirement of distributive justice.

The most obvious economic truth in the world is that if there is wealth without work, then there most also be work without wealth. If someone gets more than he gives, someone else must give more than he gets. It is quite true that no value theory can fix with mathematical precision the relative values of giving and getting. Yet, reasonable judgments may be made, and each theory provides a criterion for judgment, namely that profit and wages are normalized to each other. This means that if there is a high degree of social inequality, then someone must be getting more than he gives, and the economy is out of balance.

Non-Economic Equilibrium

But no society can long tolerate such disequilibrium conditions. Lacking a principle of distributive justice, we must use non-economic means to balance the economy. The major non-economic means of restoring equilibrium are charity, welfare and government spending, and consumer credit, that is, usury. Each of these methods transfers purchasing power from one group, which presumably has an excess, to another which has a deficit. The first method, charity, will always be necessary to some degree because no economic system can be perfect.

The second non-economic means is welfare and government spending in general. By these means, governments seek to re-establish equilibrium conditions either by redistributing incomes or by increasing spending. And for a good while, this method worked fairly well. However, in this system, distributive justice takes the form of the less efficient redistributive bureaucracy.

But for some time now, government redistributions have been insufficient and the economy has depended chiefly on the third method, usury or consumer credit. This is the plastic economy, an economy based on credit cards. And to the extent than an economy depends on consumer credit, it is, quite literally, a house of cards, and will be as unstable as those structures usually are. Of course, usury merely delays the problem, postpones the crisis to a future period; clearly, a borrowed dollar used to increase demand today must decrease demand by that same dollar tomorrow—plus interest. This necessitates more borrowing, and eventually, the system falls of its own weight, as credit is extended to an increasingly weakened consumer, and a credit crisis results. The “stability” conferred on an economy by usury is illusory and temporary.

Non-economic equilibrium provides us with a measure of just how well an economy is doing in economic terms. If the economy has a high dependence on non-economic means, we may assume that there are serious problems in the economy itself.

Usury: Wealth Without Work

We are now in a position to make a judgment about usury. The criterion for this judgment will be whether usury adds anything to the economy, or whether it is an example of wealth without work. If the former, then it is a proper part of economic order; if the latter, it destroys economic order. Note here that the moral judgment and the economic judgment are identical, however one judges the case. There are not two separate ontological realms, but only one truth to which all sciences must relate. Before we can make our judgment on usury, a few comments on money are in order.

Money is a marvelous thing. Money directs the operation of an economy. There can be land to work, hands to work on it, and tools with which to work it, but without money, these will never get together, or will do so only in a very primitive manner. But although money is a marvelous thing, there is some dispute about just what kind of thing money is. For some it is a commodity, for others a store of value, and still others, a mere medium of exchange. But without going into these arguments, one thing we can say about money is that it is an accounting system.

If, in doing a day's work, I add, say, $100 to the stock of goods and services available to to the public, it is important that I get a credit for $100, credit which gives me the right to take an equal amount out of the said stock of goods and services. This credit can be in the form of gold coins, little slips of paper, or electronic bits roaming around cyberspace. In the latter case, no currency of any kind is required, and there need never be any reason for me to convert my electronic credits into actual slips of paper or metallic coins. The computer money is independent of any particular physical representation. I do a day's work and my account gets credited for that work; I go shopping and my account gets debited. The currency I carry, if I happen to carry any, is simply the credits in visible form, and in exchanging the visible credits for tangible goods, I surrender them and thereby debit my own account and credit the account of whomever I give the money to.

Once we grasp money as an accounting system, we understand immediately why any medium will do, why tally sticks work as well (if not better) than gold coins: the tally stick can be created whenever a new product is created, and marked whenever it is sold, over whatever period of time it takes to pay for the product. One need not wait on the mint or the bank to supply one with the visible form of the credits. Either the tally stick or the electronic bits can be supplied at virtually no cost. Money can be called into being simply by the production of salable products. Further, this accounting system exactly matches a proper economy: work adds both tangible wealth (real products and services) and the accounting wealth (money) necessary to circulate them.

The question is, does usury add a salable product to the economy? Is usury necessary for the circulation of real wealth? Clearly, in order to produce something, we must consume other things: labor, raw materials, tools. These things must be paid for, and paid in proportion to what they contribute to production. If, in order to produce something, I borrow any of these things, I must pay the owner a proportion of what is produced. If I borrow the money to pay for them, what I really borrow is the things themselves, the things that money stands for. To put it in concrete terms, if I lend a farmer a supply of seed corn to plant a crop, I have a claim on some portion of that crop. Likewise, if I lend him the money to buy the seed corn, I have exactly the same claim; the money merely “stands for” the actual seed corn, and the claim is identical. In such a case, there is no case of usury.

But suppose there is no crop. Suppose that wind and weather combine to cause a crop failure. What claim do I have? None that I can see. Like the farmer, I took a risk and like the farmer I take a loss; the failure of the crop dissolves all claims. To demand a payment would be to take a share of what did not happen. I may demand he return the property he borrowed, if that is possible, but I cannot demand he share of a profit that doesn't exist.

Further, my claim stands on one more assumption: namely, that I actually had the money I lent the farmer. However, if I did not have the funds, if, for some odd reason the powers that be had given me the power to lend what I did not have, any payments, whether for principle or interest, would truly be something for nothing, would be wealth without work. Of course, this is exactly what happens with fractional reserve banking: the bank lends money it creates out of thin air; money that represents no tangible asset and requires the bank to surrender no actual goods.

Investors may claim a share of the output, where there is output and where they actually have the money they invest. No society can advance economically without such investment, and since capital represents “stored-up labor,” to deny such returns to capital would be to deny returns to the labor it represents. But to demand a return where there is none, or to demand more than is made, or to demand when nothing, in reality, was lent, is to guarantee that the economy will always be both inequitable and unstable. Such economies must constantly rely on government interventions to rebalance their accounts, and must suffer recurring bouts of contraction that no government can cure.

Science and Religion

Most religious traditions roundly reject the notion of usury. But the sages of the Enlightenment, such as Bentham, rejected this teaching, mostly because it was a religious teaching. By doing so, they wrote into their systems the very sources of economic rent—the formal term for “wealth without work”—that make equilibrium economically impossible. Hence, and despite the best of intentions, they must suffer a continual expansion of government power oven an increasingly unstable economy, an expansion that must continue until collapse. And in place of a real science, we have only a series of contending ideologies masquerading as scientific truths; by declaring its independence from the hierarchy of truth, economics has declared itself independent of science itself and a slave to mere ideology. Only by subjecting itself to the sources of truth can economics claim the name of “science,” and only then can it give adequate guidance to those who would seek a more proper role for government, on the one hand, and a better distribution of wealth on the other.

In social justice circles, there is an old saying: “If you wish for peace, you must work for justice.” The economic equivalent is, “If you wish for equilibrium, you must work for equity,” for equilibrium is economic peace and equity is economic justice, and you will never see the one without the other.

1 Quoted in James E. Alvey, "A Short History of Economics as a Moral Science," Journal of Markets and Morality 2, no. 1 (Spring, 1999): 62.

2 Paul Ormerod, The Death of Economics (New York: John Wiley & Sons, Inc., 1994), 120-7.

3 Ludwig von Mises, Human Action: A Treatise on Economics, 4th Revised ed. (San Francisco: Fox & Wilkes, 1963), 57.

4 Aristotle, Nicomachean Ethics, ed. Richard McKeon, trans. W. D. Ross, Introduction to Aristotle (New York: Modern Library, 1947), 1139a, 10.

5 Ibid., 1131a, 25-29.

6 During the Middle Ages, the term “corrective” justice became “commutative” justice due to a mistranslation. The word Aristotle uses is  (diórthotikós), “corrective” (LSJ). Although the term “commutative” has become more common, we will use the term “corrective” as closer to the original sense in Aristotle.

7 Aristotle, Ethics, 1132b, 19-21.

8 Ibid., 1131a, 25-31.

9 Hunt, History of Economic Thought, 33.

10Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (Amherst, New York: Prometheus Books, 1991), 70