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A Critique Of Interest: Debunking Time Value Of Money And Other Arguments – Analysis

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By Idries De Vries

The credit crisis of 2008 and its aftermath, including the current sovereign debt crisis, has made many people realize that the capitalist economic system is not perfect. That it contains faults which in a “perfect storm” can cause the system to have disastrous outcomes.

Surprisingly little investigation has been done, however, into what exactly are these faults in capitalism. By far most discussion has been about how to deal with these flaws and how to prevent them from causing another global economic crisis in the future. This is problematic, since unless the faults of capitalism are properly understood, their consequences can never be avoided.

The following article therefore analyzes the practice of interest (ar-riba), which plays such a pivotal role in all capitalist economies. It uses the history of interest in the western world and the philosophical and scientific theories that have lead to it becoming a cornerstone of capitalist economics, to argue that interest is not the blessing for humanity that it is often made out to be. But rather, that it holds back economic development and causes wealth concentration, which many have agreed is one of the main causes for the recurring economic crises in the capitalist world.

Introduction

Interest is the fee one pays when borrowing money. Because of interest, a debtor pays his creditor more money than originally borrowed. Interest can therefore be defined as “an exchange of more money for money”.

Under this definition the practice of charging a higher price for goods or services in the case of delayed or staggered payment cannot be called interest. What in such agreements is usually called “interest” is in effect a calculation method to determine the price for the good or service, taking into consideration the delayed or staggered payment. As such, it is part of “an exchange between money and goods or services”, and not of “an exchange between money and money”. [1]

Interest, defined as “an exchange of more money for money”, is a pillar of the present day capitalist economic reality. In fact, in the present day capitalist economies essentially nothing happens without interest. For instance, in the present day capitalist economies money itself is created through an interest bearing loan with a bank. For the total pool of money is enlarged whenever a commercial bank borrows money from a central bank, or when a company or private individual borrows money from a commercial bank, and such loan agreements always define a rate of interest to be applied to the originally borrowed amount. Money will then be either physically printed on paper or metal, or electronically added to an account. And this means that in capitalism, every transaction that makes use of money, indirectly makes use of interest. In addition, most transactions in the present day capitalist economies make direct use of interest. Essentially all capitalist companies use interest bearing loans to finance their operations (“leverage”), even the most successful and profitable ones. And the bulk of consumption by private individuals, such as the buying of houses and cars, is financed through interest bearing loans (“asset optimization”). Even that of the superrich.

As a consequence, interest, defined as “an exchange of more money for money”, is big business in the present day capitalist economies, worth hundreds of billions of dollars annually.

And this is an indication that interest has become commonly practice in the present day capitalist economies, to the point that those who do not want to engage will not be able to find a way to avoid paying or receiving interest. [2]

The history of interest

This was not always the case, however. The thinkers amongst the ancient Greeks, for instance, were firm opponents of interest. Aristotle (384 – 322 before the start of the christian calendar) considered interest “unnatural”: “The most hated sort [of money-making], and with the greatest reason, is usury, which makes a gain out of money itself, and not from the natural use of it. For money was intended to be used in exchange, but not to increase at interest. And this term usury, which means the birth of money from money, is applied to the breeding of money because the offspring resembles the parent. Whereof of all modes of making money this is the most unnatural.” [3]

Aristotle’s claim that interest is “unnatural” rests on two main arguments. Firstly, he said, to own money is different from owning land or cattle. On land grow crops and as such it is natural for total ownership to grow in the case of ownership of land. And cattle reproduce, so it is also natural for total ownership to grow in the case of ownership of cattle. No such natural growth takes place in the case of money, however. And exactly because money does not grow out of itself, Aristotle said it is unnatural to charge interest on loans, because the loaned money in and of itself does not facilitate the interest payment.

Secondly, Aristotle pointed to the fact that money is also different from tools of production, such as pots and pans that are used to prepare the food, that can be rented out in return for payment. Pots and pans that are used to prepare the food remain in existence after the food has been prepared. And as a consequence, it is possible to rent out pots and pans in return for payment, because the pots and pans can be returned after usage. Money, however, leaves the hand if it is used, if a purchase or rent agreement is settled. This means the usage of money implies its disappearance for, as far as the buyer / renter is concerned. Money, Aristotle said, more resembles the food that is made by the pots and the pans, than the pots and the pans themselves. Because in the case of food too, its usage (eating) implies its disappearance. Therefore, Aristotle said, just as it is unnatural to rent out for in return for payment, it is also unnatural to rent out money in return for payment.

Following the era of the ancient Greeks, the Christians of the Middle Ages continued to see interest as a taboo for religious reasons. Exodus 22:25 forbids oppressing one’s neighbor with usury. Deuteronomy 23:20-21 says one can not charge his brother usury. Ezekiel 18:7-8; 13 states the righteous do not lend at usury and that usurers “shall not live”. And in Luke 6:35, Jesus Christ is reported to have said: “Lend, hoping for nothing in return”. And as at that time usury and interest were still synonyms, and the Christian theologians considered all people brothers, interest in all forms or rates was considered completely forbidden. [4] And in many writings interest was compared to theft, such as in Sint Ambrose of Milan (339 – 397 according to the Christian calendar) who said: “If someone takes usury, he commits violent robbery, and he shall not live”. [5]

The Christian scholastics that later on tried to justify Christian religious teachings through logical reasoning argued against interest on the same lines, in the process borrowing much from “the Philosopher”, Aristotle. Thomas of Aquino (1225 – 1274 according to the Christian calendar) said: “Now money, according to the Philosopher, was invented chiefly for the purpose of exchange: and consequently the proper and principal use of money is its consumption or alienation whereby it is sunk in exchange. Hence it is by its very nature unlawful to take payment for the use of money lent, which payment is known as usury: and just as man is bound to restore ill-gotten goods, so is he bound to restore the money which he has taken in usury”. [6]

However, in what is at that point a break with history, the Christian scholastics began arguing that in some cases, some forms of interest should not be prohibited. For instance, they began arguing, it should not be held against a lender if he asks compensation from the borrower if the loan agreement causes the lender a loss. Such as when because of the loan agreement he is not able to pursue a profitable business opportunity that comes up. Again Thomas of Aquinas said: “A lender may without sin enter an agreement with the borrower for compensation for the loss he incurs of something he ought to have, for this is not to sell the use of money but to avoid a loss.” [7] Equally, they said, if a lender through his loan enables the borrower to avoid a great loss (such as missing out on a very profitable business opportunity), then he should be allowed to be compensated for providing this service. In the words of Thomas of Aquinas: “It may also happen that the borrower avoids a greater loss than the lender incurs, wherefore the borrower may repay the lender with what he has gained.” [8] And, they said, if good intentions are involved interest on a loan should not be prohibited either: “It is lawful to borrow for usury from a man who is ready to do so and is a usurer by profession; provided the borrower have a good end in view, such as the relief of his own or another’s need.” [Aquinas, 9]

Later, under the influence of Christian theologians such as Gabriel Biel (1420 – 1495 according to the Christian calendar), Konrad Summenhardt (1461 – 1511 according to the Christian calendar) and John Eck (1486 – 1543 according to the Christian calendar) from Tübingen University in Germany, as well Jean Gerson from Paris University, the first arguments were developed to really legitimize interest.  Summenhardt said that interest was nothing else than a compensation for the lender for the fact that during the time of the loan, he would not have access to his own funds. [10] Eck argued that if the loan agreement does not oppress the borrower, it could not be considered illegitimate. Also, Eck argued, interest could be considered a compensation for the uncertainty the lender faces; as well as a form of profit sharing between the borrower and the lender (if the borrower used the loan for a profitable business investment). [11] And, as they said, Christian law did not prohibit compensation or profit sharing, Christian law could not be understood as prohibiting interest. Provided, of course, that the loan agreement did not oppress the borrower.

As a consequence the idea developed that only loan agreements which stipulated “excessive” rates interest should were criminal, because these types of loan agreements oppressed the borrower. As loan agreements with rates of interest that did not oppress the borrower usually helped him, they should be made allowed. The distinction between usury – defined as “excessive interest” – and interest – defined as “non-excessive interest” – was first introduced this way. [12]

At the onset of the Age of Enlightenment in Europe during the 18th century, usury was still considered criminal while interest was considered allowed. And as suggested by Eck, usury was considered anything over 5%. But the philosophers of Enlightenment quickly attacked this notion, as it had resulted from religious thought. The philosophers of Enlightenment, of course, reasoned from a secular perspective, meaning the conviction that religious concepts should not be allowed to determine right or wrong in society. Jeremy Bentham (1748 – 1832 according to the Christian calendar) used the secular idea of personal freedom to finally convinced Europe to not consider interest, at whatever percentage, a crime, and to finally legitimize it in all its possible forms. He said: “No man of ripe years and of sound mind, acting freely, and with his eyes open, ought to be hindered, with a view to his advantage, from making such bargain, in the way of obtaining money, as he thinks fit; nor, (what is a necessary consequence) any body hindered from supplying him, upon any terms he thinks proper to accede to”. [13] As a consequence, British Parliament abolished all legal limitation on the practice of interest.

Interest in present day economic theory

Despite its history of being considered an “abomination”, interest is justified and even promoted in present day economic theory.

It is said that money is no different than other goods. And as other goods can be loaned out in return for compensation, so one should be able to loan out his money in return for compensation: interest.

It is also said that a human being, according to his nature, prefers “today” over “tomorrow”. So if given a choice, he would choose consumption today over equal consumption tomorrow, and ownership today over equal ownership tomorrow. Lending out money will deprives a person of the ownership of his money today, and the potential of consumption that comes with this ownership, only to restore it back to him on a later day; while he prefers ownership and the potential of consumption that comes with this ownership today. As such, it is said, a lender should be compensated for lending out his money: interest. This idea is called the “Time Value of Money”.

And it is said that someone who lends out money takes on a risk that, ceterus paribus (all other things equal), he would not have been exposed to without the loan. Because with every loan agreement there is the risk that the borrower will not return the funds he borrowed. So when agreeing to a loan a lender is said to expose himself to the additional risk of losing his money, and for this he should be compensated: interest.

The argument that promotes interest states that economic activity can be increased through interest. And as an increase in economic activity is good for society, because this creates jobs and hence increases aggregate income, it argues interest must be considered advantageous to society. The starting point of this argument is the observation that in any economy there usually are some people that own more money than they know how to utilize, either through investment or consumption; and some people that own less money than they know how to utilize, either through investment or consumption. Interest can bring these two types of people together, by motivating those that own more money than they know how to utilize to make their surplus money available to those people that own less money than they know how to utilize, thereby enabling those that own less money than they know how to utilize to nevertheless realize their plans for investment or consumption.

A critique of the justifications for interest

The argument that money is “just as other goods” can not be accepted as it conflicts with what can be observed in reality. Money is a human invention to facilitate trade. As a medium of exchange it enables trade even in the absence of a matching of needs, i.e. when trader A does not offer what trader B needs or when trader B does not offer what trader A needs. As a store of value it enables trade even when one of the traders – or both – does not have a particular need at the moment of the trade. And as a unit of value it makes measurement and comparison of offers and demands more easy. Money in itself can not, however, and this is in contrast with other goods or services, be used as a consumption good to satisfy the needs of a human being or as production good to bring forth new goods or services. Because of these fundamental differences between the reality of money and the reality of other goods and services it is rationally incorrect to apply verdicts related to the one, to the other. Or in other words, because money is not like other goods or services it is incorrect to say that what applies to other goods or services also applies to money. For such an argument is valid only in case of equality, not in the case of difference.

Regarding “Time Value of Money”, which states that money “now” is worth more than an equal amount of money “later” and that uses this statement to justify interest in general, this idea is incorrect because it is based on only a partial reality and not on complete reality. And from partial realities do not result general rules. In addition, the partial reality that the “Time Value of Money” is based on is connected to a context. And it is also rationally incorrect to apply a rule extracted from a reality in context outside of this context.

The limited reality that the idea of “Time Value of Money” is based upon are the examples where people indeed prefer “now” over “later”, such as when a trader sells his whole stock – he will then need money to replenish his stock, as a consequence of which he will prefer money “now” over money “later”. Many examples could also be given, however, where people are indifferent between “now” or “later”, or even prefer “later” over “now”. The basic fact that people tend to save for later – and many people do this while trying to avoid interest! – is proof that people sometimes prefer “later” over “now”. The complete reality is, therefore, that people sometimes prefer “now” over “later”, that sometimes they are indifferent between “now” over “later”, and that still some other times they prefer “later” over “now”. So while the basic argument of the idea of “Time Value of Money”, that people prefer “now” over “later”, is sometimes correct, sometimes also it is incorrect. Hence the idea of “Time Value of Money” can not rationally be accepted as a general justification of interest – but it does serve that purpose in economic theory! – because general justifications can only come from complete realities and not from partial realities. Partial realities rationally only provide partial justifications.

The fact that the partial reality on which the idea of “Time Value of Money” is based is connected to a context can be shown through continuing the example above, of the trader who sold his whole stock.  A trader who sold his whole stock and now needs to replenish it will under certain circumstances prefer “now” over “later”, while under other circumstances he may be indifferent between “now” and “later”, and while under again different circumstances he may actually prefer “later” over “now”. If he had made a lot of money on an earlier deal, so had significant cash on hand, it is not necessarily so that he will prefer “now” over “later”. He might in this case be indifferent between “now” and “later”. This shows that the preference of the trader in case of a particular deal depends on his circumstances. In another example, if a person is hungry he will prefer food “now” over an equal amount of food “later”. However, if this person has just eaten and is completely satisfied, or perhaps he even overate, then he will prefer food “later” over food “now”. There can be no doubt, therefore, that in many of the cases where people prefer “now” over “later” this is dependent on circumstances, and that a single case under different circumstances may lead to a different weightings of “now” and “later”. The partial reality that the idea of “Time Value of Money” is based upon can therefore not even justify interest for that reality! Because under different circumstances that partial reality could weigh “now” and “later” different.

In summary, therefore, it is incorrect to say that “now” is always better than “later” as the idea of “Time Value of Money” does, because this evaluation of “now” and “later” depends on the case and the circumstances of this case. And it is rationally incorrect to say a partial reality connected to a context can serve as a general justification, because that implies saying that a partial reality connected to a context is the same as complete reality unconnected to a context. And this is ludicrous.

Regarding those who use the idea of “Time Value of Money” as a value-judgement, in other words who argue that the people should prefer “now” over “later”, and who therefore say that the idea of “Time Value of Money” justifies interest in general because people should prefer now over later, to them must be said the following. When you say people should prefer “now” over “later” then you say that the interests of the current generation of humanity outweigh the interests of later generations of humanity. Most people on this earth will disagree – just ask any parent. But there is also no rational argument for your opinion. In addition, your opinion is damaging for humanity as a whole. For if a generation considers itself more important than later generations, then it becomes unavoidable that this generation will damage the interests of later generations. If a generation considers itself more important than later generations its opinion will motivate it to live in unsustainable manners and to over-consume that which is in limited supply on this earth, because it considers its consumption of higher value than the consumption of later generations. Later generations will because of this be confronted with shortages, even in things that are of primary importance to humanity such as clean drinking water, energy and nature.

Regarding the idea that interest is justified by the risk a person undertakes when lending out money, it assumes that man has ultimate control over his life. Or phrased differently, it assumes that if a person does not lend out his money, he does not run a risk of losing it. This, of course, is incorrect. Even if a person does not lend out his money there is still a risk he might lose. It could, amongst many other things, be stolen or destroyed in a fire or a natural disaster. But if both lending out money and not lending out money entail a risk of losing the money, how then can “risk” serve as a general justification for interest?

Furthermore, even if one were to accept the statement that the risk of losing money is greater in the case of lending it out than it is in the case of not lending it out, it remains practically impossible to calculate what exactly the difference in this risk is. And this means that the idea of risk can not justify on objective basis the interest rate charged on a loan, whatever the percentage.

Regarding the ideas “Time Value of Money” and risk used to justify interest, attention must also be drawn to the fact that interest is, as mentioned before, big business in the capitalist economies. These two theories, however, both state interest is just a compensation for the inconvenience associated with lending out money. Either the inconvenience of not possessing in the money the “now” or the inconvenience of the possibility of losing one’s money. Now if this were indeed the reality of interest, if indeed it were nothing more than a compensation for an inconvenience to keep people whole between lending out or not lending out, in other words makes them indifferent between lending out and not lending out, then a gigantic industry would not have developed around it that pushes people to increase lending. So the fact that interest is big business indicates that in reality, interest does not keep people whole between lending out or not lending out but it makes people prefer lending out. Meaning that in reality, interest is more than just a compensation for inconvenience. And that the ideas “Time Value of Money” and risk are excuses for a strong desire to deal in interest, rather than real justifications for this practice.

Critique of the promotion of interest

For a proper discussion of the idea that interest can increase economic activity it is required that the two ways through which this is said to take place are identified. Firstly, it is said that interest can increase economic activity because it can increase consumption. And increased consumption increases production, which means more jobs and higher aggregate income. The argument behind this idea is that through interest, the people that own more money than they know how to utilize, either through investment or consumption, can be motivated to make their surplus money available to people that own less money than they know how to utilize through consumption; thereby enabling an increase in aggregate consumption. Secondly, it is said that interest can increase economic activity because it can increase investment. And increased investment increases production, which means more jobs and higher aggregate income. The argument behind this idea is that through interest, the people that own more money than they know how to utilize, either through investment or consumption, can be motivated to make their surplus money available to people that own less money than they know how to utilize through investment; thereby enabling an increase in aggregate investment. The validity of the idea that interest promotes economic activity should be researched for both cases independently.

The idea that interest can increase economic activity through consumption is correct, if one only looks at the “now” and disregards the “later”. An interest bearing loan will indeed, namely, enable a debtor to increase his consumption, without decreasing the consumption of the creditor. This is because a creditor is assumed – which he may rationally be – to lend out what he does not to use himself through investment or consumption. The loan therefore does not contract his consumption, while it increases the consumption of the debtor.

Of course, the loan agreement gas two consequences in the “later” as well. Firstly, the debtor will have to use some of his income to repay the loan. This will decrease his consumption in the later. In other words, the loan enables the debtor to shift consumption from “later” to “now”. But, in the later the debtor will also have to pay interest over the loan, which will further decrease his consumption in the later. So the shift of consumption from “later” to “now” will lower total consumption – the sum of “now” and “later” – for the debtor. The other side of this coin is of course an increase in income for the creditor in the “later”. But while the interest payment will inevitably reduce the consumption of the debtor, it will most likely not increase the consumption of the creditor. The reason for this is that already in the “now” the creditor owned more money than he knew how to utilize, either through investment or consumption. Increasing his ownership will therefore most likely lead to an increase in his “inactive” ownership, i.e. the possessions for which he does not know a use either through investment or consumption. Total consumption of the creditor and the debtor, in “now” and “later”, should therefore be expected to fall because of the interest bearing loan. [14]

Of course it could be said that the interest payment will allow the creditor to lend out even more in “later”. And this will enable someone else to increase his consumption despite a lack of funds to do so originally. But the answer to this is: this is just a repeat of the earlier play. This interest bearing loan will also shift income from someone who owns less money than he knows how to utilize through consumption, to someone who already owns more money than he knows how to utilize through consumption. In the end, therefore, the second loan will only increase the share of “inactive” ownership in society, thereby further reducing total consumption. [15]

The insight that consumption can be either of the “primary” category – meaning living essentials – or of the “secondary” – meaning everything in addition of living essentials, i.e. luxuries – offers a further critique of the idea that interest can increase economic activity by enabling people that own less money than they know how to utilize through consumption to nevertheless realize their plans. It means, namely, that the interest bearing loan can be used either to facilitate expenditure on living essentials, or to facilitate expenditure on luxury.

If, however, someone’s income and wealth is insufficient for him to realize all the necessary expenditure on living essentials, then an injustice has been committed against him. Because the earth provides the ability for all to satisfy their needs regarding living essentials. [16] As such, it can not be rationally accepted that someone’s income and wealth is insufficient for him to realize all the necessary expenditure on living essentials. Because he who accepts this situation without concern, effectively says that some people do not have a right to live. And this a criminal opinion. So if a person is forced to take out an interest bearing loan to be able to realize all the necessary expenditure on living essentials, then two crimes are committed against him. The first crime committed against him is the fact the minimum share in the earth’s wealth that is his human right, has been withheld from him. Although there is plenty to go round for all when it comes to living essentials, he did not receive what he needs. The second crime committed against him is that the only solution provided to him is a transfer of consumption from “later” to “now” (loan), if he agrees to paying some of his “later” income or wealth in return (interest). In the case of a person whose income and wealth is insufficient for him to realize all the necessary expenditure on living essentials, an interest bearing loan is therefore not only not beneficial for society, it is also an injustice. It offers a man who is staring death in the face nothing but a delay his death to “later”, and a more swift death when it does finally come.

The person who want to loan money at interest to finance the consumption of luxury “now”, should be treated as an insane person. Because, as explained before, an interest bearing loan will decrease the total of his consumption in “now” and “later”. So effectively this person will prefer less consumption over more consumption.

If it is said that this person might value consumption “now” more than consumption “later”, and that because of this his lower total consumption will be preferred by him because more of it will fall in the now, the answer should be the following. The flaw in the idea that “now” is intrinsically worth more than “later” has already been shown. And where “now” can be argued to be worth more than “later”, this will be in the area of the necessary living expenses, not in the area of luxuries. So if someone considers “now” to be worth intrinsically more than “later” in the case of luxuries, then he should be treated as an irrational person, who should be placed under guardianship. Additionally, it has also explained that the idea that “now” is worth intrinsically more than “later” has disastrous consequences for the wellbeing of humanity. In light of this, if someone considers “now” to be worth intrinsically more than “later” in the case of luxuries he may also be considered criminally insane.

The regarding the idea that interest can increase economic activity through investment. Again, in what it discusses, this statement is correct.  An interest bearing loan will indeed, namely, enable investment on the part of a person who owns less money than he knows how to utilize through investment, because it will motivate a person who owns more money than he knows how to utilize through investment or consumption to make his oversupply of money available to him. As such, it will not decrease the investment or consumption of the creditor because the creditor is assumed to lend out what he does not to use himself through investment or consumption. And as investment is a form of consumption, this will increase economic activity directly. But as investment also has the potential of realizing technological and/or scientific innovation, which reduces the cost of production, it can also increase economic activity indirectly.

The flaw in this idea, however, is in what it does not discuss. The idea is about how interest influences the creditor, and on how it impacts the debtor. It disregards, however, the influence of interest on the debtor. It is incomplete, therefore, and that in and of itself is sufficient to reject it as an argument to legitimate interest across the board. For this requires a comprehensive analysis of the effect of interest. So in the case of investment, what is the influence of interest on the creditor and the debtor?

To answer this question one should compare the financing of business through interest bearing loans (finance) with the financing of business through partnership (partnership). In the case of finance there is a person with an idea to make business but without money to finance utilization of this idea in practice, who then uses an interest bearing loan from a person with “inactive” money to utilize his idea in practice. In the case of partnership there is a person with an idea to make business but without money to finance utilization of this idea in practice, who then partners up with a person with “inactive” money to utilize his idea in practice. This difference between finance and partnership might seem small, but it has far reaching consequences.

In the case of finance the person with “inactive” money will need to be repaid his money, together with interest, whether the business plan works out in practice or not. In other words, in the case of financing the rights of the person with “inactive” money are unaffected by the success of the business. This means that as long as the business turns out to be a success, there is no problem for the debtor or the creditor. The proceeds of the business will then reward the debtor for his time and effort, and enable him to repay the loan with interest. But if the business turns out to be anything other than a success, the debtor will not only have lost the time and effort he invested in it, he will still have to find a way to repay the loan with interest.

In the case of partnership, however, partners share in profit and loss. So if the business turns out to be a success, there is again no problem for the businessman or the investor. And if the business turns out to be anything other than a success, the problem this causes is shared between businessman and investor – the businessmen loses the time and effort he invested in the business, the investor loses his investment.

Comparing these two cases makes clear that the risk for the debtor/businessmen is highest under financing and lowest under partnership; while for the creditor / investor it is lowest under financing and highest under partnership. In other words, interest motivates people to loan out their “inactive” wealth, but it demotivates potential businessmen. This means interest demotivates the real engine behind economic advancement, which is the creativity (“ideas”) of the entrepreneurial spirit. Of the two options to realize economic advancement, interest is therefore clearly the lesser of the two. Because its alternative partnership promotes economic advancement more, by minimizing the risk for the businessmen while still enabling him to gain access to funds. Interest may therefore also be considered a break on economic advancement, because it maximizing the risk for the businessmen in return for granting him access to funds.

In the practice of finance to is also an injustice. When it maximizes the risk for the businessman and minimizes risk for the investor, it effectively maximizes risk for the person who began with a lack of funds and minimizes risk for the person who began with a surplus of funds. So interest places risk on the back of the person least able to carry it.

That this indeed holds back economic development is proven by the development of company structures with “limited liability”. The existence of these company structures is a confirmation of the fact that risk has an inverse relation with economic development. This confirmation should have lead to the promotion of partnership over financing, instead of to the promotion of financing that is typical in the present day capitalist societies. “Limited liability” company structures try to correct for this mistake. But where this resolves one problem, it creates another in the form of the criminal abuse of “limited liability” that is common in the present day capitalist societies.


Author:

Idries De Vries is an international management consultant, and an international speaker and author of several publications on geopolitical, economic and Islamic affairs. He is also  a guest contributor for New Civilisation.

The views expressed in this article are the author’s own and do not necessarily reflect New Civilisation’s editorial policy.

Notes:

[1] It is very important to note that in the present day capitalist economies, delayed or staggered payment is usually financed though a financial institution. In other words, an agreement between a buyer and a seller on delayed or staggered payment usually implies that the seller organizes an interest bearing loan from a bank for the buyer, with which the buyer then settles the transaction between him and the seller. This allows the seller to receive the money due to him at the time of sale, while it allows the buyer delayed or staggered payment. In the present day capitalist economies, therefore, even delayed or staggered payment applies real interest as in “an exchange of more money for money”

[2] For example, pension funds invest part of their assets in interest bearing loans. From the proceeds of these investments they then pay out the pensions.

[3] Aristotle: “Politics”, www.classics.mit.edu/Aristotle/politics.html

[4] Jones, Norman: “Usury”, 2008, http://eh.net/encyclopedia/article/jones.usury

[5] John H Munro: “The medieval origins of the ‘Financial Revolution’: usury, rentes, and negotiability”, 2002, www.mpra.ub.uni-muenchen.de/10925/2/MPRA_paper_10925.pdf

[6] Thomas van Aquino: “Summa Theologica”, www.fordham.edu/halsall/source/aquinas-usury.html; as well as: John H Munro: “The medieval origins of the ‘Financial Revolution’: usury, rentes, and negotiability”, 2002, www.mpra.ub.uni-muenchen.de/10925/2/MPRA_paper_10925.pdf

[7] Ibidem note 6

[8] Ibidem note 6

[9] Ibidem note 6

[10] Murray N. Rothbard: “An austrian perspective on the history of economic thought”, www.mises.org
[11] Visser, Hans & Visser, Herschel: “Islamic finance: principles and practice”, 2009
[12] Eck, by the way, was generously sponsored by the Frugger banking family from Germany to promote his – at that time – revolutionary ideas around Europe. See: Visser, Hans & Visser, Herschel: “Islamic finance: principles and practice”, 2009

[13] Jeremy Bentham: “Defense of Usury”, 1787, www.econlib.org/library/Bentham/bnthUs.html

[14] This, in essence, is why wealth concentration is a curse and hurts the economic well being of society.

[15] And this is the essence of the credit crisis. The reduction in aggregate consumption caused by interest bearing loans was for a long time compensated by increases in interest bearing loans. This way, the interest payments did not reduce consumption. But because of this wealth became ever more concentrated, so ever more of it became “inactive” in society. So once the ability to lend out more ended, consumption all but dried up because disposable incomes were used to finance debt – again increasing wealth concentration and the share of “inactive” wealth in society.

[16] “(…) the world already produces enough food to feed every child, woman and man and could feed 12 billion people, or double the current world population”, according to the UN Special Rapporteur on the right to food Jean Ziegler in “Promotion And Protection Of All Human Rights, Civil, Political, Economic, Social And Cultural Rights, Including The Right To Development: Report of the Special Rapporteur on the right to food”.

New Civilisation

New Civilisation is an online political journal which provides a unique source of insight and critical analysis regarding the pressing political, economic and ideological issues of the time. Its motivation is to provide an authentic alternative to the standard analysis often found in mainstream outlets – opening a channel for advocates of alternative Islamic political models to present their critiques of other understandings and put forward their own opinions while allowing them to be discussed and challenged within an environment of informed and respectful discourse.

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