Debt and Time: A Puzzle
I don’t have time to explore this properly, but I’m floating it because I’m going to discuss it in an upcoming talk, and I want your helpful insights.
I’m interested in a certain justification of usury based on an appeal to time discounting. I don’t know if anyone justifies it in precisely this way.
By “usury” I mean charging for use of something that is loaned. It doesn’t matter whether it’s money or something else; the point is that if I lend you X and you return X (or an identical substitute), and the terms of the loan require you to give me something else in addition, that is usury. Lending money at interest is, generally speaking, usury.
St. Thomas, apparently, disapproved of usury because he thought of it as a sort of swindle. Suppose I lend you a hacksaw, and you wear out the blade. You then give me back the saw with a brand new blade in it. It looks like you’ve paid for the use you got: your use wore out the whole blade, and you replaced the whole blade. If you somehow wore out the handle as well, you could return to me a new handle with a new blade — i.e., an identical substitute for the original hacksaw. It seems to follow that the most use anyone can get out of anything loaned is 100% of it — that is, the principal of the loan. Demanding interest in addition to the principal is, of necessity, charging for more than the use: for how could anyone use more than 100% of anything?
Later Catholic casuists thought of use in a way that permitted low interest rates. Had I kept the hacksaw, I could have used it to do work, which I could have sold at a profit. Perhaps by the time I wore out the saw, I would have realised enough profit to buy 1.04 saws — then we can say that an interest rate of 4% over that period accurately reflects the use I got. That this was mere convenient quibbling is suggested by the circumvention of tricky questions: e.g., how do we separate out the contribution to the profit made by my labour (which I am not hiring out) from that made by the saw?
Besides tricky questions there is the plain moral one: Why should the borrower pay for the use that the lender (supposedly) could have had, rather than the use that the borrower gets? Suppose I buy 100 grapes from your vine and eat them all. You might have bottled wine and made enough profit to buy 150 grapes in a year. But the use I got was 100 grapes worth. Again, we don’t know how much of the profit you could have made would have come from the use of grapes and how much would have come from the use of your labour (not to mention previous expenditure on fixed capital, training, etc.). If I want to be difficult I can also ask how I can know for sure that you would have really used the grapes to extract the most possible value. Maybe you would have just eaten them as well. All this ambiguity left wiggle room for casuists to simply settle on a conventional interest rate as the Just Price.
But here is where it seems like a modern economist might appeal to time discounting. If I agree to pay you 150 grapes in a years’ time, in order to have 100 grapes today, then it must be the case that, to me, 150 future grapes is worth 100 present grapes. In other words, I discount the future at 50% per annum. Thus in paying a 50% annual interest rate, I am paying only for the use I got: namely 100 present grapes’ worth, which is equal to 150 future grapes.
But when the day of repayment comes, it seems to me that I can legitimately complain as follows. Yes, 150 future grapes is worth 100 present grapes, given my rate of time discount, but you’re asking me to pay 150 present grapes! When I made the deal, the 150 grapes I agreed to hand over were future grapes, but in the meantime they have become present grapes. Thus now you’re overcharging.
I think we can go further than this. It isn’t obvious why time discounting shouldn’t be a symmetric relation. The intuition behind time discounting seems only to be that things now are worth more than the same things at some temporal distance. If one year’s distance from the present reduces the value of grapes by a third, why shouldn’t my required repayment be 66 grapes? After all, at the time of repayment, what I ‘have’ is 100 grapes at one year’s distance, in the direction of the past. Applying the discount rate, that comes to 66 present grapes, so that is what I should pay.
Slightly more technically, my puzzle is this: Either I exist, whole and entire, at each instant of my lifetime, or I am composed of temporal parts, each of which exists for a mere instant in my life. If the first — if I endure, in the metaphysicians’ jargon — then it seems like the notion of time discounting can’t apply to me. It cannot be that future consumption is worth less to me than present consumption, because I have no future consumption: at any point in my life where consumption is going on, I am there, whole and entire, doing the consuming. All my consumption is present consumption.
On the other hand, if I am composed of ‘time slices’ — if I perdure — then usury seems to be a straightforward case of intertemporal injustice. My time slice now — call him Alex(n) — can agree to pay 150 grapes in a year in order to have 100 grapes today, because Alex(n) is indifferent between 100 present grapes and 150 future grapes. He (or it — time slices of persons are presumably not persons) swaps future consumption for present consumption. But he isn’t the one who pays; my future time slice — Alex(f) — is left with the bill. Even if he inherits from Alex(n) the full benefit of the 100 grapes, he seems to be massively overcharged. Nor can it be easily argued that Alex(entire) consented to this arrangement; Alex(n) consented that future grapes would be paid for present grapes, but nobody and no part of anybody agreed to pay 150 present grapes for 100 present grapes (or, if we want to look at it this way, for 100 past grapes).
The perdurantist can at least make sense of the notion of time discounting. But I don’t think the perdurantist has much hope of using this notion to justify usury.
Am I missing something obvious here?