The REAL problem with the economy (usury and growth)

Economics Economics Questions
1

The real problem with the global economy is so fundamental most people, economists especially, shrink from even contemplating it. At the same time, the problems are so simple they can be summed up with two words - usury and growth.

First with usury. Usury is lending money at interest. Usury is also the basis of our (fundamentally amazing) global economy. Yet, usury was outright illegal and considered a great moral sin for most of human history, excepting the last 200 years. How can this be?

It’s tempting to believe that our ancestors were simply backwards imbeciles, and that this explains the discrepancy - but of course it’s not true. Our ancestors were just as intelligent as we are today, they were just responding to different circumstances.

Here is the historical problem with usury:

Imagine an economy of ten people, all standing in a circle. Each of them has one gold coin to begin with, then each of them takes that one gold coin and lends it to the person to the left, at 10% yearly interest. There are now ten coins in circulation, but eleven are owed back at the end of the year. Either ‘the economy’ will grow by 0.1 new coin per person, or ten percent of loans will default (or all loans will fall short by 10% - indebting and indenturing the entire economy.)

The problem was that in ancient times, economies did not/could not grow exponentially, (at a percentage rate). Agriculture-based economies tended not to grow - sure, they had a boom year or a bust year, or one nation would grow richer by robbing another and making it poorer. But economic production was constant on average year over year, per capita. The economy of 1776 America was fundamentally similar to the economy in 776 Medieval Europe, or 76 Rome, or in 1776 B.C. Greece. Almost everyone farmed, a few were merchants or artisans, and a few were aristocrats. Societies could be more or less egalitarian, but per capita wealth was always basically similar, and had more to do with who had better land. Per capita growth simply was not a reality.

So that’s the problem with usury without growth. If the economy stays at one gold coin per person, but 1.1 gold coins per person are due at the end of the year, all usury accomplishes is indebting/indenturing the poor and dull while enriching the rich and clever - in other words, concentrating wealth. Uncontrolled, this eventually destabilizes and weakens society. The societies which did best in were therefore ones that put controls, limits and bans on the practice of usury - which, Darwinistically speaking, is why there were so many of them.

Put another way, usury compels growth. What changed with the industrial revolution was that per capita economic growth became possible. Each generation could be wealthier than the generation before it, and so on, which had never happened before.

This also changed the function of usury. If interest rates are 10%, and the economy is growing at 0%, it’s a bad idea to go into debt - you will have a much greater chance of defaulting than of being able to pay back your debt and improve your situation. But, if the interest rates are 10% and the economy is growing at 5%, or even 10%, borrowing is suddenly not such a bad idea.

Usury, in this way, acts as a spur to growth, and this could be argued to be a good thing when growth is possible or desirable - the economies which ‘performed best’ in the industrial age were the ones which embraced usury.

So now the second issue - growth. In the developed world, at least, growth is no longer desirable - it’s actually a bad thing. In the natural world, nothing grows forever without also killing itself. If a tree grew and grew, its branches would break off. This is why trees grow to a certain size, then stop and mature. If a child grew and grew, eventually his heart would fail. It is the same way with the world economy.

Growth is not (always) the same thing as progress. Think of the tree again, say a fruit tree. An apple tree grows from a tiny seed, and spends most of its energy growing and growing, until it reaches a mature size. Once it is mature, a fruit tree will put its effort into growing fruit, as opposed to growing. As it matures, there will be more fruit and of better quality, but the size of the tree will not change much.

First world economies are now mostly ‘mature trees’ - the question is whether the ‘growth spur’ - usury - can be shut off.

What does this mean, practically? In the U.S., there are now more empty housing units than there are homeless people - more food is thrown into the garbage than is needed to feed all malnourished people in the country, and in some other countries as well - used clothing is a significant export from the U.S. to other countries - there is at least one registered motor vehicle for every person capable of driving in the U.S. - nearly everyone who wants one has a computer or and a cell phone. Most importantly, population growth rates in all developed nations are stable or declining. We do not need ‘more’ of nearly anything, but still of course need better quality. Contrary to the doctrines of classical economics, human appetites are not limitless - we don’t really want to buy more food than we can eat, more cars than we can drive, more houses than we can live in etc., and the people who do acquire such things acquire them as status symbols, not for the benefit of the goods themselves per se.

Think of computers, for example - you can spend the same amount of money, every few years, on a new computer, but still the computer will be of better and better quality - even if the amount spent (and the effort put into acquiring it) stays the same. This is economic progress without economic growth, and the same process is true of nearly all goods. However, our usury-based economic system requires more and more money to be spent, yearly, or massive defaults on loans occur. At some point - economically, biologically, ecologically - growth becomes a negative return, and we have reached that point. However, we are still stuck with a growth-demanding, usury based economic system, which was appropriate for the previous age.

Money is just a medium of exchange - free markets can exist (in everything aside from money creation) whether or not it is lent at interest, or created in some other manner. That is the fundamental issue in the economy today, and it’s deeper than ‘the gold standard’ or even ‘fractional reserve banking.’

The people who create money by lending at interest, however, are by far the most powerful people in the world politically - they are the proverbial ‘immovable object.’ Economic (and ecological, and geological) reality however, is the ‘unstoppable force’ rushing towards them, and the world-historical drama that is playing out now is the collision of these two - although the implications are so massive most people would prefer to avert their eyes.

2

Ugh.

Growth is a bad thing? I hope you don’t have a laptop, ipod or anything nice. Otherwise you’re a hypocrite.

I’ll sum up your post for those that don’t have time

“Usury is bad because people shouldn’t be allowed to go into debt. Debt only works with growth, and since growth is bad debt is bad”.

3

He’s a troll. He’s been making useless threads at an incredible rate, and then not responding to any arguments.

Pretty much every time I see a stupid sounding thread title recently, I think to myself, it is this guy again?

4

So the problem in the world isn’t violence-based counterfeiting and expropriation but voluntary exchange (lend x money now for x money later)?

The reason people voluntarily choose to lend capital at interest is because they can use that capital to have a higher productivity. In other words, they are better off. I suggest you allow people to choose for themselves what they can and can’t do with their property and time.

5

Ravochol, is this your opinion or is this someone else’s article?

Too many facepalms to count…

6

I LOL’D

7

Usury is vital to any society that strives to be wealthy. See how places were jews were tolerated and they could practice usury would develop (italian cities, Holland), while places they were kicked out, commerce would take a slump (Portugal, Spain).

8

Seconded.

9

In your economy of ten people, each of whom have 1 gold coin, why would each member loan their own gold coin out for 10% interest, and borrow someone elses coin at 10% interest. That doesn’t make any sense. If everyone values the gold coin equally, no trade over time will take place. Trade requires the two parties to value the traded goods differently, otherwise why trade? I value my apple exactly as I value your orange, you value your orange exactly as you value my apple. Do we trade back and forth forever because we value the goods equally? No. We would be indifferent to a trade, and any trade takes some amount of time and effort, so we would never trade. Your ten man society is not plausible. The simultaneous borrowing and lending you described would never occur. With any positive transaction costs, each member of the society would be worse off after their trade. Assuming they don’t want to be worse off, they would not do this trade.

10

Money doesn’t circulate and new money is never created.

11

Usury is vital to any society that strives to be wealthy. See how places were jews were tolerated and they could practice usury would develop (italian cities, Holland), while places they were kicked out, commerce would take a slump (Portugal, Spain).

I addressed this - yes, I agree this was true during the industrial age. By contrast, look at how the nations and region today most heavily based (Wall St. or the “City of London” for example) are experiencing crises and massive shrinkage (even counting the government handouts).

They say a major difference between China and the West is that in China, the banks work for the government, while in the West, the governments work for the banks. Which model is resulting in increasing prosperity, and which in serious instability and stagnation?

12

Which has had a higher GDP per capita over the last 50 years and a standard of living that has been largely unpralleled in human history?

We face a depression in the west for the first time in 80 years, and now we have to take hints from China’s monetary system?

You can’t be serious.

13

“violence-based counterfeiting and expropriation”

Would you call the Federal Reserve System *“*violence-based counterfeiting and expropriation?” I would. The Federal Reserve System is a system of private banks under a central bank-led cartel. It’s basically a usury cartel. The Fed is just the board of directors which coordinates the cartel.

Inflation is caused by the practice of lending money at interest - the Fed just regulates and coordinates the level of inflation. If you think inflation is expropriation, then your fundamental objection is to usury, while your more superficial objection is to the centralization of control over the inflation. (More or less) “free banking” could/would/has resulted in inflation, for the simple reason that more money is always owed than exists in circulation, and thus more must be created every year or massive defaults/crashes/bank runs will occur.

Getting rid of the Fed wouldn’t stop inflation, it would just remove central control over it, just like getting rid of OPEC wouldn’t get rid of oil production, it would just remove some of the central control over it.

By the way, usury tend to lead to violence and war, because many individuals and nations tend to prefer war, violence and theft from others to default, indebtedness and indenture. Many colonial adventures are, in fact, attempts to ‘balance the books.’

Snowflake 14

15

“Would you call the Federal Reserve System “violence-based counterfeiting and expropriation?” I would.”

It exists through law so yes I would.

“Inflation is caused by the practice of lending money at interest”

That’s not true. Price inflation occurs generally speaking when the money supply grows faster than the supply of goods and services in the economy. The banking system creates new money when it makes new loans but even if it didn’t charge interest, it would still be expanding the money supply. The concept of interest really has nothing to do with monetary inflation. Plus it’s entirely possible to have a system where loans don’t increase the money supply.

16

Growth is a bad thing? I hope you don’t have a laptop, ipod or anything nice. Otherwise you’re a hypocrite.

That’s not what I’m saying at all. What I am saying is that quantitative growth always reaches a point where it’s no longer a good thing, but qualititative growth is always a good thing.

GPD is a quantitative measure of the economy. I have a laptop, and it’s twice as powerful as the one I bought four years ago - but cost about $150 less (even with inflation).

I could spend the same amount of money on a computer four years ago and today, but four years ago it would only buy a laptop, but today I can buy a better laptop, as well as an Ipod, and still save a few dollars. From a quatitative (GDP) perspective - my spending is shrinking - but from a qualititative perspective, my purchases are growing.

We can imagine an economy where the total amount of money doesn’t grow at all - (net, everyone’s monetary incomes and consumption of resources is stable, or even shrinks, quantitatively) but qualitatively, what everyone gets for those incomes and resources increases, thanks to smarter ways of doing things.

With a usury-based money system, however, this is impossible - usury based money systems must grow quantatively or collapse, like a shark that must either swim forward or die.

Imagine if Google’s new car becomes a reality, for example, and instead of formally owning a fancy convertible, you can instead order one which will drive to your door whenever you want to drive. Because the cars are shared, functionally twice as many people could be driving fancy convertibles with only half as many being produced. From a quantitative point of view, this is economic shrinkage - fewer cars built, fewer resources mined and manufactured, lower “ownership” rates, etc.), while from a quanlitative point of view, the economy is growing - more people with access to fancy convertibles.

The problem is, our economic system can’t handle this - no one will invest in a car company that is guaranteed to produce fewer cars every year (they’ll probably go bankrupt), and when they do the banks which lent to them them my go bankrupt also. If this happens systemically, the whole economy crashes, because it’s built like a shark.

17

Inflation is caused by the practice of lending money at interest - the Fed just regulates and coordinates the level of inflation.

So lending money that previously didn’t exist only causes inflation when it is loaned with interest? That makes perfect sense

18

"I could spend the same amount of money on a computer four years ago and today, but four years ago it would only buy a laptop, but today I can buy a better laptop, as well as an Ipod, and still save a few dollars. From a quatitative (GDP) perspective - my spending is shrinking - but from a qualititative perspective, my purchases are growing.

We can imagine an economy where the total amount of money doesn’t grow at all - (net, everyone’s monetary incomes and consumption of resources is stable, or even shrinks, quantitatively) but qualitatively, what everyone gets for those incomes and resources increases, thanks to smarter ways of doing things."

Austrians would basically agree with you here. Search this site for criticisms of GDP and you’ll find that we see at as a flawed measure of economic growth for many reasons as well.

"Imagine if Google’s new car becomes a reality, for example, and instead of formally owning a fancy convertible, you can instead order one which will drive to your door whenever you want to drive. Because the cars are shared, functionally twice as many people could be driving fancy convertibles with only half as many being produced. From a quantitative point of view, this is economic shrinkage - fewer cars built, fewer resources mined and manufactured, lower “ownership” rates, etc.), while from a quanlitative point of view, the economy is growing - more people with access to fancy convertibles.

The problem is, our economic system can’t handle this - no one will invest in a car company that is guaranteed to produce fewer cars every year (they’ll probably go bankrupt), and when they do the banks which lent to them them my go bankrupt also. If this happens systemically, the whole economy crashes, because it’s built like a shark."

This is simply the fear of technology. If the automobile industry shrinks by half, that leaves many resources freed up for other new lines of production. That one industry shrink does not imply that the economy will be worse off. The car made the horse and buggy industry largely obsolete. Automated farm machinery made it so that farms require far fewer physical laborers. Machines used in the production of cars replace workers, but this means lower costs, increased output, and workers free for other sectors of the economy. These are all good things. While they may be bad “quantitatively”, as you say, for GDP in the short run, they are good in the long run (qualitatively and quantitatively).

This issue really doesn’t have anything to do with the money supply. The process I described occurs whether the money supply is growing, stable, or shrinking. And yes, people will still invest in car companies because there is still some level of production needed for cars and this implies that there are profits to be made. Even if the current companies go bankrupt, the assets will shift hands to new companies who will continue production (even if it’s only at half the rate). If this happened to the whole economy, there would certainly be a period of restructuring, but this in no way implies that it will die like a shark that stops swimming.

ClaytonB 19

20

Let’s say I lend you 5 gold pieces, which happen to be the only gold pieces in the entire world, at 20% interest. You now owe me 6 gold pieces.

You give me something or do something for me that I’m willing to pay you 3 gold pieces for. Rather than give you more gold I just subtract it from what you owe me.Then, you give me 3 pieces you still have. Now you have 2 left and your debt is settled. No inflation necessary.