How did usury stop being a sin and become respectable finance?

This is just a superb article  by Alex Mayyasi who is a freelance writer. He looks at one of the most fundamental questions of finance: How did usury stop being a sin and become respectable finance?

There is never one answer to such questions but several plausible ones. He brings the contribution of Scholastics to making finance respectable:

The rise of debt wasn’t the Church simply bowing to the inevitable. Members of the clergy played an active role in creating the mindset that allowed usury to become respectable.

From the 1100s to the 1500s, clergymen known as the Scholastics debated whether lending was truly sinful. The Scholastics were the intellectuals of their day. They studied Roman law, Greek philosophy and Arab science at universities in Paris, Cologne, Vienna and others throughout Europe, and included luminaries such as Thomas Aquinas. They wrote and thought with the nit-picking particularity of lawyers.

But despite the dry tone, the Scholastics could sound surprisingly like modern economists. Unlike previous generations of thinkers, who believed that prices should reflect the cost of production, many Scholastics understood the power of supply and demand, and argued that the just price was the market price. In one treatise, the prominent Italian Scholastic cardinal Thomas Cajetan analysed the ethics of how bankers hid interest payments in inflated exchange rates. It was equivalent to a cardinal in 2006 writing knowledgeably about credit-default swaps.

The Scholastics also recognised the value of taking business risks. Many of them sanctioned commercial loans to be repaid with a portion of profits. As long as the return was not guaranteed, because the venture could fail or collateral was unavailable, lenders deserved to keep the interest, they said. Some clergymen also realised that people who lent money were unable to use it on other profitable ventures. This is a very modern justification for permitting interest: opportunity cost. The price of borrowing money reflects the missed opportunity to invest it profitably elsewhere.

The Scholastics took finance seriously, but they always viewed it as connected to the domains of justice and natural law. Aquinas was not interested in narrow questions of maximising utility or channelling individual self-interest, as a modern economist might be; he and his peers wanted to know the just way to distribute wealth and how one could ensure economic exchanges were fair.

Though, Scholastics were not liked by the higher authorities:

The thinking of the Scholastics and other religious leaders was not all admirable. Some clergy refused to budge from the literal words of the Bible, and others appealed to anti-Semitism to denounce usury. But their conversation represented an informed and influential debate – at the highest levels of academia and religion – about the entanglement of ethics, debt, inflation, high finance and monopolies. Where is that sort of thing today?

The Scholastics never resolved their disputes. Instead, they were replaced by new authorities on ethics and finance. It wasn’t until the rise of neoclassical economics in the 20th century that economics became the supposedly scientific study of self-interest and individual incentives – a domain in which economists do not pass judgment on actors in the market, any more than biologists would judge the ‘morality’ of bees, or engineers the ‘ethics’ of an aqueduct.

Of course, people today do discuss the ethics of finance. We debate whether bankers deserve lucrative bonuses; we worry about the moral hazard of bank bailouts; we condemn bankers who sell financial instruments that they know will fail. But since so much of the language of economics is amoral, and built on the assumption that everyone acts in their narrow self-interest, demanding just outcomes from finance feels like expecting fair results from war.

We’ve lost the instinct that finance and debt are moral affairs all the way down, which is something that the Scholastics understood.

So what would the Scholastics make of modern finance? Would they admire how efficiently a family’s savings can find productive uses? Or would they decry how developing countries pay more to borrow than rich ones? Would they marvel at our banks’ international reach? Or would they condemn how poor people pay for banking services such as checking accounts that rich people get for free?

The classics still matter:

Anyone interested in reclaiming ethics’ place in the world of finance, however, can build on a several-thousand-year-old foundation. ‘Aristotle, Kant, Bentham – are they dead people who have nothing of interest to offer?’ Miller muses. ‘Or were they on to something? Our economy would be unrecognisable to them. But the questions are still relevant.’

How did our pursuit of knowledge in social matters become so narrow? Needless to say, we are paying the price as for society questions of distribution etc continue to remain central. But economists choosing to live in their own ivy league castles, have chosen to ignore basics..


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