by Hugh Burling
The other night I was accused of being a Socialist. In conversation I had pursued the claim that it would be a good idea to encourage ordinary people and high-street banks to make lower-risk investments, such that there would be less risk overall in the system, and that slower growth was a fair price to pay for a steadier market. I made no reference to legal compulsion at any stage. As I understand it, the high-risk investment strategies that were until recently so widespread became so partly due to the popular demand for them. That is, ordinary people wanted higher and higher returns on their savings accounts and their small-scale investments, alongside lower and lower interest charged them on their use of credit cards and borrowing. To meet these demands, win more customers and stay ahead in the finance market, banks (investment, lending and otherwise) encouraged their employees to engage in more sophisticated and risky practices. Some thing or things went wrong and the cards slipped. I beg forgiveness for my primitive understanding and exposition of our financial markets and crisis: I think my comments below will make clear why I don’t take as much interest as some in the minutiae of the operation of our collective greed.
At any rate, the conversation was reduced to the question being asked of me: “Imagining that you trusted the borrower so implicitly that the ‘risk’ of a loan could only be judged as ‘zero’, what would you consider a fair rate of return, when you leant someone your money?”
Once upon a time, the moral engines of our society condemned usury, the lending of money for the lender’s profit. The consequence was the emergence of a complex system of gifting and deviously-worded insurance deals based on bartering. I am no expert on the financial operations of the Knights Templars but I strongly suspect that even their feudal wheelings and dealings were much simpler than usury has become since it was made legal for the majority of the population. We have always had markets and capital. At least, they both seem to go back a long way (see Sean Gabb’s “Market Behaviour in the Ancient World: An Overview of the Debate” (also available as a pdf). Wanting to make a profit from helping other people is probably ‘innate’ to human economic behaviour – at least it is so common that the desire needs to be factored into considering how to motivate people to help each other.
Indeed, the beauty of Capital‘ism’ is that it reveals how a selfish motivation can benefit others. But that beauty does not stem from the selfishness of the motivation. Intellectually (rather than historically or emotionally), we support financial markets because of three truisms: (1) “many people act out of selfish motivations more readily than out of altruistic ones”, (2) “borrowing money is a very efficient way for an individual to be able to begin new enterprises and hence develop new technology, provide more services, and a variety of other things we like to have” and (3) “many incidences of borrowing and lending must occur in order to have all the things we like produced or provided”. Because so many ‘lending transactions’ – the term ‘investment’ assumes that the transaction has a selfish motivation – must be carried out, we need to take account of the selfish motivations of the aforesaid many people. Also because selfish motivations are so popular, we do not expect a majority of entrepreneurs, inventors, artists and so forth to make a living on the feudal basis of patronage (in which they suffered perpetual disadvantage). So what we do is to try and facilitate selfishly motivated lending.
The problem arises when that facilitation changes to expectation, then reliance and finally the inability to imagine that people do, sometimes, want to help other people for reasons other than financial gain, and that alternative motivations are ultimately better, if rarer. This inability leads to a twisting of the truisms. The selfish ‘many’ changes to ‘all’, and usury becomes, in the mind of the public, the only means towards growth rather than merely a very efficient one.
To end the suspense, the answer I gave to the question was “nothing”. If one could spare the money, and one sufficiently trusted the borrower to return it to one before one needed it, there would be no point in one asking for interest. Nothing would have been lost. Of course, the lender would have gained nothing either. My accuser was flabbergasted at the idea of performing a transaction without the aim of capital gain, hence his accusation.
When we advocate a free market, extol the virtues of honest trade and applaud the system which makes the best of our too-often selfish instincts, we must never forget that a compromise is all capitalism is: a compromise with our greed. It is not an ideology, it cannot provide a goal and we should not allow its mathematical doctrines to persuade us that all humans are only ever selfish, simply because we have a clever system for working with the many of us who often are. In short, capitalism is not an ism like the isms that suffix its opponent theories. It is a perpetual jury-rig, not because we once had some pristine, more efficient system or are likely to manufacture a new one, but because we’re basically not good enough to build a proper mast ourselves.
