Usury and Ethics Critical Essay

Historically, usury has been thought of as being unethical. The people who practiced usury were shunned by society as they were seen as greedy. Historical hatred towards usury is also well documented by Shakespeare in his book “The Merchant of Venice” where Shylock, a Jew who practices usury, is loathed by the members of the community.

Charles Eisenstein notes that even though the society abhors usury, they are the same people who promote its practice. He further illustrates the fact that the very money we use today is a result of usury in a disguised form. Eisenstein argues that today lending with interest in mind is an accepted practice unlike in the past.

The only difference today is that the lender and the borrower agree on the expected interest rate and the amount of time within which the loan is payable. He uses examples such as banks that offer loans to their customers, hire purchase enterprises, security bonds that are sold by the government and the mortgages (Eisenstein, 2011, p. 47).

He further argues that this new form of usury is being used as a form of money creation. This is illustrated by the stock exchange market where one is able to purchase securities without actually using their own money but interest bearing security.

This analogy defines his main argument that today’s form of usury is so diverse such that money created by an individual is most often accompanied by a corresponding debt. It is this money that he refers to as the monetary base, which means that money has been created, but actually does not exist (Eisenstein, 2011, p. 47).

Abdul Gafoor, the author of “Interest, Usury, Riba and the Operational Costs of a Bank” uses a bank as an example of an organization that practices usury. He refers to the fact that most bank customers are borrowers who are charged interest on the loans they take while the other majorities who deposit also get interest on their deposit amounts.

According to him, they are all the same although greed is exhibited when banks charge higher interests on loans than deposits (Gafoor, 2011, p. 46).

It is also through him that we get a religious point of view that clearly expounds why the Islamic religion prohibits lending with interest and thus the emergence of Sharia banks that do not charge interest on loans or deposits in line with Islamic laws.

The author does not find fault in charging interest as is the case with banks since most of the lenders usually use the money for business and thus making profit. Hence, the lender has a right to ask for something in return, but faults for charging interest when the borrower is not business oriented (Gafoor, 2011, p. 56).

Michael Hoffman, in his book “Usury in Christendom: The Mortal Sin that Was and Now is Not” gives a clear account of how usury was greatly abhorred and discouraged among Christians earlier. The practice was highly loathed by the leaders of the early Christian churches as it was condemned and even compared to robbery and in extreme cases murder (Hoffman, 2012, p. 103).

Hoffman wonders how the same churches today have become a haven that promote usury since they have learnt to arm twist the scriptures and this has allowed them to be able to invest their offering through bank accounts while at the same time encouraging their members to take loans from banks.

Some have even gone a step further by opening Sacco’s where they lend their congregation money on interest. This is a clear indication that society today has accepted the practice of lending with interest (Hoffman, 2012, p. 123).

Adam Smith, a moral philosopher, in his book “The Wealth of Nations”, discusses various principles and ideas on what actually builds a nation’s wealth. He suggests and elaborates a number of issues in regard to the division of labor and specialization, productivity and free markets as pillars of national wealth (Smith, 2009, p. 402).

In response to these philosophical explanations, some economic authors agree with Adam’s philosophy, although they also disagree and give their opinion on the same principle discussed by Adam (McCreadie, 2009, p. 32).

Regarding the real and nominal price of commodities, Adam offers two approaches. He first asserts that the actual price of commodities that a buyer should be sold at is predominantly determined by the labor involved in the actual production of the commodity. David Ricardo, a political economist, in his book “Principles of Economy and Taxation”, agrees to this principle.

He supports the fact that the actual worthiness of a product reflects the relative difficulty in producing it. In the second part of the definition of commodity nominal price, Smith observes that labor is the real measure of the exchange value of all commodities.

Ricardo disagrees and is of the opinion that both the cost of production and the utility of the commodity should be jointly used in determining commodity worthiness rather than labor alone (Ricardo & Gooner, 2010, p. 328).

Adam Smith also tackles the idea of demand and supply. In his view, an increase in demand will result in a short supply thus fetching high commodity prices while a shortage in demand is always characterized by an increased supply. Furthermore, he goes ahead to criticize mercantilism, a situation where a country imports more while limiting its exports to establish balance of trade.

Smith argues that to establish balance of trade and avoid monopolistic control of market prices by a single producer, whoever exports must subsequently import as well. Jean Baptist Say, a French businessman and economist (famous for Say’s law), argues in line with Smith at first. He proposes equal exportation and importation to create balanced availability of trade commodities on the market (McCreadie, 2009, p.37).

According to Say, it is through a balance of markets that one is able to get what he does not produce and at a relatively fair price. However, Say also argues against Smith and in favor of mercantilism. He suggests that hoarding should never be neglected especially where there is a lack of investment opportunities.

In this statement, he proposes that one should only avail to the market whatever he has and only if it fetches more than what it costs to acquire or produce. If that is not the case then it is always wise to retain ownership until the markets are favorable. Thus, Say encourages mercantilism and hoarding.

Ludwig Von Mises, an Australian economist and philosopher is another author whose work can be compared to Adam Smith’s. Like Smith, Mises, in “Human Action” routes for free markets and economic calculations. Mises points out that the opposite of active is not inactive but contentment and thus human beings will only stop working after fully satisfying their needs (Mises, 2007, p.528).

Adam Smith in his works had pointed out that human needs are insatiable and thus there is a need to embrace specialization and concentrate on individual talent. Specialization leads to the satisfaction of human needs in a more efficient manner and offers a wide range of scope for carrying out things. Mises also tends to think along the same line with Smith in his theory of economic calculations.

The two authors support free markets as a necessity for economic growth. Smith suggests that free market offers the producer of a given commodity to make profit while Mises on the other hand suggests that there cannot be economic calculations without free markets and that profit is the most accurate indicator of economic growth (McCreadie, 2009, p. 44).

Smith and Mises have also differed on certain issues. For instance, while Smith presents specialization to enhance efficiency and increase productivity as the case in the pin factory, Mises adopts specialization as a method to enhance entrepreneurial innovation and creativity.

Mises advocates for specialization where one is free to deal with a line he is best talented and offer the best in the free markets in that line while Smith on the other side regards specialization as a collective approach to a common problem (Mises, 2007, p. 798).

Price can be defined as the monetary value at which one sells a commodity. It is a very important matter in economics and business in general. Neoclassical economics is a school of thought or an approach used to bring out economic concepts. It majorly tries to bring out the relationship between demand and supply of a market and how the two affect utility to the buyer.

Price comes as a by the way factor in the whole process of neoclassical economics as it is not considered a major factor. The school of thought formulates policies that aim at giving the best satisfaction to an individual. The theories that neoclassical economists come up with do not give much with regards to price (Stigler, 2006, p. 14).

Utility refers to the level of satisfaction that an individual derives from spending their money. Different commodities will give different satisfactions. In neoclassical economics, we try to maximize on the utility by the use of small sums of money. Various commodity characteristics of a market are analyzed by the use of the theories formulated under the neoclassical economics school of thought.

Demand and supply are some of those characteristics that are given more consideration. The center of focus in this analysis is the satisfaction that one is likely to get from buying a certain commodity thus not given so much attention to the theories.

For instance, in neoclassical economics the well-being and satisfaction of laborers are more important than the amount of money spent for paying them. The laborers may be non-productive but this school of thought does not look at such factors, it will still advocate for better pay for them. This is majorly because its main aim is to ensure human beings get the best returns from whatever sacrifices they make.

On the other hand, early economic thought tries to have the price as its major point of focus. The subscribers to this school of thought majored in price related issues. They spent most of their time trying to study and understand the price. They also tried to establish the relationship between prices and values of commodities. From the policies formulated under this school of thought it is evident that the price was the center of focus.

The economists analyzed the relationships between demand and supply and their implications on price. They did not give much attention to the utility aspect of a commodity. It is under this school of thought that most methods of fixing prices emanated from.

For instance, early economists defined a method of fixing prices by considering the cost of coming up with the product and adding a small percentage profit on it. The economists formulated different economic theories and policies whose center of focus was the price (Stigler, 2006, p. 22).

From the above analysis of the two schools of thought, it is evident that the economists considered the economic aspect of commodities but from different points of view. Neoclassical economics looked at the scarcity of commodities and its relation to the utility that one could derive from such commodities.

To the neoclassical economists, value was and is never a factor to be considered while the early economists gave so much attention to value and prices of commodities. They never considered utility at any point of their analyses. Thus, it is clear that the two schools of thought are virtually talking about the same thing with different aims in mind.

Works Cited

Eisenstein, Charles. Sacred Economics: Money, Gift and Society in the Age of Transition. New York, NY: Evolver Editions, 2011. Print.

Gafoor, Abdul. Interest, Usury, Riba and the Operational Costs of a Bank. Groningen, Netherlands: Appropriate Technology Foundation Publications (APPTEC), 2011. Print.

Hoffman, Michael. Usury in Christendom: The Mortal Sin that Was and Now is Not. London, UK: Independent History and Research, 2012. Print.

McCreadie, Karen. Adam Smith’s The Wealth of Nations: A modern-day interpretation of an economic classic. Oxford, UK: Infinite Ideas, 2009. Print.

Mises, Ludwig. Human Action. New York, NY: Liberty Fund, 2007.Print.

Ricardo, David & Edward Gooner. Principles of Political Economy and Taxation. New York, NY: Nabu Press, 2010. Print.

Shakespeare, William. The Merchant of Venice. Oxford, UK: Macmillan Publishers, 2004. Print.

Smith, Adam. The Wealth of Nations. London, UK: Thrifty Books, 2009. Print.

Stigler, George. Production and Distribution Theories. New York, NY: Macmillan Publisher, 2006. Print.