Usury refers to the lending of money at interest. The practice of usury has a very long history. Writings from ancient times such as the Bible have passages that condemn usury. The fact that usury was found in many old writings does not mean that societies accepted it. What it means is that usury has been a controversial subject since those days. The situation is still the same today, although some forms of it are not acceptable in society today.
One of the indications of this situation is the change in the meaning of the term itself. The meaning of the term ”usury” today is slightly different from the meaning it had in the middle ages. Contemporary scholars use usury to mean the taking of excessive profits and interest in business dealings (Jones 3). The important word in this definition is “excessive” (Jones 3). In the middle ages, the term usury meant the taking of any interest on loans and debts.
Usury is more of a moral issue as opposed to a financial one. The Bible prohibited the taking of interest between Jews, especially from the poorer ones (Geisst 3). Strict Judaism still rejects usury to date. In the Islamic tradition, usury is sinful (Geisst 3). This is why Islamic banking standards do not include the taking of interest.
A brief look at the ancient times shows that the discomfort with usury was not limited to religious circles. Writings from the Greco-Roman period indicate that usury was a persistent social problem that bothered philosophers and rulers alike. The government of the Greek city of Sparta outlawed the taking of interest for some period of time (Jones 22).
During that time, it was illegal for Spartans to lend or borrow money at interest, or to collect interests on debts. In another instance of the application of legal controls against usury, all members of the Senate were forbidden from participating in usury by the Emperor Alexander Severus of Rome (Jones 22). This shows that the society felt that the practice robbed senators of their moral authority in the Roman states.
This situation can only result from a social consensus that the practice of usury is morally flawed. One of the philosophers of the time, Plato, also objected to the practice of usury. Plato felt that usury made a person less virtuous thereby making the person a bad citizen (Jones 22). Part of the argument presented by Plato was that usury was responsible for many of the social ills of his time, hence its inherent immorality (Jones 22).
Jeremy Bentham presented an interesting perspective on usury in 1787. His main argument was that any legal control on usury would limit personal freedoms (Bentham 1). In his view, any level headed person should be left to decide whether or not to practice usury, as long as it was not a ploy to swindle others out of their money.
In addition, he felt that it was easier to allow usury to flourish openly rather than put ineffective controls (Bentham 2). It is important to note that Bentham wrote his views when the definition of usury was in transition from charging any interest, to charging any reasonable interest.
The views above lead to two inclusions. First, the problem with usury has moral roots that cut across several moral codes. The arguments against usury try to protect the poor and the vulnerable from exploitation by moneylenders. In addition, these arguments promote the creation of wealth through productive work rather than through the lending of money.
Secondly, the introduction of controls in the modern money markets reduced the moral imperative to ban usury. In this regard, the modern injunction is against unjustified interest rates only, and not all types of interest.
Alternative Views to Adam Smith’s Thesis on the Wealth of Nations
Adam Smith was a respected economist who lived in England during the industrial revolution. He published several books popularly recognized under their shortened collective titled, “The Wealth of Nations”. Three of the ideas that Adam Smith presented in his work were as follows. First, he argued that specialization was the key to the creation of wealth.
His argument had its roots in barter trade. In this respect, Smith argued that companies should focus on the production of goods and services that they had the best resources to produce. The needs of the workers in those companies would then be met by products from other companies.
This view was corroborated by many economists, especially when it came to globalization (Rodrick 2). It is important to note that Smith was against international trade because it seemed to give foreigners an undue advantage. However, his views on the benefits of specialization formed the basis of the theory of international comparative advantage. By focusing on producing what a country is best at producing, the country is able to trade with other countries that are producing other goods (Rodrick 4).
Secondly, Smith argued against international trade because he felt that this would hurt the local economy. He did not see how the two countries could trade in a way that benefited both countries. The only people who would benefit from international trade were the traders. This was not advisable. In response to Smith, Stiglitz observed that Smith was blinded by his economic context (Altman). The world Smith lived in was feudal and international cooperation was not based on sound diplomacy.
The basis for international relations was power and relationships between individual rulers. Countries today cooperate in bilateral terms or as part of trade blocks. For instance, the two EU countries that may be rivals, now find themselves on the same side regardless of the extent of their diplomatic relations. Since they are all part of the EU, they play by the same rules regardless of how they feel about each other.
The third issue Smith raised was that if markets were left on their own, they would self-regulate. This argument favored minimal interference from the state in the conduct of business. According to Smith, government interference could lead to a collapse of the delicate balance. Chomsky responded to Smith’s third assertion by showing that Smith’s argument was not comprehensive. In many cases, traders ask their governments to intervene in order to achieve certain ends (Chomsky).
For instance, countries with young industries tend to institute protective measures to allow their industries to mature. This arises from the realization that young industries need time to develop their competitive capabilities. Failure of the government to intervene can lead to the death of young industries. Chomsky also pointed out that governments must play a role in creating a business environment that is conducive for business.
This can be done through the regulation of interest rates, creating business regulations, and enforcing ethical compliance. When markets are left to self-regulate, the result is usually no regulation at all. This means that a truly free market is vulnerable to abuse. Traders can collude to form cartels and monopolies, which eventually hurt the consumer. In summary, Chomsky showed that free markets must be policed to remain free. Otherwise, traders will take advantage of the lack of controls to tilt the market in their favor.
The Role of Merchants and the Profit Motive
Merchants play a very important role in every economy. They serve as a vital link between producers and consumers and make a profit in the process of delivering products and services (Rodrick 14). Merchants look for opportunities to make a profit.
Peter Drucker was a renowned management thinker. His thoughts on entrepreneurship were based on change. He viewed merchants as people who kept an eye on changes in the market place and kept up with them (Drucker 3). Merchants encourage and catalyze change in the market place. New opportunities can only arise as a result of the change. If the market remains unchanged, merchants cannot survive. Drucker also used the phrase “systematic innovation” to describe the role of merchants in an economy (4).
Systematic innovation refers to managed change. Merchants understand market forces and respond to them in overt or covert ways. Drucker did not use profits as an essential element of entrepreneurial thinking. This can mean that he did not think that profit was the main motivation for entrepreneurial activity. In fact, it opened the possibilities of thinking about entrepreneurs in other ways.
One such view of entrepreneurship is the force of change in whatever sphere. A phrase that gained popularity in the early nineties was “social entrepreneurship” (Swedberg 21). Social entrepreneurs are people who use entrepreneurial methods and thought patterns to bring social change.
This example is a good illustration of why Drucker was hesitant to give the profit motive much attention in regards to entrepreneurship. Drucker also defined entrepreneurs as people who pursued opportunities without regard to resources currently controlled (Drucker 13). This definition is wide enough to cover social entrepreneurs.
A radical phrase coined by Schumpeter to describe entrepreneurship was “creative destruction” (Swedberg 22). According to Schumpeter, entrepreneurs engage in creative destruction. This means that they lay to waste old systems in order to create new ways of looking at the same problems. This disruptive effect is what makes them entrepreneurs. They are able to cause changes in a way that completely alters the status quo.
On the matter of the profit motive, three main issues come to mind. First, it is clear that profit is not the only motive behind the entrepreneurial activity. The only way profit can become a central part of entrepreneurship is if the definition of profit goes beyond financial returns. Profit in this context must mean some sort of gain.
The gain can be in any field. Secondly, it is important to recognize that a large number of entrepreneurs pursue opportunities for financial gain. While the profit motive, in monetary terms, is not the absolute motive for entrepreneurship, it is an important component of the definition. Thirdly, all entrepreneurial activity arises from the need to make profits. The definition of profit, in this case, is wide. It encompasses all benefits that accrue from entrepreneurial activity, which may not be in monetary terms.
Works Cited
Altman, Daniel. “Joseph Stiglitz Q & A.” 2006. The Economists View.
Bentham, Jeremy. Defence of Usury. New York: Theodore, Foster, 1787. Print.
Chomsky, Noam. “Notes of NAFTA: “The Masters of Man”. Chomsky. Web.
Drucker, Peter F. Innovation and Entrepreneurship. London: Routledge, 2012. Print.
Geisst, Charles R. Beggar Thy Neighbor: A History of Usury and Debt. Philadelphia, PA: University of Pennsylvania Press, 2013. Print.
Jones, David Wayne. Reforming the Morality of Usury: A Study of Differences that Separated the Protestant Reformers. Lanham, MD: University Press of America, 2003. Print.
Rodrick, Dani. “Goodbye Washington Consensus, Hello Washington Confusion? A Review of the World Bank’s Economic Growth in the 1990s: Learning from a Decade of Reform.” Journal of Economic Literature XLIV (2006): 973-987. Print.
Swedberg, Richard. “Social Entrepreneurship: The View of the Young Schumpeter.”. New Movements in Entrepreneurship Book. Ed. Chris Steyaert and Daniel Hjorth. New York, NY: Edward Elgar Publishing, 2008. 21-31. Print.