Konkvistador comments on Open Thread, August 16-31, 2012 - Less Wrong

3 Post author: OpenThreadGuy 15 August 2012 03:25AM

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Comment author: [deleted] 27 August 2012 03:44:50PM *  4 points [-]

Why hate loan givers?

I find myself asking is why was the practice of making loans with interest rates so unpopular in antiquity? I always assumed this was about excessive interest rates (whatever those are), however it now seems to me that usury was about charging any interest on loans.

Some of the earliest known condemnations of usury come from the Vedic texts of India. Similar condemnations are found in religious texts from Buddhism, Judaism, Christianity, and Islam. At times many nations from ancient China to ancient Greece to ancient Rome have outlawed loans with any interest. Though the Roman Empire eventually allowed loans with carefully restricted interest rates, in medieval Europe, the Christian church banned the charging of interest at any rate (as well as charging a fee for the use of money, such as at a bureau de change).

Comment author: Athrelon 05 October 2012 04:33:25PM 5 points [-]

Per Gregory Clark in A Farewell to Alms, the ancients had noticeably less future time-orientation than modern people. Furthermore, there were relatively few ways to make profitable investments - it's not as though a farmer could take loans out to buy a tractor.

In that context, lending is more akin to drug dealing than responsible investing. It hooks in people with poor self-control who will spend it on consumption not investment. So the logical thing to do is to crack down on the practice. Yes there are some responsible users who lose out, but that's far outweighed by the benefit to those who'd end up in debtor's prison after blowing the cash on one glorious drunken weekend.

I mean, we as a civilization still have a problem with payday loans.

Comment author: gwern 05 October 2012 08:41:42PM *  2 points [-]

Per Gregory Clark in A Farewell to Alms, the ancients had noticeably less future time-orientation than modern people. Furthermore, there were relatively few ways to make profitable investments - it's not as though a farmer could take loans out to buy a tractor.

Did we read the same book? Clark's whole point was that there were many secure (eg. his argument that property rights were more secure in early Britain than during the Industrial Revolution) high-paying investments; this surprised me so much that I recorded one snippet from chapter 9 in my Evernotes:

All societies before 1400 for which we have sufficient evidence to calculate interest rates show high rates by modern standards [with ~0% inflation].5 In ancient Greece loans secured by real estate generated returns of close to 10 percent on average all the way from the fifth century to the second century BC. The temple of Delos, which received a steady inflow of funds in offerings, invested them at a standard 10 percent mortgage rate throughout this period.6 Land in Roman Egypt in the first three centuries AD produced a typical return of 9–10 percent. Loans secured by land typically earned an even higher return of 12 percent.7

... Medieval India had similarly high interest rates. Hindu law books of the first to ninth centuries AD allow interest of 15 percent of the face amount of loans secured by pledges of property, and 24–30 percent of loans with only personal security. Inscriptions recording perpetual temple endowments from the tenth century AD in southern India show a typical income yield of 15 percent of the investment.8 The return on these temple investments in southern India was still at least 10 percent in 1535–47, much higher than European interest rates by this time. At Tirupati Temple at the time of the Vijayanagar Empire the temple invested in irrigation improvements at a 10 percent return to the object of the donor. But since the temple only collected 63 percent on average of the rent of the irrigated land, the social return from these investments was as high as 16 percent.9

While the rates quoted above are high, those quoted for earlier agrarian economies are even higher. In Sumer, the precursor to ancient Babylonia, between 3000 and 1900 BC rates of interest on loans of silver (as opposed to grain) were 20–25 percent. In Babylonia between 1900 and 732 BC the normal rates of return on loans of silver were 10–25 percent.10 In the sixth century BC the average rate on a sample of loans in Babylonia was 16–20 percent, even though these loans were typically secured by houses and other property. In the Ottoman Empire in the sixteenth century debt cases brought to court revealed interest rates of 10–20 percent.11

EDIT: Adam Smith in The Wealth of Nations:

In Bengal, money is frequently lent to the farmers at forty, fifty, and sixty per cent. Twelve per cent, is said to be the common interest of money in China, and the ordinary profits of stock must be sufficient to afford this large interest.

Comment author: Athrelon 05 October 2012 10:16:06PM *  3 points [-]

Yes, it looks like you're right that there were significant investment opportunities even with BC technology, unlike what I assumed. We can quibble over whether these investment opportunities were "deep" or one-offs, but it seems reasonable that irrigating farms is something you can invest a lot in before hitting diminishing returns.

This is still a strange phenomenon: on one hand you have potential investments with high rates of return, even with risk adjustments - yet market interest rates were very high, showing few people were willing to make those investments. Clark's argument is that this demonstrates low ability to delay gratification among the ancients.

This being the case, although there evidently were opportunities for loans to be put to good investment purposes, it looks like there was a strong psychological impulse to blow it on consumption - maybe comparable to the behavior of the Western poor today. It is still plausible that restricting moneylending was good policy if the good borrowing:bad borrowing ratio was unfavorable enough.

Comment author: gwern 05 October 2012 08:44:11PM 3 points [-]

I ran into a relevant paper on the 'economics of religion' which offers some interesting theories:

As one example of the approach, consider Ekelund et al.'s treatment of the church's usury doctrine (analyzed more formally in Ekelund, Robert Hébert, and Tollison 1989). Here rent seeking is seen as the primary motivation for the maintenance of a particular doctrine. The central church's monopoly position allowed it to extract rents from downstream producers (the clergy) and from input suppliers (banks) by controlling the borrowing and lending interest rates. The authors argue that usury rules enabled the church to borrow at low rates while lending (through papal bankers) at much higher rates, and they cite many sources spanning several centuries to defend their claims.

One can, however, tell a very different, though perhaps not mutually exclusive, story. Carr and Landa (1983, p. 153) and Edward Glaeser and José Scheinkman (forthcoming) argue that usury laws acted as a form of social insurance against shocks that were not otherwise insurable. In all societies, but especially simple agrarian ones, individuals face the constant threat of bad harvests and other unpredictable disasters. Interest rate restrictions can benefit the victims of bad shocks (who will have high demand for credit) while penalizing those who had experienced good shocks (and are thus in a position to lend). Glaeser and Scheinkman formalize this model and derive a variety of nonobvious predictions, including some that they test using American data. The model's greatest appeal lies in its ability to account for the pervasive nature of interest restrictions, which arise in societies and religious traditions far removed from those of medieval Europe.

Comment author: [deleted] 05 October 2012 04:17:40PM *  0 points [-]

Bahá'í Faith

Is Usury Good ?:

Interestingly enough, in the tablet of Ishraqat, Baha'u'llah explicity lifts the ban on usury formerly instituted in Islam. ...

I wonder what has changed in 1300 years that it was once under the "devils influence", destined to "incur hell", and is now "lawful and pure" and instrumental to worship with "joy and fragrance, happiness and exultation"? I don't mean this flippantly, I am really interested to know if there are practical reasons for such an abrupt shift, similar to the lifting of the ban on eating pork.

Ancient Middle East

Johnson, Paul: A History of the Jews (New York: HarperCollins Publishers, 1987) ISBN 0-06-091533-1, pp. 172–73.

"Among the Mesopotamians, Hittites, Phoenicians and Egyptians, interest was legal and often fixed by the state. But the Hebrew took a different view of the matter."

Deuteronomy 23:20 Unto a foreigner thou mayest lend upon interest; but unto thy brother thou shalt not lend upon interest; that the LORD thy God may bless thee in all that thou puttest thy hand unto, in the land whither thou goest in to possess it."

Comment author: [deleted] 27 August 2012 05:43:29PM 0 points [-]

Does human intuition need to be explained, or just mapped? There are explanations available for why there are many cities along rivers, and they are of positive but limited value if you want to understand why Baghdad is where it is. The history of usury laws tells a very interesting story about human intuition, and it can be used to make predictions about people's reactions to similar but novel proposals. But how to tell if there should be a more elegant explanation?

Comment author: [deleted] 27 August 2012 05:47:59PM *  2 points [-]

Does human intuition need to be explained, or just mapped?

Explaining intuitions gives insight into whether they are useful. And yes even in this case I do leave the possibility open that all ursury is bad for reasons I don't yet understand despite the consensus among economists on it.

But your question is actually a poignant one since it is one we should have clearly answered at nearly any step of the entire LessWrong project of building up human rationality, yet I don't recall us attempting to do so.

Comment author: Kindly 27 August 2012 05:22:51PM 0 points [-]

Probably because it would have had less of an impact if the Bible had said "Thou shalt not lend upon interest greater than 6% to thy brother."

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