Monday, October 10, 2016

The Problem of Rent


In Medieval (Scholastic) philosophy, “rent” is what is due the owner of a thing for the use of something that is not “consumed by its use.” Thus, if the owner of, say, a tool such as a hammer or saw, loans someone that hammer or saw as a commercial transaction, the owner is due a reasonable fee for that use.
"You must pay the rent!" "But I can't pay the rent!"
The owner lost the use of the thing for a time, and whether or not the thing, be it land or a chattel, was put to a productive use by the borrower (i.e., generated a profit), the owner is, in justice, due something in exchange. Not the whole value of production, obviously, but something to compensate for the loss of the usufruct of the thing for a time.
In the Scholastic theory of rent and price, an owner cannot take rent for something that is consumed by its use. The owner is owed the price of the thing itself.
If an owner lends something, such as food (that is eaten) or money (that is spent), that by its nature is “used up” or consumed instead of simply used, the owner is owed back only what the owner lent. Anything else is considered “usury,” that is, taking a profit where no profit is generated.
Benedict XIV: "You must pay the rent, but not usury."
Thus, when Pope Benedict XIV issued an encyclical on usury in 1746, Vix Pervenit, the real title was “On Usury and Other Dishonest Profit.”  The important thing to note is the implied distinction between honest and dishonest profit; profit is not ipso facto dishonest.
This is why, incidentally, viewing “interest” as “the rent of money” is, strictly speaking, incorrect. Money in the form of currency is “fungible”: one unit is legally the same as any other unit. An owner cannot be said to rent out something when he or she does not get back the actual thing that was lent.
There is an exception to the prohibition against taking a profit on the loan of a thing that is normally consumed by its use. Suppose the borrower puts the food or the money that is lent to productive use instead of simply eating or spending it, e.g., as inventory for a restaurant or financing for a trading venture. That is, instead of consuming the thing, the borrower exchanges the thing as part of a productive endeavor, thereby creating another contract instead of only carrying out the terms of the original contract.
In that case, the original owner of what is lent is due a share of the profits, or suffers a share of the loss. This is commensurate with the market value of whatever the owner of the thing contributed to production by lending the food or the money.
"You must not pay the rent!  Just the interest!"
Aquinas even came up with a way someone could legitimately charge rent for money lent.  If the father of the bride wanted to make a big show of wealth at a wedding reception, he could go to the local moneylender and borrow sacks of coin to display on the gift or dowry table.  When the money was returned to the moneylender, the moneylender was in justice due a fee for the use of his (or her) money, because the same money that was lent was returned after being used, and the moneylender could not loan out that money while it was in the hands of the father of the bride.
In modern terms, the share of profits the owner receives as the lender is the borrower’s “cost of capital,” using “capital” in the financial sense of “accumulated savings used to purchase stock or finance the formation of capital goods.” Obviously, lending money to purchase capital goods or raw materials intended for production is, in essence, no different from lending the capital good or raw material itself. The lender is, just as obviously, due a share of the profits from the productive use of what is lent, whether it is capital or a raw material directly, or in the form of money (“financial capital”) with which to purchase capital or inventory.
Interest is due on productive use of existing savings.
In that case, in justice the owner is owed “interest” on what was borrowed. This is because the owner as the lender has an “ownership interest” in the productive project, and the owner has become, in a sense, the partner of, and co-owner with the borrower.
Because the lender is a partner, he or she is never due all the profits from production, the “Return on Investment” (ROI), any more than any other partner is due everything when he or she provides the financial backing and the borrower provides the mental and physical labor. “Return on Investment” and “Cost of Capital” are, obviously, two different things.
As far as we know, the Scholastic philosophers did not address the concept of depreciation, that is, recognizing that even things that are not consumed by their use eventually wear out and are used up in the course of their useful lives. Neither did they address inflation, especially when the purchasing power of the currency is deliberately manipulated for political ends.
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