45 – Profit and Interest

Chapter from "Priorities and Dominion" by Gary North.

(Revised: April, 2000)

For the kingdom of heaven is as a man travelling into a far country, who called his own servants, and delivered unto them his goods. And unto one he gave five talents, to another two, and to another one; to every man according to his several ability; and straightway took his journey. Then he that had received the five talents went and traded with the same, and made them other five talents. And likewise he that had received two, he also gained other two. But he that had received one went and digged in the earth, and hid his lord's money. After a long time the lord of those servants cometh, and reckoneth with them. And so he that had received five talents came and brought other five talents, saying, Lord, thou deliveredst unto me five talents: behold, I have gained beside them five talents more. His lord said unto him, Well done, thou good and faithful servant: thou hast been faithful over a few things, I will make thee ruler over many things: enter thou into the joy of thy lord. He also that had received two talents came and said, Lord, thou deliveredst unto me two talents: behold, I have gained two other talents beside them. His lord said unto him, Well done, good and faithful servant; thou hast been faithful over a few things, I will make thee ruler over many things: enter thou into the joy of thy lord. Then he which had received the one talent came and said, Lord, I knew thee that thou art an hard man, reaping where thou hast not sown, and gathering where thou hast not strawed: And I was afraid, and went and hid thy talent in the earth: lo, there thou hast that is thine. His lord answered and said unto him, Thou wicked and slothful servant, thou knewest that I reap where I sowed not, and gather where I have not strawed: Thou oughtest therefore to have put my money to the exchangers, and then at my coming I should have received mine own with usury. Take therefore the talent from him, and give it unto him which hath ten talents. For unto every one that hath shall be given, and he shall have abundance: but from him that hath not shall be taken away even that which he hath. And cast ye the unprofitable servant into outer darkness: there shall be weeping and gnashing of teeth (Matt. 25:14-30).

The theocentric principle here is God's ownership of the creation. He establishes the terms of tenancy. Men possess resources only as stewards of God. God will come at the end of history to judge each person's performance as a steward. This passage appears in the same section as Jesus' description of the final judgment (Matt. 25:31-46).

Delegated Ownership 1

This parable is a kingdom parable. It follows the five-point covenant model that was first discovered by Ray Sutton.2 First, the master calls his servants before him (sovereignty). Second, he delegates authority to them as his economic representatives by transferring money to them (hierarchy/representation). Third, while it is not stated explicitly, he commands them to produce an increase (law/dominion). We know this because all three immediately take steps to obey his implicit economic command. Fourth, he returns and imposes positive sanctions: blessings to the profitable servants. Fifth, the blessings that he gives them involve rulership (succession/continuity). He then imposes negative sanctions against the unprofitable servant, casting him into outer darkness (disinheritance).

This parable contains several theological messages, but the three main ones are these: first, God owns all things; second, He delegates temporary control over these things to men; third, men are required to increase the value of whatever God has entrusted to them.

There are also secondary implications. First, the servants were required to act on their own initiative for an indefinite time period. The master was not present to tell them precisely what to do. Second, he imposed a profit management system of control, a bottom-up hierarchy.3 He wisely decentralized his investment portfolio before he departed. He allowed his subordinates to make their own decisions regarding the proper use of his capital. He held them legally responsible for the results. Third, he had plans beyond this first stage of stewardship. He was using this stage as a test.

Profitability

Profit is a residual that remains after all expenses have been paid, including the entrepreneur's salary as a manager. The entrepreneur buys or rents resources, holds them and possibly alters them, and sells them for more than he paid. He can do this only because his competitors did not recognize the opportunity. They did not enter the free market for factors of production and bid up their prices. Their lack of foresight is what enabled the entrepreneur to buy up the resources at prices lower than those which prevailed when he sold them later. He had an advantage based on better knowledge and the courage of his convictions.

The economist distinguishes between risk and uncertainty.4 Risk can be estimated in advance; uncertainty cannot be. Risk is the kind of calculation that applies to insurance. In certain well-defined situations, the law of large numbers applies. The probability of an event, such as an economic loss through a fire, can be estimated within statistical limits. There is risk, but it can be calculated. Not so with uncertainty. An uncertain event is not part of a larger class of events. Its probability cannot be calculated in advance.

The man who received ten talents made a return of 100 percent. So did the man who received two talents. The owner granted them rewards because of their productivity. Clearly, this has to do with rewards beyond the grave. But these rewards are based on performance in history. This is consistent with Paul's teaching: "Now if any man build upon this foundation gold, silver, precious stones, wood, hay, stubble; Every man's work shall be made manifest: for the day shall declare it, because it shall be revealed by fire; and the fire shall try every man's work of what sort it is. If any man's work abide which he hath built thereupon, he shall receive a reward. If any man's work shall be burned, he shall suffer loss: but he himself shall be saved; yet so as by fire" (I Cor. 3:12-15).

The corollary of profit is loss. A man may misforecast the future. He buys or rents resources, only to discover later that they are worth less than he paid for them. The fear of loss is an important factor in restricting the market for entrepreneurship. It is a major barrier to entry.

Marxism as Covenant-Breaking

What about the person who takes no risks, buries his talent, and returns to the master only what he had been given initially? This man has produced a loss for the master. He is a highly unprofitable servant. He has not performed according to minimum standards.

Like so many other incompetent, slothful people in history, the servant of the parable tries to justify his poor performance by blaming the master. He accuses the master of being a thief, or at least an unscrupulous exploiter. "Then he which had received one talent came and said, Lord, I knew thee that thou art an hard man, reaping where thou hast not sown, and gathering where thou hast not strawed. And I was afraid, and went and hid thy talent in the earth: lo, there thou hast that is thine" (vv. 24-25).

What was the slothful servant's accusation of the master? Clearly, he was accusing him of being a capitalist. The master is rich, yet he does not go into the fields to labor. He expects a positive return on his money, even though he goes away on a journey. In short, the servant is an incipient Marxist. He believes, as Marx did, in the labor theory of value. He also believes in Marx's exploitation theory of profits. Anyone who gets money without working for a living is nothing but an exploiter, living on the labor of the poor. The servant calls him "a hard man." (Theologically speaking, this is the covenant-breaker's accusation against God: God is an unfair exploiter.)

The master accepts the ideological challenge. He reminds the servant that he is indeed a hard man, meaning someone who has the lawful authority to establish standards of profitable performance, as well as the authority to hand out rewards and punishments. He admits freely to the servant that, as a successful capitalist, he does not personally go into the fields to plant and reap, yet he reaps a profit. "His lord answered and said unto him, Thou wicked and slothful servant, thou knewest that I reap where I sowed not, and gather where I have not strawed" (v. 26). Then he tells the servant the minimum that he is entitled to, an interest return: "Thou oughtest therefore to have put my money to the exchangers, and then at my coming I should have received mine own with usury" (v. 27). Luke 19:23 reads: "Wherefore then gavest not thou my money into the bank, that at my coming I might have required mine own with usury?"

The Legitimacy of Interest

The King James translators used the English word usury to translate a Greek word that is more accurately translated as interest. This discussion of interest here is very revealing, for two reasons. First, this parable of God's kingdom acknowledges that interest-taking is legitimate. God eventually comes to every person and demands a positive return on whatever had been entrusted to him by God. The master had done without the use of his funds during his absence. He is therefore entitled to a minimum return: interest.

Second, the parable clearly distinguishes between profits and interest. The other two stewards each produced a profit of 100 percent. They received the greater praise and greater visible rewards. The minimum required performance was an interest payment. The slothful servant had been unwilling to take even the minimal risk of handing the money over to specialists in money-lending, who would seek out entrepreneurs to lend the money to, entrepreneurs who would then pay a competitive return to the money-lenders on this passively managed investment.

In other words, the master's capital was supposed to become productive. Each steward had to become an entrepreneur, or else had to seek out an entrepreneur who would put the money to economically productive uses. The talent was not to sit in the earth; it was to perform a socially useful function.

The Entrepreneur and the Banker

The economic agent who is on the cutting edge of both prediction and production is the entrepreneur. The first two men in the parable were entrepreneurs. They went out and found ways of investing the master's money that produced a positive rate of return. As the parable presents it, this rate of return was higher than what could have been earned by depositing the money with money-lenders. Thus, the entrepreneur is understood to be someone who bears much greater risk than someone who deposits money in a bank. The economist calls this form of risk uncertainty. It cannot be estimated in advance. It involves guesswork, unlike the depositor who is promised a specific rate of interest when he deposits his money.

The only way that the banker can afford to pay out a promised return is because he successfully seeks out borrowers (entrepreneurs) who produce an even higher rate of return. The banker makes his living on the difference between the interest payment which the borrower pays to him and what he in turn pays to the depositors.

The future is uncertain to men. We do not know it perfectly. We barely know it at all. We see the future as though we were peering through a darkened glass. Nevertheless, all of life involves forecasting. There is no escape. We must all bear some degree of uncertainty. But some people are willing to bear more of it than others, and of these, some are more successful in dealing with it. In economic terminology, some produce greater profits than others. Profit is a residual that remains, if at all, only after all costs of the business have been paid, including interest.

Banking: Reducing Uncertainty

The banker is able to offer a special service to investors. He can diversify depositors' uncertainty by lending to many people — people who, like the servants in the parable, have performed successfully in the past. They have "a track record," to use the language of horse racing. By lending out money to many borrowers, the banker therefore converts a portion of the depositors' uncertainty into risk, meaning from the statistically incalculable to the statistically calculable. The banker is like an insurer. In fact, in the Middle Ages, the bank was an insurance company, since both church and State had made it illegal for Christians to ask or pay interest.5 The modern profession of banking grew out of the marine insurance guild, which was legal in the Middle Ages.6

What does an insurance company do? Its statisticians (actuarians) calculate the likelihood of certain kinds of undesirable events in large populations. These unpleasant events cannot be statistically calculated individually, but they can be calculated collectively if the population involved is large enough. The seller of insurance then persuades members of these large populations to pay periodic premiums so as to "pool" their risks. When one member of the pool suffers the event that has been insured against, he is reimbursed from the pool of assets. Hence, some of life's inescapable and individually incalculable uncertainties are converted to calculable risk by means of diversification: "the law of large numbers." 7

The same is true of banking. Borrowers will seldom all go bankrupt at once. Most borrowers will repay their debts as specified in their loan agreements. Bad loans are more than offset by the good ones. Thus, the banker can offer a fixed rate of return to depositors. In almost all cases, depositors will be repaid as promised because most of the borrowers repay their loans as promised. (The exception is in a depression, when banks fail. Depressions are the result of prior monetary inflation, which in our day means fractional reserve banking.8)

What we must understand is that the master in this parable protects his funds in much the same way. He seeks out a group of potential entrepreneurs. He gives each of them an amount of money to invest. He makes predictions regarding their future performance based on their past performance, and then he allocates the distribution of his assets in terms of this estimation. He protects his portfolio by diversification.

He is not an interest-seeking banker, however. The money he invests is his own. He is not acting as the legal agent of other depositors. He legally claims all of the profits. He does not contract with borrowers who agree in advance to pay him a fixed rate of interest. The entrepreneurs are strictly his legal subordinates, unlike the relationship between banker and borrower.

The Forfeited Productivity of Inaction

The master in the parable is outraged by the coin-burying servant. The parable is intended to show the subordinate (indebted) position of all men before God. The servant was cast into outer darkness because he was an unprofitable servant (v. 30). The parable stands as a warning to all men because the Bible teaches that all people apart from grace are unprofitable servants (Luke 17:10).9 This is why we need a profitable servant as our intermediary before God, our perfect sin-bearer. But to understand our relationship of indebtedness to God, the parable's language must be taken seriously. We cannot make accurate theological conclusions about the broader meaning of the parable if the symbolic reference points of the parable are themselves inaccurate, let alone immoral.

There is no question that the master not only approves of taking interest, he sends the servant to the nether regions for not taking it. This is strong imagery! The interest payment belongs to the master. By having refused to deposit the master's money with the money-lenders, the servant has in effect stolen the master's rightful increase. The servant was legally obligated to protect the master's interests, and interest on his money was the minimum requirement. He failed. The master's judgment of the servant's past performance had been accurate; he was entitled to only one talent initially, for he had not demonstrated competence previously. Had he been given more, he would have wasted more.

The idea that the interest return was the master's minimum expectation leads us to the question of the origin of interest. Why did the master deserve an interest return? Because he had possession of an asset that could have been put to productive use, but was not. He had forfeited an economic return that could have been his. This concept of the forfeited return appeared in medieval economic literature as the doctrine of lucrum cessans. The owner of money who could have made a profit by investing it elsewhere, but who loaned the money to someone, was said by some theologians to be entitled to an interest payment from the borrower because of the income he had forfeited. Interest compensated the lender for the opportunity he had missed.

This raises the whole question of cost. What is the cost of any action or any purchase? It is the value of whatever has to be forfeited, i.e., the value of the most valuable foregone use. If I do one thing with my money, I cannot do something else with it. The value of whatever I would actually have done but did not do is what it costs me to do whatever I do.

The lender who transfers to another person the use of an asset, monetary or nonmonetary, has given up whatever other opportunities might have been available to him. There are always other opportunities available. There is therefore always a cost to the lender of lending money.

The master in the parable was being gracious to the servant. He recognized from the beginning that the man was not very competent. The master did not tell the servant that he had failed because he had not made 100 percent on the money entrusted to him. He told him only that he had failed because he had not earned an interest payment. This is the least that the master legitimately expected.

The master probably could have doubled his money by entrusting it to either of the first two servants. But he had sought greater economic safety instead. He had adopted the principle of risk reduction through portfolio diversification. You get a lower rate of return but a more sure return. But the master had been cheated. He could have deposited his money directly with the money-lenders instead of giving it to the servant. That would have been safer — greater diversification through the bank — and it almost certainly would have produced a positive rate of return, however low. Instead, he received only his original capital in return.

He had forfeited his legitimate interest payment because he had transferred the asset to the slothful, risk-aversive servant. This servant is a model of wickedness, not because he was actively evil, but that he was passively unproductive. He did nothing with that which had been entrusted to him. Doing nothing is sufficient to get you cast into hell, when doing the minimum would at least quench the master's wrath. (Warning: only one man in history has ever performed this minimum: Jesus Christ.)

Interest and Capitalization

Is interest-taking morally legitimate? This debate has been going on since at least the days of Aristotle, who regarded money as sterile and interest therefore unnatural.10 But if money is sterile, why have men throughout history paid lenders to gain access to its use for a period? How are so many people fooled into paying for the use of a sterile asset? Besides, interest is a phenomenon of every loan, not just loans of money. Modern economics teaches this; so does the Bible.11

It is obvious that the phenomenon of interest is not confined to money. Aristotle was incorrect. The phenomenon of interest applies to every scarce economic resource. We always discount future value. Whatever we own in the present is worth more to us than the promise of owning that same item in the future. Promises to repay can be broken (the risk factor), but more to the point, the present commands a price premium over the future.12

We live in the present. We make all of our decisions in the present. We enjoy the use of our assets in the present. While wise people plan for the future by purchasing expected streams of future income by buying assets that they expect to produce net income over time, they purchase these hoped-for streams of income at a discount. The rate of discount that we apply to any stream of expected future income is called the rate of interest. Mises called it time-preference.

Thus, the rate of interest is not exclusively a monetary phenomenon. Interest is a universal discount that we apply to every economic service that we expect to receive in the future. We buy a hoped-for stream of rents; we can buy them for cash; but we expect a discount for cash. This purchase at a discount for cash is called capitalization. It is the heart of capitalism. It is the heart of every society more advanced than the utterly primitive.

The person who lends money at zero interest is clearly forfeiting a potential stream of income. He will seldom do this voluntarily, except for charitable reasons. The ownership of the asset offers him an expected stream of income: psychological, physical, or monetary. If it did not offer such a stream of income, it would be a free good. It would not be demanded. It would therefore not command a price. The owner expects to receive a stream of income. He chooses the degree of risk that he is willing to accept, and he then refuses to lend the asset for less than the interest rate appropriate to this degree of risk.

The borrower compensates the owner for his use of the owner's asset, or its exchange value, for a specified period of time. He borrows it only because he values its stream of services more highly than he values the extra payment (interest) to the owner above the rental income generated by the asset. He expects to make a profit of some kind on the temporary exchange of control over it.

Conclusion

Non-fractional reserve banking and the taking of interest are both biblically legitimate. The parable of the talents should be sufficient proof for anyone who is not trying to make an overnight theological reputation for himself based on the promotion of the utterly fantastic. We should take the Bible seriously in preference to Aristotle, and also in preference to the economics of love.13 The capitalization of long-term assets, including human services is biblically legitimate.

Again, I acknowledge that men, in their quest for autonomy from God, are willing to become slaves of sin, and therefore in principle slaves of other men. I recognize the New Testament principle that it is best to owe no man anything (Rom. 13:8a). I also recognize that modern economics has promoted the ideal of perpetual debt for perpetual prosperity, and that a world so constructed will eventually collapse. But to place temporal limits on the judicial enforceability of the discounting of future long-term human services, because the Bible requires that we restrain man's overconfidence about his long-term future, is not the same as denying that there is an inescapable discounting (capitalization) process between the present value of present goods and the present value of expected future goods.

With respect to capitalized debt, if both the lender and the borrower agree that a piece of collateral is acceptable in exchange for the defaulted loan, then the debtor is not in debt, net. He has an offsetting asset. He wants the money in cash; the lender would rather have the money over time. The existence of the collateral reduces the likelihood that the debtor will default. The debtor is therefore not a servant of the lender in this case. Nevertheless, if the loan involves the potential loss of a man's home, meaning his status and his own self-evaluation, then he is in a form of bondage. But if he owns investment assets (a house, for example) with a mortgage on it, and he risks losing the house if he defaults, then this voluntary transaction is merely a shifting of risk to the liking of both transactors. The lender feels better about the future with a stream of income guaranteed by the value of the collateral. The borrower feels better about owning the collateral and paying the money. Neither is a servant; neither is a master.

The top priority here is the multiplication of assets in the broadest sense. God grants assets to His stewards. He demands a positive rate of return.14 He who hides his assets is comparable to the person who hides his candle under a basket. God is cheated by such seemingly low-risk investing.

Footnotes:
1.
This bulk of this chapter appeared first in Gary North, Tools of Dominion: The Case Laws of Exodus (Tyler, Texas: Institute for Christian Economics, 1990), ch. 23.
2.
Ray R. Sutton, That You May Prosper: Dominion By Covenant (Tyler, Texas: Institute for Christian Economics, 1987). Revised edition, 1992.
3.
Ludwig von Mises, Bureaucracy (Spring Mills, Pennsylvania: Libertarian Press, [1944] 1983).
4.
Frank H. Knight, Risk, Uncertainty and Profit (New York: Harper Torchbooks, [1921] 1965).
5.
Jews could legally lend to Christians, which is why Jews from the middle ages onward have been found in banking. It was a near-monopoly granted to them by Christian legislators.
6.
John T. Noonan, The Scholastic Analysis of Usury (Cambridge, Massachusetts: Harvard University Press, 1957), ch. 10.
7.
Peter L. Bernstein, Against the Odds: The Remarkable Story of Risk (New York: Wiley, 1996).
8.
Ludwig von Mises, Human Action: A Treatise on Economics (New Haven, Connecticut: Yale University Press, 1949), ch. 20.
9.
Gary North, "Unprofitable Servants," Biblical Economics Today (Feb./March 1983).
10. "For money was intended to be used in exchange, but not to increase at interest. And this term interest, which means the birth of money from money, is applied to the breeding of money because the offspring resembles the parent. That is why of all modes of getting wealth, this is the most unnatural." Aristotle, The Politics, I:9., Stephen Everson, ed. (New York: Cambridge University Press, 1988), p. 15.
11.
"Thou shalt not give him thy money upon usury, nor lend him thy victuals for increase" (Lev. 25:37). "Thou shalt not lend upon usury to thy brother; usury of money, usury of victuals, usury of any thing that is lent upon usury: Unto a stranger thou mayest lend upon usury; but unto thy brother thou shalt not lend upon usury: that the LORD thy God may bless thee in all that thou settest thine hand to in the land whither thou goest to possess it" (Deut. 23:19-20).
12.
Mises, Human Action, ch. 19.
13.
North, Tools of Dominion, Appendix F: "Lots of Free Time: The Existentialist Utopia of S. C. Mooney."
14.
This is possible only because He wipes away the effects of sin.

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