Capital for All

Libertarians and conservatives love to talk about “equality of opportunity” vs. “equality of outcome.” Someone who puts in 60 hours/week of hard work starting up a business deserves more income than someone who puts in 30 hours/week in a low stress job and 30 hours/week smoking pot and watching television. The same goes for someone who works hard at producing something that others want vs. working hard on a project just because it is personally satisfying. Equal income is not equality.

An open market without guild requirements, undue licensing requirements or artificial regulatory overhead does much for equality of opportunity. There is much that can be done that increases both freedom and economic equality, while reducing the size of government. But even with these measures taken, there remains a glaring inequality of opportunity that is based on ancestry versus personal merit: access to capital.

The Bible addresses this in several ways, one of which is the Jubilee law which I have already covered. Land functions much like capital, and land can be mortgaged for capital. But the Bible calls for more.

Wealthy Hebrews were expected to loan to the poor – at zero interest. Do note that this was zero interest using a hard money currency; i.e., no inflation. How much one was obligated to loan was not specifically mentioned. The prohibition on charging interest to countrymen was explicit. (Hebrews were allowed to charge foreigners interest, however.)

A zero interest loan is a form of charity and was understood as such. But by providing loans instead of gifts, charity monies could get stretched farther. It was possible to go beyond providing mere needs to helping the poor provide for wants and ambitions.

Any form of handout is subject to abuse. A person who fakes neediness is robbing from the truly needy. However, with loans such abuse is kept to a minimum. A person who takes largesse in the form of a loan to buy luxuries is in for trouble when it comes time to pay the loan back. In ancient times the terms were quite stern: to default on such a loan was to become an indentured servant for up to six years. Before condemning this system keep in mind:

1. Such lack of bankruptcy eliminated the need for collateral – rather important for the poor who need capital.
2. The indentured servants were to be treated as employees, not slaves.
3. At the end of the term of indenture, the servant was to be given capital on the way out.

Contrast this with the modern situation. Poor people have to pay extra interest in return for easy bankruptcy. This can mean that loans may not be available at all. Without the availability of loans for capital, a modern poor person needs to be a wage slave before getting the capital. In the Biblical system the capital came first and the wage slavery was bypassed if the capital was used wisely. Under the Biblical system you got the opportunity to stay independent and only had to work for someone else if you blew your chance.

Consider someone growing up in a modern housing project who has no savings, no credit history and little exposure to a work ethic. Under the Biblical system that person would have a chance to start up a farm or business using zero interest money. If that person were to fritter away that opportunity, spending the loan on fun instead of business, then that person would become a servant for a time, gaining continuous exposure to someone who does have a work ethic. Upon completion of that term, the person would get another helping of capital in return for labor done, another chance at independence with both free and clear money and lessons learned.

That said, there is much potential for abuse of a system allowing indentured servitude, so I do not advocate going all the way back to such a system. But we can learn from it.

Modern Applications:

Perhaps the closest modern application of this principle is the guaranteed student loan program. The nominal interest rates are low, and when inflation is factored in, the real interest rates are very low. The fact that student loans cannot be defaulted through bankruptcy has some analog to indentured servitude. The fact that such loans are only for education does target the monies to a form of capital improvement vs. luxury spending.

Alas, such laws are not much good for those who gain little from college. Most people are not academically inclined; either they learn better through doing or simply have limited learning capacity. Denying these people capital is regressive.

A program that mimics serving an indenture and then getting capital is the GI Bill. This was a very successful program: giving people scholarships after they experience the rigors of military service means they are likely to have better study habits. The down sides of such a program are that it requires a delay before going to college and that it does not benefit those who are not academically inclined.

A couple of possible applications of this principle for the modern world come to mind:

The first possibility would be a modification of bankruptcy law so that people could get low interest loans without collateral in return for more difficulty in declaring bankruptcy. In return for priority in payment, lenders would not be allowed to charge the outrageously high interest and penalties that credit card companies charge when payments go late. Such loans should be limited to those who can prove self-responsibility by means other than age, such as by living independently for a time without incurring debt or by doing a term of military service.

A second possibility would be to modify the citizen’s dividend mentioned in the previous section. Those going to college or starting a business could request an advance on their dividend. Then during their earning years, they get no dividend. The dividend would resume by retirement age, taking the place of Social Security. Once again, proof of self-responsibility would be a good idea before allowing this “loan.”

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Copyright 2004, Carl S. Milsted, Jr. All rights reserved.