Of Usury, from Brant's Stultifera Navis (the Ship of Fools); woodcut attributed to Albrecht Dürer

Usury ( /ˈjuːʒəri/^[1]) is the practice of charging excessive, unreasonably high, and often illegal interest rates on loans.^[2][3]

Originally, when the charging of interest was still banned by Christian churches, usury simply meant 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). In countries where the charging of interest became acceptable, the term came to be used for interest above the rate allowed by law. The term is largely derived from Christian religious principles; Riba is the corresponding Arabic term and ribbit is the Hebrew word.

The pivotal change in the English-speaking world seems to have come with the permission to charge interest on lent money^[4]: particularly the 1545 act "An Act Against Usurie" (37 H.viii 9) of King Henry VIII of England (see book references).

Historical meaning[link]

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Banking during Roman times was different from modern banking. During the Principate, most banking activities were conducted by private individuals, not by such large banking firms as exist today; almost all moneylenders in the Empire were private individuals because anybody that had any additional capital and wished to lend it out could easily do so.^[5]

The rate of interest on loans varied in the range of 4–12 percent; but when the interest rate was higher, it typically was not 15–16 percent but either 24 percent or 48 percent. The apparent absence of intermediary rates suggests that the Romans may have had difficulty calculating the interest due on anything other than mathematically convenient rates. They quoted them on a monthly basis, as in the loan described here, and the most common rates were multiples of twelve. Monthly rates tended to range from simple fractions to 3–4 percent, perhaps because lenders used Roman numerals.^[6]

Moneylending during this period was largely a matter of private loans advanced to persons short of cash, whether persistently in debt or temporarily until the next harvest. Mostly, it was undertaken by exceedingly rich men who were prepared to take on a high risk if the profit looked good; interest rates were fixed privately and were almost entirely unrestricted by law. Investment was always regarded as a matter of seeking personal profit, often on a large scale. Banking was of the small, back-street variety, run by the urban lower-middle class of petty shop-keepers. By the 3rd century, acute currency problems in the Empire drove them into decline.^[7] The rich who were in a position to take advantage of the situation became the money-lenders when the ever-increasing tax demands in the last declining days of the Empire crippled and eventually destroyed the peasant class by reducing tenant-farmers to serfdom. It was evident that usury meant exploitation of the poor.^[8]

The First Council of Nicaea, in 325, forbade clergy from engaging in usury^[9] (canon 17). At the time, usury was interest of any kind, and the canon merely forbade the clergy to lend money on interest above 1 percent per month (12.7% APR). Later ecumenical councils applied this regulation to the laity.^[9][10]

Lateran III decreed that persons who accepted interest on loans could receive neither the sacraments nor Christian burial.^[11] Pope Clement V made the belief in the right to usury a heresy in 1311, and abolished all secular legislation which allowed it.^[12] Pope Sixtus V condemned the practice of charging interest as "detestable to God and man, damned by the sacred canons and contrary to Christian charity."^[12]

Theological historian John Noonan argues that "the doctrine [of usury] was enunciated by popes, expressed by three ecumenical councils, proclaimed by bishops, and taught unanimously by theologians."^[10]

Certain negative historical renditions of usury carry with them social connotations of perceived "unjust" or "discriminatory" lending practices. The historian Paul Johnson, comments:

Most early religious systems in the ancient Near East, and the secular codes arising from them, did not forbid usury. These societies regarded inanimate matter as alive, like plants, animals and people, and capable of reproducing itself. Hence if you lent 'food money', or monetary tokens of any kind, it was legitimate to charge interest.^[13] Food money in the shape of olives, dates, seeds or animals was lent out as early as c. 5000 BC, if not earlier. ...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.^[14]

The Hebrew Bible regulates interest taking. Interest can be charged to strangers but not between Hebrew.

Deuteronomy 23:19 Thou shalt not lend upon interest to thy brother: interest of money, interest of victuals, interest of any thing that is lent upon interest. 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.^[15]

Israelites were forbidden to charge interest on loans made to other Israelites, but allowed to charge interest on transactions with non-Israelites, as the latter were often amongst the Israelites for the purpose of business anyway, but in general, it was seen as advantageous to avoid getting into debt at all to avoid being bound to someone else. Debt was to be avoided and not used to finance consumption, but only when in need. However, the laws against usury were among the many which the prophets condemn the people for breaking.^[16]

Johnson contends that the Torah treats lending as philanthropy in a poor community whose aim was collective survival, but which is not obliged to be charitable towards outsiders.

A great deal of Jewish legal scholarship in the Dark and the Middle Ages was devoted to making business dealings fair, honest and efficient.^[17]

Usury (in the original sense of any interest) was at times denounced by a number of religious leaders and philosophers in the ancient world, including Plato, Aristotle, Cato, Cicero, Seneca,^[18] Aquinas,^[19] Muhammad,^[20] Moses,^[21] Philo^{[citation needed]} and Gautama Buddha^{[citation needed]}.^[22]

For example, Cato in his De Re Rustica said:

"And what do you think of usury?" — "What do you think of murder?"

But one must always consider that usury, in historical context, has always been inextricably linked to economic abuses, mostly of the masses and of the poor; but sometimes of the financier and royalty, as bankrupt royalty has led to many a demise, thus frowning upon lending at interest or for a euphemistic "just profit"^{[clarification needed]}. The main moral argument is that usury creates excessive profit and gain without "labor" which is deemed "work" in the Biblical context. Profits from usury are argued not to arise from any substantial labor or work but from mere avarice, greed, trickery and manipulation. In addition, usury is said to create a divide between people due to obsession with monetary gain. Most importantly, usury is the derivation of profit from biological time, which is linked to life, considered sacred, God-given and divine, leading to excessive worrying about money instead of God, thus subjugating a God-given sanctity of life to man-made artificial notions of material wealth.

Interest of any kind is forbidden in Islam. As such, specialized codes of banking have developed to cater to investors wishing to obey Qur'anic law. (See Islamic banking)

As the Jews were ostracized from most professions by local rulers, the church and the guilds, they were pushed into marginal occupations considered socially inferior, such as tax and rent collecting and moneylending. Natural tensions between creditors and debtors were added to social, political, religious, and economic strains.^[23]

...financial oppression of Jews tended to occur in areas where they were most disliked, and if Jews reacted by concentrating on moneylending to non-Jews, the unpopularity — and so, of course, the pressure — would increase. Thus the Jews became an element in a vicious circle. The Christians, on the basis of the Biblical rulings, condemned interest-taking absolutely, and from 1179 those who practiced it were excommunicated. Catholic autocrats frequently imposed the harshest financial burdens on the Jews. The Jews reacted by engaging in the one business where Christian laws actually discriminated in their favor, and became identified with the hated trade of moneylending.^[24]

Peasants were forced to pay their taxes to Jews who were economically coerced into becoming the "front men" for the lords. The Jews would then be identified as the people taking their earnings. Meanwhile the peasants would remain loyal to the lords.^{[citation needed]}

In England, the departing Crusaders were joined by crowds of debtors in the massacres of Jews at London and York in 1189–1190. In 1275, Edward I of England passed the Statute of Jewry which made usury illegal and linked it to blasphemy, in order to seize the assets of the violators. Scores of English Jews were arrested, 300 were hanged and their property went to the Crown. In 1290, all Jews were expelled from England, and allowed to take only what they could carry; the rest of their property became the Crown's. The usury was cited as the official reason for the Edict of Expulsion. However, not all Jews were expelled: it was easy to convert to Christianity and thereby avoid expulsion. Many other crowned heads of Europe expelled the Jews, although again conversion to Christianity meant that you were no longer considered a Jew (see the articles on marranos or crypto-Judaism).

The growth of the Lombard bankers and pawnbrokers, who moved from city to city was along the pilgrim routes.

In the 16th century, short-term interest rates dropped dramatically (from around 20–30% p.a. to around 9–10% p.a.). This was caused by refined commercial techniques, increased capital availability, the Reformation, and other reasons. The lower rates weakened religious scruples about lending at interest, although the debate did not cease altogether.

The papal prohibition on usury meant that it was a sin to charge interest on a money loan. As set forth by Thomas Aquinas, the natural essence of money was as a measure of value or intermediary in exchange. The increase of money through usury violated this essence and according to the same Thomistic analysis, a just transaction was one characterized by an equality of exchange, one where each side received exactly his due. Interest on a loan, in excess of the principal, would violate the balance of an exchange between debtor and creditor and was therefore unjust.

Some have suggested that the development of double entry bookkeeping would provide a powerful argument in favor of the legitimacy and integrity of usury but this is an obvious non-sequitur. Business has always been accepted as a right and proper activity^[26] by all cultures, including those that reject usury.

Religious context[link]

The Old Testament[link]

From the King James Version

[Exodus 22:25] If thou lend money to any of my people that is poor by thee, thou shalt not be to him as an usurer, neither shalt thou lay upon him usury.

[Leviticus 25:36] Take thou no usury of him, or increase: but fear thy God; that thy brother may live with thee.

[Leviticus 25:37] Thou shalt not give him thy money upon usury, nor lend him thy victuals for increase.

[Deuteronomy 23:19] Thou shalt not lend upon usury to thy brother; usury of money, usury of victuals, usury of any thing that is lent upon usury:

[Deuteronomy 23:20] 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.

[Ezekiel 18:17] He withholds his hand from sin and takes no usury or excessive interest.

Torah[link]

The following quotations are from the Hebrew Bible, 1917 Jewish Publication Society translation:

If thou lend money to any of My people, even to the poor with thee, thou shalt not be to him as a creditor; neither shall ye lay upon him interest. (Exodus, 22:25)^[27]

And if thy brother be waxen poor, and his means fail with thee; then thou shalt uphold him: as a stranger and a settler shall he live with thee. Take thou no interest of him or increase; but fear thy God; that thy brother may live with thee. Thou shalt not give him thy money upon interest, nor give him thy victuals for increase. (Leviticus, 25:35-37)

Thou shalt not lend upon interest to thy brother: interest of money, interest of victuals, interest of any thing that is lent upon interest. 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. (Deuteronomy, 23:20-21)

New Testament[link]

This article may be confusing or unclear to readers. Please help clarify the article; suggestions may be found on the talk page. (March 2011)

Christ drives the Usurers out of the Temple, a woodcut by Lucas Cranach the Elder in Passionary of Christ and Antichrist.^[28]

The New Testament contains references to usury, notably in the Parable of the talents:

"Thou oughtest therefore to have put my money to the exchangers, and then at my coming I should have received mine own with usury."

—Matthew 25:27

"…Out of thine own mouth will I judge thee, thou wicked servant. Thou knewest that I was an austere man, taking up that I laid not down, and reaping that I did not sow. Wherefore then gavest not thou my money into the bank, that at my coming I might have required mine own with usury?"

—Luke 19:22-23

Finally the master said to him 'Why then didn't you put my money on deposit, so that when I came back, I could have collected it with interest?'

—Luke 19:23

Qur'an[link]

The following quotations are English translations from the Qur'an:

Those who charge usury are in the same position as those controlled by the devil's influence. This is because they claim that usury is the same as commerce. However, God permits commerce, and prohibits usury. Thus, whoever heeds this commandment from his Lord, and refrains from usury, he may keep his past earnings, and his judgment rests with God. As for those who persist in usury, they incur Hell, wherein they abide forever (Al-Baqarah 2:275)

God condemns usury, and blesses charities. God dislikes every disbeliever, guilty. Lo! Those who believe and do good works and establish worship and pay the poor-due, their reward is with their Lord and there shall no fear come upon them neither shall they grieve. O you who believe, you shall observe God and refrain from all kinds of usury, if you are believers. If you do not, then expect a war from God and His messenger. But if you repent, you may keep your capitals, without inflicting injustice, or incurring injustice. If the debtor is unable to pay, wait for a better time. If you give up the loan as a charity, it would be better for you, if you only knew. (Al-Baqarah 2:276-280)

O you who believe, you shall not take usury, compounded over and over. Observe God, that you may succeed. (Al-'Imran 3:130)

And for practicing usury, which was forbidden, and for consuming the people's money illicitly. We have prepared for the disbelievers among them painful retribution. (Al-Nisa 4:161)

The usury that is practiced to increase some people's wealth, does not gain anything at God. But if people give to charity, seeking God's pleasure, these are the ones who receive their reward many fold. (Ar-Rum 30:39)

Scholastic theology[link]

The first of the scholastics, Saint Anselm of Canterbury, led the shift in thought that labeled charging interest the same as theft. Previously usury had been seen as a lack of charity.

St. Thomas Aquinas, the leading theologian of the Catholic Church, argued charging of interest is wrong because it amounts to "double charging", charging for both the thing and the use of the thing. Aquinas said this would be morally wrong in the same way as if one sold a bottle of wine, charged for the bottle of wine, and then charged for the person using the wine to actually drink it. Similarly, one cannot charge for a piece of cake and for the eating of the piece of cake. Yet this, said Aquinas, is what usury does. Money is exchange-medium. It is used up when it is spent. To charge for the money and for its use (by spending) is to charge for the money twice. It is also to sell time since the usurer charges, in effect, for the time that the money is in the hands of the borrower. Time, however, is not a commodity that anyone can sell. (For a detailed discussion of Aquinas and usury, go to Thought of Thomas Aquinas).

Labor is time, or if preferred, is measured by time. Workers are paid by the hour, by the day, by the week, by the month, rarely by the quarter or year. Labor is not effort, energy, expenditure of fuel (food). It is nothing but one's time. As an example of labor without the expenditure of energy: A security guard whose job is just to be there. Perhaps nothing happens and he can read a book, assemble model trains, or even sleep, as long as he wakes up when the alarm rings. He has spent not one calorie of energy for the employer above what it takes just to live. Yet he is paid (compensated) for his time, for his labor. Even share-croppers and pieceworkers are compensated for the time they spent adding value to the raw materials. The sharecropper hands over the agreed portion of the increase (crop; harvest) to the owner of the land or the leaseholder in return for whatever the landlord provided: the land, perhaps the seed, farming tools, supplies, etc. The pieceworker is compensated for the labor, the time he spent, in adding value to the raw materials: the tools, the supplies, the workspace, light, heat, etc., according to the agreement made with the boss (client). If one labors for compensation, what he is compensated for is his time. As an even exchange of value, he has neither gained or lost anything. He has merely converted something he was going to lose anyway, time from his life, which, as we all know, is limited though we do not know in advance what the limit is, into something else that he wanted. Whether he is paid in goods, services or money is irrelevant. Money is but a medium of exchange that is much more efficient than straight barter. Only a miser wants money for itself, just to possess it. Normal people want money because it allows them to convert one thing that they are willing to sacrifice into something else that they actively want.

This did not, as some think, prevent investment. What it stipulated was that in order for the investor to share in the profit he must share the risk. In short he must be a joint-venturer. Simply to invest the money and expect it to be returned regardless of the success of the venture was to make money simply by having money and not by taking any risk or by doing any work or by any effort or sacrifice at all. This is usury. St Thomas quotes Aristotle as saying that "to live by usury is exceedingly unnatural". Islam likewise condemns usury but allowed commerce (Al-Baqarah 2:275) - an alternative that suggests investment and sharing of profit and loss instead of sharing only profit through interests. Judaism condemns usury towards Jews, but allows it towards non-Jews. St Thomas allows, however, charges for actual services provided. Thus a banker or credit-lender could charge for such actual work or effort as he did carry out e.g. any fair administrative charges. The Catholic Church, in a decree of the Fifth Council of the Lateran, expressly allowed such charges in respect of credit-unions run for the benefit of the poor known as "montes pietatis".^[29]

In the 13th century Cardinal Hostiensis enumerated thirteen situations in which charging interest was not immoral.^[30] The most important of these was lucrum cessans (profits given up) which allowed for the lender to charge interest "to compensate him for profit foregone in investing the money himself." (Rothbard 1995, p. 46) This idea is very similar to Opportunity Cost. Many scholastic thinkers who argued for a ban on interest charges also argued for the legitimacy of lucrum cessans profits (e.g. Pierre Jean Olivi and St. Bernardino of Siena).

Other contexts[link]

Usury in literature[link]

In The Divine Comedy Dante places the usurers in the inner ring of the seventh circle of hell. (Cultural attitudes have changed a great deal since the 14th century as the usurers' ring was shared only by the blasphemers and sodomites.)

In the 16th century, it was necessary for Shylock to convert to Christianity and forsake usury before he could be redeemed in the climax of The Merchant of Venice. Thomas Lodge's didactic tirade against London moneylenders, An Alarum against Usurers containing tried experiences against worldly abuses tried to incite the educated class against the harm usurers seemed to induce in their victims.

By the 18th century, usury was more often treated as a metaphor than a crime in itself, so Jeremy Bentham's Defense of Usury was not as shocking as it would have appeared two centuries earlier.

In Honoré de Balzac's 1830 novel Gobseck, the title character, who is a usurer, is described as both "petty and great—a miser and a philosopher..."^[31]

In the early 20th century Ezra Pound's anti-usury poetry was not primarily based on the moral injustice of interest but on the fact that excess capital was no longer devoted to artistic patronage, as it could now be used for capitalist business investment.^[32]

Usury and the law[link]

The Magna Carta commands, "If any one has taken anything, whether much or little, by way of loan from Jews, and if he dies before that debt is paid, the debt shall not carry usury so long as the heir is under age, from whomsoever he may hold. And if that debt falls into our hands, we will take only the principal contained in the note."^[33]

"When money is lent on a contract to receive not only the principal sum again, but also an increase by way of compensation for the use, the increase is called interest by those who think it lawful, and usury by those who do not." (William Blackstone's Commentaries on the Laws of England).

In the United States, usury laws are state laws that specify the maximum legal interest rate at which loans can be made. Congress has opted not to regulate interest rates on purely private transactions, but it arguably has the power to do so under the interstate commerce clause of Article I of the Constitution.

Congress opted to put a federal criminal limit on interest rates by the Racketeer Influenced and Corrupt Organizations Act (RICO) definitions of "unlawful debt", which make it a federal felony to lend money at an interest rate more than twice the local state usury rate and then try to collect that "unlawful debt".^[34]

It is a federal offense to use violence or threats to collect usurious interest (or any other sort). Such activity is referred to as loan sharking, but that term is also applied to non-coercive usurious lending or even to the practice of making consumer loans without a license in jurisdictions that require licenses.

Usury and royalties[link]

Royalties are contractual obligations of the Issuer of the royalty, made for the benefit of the holder of the royalty. Royalties require the payment of an agreed percentage of revenue of the Issuer, for an agreed period of time. In the event a royalty is purchased from an Issuer, the future revenue upon which the royalty is based is unknown at the time of the original transaction. Therefore, the cumulative amount of the future royalty payments is also an unknown. Royalty payments are not interest and royalties expire without value at their maturity. To be usurious payments made and received for the use of funds must be considered interest for loaned funds which require repayment at the maturity of the loan. The value in gains by the use of the royalty should equal its payment value, excess cost or interest beyond its tangible value is illicit interest or usury.

Usury and slavery in present day[link]

While the practice of direct slavery is widely banned across the world, in some places debt-slavery is still practiced.^[35] A debtor who is found unable to repay a loan can be placed in a state of debt-slavery, a situation where-by their life and labors are directed by the lender until the debt is considered repaid.^[36] Usury is often a major part of extending this slavery, not uncommonly assisting in extending the debt-slavery onto the children of the debtor, thus making slaves of multiple generations and promoting child labor.^[37] Another form of or name for this practice is debt bondage.

Usury statutes in the United States[link]

Each U.S. state has its own statute which dictates how much interest can be charged before it is considered usurious or unlawful.

If a lender charges above the lawful interest rate, a court will not allow the lender to sue to recover the debt because the interest rate was illegal anyway. In some states (such as New York) such loans are voided ab initio.^[38]

However, there are separate rules applied to most banks. The U.S. Supreme Court held unanimously in the 1978 Marquette Nat. Bank of Minneapolis v. First of Omaha Service Corp. case that the National Banking Act of 1863 allowed nationally chartered banks to charge the legal rate of interest in their state regardless of the borrower's state of residence.^[39] In 1980, because of inflation, Congress passed the Depository Institutions Deregulation and Monetary Control Act to exempt federally chartered savings banks, installment plan sellers and chartered loan companies from state usury limits. This effectively overrode all state and local usury laws.^[40][41] The 1968 Truth in Lending Act does not regulate rates, except for some mortgages, but requires uniform or standardized disclosure of costs and charges.^[42]

In the 1996 Smiley v. Citibank case, the Supreme Court further limited states' power to regulate credit card fees and extended the reach of the Marquette decision. The court held that the word "interest" used in the 1863 banking law included fees and, therefore, states could not regulate fees.^[43]

Some members of Congress have tried to create a federal usury statute that would limit the maximum allowable interest rate, but the measures have not progressed. In July 2010, the Dodd–Frank Wall Street Reform and Consumer Protection Act, was signed into law by President Obama. The act provides for a Consumer Financial Protection Bureau to regulate some credit practices but has no interest rate limit.^[44]

Usury statutes in Canada[link]

Canada's Criminal Code limits the interest rate to 60% per year.^[45] The law is broadly written and Canada's courts have often intervened to remove ambiguity.^[46]

Ethical arguments for usury[link]

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Freedom of trade[link]

The primary ethical argument in defense of usury has been the argument of negative freedom against the "restraint of trade" since the borrower has voluntarily entered into the usury contract.^{[citation needed]} Opponents note, however, that borrowers may be tricked into signing such contracts, assume there is a usury law cap on interest that does not exist, or be driven to accept such an interest rate out of necessity.^{[citation needed]} At the same time however, except for related party transactions where feelings of compassion, guilt, etc., compel the lender to lend without interest, in un-related party transactions where neither the borrower nor the lender has any predetermined attachment to one another, there is no incentive for the lender to lend or for the borrower to repay the debt without usury.

Investment[link]

A practical argument for usury in welfare economics is that charging interest is essential to guiding the investment process, based on the claim that profits are required to direct investments to their most productive use (solving the economic calculation problem). According to this argument, interest-driven investment is essential to economic growth, and therefore to the very existence of industrial civilization. This practical argument for the utility of usury treats all "unearned" returns to capital as interest; traditionally, guaranteed interest is usurious, whereas dividends from shared ventures are less so. In this tradition, the practical case against usury does not completely apply (although replacing debt market investments with stock market savings may not always be desirable). Officially, this is how capitalist Islamic states solve the calculation problem. An example of the 'moral' difference between dividend income and interest income is found in The Merchant of Venice: Shylock lends Antonio money for trade speculation, demanding repayment in flesh should Antonio's project fail utterly (accepting none of the business risk).

Excessive rates[link]

In addition to the defense of interest as such, the practice of charging high interest rates is defended by those who point out that such rates reflect the very fact that the loans are being given to creditors with a high risk of default (in a competitive debt market the interest spread simply covers the credit risk). Economists of the Austrian school say that there is no such thing as a "just" interest rate separate from the free market equilibrium determined by the time-preferences of individual lenders and debtors. (Other free market theorists take a similar view on the merit of an unregulated debt market, but may not explain the subjective estimate of a worthwhile interest-rate bargain through time preference.)

Adverse selection and enforcement methods[link]

Some have defended the threat or use of force (legal or illegal) against non-payers (such as required by Shylock). This position is based on the idea that without force there will be a market failure—since very high interest loans will be taken up only by those intending to default. The need for enforcement stems from this adverse selection problem rather than any immorality inherent in moneylenders. See: "The market for lemons".

Today's credit reporting system in industrialized countries obviates much of the need for the use of force. Since all potential lenders can quickly learn of one's delinquent status, non-payers may find an unwilling seller for many important goods, like apartment rentals, mortgages, renting of expensive equipment without a deposit, and in many cases, insurance or employment. In the minds of many debtors, such considerations outweigh fear of force brought against them.^{[citation needed]}

Charities[link]

Some low-interest charity loans (such as small business micro-loans) defend interest-charging^{[citation needed]} since it allows for the indefinite administration of the charity, the replacement of defaulted loans, and in some cases, the creation of additional loan pools in other regions. These people say that the final "ethical result" of the interest rates justifies the means of charging them.^{[citation needed]}

Avoidance mechanisms and interest-free lending[link]

Islamic banking[link]

In a partnership or joint venture where money is lent, the creditor only provides the capital yet is guaranteed a fixed amount of profit. The debtor, however, puts in time and effort, but is made to bear the risk of loss. Muslim scholars argue that such practice is unjust.^[47] As an alternative to usury, Islam strongly encourages charity and direct investment in which the creditor shares whatever profit or loss the business may incur (in modern terms, this amounts to an equity stake in the business).

Interest-free banks[link]

The JAK members bank is a usury-free saving and loaning system.

Interest-free micro-lending[link]

Growth of the internet internationally has enabled both both business micro-lending through sites such as kickstarter as well as through global micro-lending charities where lenders make small sums of money available on zero-interest terms. Persons lending money to on-line micro-lending charity Kiva for example do not get paid any interest,^[48] although the end users to whom the loans are made may be charged interest by Kiva's partners in the country where the loan is used.^[49]

See also[link]

• Abomination (Bible)
• Contractum trinius
• Loansharking (traditional occupation of Mafiosi)
• Money changing
• Payday loans
• Predatory lending
• Vix Pervenit
• Title loan
• Usury Act 1660

References[link]

Constructs such as ibid., loc. cit. and idem are discouraged by Wikipedia's style guide for footnotes, as they are easily broken. Please improve this article by replacing them with named references (quick guide), or an abbreviated title. (October 2010)

Further reading[link]

• 'In Restraint of Usury: the Lending of Money at Interest', Sir Harry Page, The Chartered Institute of Public Finance and Accounts, London, 1985,
• The Bibliography therein - particularly:
• 'The Idea of Usury: from Tribal Brotherhood to Universal Otherhood', Benjamin Nelson, 2nd Edition, University of Chicago Press, Chicago and London, 1949, enlarged 2nd edition, 1969.
• 'Interest and Inflation Free Money: Creating an Exchange Medium That Works for Everybody and Protects the Earth', Margrit Kennedy, with Declan Kennedy: Illustrations by Helmut Creutz; New and Expanded Edition, New Society Publishers, Philadelphia, PA, USA and Gabriola Island, BC, Canada, 1995.

External links[link]

Wikiquote has a collection of quotations related to: Usury

Look up usury in Wiktionary, the free dictionary.

• Usury Laws by State (US)
• The History of Usury from Americans for Fairness in Lending
• Usury and the Church of England
• Global Islamic Finance & Commerce
• Usury is Riba in Islam, this is an exclusive site on the subject of Riba (ar-Riba, usury, interest), answering the logic and reasoning for the prohibition of usury
• USURY, A Scriptural, Ethical and Economic View, by Calvin Elliott, 1902. (a searchable facsimile at the University of Georgia Libraries; DjVu & layered PDF format)
• Catholic Encyclopedia article on Usury, 1912
• Question 78. The sin of usury (St Thomas Aquinas' Summa Theologiæ)
• Luther's Sermon on Trading and Usury
• Concordia Cyclopedia: Usury
• What Love Is This? A Renunciation of the Economics of Calvinism
• Dr. Ian Hodge on Usury
• S.C. Mooney's Response to Dr. Gary North's critique of Usury: Destroyer of Nations
• Norman Jones's article on usury from EH.NET's Encyclopedia
• Islamic definition of Usury
• Usury laws by state.
• History of Religious Injunctions Against Usury
• Origin of Modern Banking and Usury in Britain
• Buddha on Right Livelihood and Usury
• Usury (Jewish Encyclopedia, 1906 ed.)
• Usury (Beyond the Pale exposition, friends-partners.org)
• Defence of Usury by Jeremy Bentham. 1787
• Of Usury by Francis Bacon
• Thomas Geoghegan on "Infinite Debt: How Unlimited Interest Rates Destroyed the Economy"

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Sheikh Shady Alsuleiman was born in 1978 in Sydney - Australia from a Palestinian family who migrated to Australia in the late 1960s. He initially obtained an Ijazah (licence) with Sanad (complete chain back to the Prophet) in complete and sound memorization of the Holy Quran at Darul Uloom Al-Husainiah in Sindh - Pakistan.

He then travelled to the Arab world in particular Damascus - Syria for a six year journey to continue his Islamic and Arabic studies at numerous Islamic Institutions through many well-recognised scholars. In Syria, Sheikh Shady studied various Islamic subjects and modules, from Fiqh, Usool Al-Fiqh, Hadith, Mustalah al-hadith, Quranic Science and Tafseer and Arabic studies, he generally focused on and specialised in Arabic and Comparative Fiqh (Islamic Law/Jurisprudence) and received numerous Ijaza's in that field.

Sheikh Shady arrived back to Sydney in early 2001, were he began to be heavily active and involved with the Muslim youth and the second Muslim generation in Australia. He is known to be an Imam who made dramatic changes in many youths life in particular troubled youth.

Sheikh Shady is the founder of one of Australia's largest youth centres known as the UMA in Sydney, and also the founder of Sydney Islamic College that delivers Islamic studies to adults. He also held the position of the secretary of the Australian National Imams Council (ANIC) from 2006 to 2010.

He operates from various mosques in Australia. He also travels to numerous interstate and overseas countries in which he delivers lectures and participates in many different Islamic conferences and events around the world.

References[link]

External links[link]

• http://uma.org.au/ask-the-sheikh/about-sheikh-shady.html
• http://www.sydneyic.org.au/web.php/teachers/shady
• http://www.aussiemuslims.com/forums/showthread.php?t=17694
• http://www.brudirect.com/index.php/200910218934/Local-News/talk-on-islam-in-australia.html
• http://www.theaustralian.com.au/news/nation/imam-body-to-bridge-culture-gulf/story-e6frg6nf-1111112608284
• http://www.theaustralian.com.au/news/nation/muslim-body-yielding-to-extremist-views/story-e6frg6nf-1111112614679
• http://www.heraldsun.com.au/news/national/mufti-aims-for-quiet-return/story-e6frf7l6-1111112860855
• http://news.brunei.fm/2009/10/30/islamic-experience-in-australia/

Adam Smith

Born	16 June 1723 Kirkcaldy, Scotland
Died	17 July 1790(1790-07-17) (aged 67) Edinburgh, Scotland
Region	Western philosophy
School	Classical economics
Main interests	Political philosophy, ethics, economics
Notable ideas	Classical economics, modern free market, division of labour, the "invisible hand"
Influenced by Aristotle · Butler · Cantillon  · Chydenius · Hobbes · Hume · Hutcheson · Locke · Mandeville · Petty · Quesnay
Influenced Belgrano · Comte · Darwin · Engels · Friedman · Hayek · Hegel · Jevons · Keynes · Malthus · Chomsky  · Marx  · Menger  · Mill · Rand · Ricardo · Semyon Desnitsky · US Founding Fathers  · C.D.F. Reventlow
Signature

Adam Smith (baptised 16 June 1723 – 17 July 1790 [OS: 5 June 1723 – 17 July 1790]) was a Scottish social philosopher and a pioneer of political economy. One of the key figures of the Scottish Enlightenment,^[1] Smith is the author of The Principles Which Lead and Direct Philosophical Enquiries, Illustrated by the History of Astronomy, prior to 1758, The Theory of Moral Sentiments, 1759, and An Inquiry into the Nature and Causes of the Wealth of Nations, 1776. The latter, usually abbreviated as The Wealth of Nations, is considered his magnum opus and the first modern work of economics. It earned him an enormous reputation and would become one of the most influential works ever published. Smith is widely cited as the father of modern economics and capitalism and is still among the most influential thinkers in the field of economics today.^[2] In 2009, Smith was named among the 'Greatest Scots' of all time, in a vote run by Scottish television channel STV.^[3]

Smith studied social philosophy at the University of Glasgow and at Balliol College in the University of Oxford, where he was one of the first students to benefit from scholarships set up by his fellow Glaswegian John Snell. After graduating, he delivered a successful series of public lectures at Edinburgh, leading him to collaborate with David Hume during the Scottish Enlightenment. Smith obtained a professorship at Glasgow teaching moral philosophy, and during this time he wrote and published The Theory of Moral Sentiments. In his later life, he took a tutoring position that allowed him to travel throughout Europe, where he met other intellectual leaders of his day. Smith then returned home and spent the next ten years writing The Wealth of Nations, publishing it in 1776. He died in 1790 at the age of 67.

Biography[link]

Early life[link]

Smith was born to Margaret Douglas at Kirkcaldy, Fife, Scotland. His father, also named Adam Smith, was a lawyer, civil servant, and widower who married Margaret Douglas in 1720 and died two months after Smith was born.^[4] Although the exact date of Smith's birth is unknown, his baptism was recorded on 5 June 1723 at Kirkcaldy.^[5] Though few events in Smith's early childhood are known, Scottish journalist and Smith's biographer John Rae recorded that Smith was abducted by gypsies at the age of four and released when others went to rescue him.^{[N 1]} Smith was close to his mother, who likely encouraged him to pursue his scholarly ambitions.^[7] He attended the Burgh School of Kirkcaldy—characterised by Rae as "one of the best secondary schools of Scotland at that period"—from 1729 to 1737.^[6] While there, Smith studied Latin, mathematics, history, and writing.^[7]

A commemorative plaque for Smith is located in Smith's home town of Kirkcaldy.

Formal education[link]

Smith entered the University of Glasgow when he was fourteen and studied moral philosophy under Francis Hutcheson.^[7] Here, Smith developed his passion for liberty, reason, and free speech. In 1740, Smith was awarded the Snell exhibition and left to attend Balliol College, Oxford.^[8]

Smith considered the teaching at Glasgow far superior to that at Oxford, which he found intellectually stifling.^[9] In Book V, Chapter II of The Wealth of Nations, Smith wrote: "In the University of Oxford, the greater part of the public professors have, for these many years, given up altogether even the pretence of teaching." Smith is also reported to have complained to friends that Oxford officials once discovered him reading a copy of David Hume's Treatise on Human Nature, and they subsequently confiscated his book and punished him severely for reading it.^[6][10][11] According to William Robert Scott, "The Oxford of [Smith's] time gave little if any help towards what was to be his lifework."^[12] Nevertheless, Smith took the opportunity while at Oxford to teach himself several subjects by reading many books from the shelves of the large Oxford library.^[13] When Smith was not studying on his own, his time at Oxford was not a happy one, according to his letters.^[14] Near the end of his time at Oxford, Smith began suffering from shaking fits, probably the symptoms of a nervous breakdown.^[15] He left Oxford University in 1746, before his scholarship ended.^[15][16]

In Book V of The Wealth of Nations, Smith comments on the low quality of instruction and the meager intellectual activity at English universities, when compared to their Scottish counterparts. He attributes this both to the rich endowments of the colleges at Oxford and Cambridge, which made the income of professors independent of their ability to attract students, and to the fact that distinguished men of letters could make an even more comfortable living as ministers of the Church of England.^[11]

Smith's discontent at Oxford might be in part due to the absence of his beloved teacher in Glasgow, Francis Hutcheson. Hutcheson was well regarded as one of the most prominent lecturers at the University of Glasgow in his day and earned the approbation of students, colleagues, and even ordinary residents with the fervor and earnestness of his orations (which he sometimes opened to the public). His lectures endeavored not merely to teach philosophy but to make his students embody that philosophy in their lives, appropriately acquiring the epithet, the preacher of philosophy. Unlike Smith, Hutcheson was not a system builder; rather it was his magnetic personality and method of lecturing that so influenced his students and caused the greatest of those to reverentially refer to him as "the never to be forgotten Hutcheson"––a title that Smith in all his correspondence used to describe only two people, his good friend David Hume and influential mentor Francis Hutcheson.^[17]

Teaching career[link]

Smith began delivering public lectures in 1748 in University of Edinburgh, sponsored by the Philosophical Society of Edinburgh under the patronage of Lord Kames.^[18] His lecture topics included rhetoric and belles-lettres,^[19] and later the subject of "the progress of opulence". On this latter topic he first expounded his economic philosophy of "the obvious and simple system of natural liberty". While Smith was not adept at public speaking, his lectures met with success.^[20]

David Hume was a friend and contemporary of Smith.

In 1750, he met the philosopher David Hume, who was his senior by more than a decade. In their writings covering history, politics, philosophy, economics, and religion, Smith and Hume shared closer intellectual and personal bonds than with other important figures of the Scottish Enlightenment.^[21]

In 1751, Smith earned a professorship at Glasgow University teaching logic courses, and in 1752 Smith was elected a member of the Philosophical Society of Edinburgh, having been introduced to the society by Lord Kames. When the head of Moral Philosophy died the next year, Smith took over the position.^[20] He worked as an academic for the next thirteen years, which he characterized as "by far the most useful and therefore by far the happiest and most honorable period [of his life]".^[22]

Smith published The Theory of Moral Sentiments in 1759, embodying some of his Glasgow lectures. This work was concerned with how human morality depends on sympathy between agent and spectator, or the individual and other members of society. Smith defined "sympathy" as the feeling of moral sentiments. He bases his explanation not on a special "moral sense", as the third Lord Shaftesbury and Hutcheson had done, nor on utility as Hume did, but on sympathy. Following the publication of The Theory of Moral Sentiments, Smith became so popular that many wealthy students left their schools in other countries to enroll at Glasgow to learn under Smith.^[23] After the publication of The Theory of Moral Sentiments, Smith began to give more attention to jurisprudence and economics in his lectures and less to his theories of morals.^[24] For example, Smith lectured that the cause of increase in national wealth is labor, rather than the nation's quantity of gold or silver, which is the basis for mercantilism, the economic theory that dominated Western European economic policies at the time.^[23]

François Quesnay, one of the leaders of the Physiocratic school of thought

In 1762, the University of Glasgow conferred on Smith the title of Doctor of Laws (LL.D.). At the end of 1763, he obtained an offer from Charles Townshend—who had been introduced to Smith by David Hume—to tutor his stepson, Henry Scott, the young Duke of Buccleuch. Smith then resigned from his professorship to take the tutoring position, and he subsequently attempted to return the fees he had collected from his students because he resigned in the middle of the term, but his students refused.^[25]

Tutoring and travels[link]

Smith's tutoring job entailed touring Europe with Scott, during which time he educated Scott on a variety of subjects – such as proper Polish.^[25] He was paid £300 per year (plus expenses) along with a £300 per year pension; roughly twice his former income as a teacher.^[25] Smith first travelled as a tutor to Toulouse, France, where he stayed for one and a half years.^[25] According to his own account, he found Toulouse to be somewhat boring, having written to Hume that he "had begun to write a book to pass away the time".^[25] After touring the south of France, the group moved to Geneva, where Smith met with the philosopher Voltaire.^[26]

From Geneva, the party moved to Paris. Here Smith came to know several great intellectual leaders of the time; invariably having an effect on his future works. This list included: Benjamin Franklin,^[27] Turgot, Jean D'Alembert, André Morellet, Helvétius and, notably, François Quesnay; head of the Physiocratic school.^[28] So impressed with his ideas^[29] Smith considered dedicating The Wealth of Nations to him – had Quesnay not died beforehand.^[30] Physiocrats were opposed to mercantilism, the dominating economic theory of the time. Illustrated in their motto Laissez faire et laissez passer, le monde va de lui même! (Let do and let pass, the world goes on by itself!). They were also known to have declared that only agricultural activity produced real wealth; merchants and industrialists (manufacturers) did not.^[27] This however, did not represent their true school of thought, but was a mere 'smoke screen' manufactured to hide their actual criticisms of the nobility and church; arguing that they made up the only real clients of merchants and manufacturers.^[31] The wealth of France was virtually destroyed by Louis XIV and Louis XV to ruinous wars,^[32] by aiding the American insurgents against the British, and perhaps most destructive (in terms of public perceptions) was what was seen as the excessive consumption of goods and services deemed to have no economic contribution – unproductive labour. Assuming that nobility and church are essentially detractors from economic growth, the feudal system of agriculture in France was the only sector important to maintain the wealth of the nation. Given that the English economy of the day yielded an income distribution that stood in contrast to that which existed in France, Smith concluded that the teachings and beliefs of Physiocrats were, "with all [their] imperfections [perhaps], the nearest approximation to the truth that has yet been published upon the subject of political economy".^[33] The distinction between productive versus unproductive labour – the physiocratic classe steril – was a predominant issue in the development and understanding of what would become classical economic theory.

Later years[link]

In 1766, Henry Scott's younger brother died in Paris, and Smith's tour as a tutor ended shortly thereafter.^[27] Smith returned home that year to Kirkcaldy, and he devoted much of the next ten years to his magnum opus.^[34] There he befriended Henry Moyes, a young blind man who showed precocious aptitude. As well as teaching Moyes, Smith secured the patronage of David Hume and Thomas Reid in the young man's education.^[35] In May 1773, Smith was elected fellow of the Royal Society of London,^[36] and was elected a member of the Literary Club in 1775.^[37] The Wealth of Nations was published in 1776 and was an instant success, selling out its first edition in only six months.^[38]

In 1778, Smith was appointed to a post as commissioner of customs in Scotland and went to live with his mother in Panmure House in Edinburgh's Canongate.^[39] Five years later, as a member of the Philosophical Society of Edinburgh when it received its royal charter, he automatically became one of the founding members of the Royal Society of Edinburgh,^[40] and from 1787 to 1789 he occupied the honorary position of Lord Rector of the University of Glasgow.^[41] He died in the northern wing of Panmure House in Edinburgh on 17 July 1790 after a painful illness and was buried in the Canongate Kirkyard.^[42] On his death bed, Smith expressed disappointment that he had not achieved more.^[43]

Smith's literary executors were two friends from the Scottish academic world: the physicist and chemist Joseph Black, and the pioneering geologist James Hutton.^[44] Smith left behind many notes and some unpublished material, but gave instructions to destroy anything that was not fit for publication.^[45] He mentioned an early unpublished History of Astronomy as probably suitable, and it duly appeared in 1795, along with other material such as Essays on Philosophical Subjects.^[44]

Smith's library went by his will to David Douglas, Lord Reston (son of his cousin Colonel Robert Douglas of Strathendry, Fife), who lived with Smith. It was eventually divided between his two surviving children, Cecilia Margaret (Mrs. Cunningham) and David Anne (Mrs. Bannerman). On the death of her husband, the Rev. W. B. Cunningham of Prestonpans in 1878, Mrs. Cunningham sold some of the books. The remainder passed to her son, Professor Robert Oliver Cunningham of Queen's College, Belfast, who presented a part to the library of Queen's College. After his death the remaining books were sold. On the death of Mrs. Bannerman in 1879 her portion of the library went intact to the New College (of the Free Church), Edinburgh.

Personality and beliefs[link]

Character[link]

Not much is known about Smith's personal views beyond what can be deduced from his published articles. His personal papers were destroyed after his death at his request.^[45] He never married,^[47] and seems to have maintained a close relationship with his mother, with whom he lived after his return from France and who died six years before his own death.^[48]

Smith, who is often described as a prototypical absent-minded professor,^[49] is considered by historians to have been an eccentric but benevolent intellectual, comically absent-minded, with peculiar habits of speech and gait, and a smile of "inexpressible benignity".^[50] He was known to talk to himself,^[43] a habit that began during his childhood when he would speak to himself and smile in rapt conversation with invisible companions.^[49] He also had occasional spells of imaginary illness,^[43] and he is reported to have had books and papers placed in tall stacks in his study.^[49]

Various anecdotes have discussed his absent-minded nature. In one story, Smith took Charles Townshend on a tour of a tanning factory, and while discussing free trade, Smith walked into a huge tanning pit from which he needed help to escape.^[51] Another episode records that he put bread and butter into a teapot, drank the concoction, and declared it to be the worst cup of tea he ever had. In another example, Smith went out walking and daydreaming in his nightgown and ended up 15 miles (24 km) outside town before nearby church bells brought him back to reality.^[49][51]

James Boswell who was a student of Smith's at Glasgow University, and later knew him at the Literary Club, says that Smith thought that speaking about his ideas in conversation might reduce the sale of his books, and so his conversation was unimpressive. According to Boswell, he once told Sir Joshua Reynolds that 'he made it a rule when in company never to talk of what he understood'.^[52]

Portrait of Smith by John Kay, 1790

Smith, who is reported to have been an odd-looking fellow, has been described as someone who "had a large nose, bulging eyes, a protruding lower lip, a nervous twitch, and a speech impediment".^[11] Smith is said to have acknowledged his looks at one point, saying, "I am a beau in nothing but my books."^[11] Smith rarely sat for portraits,^[53] so almost all depictions of him created during his lifetime were drawn from memory. The best-known portraits of Smith are the profile by James Tassie and two etchings by John Kay.^[54] The line engravings produced for the covers of 19th century reprints of The Wealth of Nations were based largely on Tassie's medallion.^[55]

Religious views[link]

There has been considerable scholarly debate about the nature of Smith's religious views. Smith's father had shown a strong interest in Christianity and belonged to the moderate wing of the Church of Scotland.^[56] The fact that he received the Snell Exhibition suggests that Smith may have gone to Oxford with the intention of pursuing a career in the Church of England. It is generally believed that at Oxford Smith rejected Christianity, retuning to Scotland a deist.^[57]

Economist Ronald Coase has challenged the view that Smith was a deist,^[58] stating that while Smith may have referred to the "Great Architect of the Universe" in his works, other scholars have "very much exaggerated the extent to which Adam Smith was committed to a belief in a personal God".^[59] He based this on his analysis of a passage in The Wealth of Nations where Smith writes that the curiosity of mankind about the "great phenomena of nature", such as "the generation, the life, growth and dissolution of plants and animals", has led men to "enquire into their causes", and that "[s]uperstition first attempted to satisfy this curiosity, by referring all those wonderful appearances to the immediate agency of the gods. Philosophy afterwards endeavoured to account for them, from more familiar causes, or from such as mankind were better acquainted with than the agency of the gods".^[60]

Smith was also a close friend and later the executor of David Hume, who was commonly characterized in his own time as an "atheist".^[61] Smith's written tributes to Hume, which stressed his courage in the face of death in spite his irreligiosity, attracted controversy.^[62]

Published works[link]

[edit] The Theory of Moral Sentiments

In 1759, Smith published his first work, The Theory of Moral Sentiments. He continued making extensive revisions to the book, up until his death.^{[N 2]} Although The Wealth of Nations is widely regarded as Smith's most influential work, it is believed that Smith himself considered The Theory of Moral Sentiments to be a superior work.^[64]

In the work, Smith critically examines the moral thinking of his time, and suggests that conscience arises from social relationships.^[65] His goal in writing the work was to explain the source of mankind's ability to form moral judgements, in spite of man's natural inclinations towards self-interest. Smith proposes a theory of sympathy, in which the act of observing others makes people aware of themselves and the morality of their own behavior.^[66]

Scholars have traditionally perceived a conflict between The Theory of Moral Sentiments and The Wealth of Nations; the former emphasizes sympathy for others, while the latter focuses on the role of self-interest.^[67] In recent years, however, some scholars^[68][69][70] of Smith's work have argued that no contradiction exists.^[71] They claim that in The Theory of Moral Sentiments, Smith develops a theory of psychology in which individuals seek the approval of the "impartial spectator" as a result of a natural desire to have outside observers sympathize with them. Rather than viewing The Wealth of Nations and The Theory of Moral Sentiments as presenting incompatible views of human nature, some Smith scholars regard the works as emphasizing different aspects of human nature that vary depending on the situation.

These views ignore that Smith's visit to France (1764–66) changed radically his former views and that The Wealth of Nations is an inhomogeneous convolute of his former lectures and of what Quesnay taught him.^[72] Before his voyage to France in The Theory of Moral Sentiments, Adam Smith refers to an "invisible hand" ("By preferring the support of domestic to that of foreign industry, [an individual] intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other eases, led by an invisible hand to promote an end which was no part of his intention.") ^[73] which ensures that the gluttony of the rich helps the poor, as the stomachs of rich are so limited that they have to spend their fortune on servants. After his visit to France, Smith considers in the Wealth of Nations (1776) the gluttony of the rich as unproductive labour. The micro-economical/psychological view in the tradition of Aristotle, Puffendorf and Hutcheson,^[74] Smith's teacher, – elements compatible with a neoclassical theory – changed to the macro-economical view of the classical theory Smith learned in France.^{[clarification needed]}

[edit] The Wealth of Nations

Later building on the site where Smith wrote The Wealth of Nations

There is a fundamental dissent between classical and neoclassical economists about the central message of Smith's most influential work: An Inquiry into the Nature and Causes of the Wealth of Nations. Neoclassical economists emphasise Smith's invisible hand,^[75] a concept mentioned in the middle of his work – book IV, chapter II – and classical economists believe that Smith stated his programme how to promote the "Wealth of Nations" in the first sentences.

Smith used the term "the invisible hand" in "History of Astronomy"^[76] referring to "the invisible hand of Jupiter" and twice – each time with a different meaning – the term "an invisible hand": in The Theory of Moral Sentiments^[77] (1759) and in The Wealth of Nations^[78] (1776). This last statement about "an invisible hand" has been interpreted as "the invisible hand" in numerous ways. It is therefore important to read the original:

As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other eases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. [emphasis added].

Those who regard that statement as Smith's central message also quote frequently Smith's dictum:^[79]

It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.

The first page of The Wealth of Nations, 1776 London edition

Smith's statement about the benefits of "an invisible hand" is certainly meant to answer Mandeville's contention that "Private Vices ... may be turned into Public Benefits".^[80] It shows Smith's belief that when an individual pursues his self-interest, he indirectly promotes the good of society. Self-interested competition in the free market, he argued, would tend to benefit society as a whole by keeping prices low, while still building in an incentive for a wide variety of goods and services. Nevertheless, he was wary of businessmen and warned of their "conspiracy against the public or in some other contrivance to raise prices."^[81] Again and again, Smith warned of the collusive nature of business interests, which may form cabals or monopolies, fixing the highest price "which can be squeezed out of the buyers".^[82] Smith also warned that a true laissez-faire economy would quickly become a conspiracy of businesses and industry against consumers, with the former scheming to influence politics and legislation. Smith states that the interest of manufacturers and merchants "...in any particular branch of trade or manufactures, is always in some respects different from, and even opposite to, that of the public...The proposal of any new law or regulation of commerce which comes from this order, ought always to be listened to with great precaution, and ought never be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention."^[83]

The neoclassical interest in Smith's statement about "an invisible hand" originates in the possibility to see it as a precursor of neoclassical economics and its General Equilibrium concept. Samuelson's "Economics" refers 6 times to Smith's "invisible hand". To emphasize this relation, Samuelson^[84] quotes Smith's "invisible hand" statement putting "general interest" where Smith wrote "publick interest". Samuelson^[85] concluded: "Smith was unable to prove the essence of his invisible-hand doctrine. Indeed, until the 1940s no one knew how to prove, even to state properly, the kernel of truth in this proposition about perfectly competitive market." And it was then when neoclassical economics was revived in Chicago from oblivion and Samuelson entered the scene.

Very differently, classical economists see in Smith's first sentences his programme to promote "The Wealth of Nations". Taking up the physiocratical concept of the economy as a circular process means that to have growth the inputs of period2 must excel the inputs of period1. Therefore the outputs of period1 not used or usable as input of period2 are regarded as unproductive labour as they do not contribute to growth. This is what Smith had learned in France with Quesnay. To this French insight that unproductive labour should be pushed back to use more labor productively, Smith added his own proposal, that productive labor should be made even more productive by deepening the division of labor. Deepening the division of labor means under competition lower prices and thereby extended markets. Extended markets and increased production lead to a new step of reorganising production and inventing new ways of producing which again lower prices, etc., etc.. Smith's central message is therefore that under dynamic competition a growth machine secures "The Wealth of Nations". It predicted England's evolution as the workshop of the World, underselling all its competitors. The opening sentences of the "Wealth of Nations" summarize this policy:

The annual labor of every nation is the fund which originally supplies it with all the necessaries and conveniences of life which it annually consumes ... . [T]his produce ... bears a greater or smaller proportion to the number of those who are to consume it ... .[B]ut this proportion must in every nation be regulated by two different circumstances;

• first, by the skill, dexterity, and judgment with which its labor is generally applied; and,
• secondly, by the proportion between the number of those who are employed in useful labour, and that of those who are not so employed [emphasis added].^[86]

Criticism and Dissent[link]

Prominent interpretation, as well as criticism, of Smith's views on the societal merits of unregulated labor management by the ruling class is expressed by Noam Chomsky as follows: "He's pre-capitalist, a figure of the Enlightenment. What we would call capitalism he despised. People read snippets of Adam Smith, the few phrases they teach in school. Everybody reads the first paragraph of The Wealth of Nations where he talks about how wonderful the division of labor is. But not many people get to the point hundreds of pages later, where he says that division of labor will destroy human beings and turn people into creatures as stupid and ignorant as it is possible for a human being to be. And therefore in any civilized society the government is going to have to take some measures to prevent division of labor from proceeding to its limits."^[87]

Other works[link]

Smith's burial place in Canongate Kirkyard

Shortly before his death, Smith had nearly all his manuscripts destroyed. In his last years, he seemed to have been planning two major treatises, one on the theory and history of law and one on the sciences and arts. The posthumously published Essays on Philosophical Subjects, a history of astronomy down to Smith's own era, plus some thoughts on ancient physics and metaphysics, probably contain parts of what would have been the latter treatise. Lectures on Jurisprudence were notes taken from Smith's early lectures, plus an early draft of The Wealth of Nations, published as part of the 1976 Glasgow Edition of the works and correspondence of Smith. Other works, including some published posthumously, include Lectures on Justice, Police, Revenue, and Arms (1763) (first published in 1896); and Essays on Philosophical Subjects (1795).^[88]

Legacy[link]

In economics and moral philosophy[link]

The Wealth of Nations was a precursor to the modern academic discipline of economics. In this and other works, Smith expounded how rational self-interest and competition can lead to economic prosperity. Smith was controversial in his own day and his general approach and writing style were often satirized by Tory writers in the moralizing tradition of Hogarth and Swift, as a discussion at the University of Winchester suggests.^[89] In 2005, The Wealth of Nations was named among the 100 Best Scottish Books of all time.^[90] Former British Prime Minister Margaret Thatcher, it is said, used to carry a copy of the book in her handbag.^[91]

George Stigler attributes to Smith "the most important substantive proposition in all of economics." It is that, under competition, owners of resources (for example labor, land, and capital) will use them most profitably, resulting in an equal rate of return in equilibrium for all uses, adjusted for apparent differences arising from such factors as training, trust, hardship, and unemployment.^[92]

Paul Samuelson finds in Smith's pluralist use of supply and demand as applied to wages, rents, profit a valid and valuable anticipation of the general equilibrium modeling of Walras a century later. Smith's allowance for wage increases in the short and intermediate term from capital accumulation and invention added a realism missed later by Malthus, Ricardo, and Marx in their propounding a rigid subsistence-wage theory of labour supply.^[93]

On the other hand, Joseph Schumpeter dismissed Smith's contributions as unoriginal, saying "His very limitation made for success. Had he been more brilliant, he would not have been taken so seriously. Had he dug more deeply, had he unearthed more recondite truth, had he used more difficult and ingenious methods, he would not have been understood. But he had no such ambitions; in fact he disliked whatever went beyond plain common sense. He never moved above the heads of even the dullest readers. He led them on gently, encouraging them by trivialities and homely observations, making them feel comfortable all along."^[94]

Classical economists presented competing theories of those of Smith, termed the "labour theory of value". Later Marxian economics descending from classical economics also use Smith's labour theories, in part. The first volume of Karl Marx's major work, Capital, was published in German in 1867. In it, Marx focused on the labour theory of value and what he considered to be the exploitation of labour by capital.^[95][96] The labour theory of value held that the value of a thing was determined by the labor that went into its production. This contrasts with the modern understanding of mainstream economics, that the value of a thing is determined by what one is willing to give up to obtain the thing.

The Adam Smith Theatre in Kirkcaldy

The body of theory later termed "neoclassical economics" or "marginalism" formed from about 1870 to 1910. The term "economics" was popularized by such neoclassical economists as Alfred Marshall as a concise synonym for "economic science" and a substitute for the earlier, broader term "political economy" used by Smith.^[97][98] This corresponded to the influence on the subject of mathematical methods used in the natural sciences.^[99] Neoclassical economics systematized supply and demand as joint determinants of price and quantity in market equilibrium, affecting both the allocation of output and the distribution of income. It dispensed with the labour theory of value of which Smith was most famously identified with in classical economics, in favour of a marginal utility theory of value on the demand side and a more general theory of costs on the supply side.^[100]

The bicentennial anniversary of the publication of The Wealth of Nations was celebrated in 1976, resulting in increased interest for The Theory of Moral Sentiments and his other works throughout academia. After 1976, Smith was more likely to be represented as the author of both The Wealth of Nations and The Theory of Moral Sentiments, and thereby as the founder of a moral philosophy and the science of economics. His homo economicus or "economic man" was also more often represented as a moral person. Additionally,economists David Levy and Sandra Peart in "The Secret History of the Dismal Science" point to his opposition hierarchy, beliefs in inequality, including racial inequality, and provide additional support for those who point to Smith's opposition to slavery, colonialism, and empire.^[101] They show the caricatures of Smith drawn by the opponents of views on hierarchy and inequality in this online article.. Emphasized also are Smith's statements of the need for high wages for the poor,and the efforts to keep wages low. In The “Vanity of the Philosopher”: From Equality to Hierarchy in Postclassical Economics Peart and Levy also cite Smith's view that a common street porter was not intellectually inferior to a philosopher,^[102] and point to the need for greater appreciation of the public views in discussions of science and other subjects now considered to be technical. They also cite Smith's opposition to the often expressed view that science is superior to common sense.^[103]

Smith had a critical view on property, saying "Wherever there is great property, there is great inequality ... Civil government, so far as it is instituted for the security of property, is in reality instituted for the defence of the rich against the poor, or of those who have some property against those who have none at all."^[104]

Portraits, monuments, and banknotes[link]

A statue of Smith in Edinburgh's High Street, built through private donations organised by the Adam Smith Institute.

Smith has been commemorated in the UK on banknotes printed by two different banks; his portrait has appeared since 1981 on the £50 notes issued by the Clydesdale Bank in Scotland,^[105][106] and in March 2007 Smith's image also appeared on the new series of £20 notes issued by the Bank of England, making him the first Scotsman to feature on an English banknote.^[107]

A large-scale memorial of Smith by Alexander Stoddart was unveiled on 4 July 2008 in Edinburgh. It is a 10 feet (3.0 m)-tall bronze sculpture and it stands above the Royal Mile outside St Giles' Cathedral in Parliament Square, near the Mercat cross.^[108] 20th century sculptor Jim Sanborn (best known for the Kryptos sculpture at the United States Central Intelligence Agency) has created multiple pieces which feature Smith's work. At Central Connecticut State University is Circulating Capital, a tall cylinder which features an extract from The Wealth of Nations on the lower half, and on the upper half, some of the same text but represented in binary code.^[109] At the University of North Carolina at Charlotte, outside the Belk College of Business Administration, is Adam Smith's Spinning Top.^[110][111] Another Smith sculpture is at Cleveland State University.^[112]

Residence[link]

His house on Panmure Close off the Canongate survived until 1889,^[113] but a nearby building of similar age adopted the stance of having been his house (in the same manner as John Knox's House) erecting a plaque c.1950 proclaiming itself as having been his residence. In reality Smith's residence was a far grander building than that remaining.

As a symbol of free market economics[link]

Adam Smith's Spinning Top, sculpture by Jim Sanborn at Cleveland State University

Smith has been celebrated by advocates of free market policies as the founder of free market economics, a view reflected in the naming of bodies such as the Adam Smith Institute in London, the Adam Smith Society^[114] and the Australian Adam Smith Club,^[115] and in terms such as the Adam Smith necktie.^[116]

Alan Greenspan argues that, while Smith did not coin the term laissez-faire, "it was left to Adam Smith to identify the more-general set of principles that brought conceptual clarity to the seeming chaos of market transactions". Greenspan continues that The Wealth of Nations was "one of the great achievements in human intellectual history".^[117] P. J. O'Rourke describes Smith as the "founder of free market economics".^[118]

However, other writers have argued that Smith's support for laissez-faire (which in French means leave alone) has been overstated. Herbert Stein wrote that the people who "wear an Adam Smith necktie" do it to "make a statement of their devotion to the idea of free markets and limited government", and that this misrepresents Smith's ideas. Stein writes that Smith "was not pure or doctrinaire about this idea. He viewed government intervention in the market with great skepticism ... yet he was prepared to accept or propose qualifications to that policy in the specific cases where he judged that their net effect would be beneficial and would not undermine the basically free character of the system. He did not wear the Adam Smith necktie." In Stein's reading, The Wealth of Nations could justify the Food and Drug Administration, the Consumer Product Safety Commission, mandatory employer health benefits, environmentalism, and "discriminatory taxation to deter improper or luxurious behavior".^[119]

Similarly, Vivienne Brown stated in The Economic Journal that in the 20th century United States, Reaganomics supporters, The Wall Street Journal, and other similar sources have spread among the general public a partial and misleading vision of Smith, portraying him as an "extreme dogmatic defender of laissez-faire capitalism and supply-side economics".^[120] In fact, The Wealth of Nations includes the following statement on the payment of taxes:

"The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state."^[121]

Moreover, in this passage Smith goes on to specify progressive, not flat, taxation:

"The rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion"^[122]

Smith even specifically named taxes that he thought should be required by the state among them luxury goods taxes and tax on rent. He believed that tax laws should be as transparent as possible and that each individual should pay a "certain amount, and not arbitrary," in addition to paying this tax at the time "most likely to be convenient for the contributor to pay it".^[121] Smith goes on to state that:

"Every tax, however, is, to the person who pays it, a badge, not of slavery, but of liberty."^[123]

Additionally, Smith outlined the proper expenses of the government in The Wealth of Nations, Book V, Ch. I. Included in his requirements of a government is to enforce contracts and provide justice system, grant patents and copy rights, provide public goods such as infrastructure, provide national defense and regulate banking. It was the role of the government to provide goods "of such a nature that the profit could never repay the expense to any individual" such as roads, bridges, canals, and harbours. He also encouraged invention and new ideas through his patent enforcement and support of infant industry monopolies. he supported public education and religious institutions as providing general benefit to the society. Finally he outlined how the government should support the dignity of the monarch or chief magistrate, such that they are equal or above the public in fashion. He even states that monarchs should be provided for in a greater fashion than magistrates of a republic because "we naturally expect more splendor in the court of a king than in the mansion-house of a doge."^[124] In addition, he was in favor of retaliatory tariffs and believed that they would eventually bring down the price of goods. He even stated in Wealth of Nations:

"The recovery of a great foreign market will generally more than compensate the transitory inconvenience of paying dearer during a short time for some sorts of goods."^[125]

Noam Chomsky has argued^{[N 3]} that several aspects of Smith's thought have been misrepresented and falsified by contemporary ideology, including Smith's reasons for supporting markets and Smith's views on corporations. Chomsky argues that Smith supported markets in the belief that they would lead to equality, and that Smith opposed wage labor and corporations.^[126] Economic historians such as Jacob Viner regard Smith as a strong advocate of free markets and limited government (what Smith called "natural liberty") but not as a dogmatic supporter of laissez-faire.^[127]

Economist Daniel Klein believes using the term "free market economics" or "free market economist" to identify the ideas of Smith is too general and slightly misleading. Klein offers six characteristics central to the identity of Smith's economic thought and argues that a new name is needed to give a more accurate depiction of the "Smithian" identity.^[128][129] Economist David Ricardo set straight some of the misunderstandings about Smith's thoughts on free market. Most people still fall victim to the thinking that Smith was a free market economist without exception, though he was not. Ricardo pointed out that Smith was in support of helping infant industries. Smith believed that the government should subsidise newly formed industry, but he did fear that when the infant industry grew into adulthood it would be unwilling to surrender the government help.^[130] Smith also supported tariffs on imported goods to counteract an internal tax on the same good. Smith also fell to pressure in supporting some tariffs in support for national defense.^[130] Some have also claimed, Emma Rothschild among them, that Smith supported a minimum wage.^[131]

See also[link]

• Political economy
• Organizational capital

Footnotes[link]

Notes[link]