If your mum needed money, would you charge her interest? Would it be exploitative to do so?

If I expected the money back? Yes. Most likely though it wouldn't be a loan, it would be a gift.

If a friend visits you for a coffee, do you expect to receive a bigger coffee in return next time you visit them?[/quote]
Nope. Coffee during a visit is a gift. I wouldn't expect anything from them on the next visit.

If you buy the first round of beers when you go out with friends, should the person who buys the second round have to more beers than you did?[/quote]
Same as above.


The problem with these examples is you're talking about friends and or family interactions. I probably would never loan friends money, and I would never give an interest free loan to a stranger. If nothing else, interest acts as a method to encourage timely repayment.

I think it is ethical.

The people are made aware of the terms of the deal before accepting the deal. And they still choose to accept because they find the deal to be beneficial (ala me getting to have this car while I make payments for 3 years is superior to me finding other ways to get around while saving up enough money to buy without a loan). A loan with interest is a fair offer than can be taken or refused.

[quote name='szecs' timestamp='1301925413' post='4794200']
Anyhoo: ever heard of couch surfing?

???
[/quote]

TAHT!!!1

[quote name='Prefect' timestamp='1301906197' post='4794105']
[quote name='SimonH' timestamp='1301889227' post='4794043']It was recently announced that the average UK household has £77,000 of personal debt. Anyone got figures for the US or unhappy Japan?

Do you have a source on that number? This kind of number seems unlikely to me, as most people could in no way afford to have so much debt. Perhaps UK households hold a lot of mortgages?[/quote]OK, I should have said 'will soon have' rather than 'has'. Plenty of data available, this and this are typical sources.
[/quote]
The first link says this:

• The average debt per household in the UK, not including mortgages, currently stands at around £8,939. If you include unsecured loans this increases more than 100% to almost £18,263.
• Average debt including mortgages is just under £58,040 per household.[/quote]
  So yes, without mortgages your numbers are pretty overstated. If you do include mortgages this comes close to your number, but then again, as I wrote including mortgages can be a bit misleading - after all, given the value of the house, it all balances out in terms of net wealth.
  
  Your second link doesn't distinguish between mortgages and non-mortgage loans, but it does implicitly touch an interesting point: The economy is stock-flow-consistent. If you separate it into government, private domestic, and foreign sectors, then the balances of each of those sectors have to sum to zero. Since exports/imports are usually slow to adjust and tend to not change much over time, this means that if the government successfully reduces its deficit (which, given automatic stabilisers, is actually rather unlikely despite the rhetoric), then it means more money flowing out from the private domestic sector. Depending on how the government deficit is reduced - and given how politics plays out these days the bottom 95% are going to take the largest hit - this means the general population will have less savings / more debt over time.
  
  And this means that in practice their freedom will become increasingly limited.
  
  Which just goes to show that the whole trickle-down free market equals freedom rhetoric is pretty far removed from an ethically sound outlook on reality.

Which just goes to show that the whole trickle-down free market equals freedom rhetoric is pretty far removed from an ethically sound outlook on reality.

How do you define an ethically sound outlook on reality.

[quote name='Hodgman' timestamp='1301915789' post='4794150']
[quote name='kindjie' timestamp='1301901405' post='4794092']
It's obviously ethical to lend people money and charging interest - you'd have to take a really hard to defend extremist position to argue otherwise.

In my ethics class, the first port of call was always the mum test.

If your mum needed money, would you charge her interest? Would it be exploitative to do so?
If a friend visits you for a coffee, do you expect to receive a bigger coffee in return next time you visit them?
If you buy the first round of beers when you go out with friends, should the person who buys the second round have to more beers than you did?
If you purge your mind of modern economic theory and jargon for a moment, then the obvious position is that the above behavior is absurd and asocial. It only becomes an extreme position when viewed within the inhuman context of modern economics (where this kind of ethics is frankly irrelevant).
[/quote]

EDIT:

Nice ethics test

But the last paragraph in the above quote begs the question, should modern economics be inhuman and devoid of ethics? I certainly don't think so for the following reasons:

1 - I think that leads to a nightmare dystopia

2 - Economics is by definition a social science and should therefore include humanity and ethics
[/quote]



The mum test is a fun exercise, but it doesn't really work in general when talking about ethics. If my mum needed to borrow money for a coffee, I'd just buy her the coffee. Similarly for my friends. If my mum or my friends needed to borrow $30,000 for a car and it'll take them years to pay it back, then I'd have to charge interest or risk going broke!

When I go out with friends for a few beers, I don't have to worry about inflation between arriving at the pub and leaving at the end of the night (unless I'm in Zimbabwe, or possibly China if they're not careful ). The dynamics of small groups of people is also vastly different, in that there's a reasonable expectation (backed up by studies in psychology) that you'll have the next round bought for you and not lose a lot of money. Your friends also wouldn't expect you to pay if you're too poor to afford a round. How many times would you pick up a round with a friend who NEVER paid for one and you knew could afford it? Mum/friend test in ethics doesn't work in general when you distort the cases.

When I started my business, my dad wanted to be a part of it. He didn't give me money (that's a lot of money to give away for nothing), he bought equity with some expectation of a return on his investment. This is similar to interest in that sense. It's easy to say "interest is evil" when you're the one receiving the money, but if someone you didn't know (or even a friend) asked to borrow $100,000 for a house you'd probably need to offset the risk somehow! The ethical thing would be to go over their financials and make sure they can actually afford it, because if the interest is an issue they'll probably have to default - everyone loses.

Also, don't forget that lending money is a service, and most people would agree it's ethical to charge for a service.

ASIDE: Not referring to anything particular in this thread, but it's a little terrifying to see how much misunderstanding there is about very basic economics... Even if you're 100% communist, you still need to understand the basics because free markets aren't being overthrown any time soon and in the meanwhile you need to provide for your family.

So yes, without mortgages your numbers are pretty overstated. If you do include mortgages this comes close to your number, but then again, as I wrote including mortgages can be a bit misleading - after all, given the value of the house, it all balances out in terms of net wealth.

Mortgages ARE debt and betting on your house strictly appreciating value is a bet that a LOT of people in the last 2 years have lost with HORRIBLE consequences. Please, please don't ever get a mortgage thinking it's free money - you WILL lose.

Your second link doesn't distinguish between mortgages and non-mortgage loans, but it does implicitly touch an interesting point: The economy is stock-flow-consistent. If you separate it into government, private domestic, and foreign sectors, then the balances of each of those sectors have to sum to zero. Since exports/imports are usually slow to adjust and tend to not change much over time, this means that if the government successfully reduces its deficit (which, given automatic stabilisers, is actually rather unlikely despite the rhetoric), then it means more money flowing out from the private domestic sector. Depending on how the government deficit is reduced - and given how politics plays out these days the bottom 95% are going to take the largest hit - this means the general population will have less savings / more debt over time.

You left out foreign investment, which is money coming into the country. The cost of raising capital is directly related to the amount of debt you have. The more debt you have, the higher your risk of default, the lower your debt rating, the more interest you're charged to offset the risk, the more expensive the capital. Eventually the cost is so high that you can't afford the interest (this is what is happening in Greece and Portugal, and the USA is only a few years away from that), and you're forced to default or cut pretty much ALL government expenditures - this means ZERO social programs.

If this wasn't the case then everyone would raise debt all the time - why wouldn't you? - and inflation would be massive. You'd wake up in the morning with money in your pocket, and by the time you walk to the store you'd need 100 times more to buy the same thing. If diamonds were free, would they still be worth anything?

Foreign investors are ALWAYS going to put their money where they get the highest return for the lowest risk.
Consider this: Two strangers John and Bob both need money.

• Bob already owes $100,000 that he's been spending on TVs and boats. He's working hard to barely make the payments.
• John makes the same amount of money as Bob, but he's been living within his means and has $10,000 in debt that he spent on a car to drive himself to work. He's easily making the payments.Who would you rather lend your kids' college tuition to, all other things being equal?
  
  

  
  And this means that in practice their freedom will become increasingly limited.
  
  Which just goes to show that the whole trickle-down free market equals freedom rhetoric is pretty far removed from an ethically sound outlook on reality.
  

  
  
  The so-called trickle-down effect is TOTALLY different from what you're talking about here and is used to justify taxing higher income people less. That's one I don't personally buy into either; I'd rather tax high income people a bit more and spend the money on social programs for everyone, but that's personal opinion.

ASIDE: Not referring to anything particular in this thread, but it's a little terrifying to see how much misunderstanding there is about very basic economics... Even if you're 100% communist, you still need to understand the basics because free markets aren't being overthrown any time soon and in the meanwhile you need to provide for your family.

I'm probably included in 'anything in particular', though I specifically mentioned that I was ignoring modern economics (yes I'm aware that means: ignoring reality).
It can be very useful to (attempt to) purge your mind of societal doctrines and (attempt to) gain an alien perspective on things.

For example, if we were raised in a gift economy, then we would have to suspend reality and enter a state of complete ignorance in order to even consider this idea of a "loan", let alone a "loan with interest".

So yes, our ethical frameworks do have to deal with our day-to-day realities, but it can still be very healthy to occasionally consider the ethical viewpoint of someone who's day-to-day reality is built upon completely different foundations to our own.

The opposite of this approach is the firmly-grounded-in-reality viewpoint that uses economic rules to justify economic realities -- yes this is useful to show that, e.g. interest must at least cover the losses due to inflation in order to consider the repayment equal to the loan -- but this can't be your only approach, as it is too firmly cemented in the status quo to allow much or any analysis of the social context and assumptions on which the reasoning is built.

Do you have a source on that number? This kind of number seems unlikely to me, as most people could in no way afford to have so much debt.

Bank of England Statistics: Lending to Individuals gives total individual debt as £1.454 trillion, of which £1.242 trillion was secured against a dwelling. UK population is something like 65 million, which gives total individual debt per capita of about £22,500. Given that this i) includes children and others without debt, ii) is a high-ball population estimate in the first place, and that the average number of debt-holders per household will average somewhere above 1, the figure seems fairly plausible.

(I'm not sure how the figures above were derived, so thought I'd include this, too.)

[quote name='Prefect' timestamp='1301936935' post='4794285']
So yes, without mortgages your numbers are pretty overstated. If you do include mortgages this comes close to your number, but then again, as I wrote including mortgages can be a bit misleading - after all, given the value of the house, it all balances out in terms of net wealth.

Mortgages ARE debt and betting on your house strictly appreciating value is a bet that a LOT of people in the last 2 years have lost with HORRIBLE consequences. Please, please don't ever get a mortgage thinking it's free money - you WILL lose.
[/quote]
This is true, but in the bigger picture, you also have to realize that the current situation related to mortgages is somewhat unusual. Typically, mortgages do not involve betting that your house increases in value: you use them to buy your house without paying everything up front, and you pay them down over a number of years (sometimes decades, depending on your cash flow etc.)

The trend that people hold on to mortgages indefinitely to pay for consumption spending in a widespread way is fairly recent. I agree with you that that's untenable, but you do have to realize that just because people were irresponsible with mortgages in roughly the last decade doesn't mean that mortgage in general can be equated to, say, credit card debt.

You left out foreign investment, which is money coming into the country. The cost of raising capital is directly related to the amount of debt you have. The more debt you have, the higher your risk of default, the lower your debt rating, the more interest you're charged to offset the risk, the more expensive the capital.
[/quote]
I think you're muddling up microeconomic considerations (i.e. how likely it is that somebody will lend to a person) with macroeconomic flows. For example, the fact that "foreign investment money" was flowing to Brazil like crazy a few month ago (I haven't kept uptodate with the situation) had nothing to do with the creditworthiness of Brazil. If you were to truly follow mainstream economic logic, it was actually due to the opposite: high interest rates in Brazil attracted savers and exchange rate speculations - even though according to mainstream logic high interest rates should be the result of a missing trust (of course, the mainstream thinking is wrong because on a macroeconomic level, the interest rates are controlled by government via the central bank, but that's another issue).

By the way, foreign investment simply isn't as important as people seem to think it is. Do not make yourself beholden to foreign capital, for it will lead you to make socially pessimal decisions. In a nutshell, foreign investment is only really relevant if without it you cannot get necessary imports. If you are not constrained by imports, then you can always generate all the monetary flows necessary to put the economy to the full employment domestically.

Eventually the cost is so high that you can't afford the interest (this is what is happening in Greece and Portugal, and the USA is only a few years away from that), and you're forced to default or cut pretty much ALL government expenditures - this means ZERO social programs.
[/quote]
This is a common fallacy. The Greek and Portuguese governments are users of a foreign currency - the Euro. The US government, on the other hand, is the issuer of its own currency. It is the Linden Labs to Linden Dollars, to use a perhaps outdated analogy. It cannot become insolvent in its own currency. (To continue the analogy: Linden Labs can become insolvent in US$, but not in Linden Dollars; similarly, the US government can become insolvent in Euro - though it is obviously quite far away from that - but it can never become insolvent in US$).

To make this very clear, from first principles, let us cut through the terminological BS of economics and just look at it from the operations level: Let us say that the US federal government writes you a check, and you take that check to the bank. Do you honestly believe that it could happen that this check does not clear?

Of course, if the US goverment is unwilling to make payments in US$, then it won't. If the tea partiers in congress are keeping their hard line, then this basically means that the US government as an entity becomes unwilling to pay (remember, the legislative and executive etc. combine to form government as a whole). But don't ever confuse this with being unable to pay.

If this wasn't the case then everyone would raise debt all the time - why wouldn't you? - and inflation would be massive. You'd wake up in the morning with money in your pocket, and by the time you walk to the store you'd need 100 times more to buy the same thing. If diamonds were free, would they still be worth anything?
[/quote]
What is inflation? There is some debate on that, so let's look at a more objective measure, the price level. Why do price levels rise? Mainly it's because different economic actors are always trying to increase their share of the pie, and one of the easiest ways to try to do that is to raise nominal prices.

Beyond that, price rises can come from increased production costs (e.g. due to energy price rises), or from supply and demand effects. Obviously, if the government were to spend a bazillion dollars on chewing gum, then the price of chewing gum would eventually rise - at least if government spends on a nominal quantity rule, saying "We will spend a trillion US$ to buy as much chewing gum as we can"; the situation is different if government says "We will spend as much chewing gum as possible at a fixed price"; the latter will obviously not cause the price of chewing gum to rise beyond the price that government pays.

But nobody is suggesting anything crazy like the former. If you look at the current situation in a non-ideological way, then you will realise that there is actually an enormous gap in aggregate demand at the time, so the specter of demand-pull inflation is quite a long distance away. The high unemployment rates throughout the western world are proof of that. The government could (and should) simply increase its budget deficit with measures that are targetted directly to putting those unemployed to work for useful and necessary projects (such as getting or crumbling infrastructure fixed). There simply cannot be any demand pull inflation because of that, as long as the government uses reasonable price setting strategies (e.g. pay all those jobs at the legal minimum wage, or whatever).

I seriously urge you to rethink a lot of preconceptions you may have about inflation and sovereign government debt. Decades ago, mainstream economists started saying that 60% debt to GDP ratios are the limit to what is sustainable. That number was totally arbitrary even back then, when it might still have had some theoretical merit because of the gold standard. Now it has zero merit anymore. Japan has successfully sustained debt to GDP ratios way above 100%, even above 200%, for decades now and the (economic) problem they're fighting is still not inflation, but deflation. Yet economists are still claiming that debt above 60% is a serious problem, though some apparently have increased this to 80% out of an attempt to look more reasonable. The truth is that those arbitrary ratios are irrelevant. The only way to judge a budget deficit as an agrregate sum is in relation to what is happening in the real economy: does the deficit push aggregate demand beyond production capacities? Or is it too low and does it leave productive capacities idle? Is the budget deficit used for unemployment entitlements instead of using it to put those people to useful work? (When you look at the composition of the budget deficit instead of considering it simply as a sum, then it also makes sense to ask questions like what is its effect on income and wealth distributions?)

Scientists go back to the drawing board when the empirical data contradicts their theories. Economists apparently don't. Please stop believing everything you read, even if it sounds intuitive. A lot of macroeconomics is initially unintuitive, because it contradicts our day-to-day experience.