Borrow and Lend

From: R
To: Walter Block
Subject: Re: Austrian Economics

Borrowing lets the borrower consume what the lender has produced without himself producing first. If the borrower was not given a loan he would have to produce first and then exchange to consume. So in case of no credit the borrower would be forced to be more productive if he wanted to consume. So basically the point that I am trying to make is that an economy without credit will be more productive because whoever wants to consume will first have to produce on his own first.

But the loan is “earned.” The lender agreed! Merely because he did not produce this wealth does not mean he didn’t earn it, or isn’t the rightful (temporary) owner of it. You didn’t produce the shoes or wrist watch you’re now wearing. You didn’t “earn” them in the sense of producing them. Instead, you traded for them with the wealth you did earn (or were given by your parents, which is also a legitimate way of earning, or owning). And the borrower traded something with the lender. The lender lent the borrower, say, $100 for one year. What did the borrower trade with him in order to obtain this $100 for one year? Why, a promisory note, obligating the borrower to pay the lender $110 in a year’s time, for example. Basically I am trying to say one should not be allowed to consume the unearned. In case of a loan the borrower consumes the unearned first then earns and then repays. Thanks and Regards R

Dear R:

Not so. If an economy without credit were more productive, credit would be a negative on net balance. This is false. Credit allows for specialization and the division of labor. It transfers wealth, temporarily, from those who can use it less effectively to those who can use it more effectively (if not, the lender will lose his money, and be less able to lend in the future.)


10:21 pm on September 12, 2017