I am not, generally, a scholar of many different kinds of political economies or kinds of social structures. I engage in discourse online and am a person in the world, in society, but this series is pretty much about one book that I read that I found really interesting, and which, for me, answered a lot of uncomfortable questions that I had about capitalism and its alternatives.
That said, I would like to insert a little bit of my own perspective for this particular post, which is that, like many people my age and circumstance, I have felt the crushing flaws of our current global capitalist system, but, to be brutally honest, I really did find it hard to imagine alternatives.
I mean, there are the things we know are working alternatives, like, we know there are other countries with universal healthcare and their societies run just fine. We know that a lot of other countries provide a lot more time off for their workers, have different prison structures, etc. and are not on the verge of collapse¹.
However, I found it very hard to imagine a world where I can’t walk into a coffee shop and purchase a cup of coffee, or how businesses would truly operate without some of the notions of ownership that we have. In other words, I could not imagine a world without markets and personal ownership, and I assumed that markets and capitalism especially were one and the same. I did try to read different explanations of alternatives to capitalism — I found them either too theoretical or just unsatisfying. Yet I knew that the concepts I could easily grasp, the “democratic socialism” like universal health care and a larger welfare state, were still limited, would do nothing for global systems of exploitation — in Europe for example, the citizens of those nations are better off, but they continue to exploit the global South. I still needed something more than these.
But at the end of Debt: The First 5000 Years, Graeber gave a definition for capitalism that finally, really resonated with me.
Capitalism, Graeber says, is not defined by markets. We have had markets in some form or another for most of human civilization, although we argue about the differences between modern markets and ancient ones. Instead, capitalism is defined by interest.
Capitalism Defined by Interest
Let me just state the obvious, which is that the idea that capitalism is the natural and most perfect system for human exchange obviously benefits the capitalists — the very rich. I was frustrated because I knew there must be something better, but I couldn’t really see past the obfuscation that markets cannot exist without capitalism. I now think this kind of messaging is purposeful. It’s meant to make you believe there are no better alternatives without completely upending our modern way of living².
But capitalism is really about an expectation for constant growth, and that’s something we can all agree makes no sense (certainly, Graeber was not the first to propose that). Economists are concerned about slowing population growth, when simultaneously, we know there are limits to what our planet can sustain. Was the plan to simply have the globe overrun with trillions of people? Where was the natural end point to the growth? We have a finite planet and finite resources, yet we expect to grow at all costs?
This expectation of growth is economically baked into the system in the form of interest-bearing loans. The reason that a loan carries interest is that it is assumed that, if instead of giving the loan, you invested the money, the money would generate a return³. So, you must demand interest on the loan that is at least equal to the return it would theoretically generate, which is nonsense. This causes every other profit seeking venture to be expected to grow, to generate a return, whether it’s a tiny startup or an already giant corporation. No matter how small or large the business, it must grow.
Interest-bearing loans
It is considered completely normal to pay almost twice the value of a house because of the interest on the loan for the house. Interest bearing loans create so many of these kinds of debt spirals, like the many student loan screenshots people post on social media, where they have paid off the principle of their loan, and yet, they have almost twice the amount of the principle still left to pay.
We’ve heard story after story about interest-related debt traps, like loan sharks and predatory payday loans and credit card debt. We all agree that it doesn’t make any sense. And, unlike imagining a world without markets, imagining a world without compound interest is much easier, at least to me. You could still charge fees for loans that is some percentage of the loan, for example, and fees for defaulting etc., but the point is to get rid of this driver of constant growth in the entire capitalist system.
Understanding the difference between a percentage-based fee, and simple or compound interest is pretty important here.
Flat Fee
Let’s say you borrow $10,000, and in three years, you have to pay back the principle plus a 7% fee — $10,700. You pay back $700 on top of the original amount. It’s a fee taken only once, it’s just that the fee is based on a percentage of the loan.
Interest
Now let’s say you borrow using simple interest (Principle * Percentage * Loan Term). So you borrow $10,000 at a 7% interest rate per year, borrowed for three years. You would have to pay back $12,100 which is $2,100 on top of the original loan.
$10,000+($10,000 * 0.07 * 3)= $12,100
The system we have now is one where the interest compounds, and usually, it compounds continuously. If we compound the 7% interest per month….
$10,000*e^(0.07*3) = $12,336.78
…you pay back about $2,336 on top of the original loan. You can see how if you borrowed the money for longer, the amount you would have to pay back would reach the entire principle of the loan. And for a very large sum of money, the more interest you would have to pay, and the longer you would need to pay back the loan.
This is how we end up paying back a mortgage over twice the value of a house. The punchline of the joke is that the vast majority of mortgages and loans come from banks…which are just levers in the state-created currency and market relationship, discussed in my previous articles in this series, and not a person or even a business that uses money in the same way.
After having these revelations while reading Debt, I realized that interest-bearing loans effectively use banks to enact violence, with the blessing of federal governments.
The Violence of Interest-Bearing Loans
I use this provocative word, “violence”, intentionally. In Debt, Graeber draws a line from the Spanish invasion and genocide in the Americas, one of the worst in history and that preluded an era of horrific imperialism and slavery around the globe, to interest-bearing loans:
When dealing with conquistadors, we are speaking not just of simple greed, but greed raised to mythic proportions. This is, after all, what they are best remembered for. They never seemed to get enough. Even after the conquest of Tenochtitlan or Cuzco, and the acquisition of hitherto-unimaginable riches, the conquerors almost invariably regrouped and started off in search of more treasure.
...[…]…
Why the unrelenting drive for more and more and more ? It might help, I think, to go back to the very onset of Hernan Cortes’s conquest of Mexico: What were his immediate motives? Cortes had migrated to the colony of Hispaniola in 1504, dreaming of glory and adventure, but for the first decade and a half, his adventures had largely consisted of seducing other people’s wives. In 1518, however, he managed to finagle his way into being named commander of an expedition to establish a Spanish presence on the mainland…[…]…
Three years later…[…]…Cortes had his victory. After eight months of grueling house-to-house warfare and the death of perhaps a hundred thousand Aztecs, Tenochtitlan, one of the greatest cities of the world, lay entirely destroyed. The imperial treasury was secured, and the time had come, then, for it to be divided in shares amongst the surviving soldiers. Yet according to Diaz, the result among the men was outrage. The officers connived to sequester most of the gold, and when the final tally was announced, the troops learned that they would be receiving only fifty to eighty pesos each. What’s more, the better part of their shares was immediately seized again by the officers in their capacity of creditors-since Cortes had insisted that the men be billed for any replacement equipment and medical care they had received during the siege. Most found they had actually lost money on the deal.
…[…]…
These were the men who ended up in control of the provinces, and who established local administration, taxes, and labor regimes. Which makes it a little easier to understand the descriptions of Indians with their faces covered by names like so many counter-endorsed checks, or the mines surrounded by miles of rotting corpses. We are not dealing with a psychology of cold, calculating greed, but of a much more complicated mix of shame and righteous indignation, and of the frantic urgency of debts that would only compound and accumulate (these were, almost certainly, interest-bearing loans), and outrage at the idea that, after all they had gone through, they should be held to owe anything to begin with. And what of Cortes? He had just pulled off perhaps the greatest act of theft in world history. Certainly, his original debts had now been rendered inconsequential. Yet he somehow always seemed to find himself in new ones. Creditors were already starting to repossess his holdings while he was off on an expedition to Honduras in 1526; on his return, he wrote the Emperor Charles V that his expenses were such that “all I have received has been insufficient to relive me from misery and poverty, being at the moment I write in debt for upwards of five hundred ounces of gold, without possessing a single peso towards it.” Disingenuous, no doubt (Cortes at the time owned his own personal palace) , but only a few years later, he was reduced to pawning his wife’s jewelry to help finance a series of expeditions to California, hoping to restore his fortunes. When those failed to turn a profit, he ended up so besieged by creditors that he had to return to Spain to petition the emperor in person
— p. 315–316
We can see how the expectation of this constant, greedy form of growth is an explanation of so many of the ills of capitalism people talk about today. The pursuit of profit at all costs and above all else. It creates a greed of desperation: grow or die. This invention, the interest-bearing loan, is something that directly benefits the wealthy and directly exploits the poor — since the lenders, or investors, are those that stand to gain, and the borrowers are those that stand to lose, and may enact their loss on others the way that Cortes did. This is obviously not an absolution for one of history’s evilest men. But it helps us understand how, perhaps, to avoid creating more Corteses, and the mini-Corteses that are, frankly, CEOs of businesses around the world. Is the Shell corporation poisoning the Niger Delta any more defensible?
The logic of interest permeates the rest of our culture around exchange. We hear story after story of startups and other businesses that, in the pursuit of explosive growth, compromise their mission and their ethics.
If it were simply the norm to grow slowly, or to reach some optimal point and plateau there, would that be so bad? If investors simply took an annual dividend that just stayed the same each year, is that such a loss?
An Alternative Vision of Finance
Back to the $10,000 you borrowed at a flat 7% fee over three years. Most individuals today would not agree to lend to you under this arrangement unless they know you. And yet, in most arrangements where people transfer huge sums of money to people they know or mutual friends, they often charge no fees at all. This is very common in Chinese communities both in China and abroad, and in many immigrant communities in the United States. People run entire businesses using money borrowed in this way, shops and restaurants. They intentionally opt out of the interest bearing financial system that can lead to so many of those debt spirals. I could talk at length about many other models for community based finance, like lending circles and co-op banks, which are becoming increasingly common in sub-saharan Africa.
So we do, actually, have examples of financial systems today which operate without interest.
One of the biggest examples of these is Islamic banking or Sharia banking, where interest is forbidden. There are certainly some nuances — similar to the flat fee example given above, you can still charge fees for a loan, and for defaulting etc., but never true interest. This form of banking is used by millions of people around the globe, including relatively large corporations. In fact, Sharia banking combined with the many community-based forms of finance popular around the world made me think that actually, those who benefit from interest-bearing loans is a very small subset of the global population.
I should note a strong caveat here that Sharia banking in practice still has a bit of a ways to go before becoming truly interest-free among the millions of people mentioned — in reality, there is a practice of businesses switching between Sharia banks and traditional banks depending on their financial outlook. Graeber also notes this in his book:
True, much of what has since come to pass for Islamic economics nowadays has proved decidedly unimpressive. Certainly in no sense does it pose a direct challenge to capitalism. Still, one has to assume that among popular movements of this sort, all kinds of interesting conversations about, say, the status of wage labor must be taking place. Or perhaps it’s naive to look for any new breakthrough from the puritanical legacy of the old patriarchal rebellion. Perhaps it will come out of feminism. Or Islamic feminism. Or from some as yet completely unexpected quarter. Who’s to say? The one thing we can be confident of is that history is not over, and that surprising new ideas will certainly emerge.
— p. 384
However, Sharia banking has also seen a decade of change and greater participation in global financial technology since Debt was published. Though I have not had the chance to read much analysis on how it has changed in the time since, it appears to have growing prominence in the global South, and greater use due to financial shocks like the pandemic.
The more abstract takeaway of understanding this definition of capitalism is that I believe less and less that it is necessary to persuade a lot of individuals in order to change systems, because these two things do not necessarily go hand in hand. In order to change the system of interest and expectations of investment, we need to convert systems of banking and investing, which do not actually involve all that many people. Policy change and persuasion do not always go hand in hand. I’m reminded of the Ibram X. Kendi quote:
“Critiquing racism is not activism. Changing minds is not activism. An activist produces power and policy change, not mental change.”
As I said at the outset of writing this series, I also pledged to be more optimistic, to have revolutionary optimism. It’s hard to work toward something you cannot see or understand. This simple concept, that interest is the key of what holds up capitalism and all its ills, climate change, exploitation, systemic racism — interest, rather than markets or ownership⁴, gave me something to believe in and try to work toward.
My first step is explaining this concept to others.
Footnotes
- Sure, some people will yell about how you cannot compare giant countries to small countries and other nuances like this, but my point today is simply that these systems exist somewhere and we can imagine them or already live in them.
- Of course many things should be upended, but that’s for a different post — my point here is just that making alternative systems seem totally abstract, theoretical, or totally alien compared to your daily life is a tactic to keep the existing system in place.
- You might say that the interest is to account for inflation — but we all know real loans from real banks charge far more than just an inflation rate. Additionally, interest rates themselves are an economic lever used to control inflation. Later on we’ll discuss real systems that operate without interest in the real world, showing that it can, in fact, be done at scale! (so keep reading!)
- My goal here isn’t to attack other theories, it’s just that I was looking for an answer I could personally feel motivated toward and believe in, something that did not feel impossibly out of reach. It’s a small step beyond the “democratic socialism” welfare state policies my peers have already begun to gravitate toward. I am sure the future will bring multi-fold solutions and policies. Feel free to send me your favorite explanations of other theories!
References and Other Reading
- The edition of Debt: The First 5000 Years I used for this blog post is ISBN 978–1–933633–86–2
- Paper examining Islamic banking: https://www.sciencedirect.com/science/article/pii/S0165176516304190
