The Ethics of Capital and Interest

Friday morning I lectured at Acton University about the ethics of capital and interest. I began by laying out what I call the positive case for capital and interest and then examined some moral objections that have been raised against capital accumulation and the charging of interest.

The positive case for capital accumulation, indeed for all economic activity, is rooted in the cultural mandate. God gave mankind the cultural mandate in the Garden before sin had entered the world. In Genesis 1:28 we read “Be fruitful and multiply and fill the earth and subdue it and have dominion over the fish of the sea and over the birds of the heavens and over every living thing that moves on the earth.” Genesis 2:15 reads “The Lord God took the man and put him in the garden of Eden to work it and keep it.”

David Bruce Hageman identifies four tasks in the cultural mandate: ruling, filling, working, and keeping. People are to fill the earth. Humans are called to transform the original garden into a beautiful city. After the fall, however, the ground was cursed, scarcity became aggravated, and conflict arouse between God and man and between man and man. The cultural mandate, however was not rescinded.

In light of the cultural mandate and the nature of the cursed ground, how do we fill the earth with people without our starving to death or killing one another in a barbaric struggle for survival?  We must engage in consumption and production. We can’t exercise dominion if we are starving to death. Sustaining an expanding population requires increases in productivity. This is only possible when people formed communities where wide diversity of talents and gifts could be pooled together.

Economics teaches us that capital is a necessary source of prosperity. Capital goods are produced means of production. They include tools, machines, intermediate goods, and goods in process. As such they form the intermediate stages of each production process.

Using capital goods increases the productivity of the user. They allow people to produce more output per unit of land and labor. They also allow us to produce goods that could not be had at all without capital goods, such as watches and computers. By increasing our productivity, capital goods advance people in time toward their objective in producing consumer goods.

However, before capital goods can be used, they must be produced. People must make the capital goods first before they can be used to produce a consumer good or goods closer to consumption. Capital goods arise, consequently, from combination of land, labor, and time.

The more numerous the stages of production, the greater the opportunities for the division of labor. This further increases our productivity through the Law of Association which says that cooperative action is more efficient and productive than isolated action of self-sufficient individuals.

Producing capital goods requires saving. By saving we mean the restriction of present consumption.  In order to accumulate capital, people must be willing to put off present consumption and make available to workers resources they need to live for duration of production process in which they participate. The capitalist is the one who saves so that he will have resources available to invest in the production of capital goods. Savings is also required for capital maintenance, because capital goods wear out and become obsolete over time. Technological advance also requires savings, because research and development is funded out of savings, and to be operational, technology must always be  bound up in physical capital goods.

The willingness to save is constrained by time preference. People value present money more highly than they value the same amount of money in the future. To be willing to invest money now, people require a premium to compensate them for the waiting time they must endure.

This payment compensating for time preference is called interest. Interest, therefore, is income earned by capitalist/savers for supplying present money in exchange for future money. If capitalists invest savings for a particular project, they must do without use of their money for a particular period of time. Interest compensates them for this service of advancing present money to someone. Interest, then, is payment for rendering services of advancing money in the present to either entrepreneurs or owners of factors of production. The principle is the same regardless of whether capitalist saves and invests in the loanable funds market, financial instruments (stocks and bonds), or physical production.

The conclusion of the matter is that capital accumulation is a tremendous and necessary source of prosperity that allows us to better fulfill the cultural mandate. Interest is the income for providing the service of advancing money in the present which funds all capital accumulation.

Notwithstanding the social benefits of capital accumulation, several moral objections have been raised against it. One of the most popular is the Marxist claim that capital accumulation is a matter of stockpiling surplus value at the expense of exploited labor. In fact, capital is not the result of only land and labor. It is result of combining land, labor, and time. The capitalist is actually laborers' benefactor by advancing income in the present to workers which sustains them through time-consuming productive process.

Another argument against capital accumulation is that capitalists have too much power. In free society, however, the only way for a capitalist to accumulate capital is to better serve others. If they do not do what consumers want, they will reap losses and lose their capital. They only wield true power if they obtain special privilege from the state protecting them from competition in some way. The real problem in this case is state intervention, not capital accumulation.

Another argument against capital accumulation is that it leads to income inequality. Again however, in a free society, capitalists accumulate capital by more successfully serving others. “The workman is worthy of his hire.” If he satisfies the needs of others, why should not the capitalist increase his wealth?

Finally, in the Bible, God specifically instructs us to be good stewards with capital.

I passed by the field of a sluggard, by the vineyard of a man lacking sense, and behold, it was all overgrown with thorns; the ground was covered with nettles, and its stone wall was broken down. Then I saw and considered it; I looked and received instruction. A little sleep, a little slumber, a little folding of the hands to rest, and poverty will come upon you like a robber, and want like an armed man" Prov. 24:30-34.

Know well the condition of your flocks, and give attention to your herds, for riches do not last forever; and does a crown endure to all generations? When the grass is gone and the new growth appears and the vegetation of the mountains is gathered, the lambs will provide your clothing, and the goats the price of a field. There will be enough goats' milk for your food, for the food of your household and maintenance for your girls”Prov. 27: 23-27.

There are also a number of moral objections to interest. One popular argument appeals to scriptural condemnation of usury. It is important to recognize that according to the biblical language, usury is equivalent to interest. The prohibition against interest, however, is a prohibition against charging interest for charitable loans made to people in extreme need. It was not a prohibition of interest on commercial loans.


Other criticisms of interest run back to Aristotle. It is argued that money is barren and time belongs to all. Therefore, charging interest is either charging something for nothing (money is barren) or charging for something that he does not own (time). However, money in fact is an economic good. It is not barren, but provides service to holder. Also the saver/investor in lending or investing does without the use of his property--his money--for a specific period of time. Again, the workman is worthy of his hire. The capitalist/saver provides a service by advancing present money to those who desire it. This service is worthy of his compensation.