26 ECONOMIC OPPRESSION BY MEANS OF THE STATE And if thou sell ought unto thy neighbour, or buyest ought of thy neighbour's hand, ye shall not oppress one another: According to the number of years after the jubile thou shalt buy of thy neighbour, and according unto the number of years of the fruits he shall sell unto thee: According to the multitude of years thou shalt increase the price thereof, and according to the fewness of years thou shalt diminish the price of it: for according to the number of the years of the fruits doth he sell unto thee. Ye shall not therefore oppress one another; but thou shalt fear thy God: for I am the LORD your God (Lev. 25:14-17).
The theocentric message of this passage is that God is not an oppressor. Though He is the author of the law, as well as the final judge, He does not use His authority to do injustice. He does not seek unfair advantage. Neither should those who act in His name as His stewards.
God was the owner of the land of Israel: special ownership as distinguished from His general ownership of the earth. He established the terms of ownership and leasing within Israel's boundaries. His permanent sharecropping tenants were required to honor these terms. More specifically, they were required to imitate God: no oppression. The terms governing leaseholds in some unique way reflected God's dealings with His people. As an aspect of the jubilee land law, this law was a specific application of the general law prohibiting oppression.
In buying and selling, both parties were required to honor the limiting factor of the jubilee year. This raises important questions. First, what is oppression, biblically speaking? Second, is oppression here merely the failure to write contracts whose provisions ended with the advent of the jubilee year? Third, did this warning refer only to rural land sales?
The context indicates that rural land was the thing being bought and sold. But the legal restriction on the leasing of land would also have applied to the leasing of men. If, for example, an Israelite was sold into bondage because of his failure to repay a business debt, his term of servitude could not extend beyond the jubilee year.(1) The law required that "ye shall return every man to his possession, and ye shall return every man unto his family" (Lev. 25:10b). Business debt could not be collateralized by land beyond the jubilee.
The first question is more difficult to answer. What is oppression in this context? Has it anything to do with pricing? The text indicates that it has everything to do with the period of time in which the terms of the contract will apply. Time has something to do with pricing, but what? "According to the multitude of years thou shalt increase the price thereof." The question arises: Increase the price from what? What were the price floor and price ceiling that governed the pricing of additional years? How were they established? To answer this question in the absence of historical records, we need to understand something about modern capital theory.
We need to think very carefully about how prices are formed in a free market society if we are to discuss the meaning of economic oppression. If we do not understand how prices are established in a free market society, we may be tempted to accuse sellers of goods and services (i.e., buyers of money) of having oppressed buyers (i.e., sellers of money). Warning: he who brings a lawsuit against another should first determine if an infraction of God's law has taken place. The Bible is clear: he who testifies falsely against another and is subsequently convicted of having made a false accusation must suffer the same penalty that his intended victim would have suffered (Deut. 19:14-21). Historically, there have been a great number of would-be economic theorists who have made such accusations against an entire class of people. There have been politicians and bureaucrats who have imposed socialistic programs onto society in the name of such conscience-driven economic analyses. They have shown zeal without knowledge. The result has been economic exploitation through State coercion on a massive scale, always in the name of economic justice and frequently in the name of social salvation.(2) Where such policies have been widely enforced, God has brought His curse: low productivity and low income.
Pricing a Factor of Production The text speaks of the years of the fruits. "According to the number of years after the jubile thou shalt buy of thy neighbour, and according unto the number of years of the fruits he shall sell unto thee" (v. 15). This is a very important economic concept. Capital theory is dependent on it. Land and labor produce fruit over time. This is what makes land and labor valuable. Modern economic theory, beginning with the marginalist revolution of the early 1870's,(3) attempts to explain the relationship between the market value of the fruits of production and the market value of the economic inputs that produce these fruits.
What does modern economic theory teach? First and foremost, it teaches that all economic value is subjective value. Economic value is imputed, i.e., it is subjectively determined. Economic value is not the product of labor; on the contrary, labor is valuable because of the value of labor's output.(4) Economic value is also not the product of objective costs of production. The classical economists, from Adam Smith to Karl Marx and John Stuart Mill, argued for objective value theory -- labor theory of value or cost-of-production theory of value -- but the marginalist or subjectivist revolution rejected this approach to value theory.(5) The classical economists did not trace market exchange, production, and the formation of prices solely to the actions of consumers. They did not construct a general theory of value.(6)
Consumer Sovereignty(7)
The subjectivists concluded that economic inputs possess value only in relation to the value of their output. The question immediately arises: Value to whom? Concluded the subjectivists: value is imputed subjectively by an imputing agent -- the consumer -- to the fruits of production. In his Theory of Money and Credit (1912), Ludwig von Mises wrote that "in the last resort it is still the subjective use-value of things that determines the esteem in which they are held."(8) In short, "the only valuations that are of final importance in the determination of prices and objective exchange-value are those based on the subjective use-value that the products have for those persons who are the last to acquire them through the channels of commerce and who acquire them for their own consumption."(9) The persons who are the last to acquire anything are called consumers. If all potential consumers refuse to pay for some asset's fruits of production, these fruits have no economic value.(10) Neither will the specific factor of production, assuming that all producers recognize that no future consumer will pay for this output. Thus, "The consumers determine ultimately not only the prices of the consumers' goods, but no less the prices of all factors of production."(11) Regarding capital goods, Mises wrote: "The prices of the goods of higher orders are ultimately determined by the prices of the goods of the first or lowest order, that is, the consumers' goods. As a consequence of this dependence they are ultimately determined by the subjective valuations of all members of the market society."(12) This is why he concluded: "The pricing process is a social process."(13)
But don't producers have more money than consumers? Can't they impose their will on consumers? On the contrary, producers have far less money than consumers, which is why producers are vulnerable to shifts in consumer demand. Producers own inventories of highly specialized consumer goods and even more specialized producer goods (capital equipment). Consumers own the most marketable commodity, money. They have the competitive advantage. Think of a producer of shoes. If consumers decide they do not like the style of these shoes, what can the producer do with these shoes? Spend a fortune on advertising to change consumers' minds? I am in the advertising business; let me assure you, most producers do not have sufficient funds to change the minds of many consumers.(14) All the shoe manufacturer can do is lower the price of his inventory, even if he does not regain his costs of production. After all, some income is better than no income. Some money is better than a pile of unsold shoes that must be stored somewhere.
Consumers can buy many things with their inventory of unspecialized money; producers cannot buy many things with their inventory of specialized goods. This is why consumers are economically sovereign over producers, even though consumers and producers are equally sovereign legally. The hierarchy of control under capitalism is economic. Consumers "hold the hammer": money (the most marketable commodity) plus the legal authority to buy or not to buy from any producer.
Market theory rests on the insight that the consumer is economically sovereign, even though the owner of a tool of production is legally sovereign. The owner lawfully can do whatever he pleases with his property, so long as he does not physically injure someone else, but he cannot thwart the consumer at zero cost. If he thwarts the demand of the highest-bidding consumer by not selling the capital good's final output to him, he thereby forfeits the extra amount of money which that consumer would have paid him. The owner's inventory cost is not just the cost of storage and insurance, but also the forfeited income.(15)
The free market, with its lure of profit, encourages the specializing of risk-bearing (insurance) and uncertainty-bearing (entrepreneurship).(16) Capitalism allows consumers safely to transfer to producers both the risk and the uncertainty of deciding what to produce and when, since the legal system places in the hands of consumers the authority to say "no" to those products and services that they do not wish to buy at the prices offered. The consumers therefore hold the hammer over producers, despite the fact that the producers appear sovereign because they decide what gets produced. What they cannot control is what gets sold at what price.
Economic Imputation
So far, there is something missing from this explanation of the structure of capitalist production and distribution. (Note: this is an integrated system; production is not separate from distribution.)(17) What is missing is imputation. We have seen that production takes place over time. So, a question arises regarding the valuation of capital goods, raw materials, labor inputs, and land. How does the present value of any scarce economic resource relate to the value of its final output? That is to say, how do present prices relate to future prices?
To answer this, we need to apply Mises' theory of entrepreneurship to capital goods theory. Producers act as the economic agents of future consumers. Producers forecast future market demand as well as they can. They study historical records of previous demand (perhaps only a few minutes old), and then they guess what future demand (consumers) and future supply (their competition) will be. That is, they guess what the market price will be for a particular product.(18) As Mises wrote in 1922 in his monumental refutation of socialism, the capitalist "must exercise foresight. If he does not do so then he suffers losses -- losses that bring it about that his disposition [control] over the factors of production is transferred to the hands of others who know better how to weigh the risks and the prospects of business speculation."(19)
University of Chicago economist Frank Knight(20) agreed with Mises on the role of entrepreneurship, although he rejected Mises' theory of interest and capital. Knight understood that the consumer is sovereign under capitalism, and the entrepreneur-producer is his servant. He noted the amazing fact that today's consumer does not know exactly what he will want to buy in the future or what he will be willing to pay. Therefore, "he leaves it to producers to create goods and hold them ready for his decision when the time comes. The clue to the apparent paradox is, of course, in the `law of large numbers,' the consolidation of risks (or uncertainties). The consumer is, to himself, only one; to the producer he is a mere multitude in which individuality is lost. It turns out that an outsider can foresee the wants of a multitude with more ease and accuracy than an individual can attain with respect to his own. This phenomenon gives us the most fundamental feature of the economic system, production for a market. . . ."(21)
In the expectation that a particular piece of capital equipment will produce something of value to future consumers -- something they will pay for -- producers today impute value to capital equipment. They do the same with land, labor, and raw materials. They do this as present economic agents of future consumers. (I keep repeating this because non-economists simply do not grasp it, including thousands of non-economists who hold Ph.D.'s in economics.) Mises described land ownership by a farmer in a market economy: "He does not control production as the self-supporting peasant does. He does not decide the purposes of his production; those for whom he works decide it -- the consumers. They, not the producer, determine the goal of economic activity. The producer only directs production towards the goal set by the consumers."(22)
Understand, however, that these consumers are not present consumers, for production is always aimed at the future. The consumers who control production are in the minds of the producers. A particular producer -- the capitalist entrepreneur -- may discover later that the actual consumers do not act in the way that his mental consumers did. He will then suffer losses, either because he has to sell his output for less per unit than he planned, in order to unload his inventory, or else he sells it at the expected price per unit, but then discovers that he could have charged more.(23) In either case, he experiences a loss.
The producer can consult present prices, meaning the historical record of recent prices. This does not tell him anything secure regarding the future. Mises wrote in Human Action that "the prices of the factors of production are determined exclusively by the anticipation of future prices of the products. The fact that yesterday people valued and appraised commodities in a different way is irrelevant. The consumers do not care about the investments made with regard to past market conditions and do not bother about the vested interests of entrepreneurs, capitalists, land-owners, and workers, who may be hurt by changes in the structure of prices. Such sentiments play no role in the formation of prices. . . . The prices of the past are for the entrepreneur, the shaper of future production, merely a mental tool."(24) A good's present price is only a starting point for the producer's inquiry into the possible range of a similar good's future prices. These prices are set by competition: producers vs. producers, consumers vs. consumers.
Factors of Production
Land and labor are original factors of production.(25) Capital is not an original factor of production; it is the product of land (raw materials) and human labor over time.(26) Thus, the producers of capital equipment (producers' goods) act as present economic agents of future buyers and renters of producers' goods, i.e., future consumers of producers' goods. The producers of capital goods impute value to present raw materials and labor. They enter the markets for raw materials and labor and bid against each other to buy legal control over these scarce economic resources. That producer whose imputations of the present value of these resources are the highest, and who then bids up the price until no bidders remain to bid against him, wins legal control of specific resources. Producers give up the ownership of present goods (money) in order to buy future goods -- the output of whatever resources they have bought -- that can later be sold for more money than they paid for them, they hope. A present purchase of original factors of production costs a producer the ownership of presently owned consumer goods (i.e., money that could buy consumer goods) over time. What it costs him, in other words, is interest.
What about owners of land? The same process of imputation takes place. Land contains raw materials. Coupled with labor, these raw materials can be fashioned to produce goods. The present value of land is therefore imputed to it by men who are acting as economic agents for future consumers. If the net value of a piece of land's output is zero or less, and is expected to remain zero or less, then the value of the land is zero or less.(27) It can rise above zero only when the expectations of imputing agents change.
An Expected Stream of Net Income When a person purchases a piece of property, he is buying legal ownership over what the text in Leviticus calls the years of its fruitfulness. The buyer is buying an expected stream of production when he buys a piece of land, but he cannot know for sure that this stream of income will persist in the future. As Knight wrote in 1933, "The basic economic magnitude (value or utility) is service, not good. It is inherently a stream or flow in time. . . ."(28) To put it bluntly, streams can dry up. This is what happened to Israel in the three years of drought when Elijah fled the nation (I Ki. 17).
The jubilee law limited its discussion of fruits to agricultural land located in Israel, but the same principle of ownership always governs the purchase of any scarce economic resource: the owner has purchased legal control over an expected stream of net productivity (a capital good) or over an expected stream of passive income (a bond).
If a person buys a capital good for a cash payment, he becomes its permanent owner. If he rents it for a specified period of time, he becomes a lessee. Because the capital good is physical, people without training in economics tend to think of it differently from the way they think of a promissory note. But the present value of the note is not derived from the physical piece of paper or a blip in a computer memory device; rather, it is derived from the estimated value of the money it promises to repay in the future, discounted by the prevailing rate of interest.(29) Similarly, the present value of a capital good is not derived from its physical make-up; rather, its present value is the estimated value of what it is expected to produce, discounted by the prevailing rate of interest. The economic issue is value, not physical make-up. The economic issue is the market's present imputation of future value, discounted by the prevailing rate of interest. Thus, the same process of imputation (valuation) applies equally to promissory notes, land, and capital equipment.(30) Prior to the abolition of slavery in the nineteenth century, it also applied to human labor. We call this imputation process capitalization.
Consider the case of a person who leases a piece of equipment but whose lease contract permits him to sublease it to someone else. A second person agrees to make a cash payment or else a periodic payment to the person who leased the equipment first. The person who leased the asset first has now become a recipient of money income. It is now the same as if he had purchased a bond in the first place instead of leasing a piece of equipment from someone else. He now owns a piece of paper issued by a third party who promises to pay him in the future. So, there is no economic difference between buying a stream of net future income in the form of a piece of capital equipment or a written promise to pay (IOU).
Economic Oppression The text warns against becoming an economic oppressor. What must be recognized from the beginning is that in the case of buying and selling rural land in Israel, economic oppression was a two-way street. Whether a person was a seller of land (buyer of money) or a buyer of land (seller of money) -- i.e., whether a lessor or lessee -- he could become an oppressor, according to this passage. "And if thou sell ought unto thy neighbour, or buyest ought of thy neighbour's hand, ye shall not oppress one another" (Lev. 25:14). This should warn us against any thought that the potential oppressor is always a buyer of some asset, or that a seller is always the potential oppressor.
This is especially relevant with respect to buyers of labor services (sellers of money) and sellers of labor services (buyers of money). It has been assumed by those who favor civil legislation that "protects labor" that employers are almost always the oppressors. Similarly, it has been assumed by those who oppose trade unions that the unions are normally the oppressors. Neither assumption is valid. What is valid is the conclusion that when the civil government interferes in the competitive market process of making voluntary contracts, the group favored by the legislation becomes the economic oppressor. This oppression is established by positive sanctions (subsidies) and negative sanctions (restraints against trade). The element of civil compulsion is the most important aspect in identifying the Bible's concept of economic oppression.
Things Seen and Unseen
Let me explain my reasoning by a discussion of the economics of labor unions. If the State threatens violence against an employer who refuses to hire trade union members, or refuses to pay the wages demanded by trade union members, the employer is being oppressed economically. But it is not just the employer who is victimized. If he capitulates to the State, then he must fire (or refuse to hire) those workers who are not union members. They are no longer legally employable by him. They are now forced by law either to look elsewhere for employment or join the local trade union, which may not be possible because of unofficial restrictions against entry.(31) What the voters and the politicians had regarded as economic oppression -- an employer's refusal to hire one group of workers -- was in fact a decision by the employer to hire a different group of workers: those who did not belong to a trade union. But very few legislators ever consider the effects of their law on those excluded. The legislation is called "pro-labor," but it is in fact discriminatory against specific laborers. Such legislation oppresses non-union members.
The challenge for the economist is to use economic reasoning to explain what cannot be seen. The public can literally see specific people working for higher wages than they were offered before, and so the public concludes that the legislation has "helped labor." The public cannot literally see those workers who have been forced by law to seek employment elsewhere. The voters do not readily consider the secondary effects of this "pro-labor" legislation, for these secondary effects are not visible. These effects are only perceived through economic reasoning -- a skill that must be developed. The belief that "labor" in general has been helped by legislation making trade unions compulsory in certain industries and in certain regions is an example of what the mid-nineteenth-century French essayist Frédéric Bastiat called the fallacy of the effects not seen.(32)
Furthermore, it is not just the employed labor union member who benefits. Those employers who can now afford to hire the excluded laborers, but who could not have afforded to do so at the wages previously offered to these laborers, before the law was passed, receive a subsidy: lower-priced labor services. So, civil legislation to "help labor" and to "stop exploitation by employers" by making trade unionism compulsory necessarily winds up helping some laborers at the expense of others, and also helping some employers at the expense of others.
It takes only the simplest level of economic analysis to understand the economic effects of such legislation, but virtually no college-level economics textbook discusses the legislation in this forthright manner, and no high school textbook does. Neither do the history textbooks. There is a good economic reason for this omission. The vast majority of textbooks are sold to tax-funded schools, and these schools are subject to political pressure from well-organized trade unions, most notably the high school teacher unions.(33) It is not in the unions' interest to have students exposed to the idea that their teachers' income is based in part on the political exploitation of other potential teachers who are willing to work for less but who are excluded through a threat of government violence against the school system's Board of Trustees. After several generations of such textbooks, even the trustees fail to understand the economics of legislated violence.
The State and Economic Oppression The text in Leviticus warns against exploiting others economically. The person who leases a piece of land from an owner can become an oppressor, but so can the owner who leases it. The ethical and judicial question is this: What is economic oppression? This is not so easy to answer as Christian social commentators and humanistic legislators have sometimes imagined.
In Tools of Dominion, I argued that neither the Bible nor economic theory provides a legally enforceable definition of economic oppression that is based on price. I argued rather that the State creates the conditions for economic oppression: injustice. This is affirmed by Psalm 82, which refers to rulers of the congregation, which was the nation as a whole.(34) "God standeth in the congregation of the mighty; he judgeth among the gods. How long will ye judge unjustly, and accept the persons of the wicked? Selah. Defend the poor and fatherless: do justice to the afflicted and needy. Deliver the poor and needy: rid them out of the hand of the wicked" (Ps. 82:1-4). For the benefit of readers who do not have access to Tools of Dominion, I reprint my arguments.
* * * * * * * * * * * * * * Economic theory provides no definition of the concept of "economic oppression" in the case of voluntary transactions. Only where coercion is involved -- the threat of physical violence -- can the economist be confident that oppression is involved. This does not mean that a definition of oppression is impossible, but it does mean that no appeal to modern humanistic economic theory can provide a clear-cut definition. The use of the coercive power of the civil government to extract resources from other people can be regarded as oppression in most instances, but there are no clearly defined criteria of oppressive voluntary transactions made in a free market. The mere presence of competitive bargaining between unequally rich or unequally skillful bargainers does not constitute economic oppression, as the bargain between Jacob and Esau indicates (Gen. 25:29-34).(35) Nevertheless, there are acts of economic oppression, even if conventional economic theory cannot state the criteria scientifically (neutrally).(36) . . .
In the case of voluntary economic transactions, the Bible gives no specific guidelines as to what constitutes economic oppression, apart from oppression in the form of commands to perform a civil crime (e.g., adultery, prostitution). There are laws that prohibit false weights and measures or other crimes involving fraud, but these are general rules for the whole population. They are not laws designed specifically to protect widows, the fatherless, and strangers. Apart from the law regarding weights and measures, the Bible does not authorize legislation or court decisions against perceived cases of economic oppression.(37) There are no biblical (or economic) guidelines that define "price gouging" or "rent-racking," or similar unpopular practices. The attempt of governors and judges, whether civil or ecclesiastical, to go beyond the enforcement of specific laws against fraud is necessarily an expansion of arbitrary rule. Legal predictability suffers, and therefore human freedom also suffers. The power-seeking State expands at the expense of individual freedom.
This is not to argue that such evil economic practices do not exist. No doubt they do exist. The question is: What, if anything, is the civil government or a church court supposed to do in any formal case of alleged oppression? The problem that freedom-seeking Christian societies must deal with is the preservation of the judicial conditions necessary for maintaining personal liberty. How can a society avoid oppression by unjust civil magistrates if the legal system offers great latitude for civil judges to define arbitrarily and retroactively what constitutes an economic crime? Civil government is a God-ordained monopoly of violence. Allow arbitrary and unpredictable power here, and the entire society can be placed under the bondage of oppressors -- oppressors who legally wield instruments of physical punishment. In contrast, economic oppression is an individual act by a specific person against a handful of people locally. It is a temporary phenomenon, limited at the very least by the continuing wealth of the oppressor, the continuing poverty of the victims, and the lifespans of both the oppressor and the oppressed. There are no comparably effective restraints on oppression by those who control the administration of civil justice. Society-wide, monopolistic, State-enforced sin is generally a far greater threat to potential victims of oppression than localized, privately financed sin.(38)
* * * * * * * * * * * * * * Oppression and the Jubilee Land Law We now return to the text of the jubilee land law. Who is likely to become the victim of oppression? Answer: the person with less reliable information about alternative offers and future economic and legal conditions. This can be either party. In an overwhelmingly agricultural community, both parties probably have equally good information about the value of the fruits of production. The person who wants to lease the land probably has somewhat poorer information about the physical details of the property. On the other hand, the land owner may have fallen into debt. Perhaps he is not a good manager of his money. He may be a poor farmer. He may have poor information about the value of the stream of net income from the land. So the text does not specify one of the two parties as the more likely oppressor.
To identify the oppressor here, we need to identify the person who uses the State, or his knowledge about the most likely future actions of the State, in order to gain a competitive advantage over the other person in a voluntary transaction. It is rare for biblical law to specify pricing as judicable economic oppression except in life-and-death situations - what I call "priestly pricing." Biblically defined economic oppression through price-setting is usually based on a person's efficient use of illegitimate power by the State. The oppressor and the civil magistrates act in collusion to oppress someone or some group.
A Question of Knowledge
The law of the jubilee was clear: in year 50, Israel's agricultural land was to revert to the original owners or their heirs. This leads me to ask: On what basis could anyone not know what to pay for or charge for leasing the land? All land was not equally valuable. To the extent that one piece of land was more productive, net, than another, to that extent the lease price would have been higher than less productive land. For example, a farm with a well-developed orchard would have brought a higher price than a farm whose income was dependent on farming that required higher inputs of labor and capital. The net income from the fruit of the orchard probably would have exceeded the net income from grain farming. So, the existence of variously priced annual leasehold rents was not necessarily evidence of economic oppression by anyone.
Then what was? A cash payment or long-term annual rent agreement that was either too high (an exploiting lessor) or too low (an exploiting lessee) for the number of years remaining before the jubilee. But since everyone knew the number of years remaining, how could there be any doubt about this? The answer should be clear to anyone who has followed my logic so far: one of the parties knew that this statute would probably not be honored by the civil magistrates when the year of jubilee arrived.
Which of the two would become the beneficiary if only one of them knew the truth? In the case of an advance cash payment for the full term of the lease, the party making the payment would have benefited. The person giving up control over the property would have asked a price on the assumption that the property would return to him or his heirs in the jubilee year. But this price was too low if the person gaining control would not in fact be required to relinquish control at the jubilee.
In the case of a long-term lease arrangement, however, the person agreeing to pay the existing owner an annual payment until the next jubilee year would have taken on an obligation longer than he had suspected. If the civil courts enforced the payment of the terms of the lease, but refused to enforce the jubilee, the person obligated to pay could become the oppressed party. If the land became less productive or its fruits less valuable in the market, the person who leased the land was stuck. The owner would collect his rental payment indefinitely.
The Civil Magistrates as Enforcers
The decisive factor, then, was the covenantal faithfulness of the civil rulers. Their decision to neglect the enforcement of the jubilee year would create conditions for economic oppression by one of the two contracting parties. Each party in the transaction was therefore warned in advance by God: do not become an oppressor, even if corrupt civil magistrates make such oppression possible by refusing to enforce the terms of the jubilee land law. God warned everyone to abide by the jubilee law even if the civil rulers did not enforce it.
If I am correct in my analysis of this passage, then we have additional evidence that economic oppression in a free market is usually the result of civil magistrates who refuse to enforce God's revealed law. It is rarely the process of voluntary pricing in a free market that constitutes economic oppression; it is rather pricing in a society in which civil magistrates favor a particular individual or class by means of economically discriminatory legislation or economically discriminatory court decisions. State subsidies of all kinds enable people to oppress each other economically. The incentive to oppress others in this way is universal; the ability to do so is very limited when the civil magistrates restrict their actions to enforcing the laws of God by imposing the sanctions specied by His law. The State initiates economic oppression by creating the legal conditions in which such oppression is profitable. In short, the State subsidizes economic oppression. As in the case of any State subsidy, this increases the supply of the item being subsidized: economic oppression.
The Legitimacy of Both Rent and Interest This law provides evidence of the existence of rental agreements in ancient Israel. A lease is a rental agreement. A potential lessee approaches the land owner and makes an offer to take control of the land, meaning the fruits produced by the land over time. "Land" here is defined as everything on the land or under the land, including houses, streams, ponds, fish, metals, and anything else specified by either the lease or local custom. The lessee can pay this rent in advance, or annually, or by a combination of the two. The terms of the lease are negotiable. What was not negotiable in ancient Israel was an extension of this lease beyond the beginning of the next jubilee year. The sound of the ram's horn in year 50 would end all agricultural leases.
Let us assume that the ram's horn has sounded. How would Israelites have estimated the value of a new lease? Let us begin with a hypothetical situation in which an heir has just inherited his land. He is an international trader by profession. He has no interest in farming. Neither do his sons. What he wants is cash, so that he can make purchases for the next voyage. He advertises that he is willing to lease the property to anyone who wants it: high bid wins.
Let us assume that those who might be interested in leasing the land are all of equal forecasting ability and equal ability as farmers. They all have cash, and they all want to farm. How will they calculate the value of the lease?
Capitalizing Future Income
First, they will make forecasts regarding the average net income that can be derived from the fruit of the land over the next 49 years, including those initial six sabbatical years in which there is neither income nor a miraculous triple crop.
Second, they will seek information on what the correct rate of interest is for long-term loans. (Let us assume that a developed market for commercial loans did exist in Israel.) The person with money to invest can invest in a farm for a period of time or lend the money into the loan market. The lender makes adjustments for comparative rates of risk, and then he decides where to invest in terms of the highest available rate of return. Will he invest in the land's lease or a bond? If his goal is money income, it will make no difference to him where the money will come from. He seeks the highest rate of return. He cares nothing about getting his hands into "the good earth," nor does he become ecstatic when clipping coupons. He simply wants the highest rate of return on his invested money. He can pay the land owner cash and receive lawful access to a stream of future agricultural income, or he can pay a borrower cash and receive a stream of future money income.
Let us consider a specific example. If the lessor's land is expected to produce an ounce of gold per year, net of all expenses, and the bond-issuer promises to repay the creditor an ounce of gold per year, the present price of the lease will equal the present price of the bond. Why? Because the rate of interest -- the discount applied to the price of future goods in relation to the price of present goods -- is applied equally to both streams of income. Once he has adjusted for comparative rates of risk regarding repayment, the man with gold to invest is not comparing a piece of paper (an IOU) with acres of dirt; he is comparing gold held in the present vs. gold received in the future.
If there was no organized market for such loans in ancient Israel, then each of the prospective lessees would have had to estimate what his own rate of discount was. This discount is not on money as such; it is on time itself. (I shift to the present tense.) Each potential lessee asks himself: "How high do I discount the value to me of future income in relation to cash held today?" If he expects to gain from the farm a net income of one ounce of gold per year,(39) including forfeited income during six sabbatical years, he will not offer the farm's owner 49 ounces of gold, cash, even if he has that much available to invest. Why not? Because he already has 49 ounces of gold. Why should he give up 49 ounces today in order to get back one ounce per year over a 49-year period? A bird in hand today is worth more than a bird in hand 49 years from now.(40) The 49th ounce of gold that he owns today is worth a great deal more to him than the 49th ounce of gold he expects to receive 49 years in the future. The discount that he applies to the value of each year's ounce of gold is his rate of interest.
Interest and Rent
There are some contemporary commentators who claim that the Old Testament's prohibition against interest from charitable loans to the poor -- "thy poor brother" (Deut. 15:9) -- also applied to commercial transactions. Rarely or never are these critics professional theologians, let alone economists. This interpretation of "usury" is incorrect. The two types of loans were (and are) morally and legally different.
The Hebrew word translated as usury in the King James Version means interest. Interest was prohibited when it was derived from a morally obligatory charitable loan to a poor person, either brother in the faith or a righteous resident alien. It was not prohibited when it was from a business loan, which was not morally obligatory. The charitable loan was morally compulsory (Deut. 15:9-10); the commercial loan was not. The charitable loan was cancelled in the seventh year (Deut. 15:1-7); the commercial loan was not. The borrower who did not repay a charitable loan on time could be sold into indentured servitude; this servitude lasted until the debt was repaid or until the year of national debt relief (Deut. 15:12-13). In contrast, the borrower who failed to repay a commercial loan suffered whatever penalties the contract specified. This collateral could legally involve indentured servitude beyond the seventh year, but not beyond the beginning of the year of jubilee, when every person had the right to return to his own land. The jubilee year was to break the bonds of every citizen in Israel, meaning every person who had an inheritance based on the conquest of Canaan.
Interest is familiar to most people: a payment made to a creditor by a debtor for the use of money over time. The money is then spent by the borrower in order to buy a factor of production or on consumption. But why should this definition of interest be limited to money? The addition of money to the transaction does not alter the economic nature of the transaction: payments made over time for the use of a scarce resource over time. It results from a discounting process: services today are worth more than the same services tomorrow. Today's value of a bird in hand is greater than today's value of a guaranteed bird in hand in the future. (I am not speaking here of comparative risk.)
Why is a resource valuable? Because it generates rent: a stream of income over time. To gain legal access to this stream of income, the renter must pay rent to the owner.(41) As people's knowledge of economic alternatives improves, rental payments made to the owner of a production factor will more closely approximate the market value of that factor's output. Because the term rent has for so long been applied to land, people think of it exclusively as a factor payment to land. This limited definition is valid only in the case of a narrow theoretical discussion of the original factors of production: land (rent) and labor (wage).(42) But a wage is a rental payment for human labor. The analytic concept of rent -- a stream of income -- applies to every factor of production.
In terms of economic theory, the payment of rent is made to maintain legal control over any factor of production. A consumer today can rent a car or a tool or almost anything else that can be purchased. What if I want to buy a stream of income for a period of time? I can go into the market and offer a cash payment. How much will I offer? If I am well informed, I will offer no more than the expected stream of income discounted by the rate of interest. I can buy land this way. I can buy tools. I can buy a contractual stream of money: a bond. Because of market competition, the cash price I must pay to buy the rent (passive income stream) from land will equal the cash price I must pay to buy the rent (passive income stream) from a bond (money contract), assuming everyone expects them to produce equal streams of passive income. Unless I am misinformed (or remarkably charitable), I will not pay more to buy the same passive income stream from different sources of equal risk. Stated differently, the interest rate (discount for time) applies equally to rental income from all sources.
If I want to gain legal control a piece of land that will provide me a passive income stream over a period of time, I can do it in either of two ways: 1) borrow the money and pay cash in advance for the use of the land, paying interest to the creditor; 2) lease the land weekly or monthly, paying rent to the owner. Legally, the terms of the two contracts are different. Economically, they are the same.
This leads us to an important conclusion: if paying interest for the use of money over time is illegal biblically, then paying money for the use of land over time is also illegal biblically. We call such payments for land rent. I will put it another way. If I were to borrow money at a rate of interest and then go out and use this money to pay cash for the use of a piece of property over the same period as the loan period, it is no different economically from going to the owner of the property and guaranteeing him monthly rent for that period. I can either guarantee to pay the creditor who loaned me cash a monthly rate of interest until I repay the principal or guarantee to pay the property owner a monthly rental payment until the lease expires. Legally, I am equally obligated to pay. Economically, it will cost me the same amount of money in a competitive market.
Very few of those people -- never are they trained economists -- who claim that all interest payments are immoral understand that their negative judgment against interest must apply equally to rent.(43) A denial of the legitimacy or legality of interest payments over time is also a denial of the legitimacy or legality of rental payments over time, i.e., a lease.
The critic of all interest payments who says that he opposes interest payments "because the Old Testament does" has a major problem with Leviticus 25:14-17, i.e., the law governing long-term land leases. If a lease is legitimate, then rent is also legitimate, for a lease is a long-term rental contract. If rent is legitimate, then interest is also legitimate, for interest in a modern capitalist market is a rental contract for the use of money -- an agreement entered into only because borrowers have uses for things money can buy. There is a lender and a borrower in each case. There is an agreement to pay money in installments over time for the use of goods over the same period of time. The lender (a person who gives up money or goods for a period of time) forfeits the use of the things that the cash would buy. The borrower (a person who gains control over money or goods for a period of time) gains access to the things money can buy by means of his promise to repay money or goods in the future. In each case, the lender will not lend unless he receives more money or more goods in the future than he gives up today; otherwise, it would be irrational to give them up, except as an act of charity.
Conclusion The jubilee land law prohibited oppression in the writing of land lease contracts. Oppression resulted when one of the two parties to the transaction used specialized knowledge to take advantage of the other. The kind of knowledge was quite specific: knowledge of future decisions by the civil magistrates not to enforce the terms of the jubilee land law.
Either party to the transaction could become an oppressor under this definition. The land owner might persuade the lessee to agree to a contract in which the lessee promised to make regular payments until the jubilee year was declared. If it was not declared, and the magistrates refused to allow him to escape from the terms of the contract, the lessee would find himself locked into the contract. Under some economic conditions (e.g., a long-term fall in the money price for agricultural products), this would defraud the lessee. On the other hand, the lessee might be able to get the land owner to accept a cash payment in advance for legal control over the land's production. If the jubilee land law was not enforced, the lessee would be able to extend his control over the land indefinitely. This would defraud the land owner. Conclusion: the State was the source of the opportunity for oppression.
Both parties were warned to honor the terms of the jubilee land law whether the civil magistrates did or not. God placed the primary responsibility for law enforcement on the contracting parties. He warned them both: "Honor the terms of the leasehold that I have made with Israel for control over My land."
The issue of economic oppression in this law was not the actual pricing of the factor of production: land. This decision was left to the contracting parties. Each looked at the expected future stream of income from the land. Each would apply the prevailing market discount of the price of future goods in relation to present goods to this stream of income: interest. Then they would decide what to offer each other. The agreed-upon price, however, had to take into consideration the irrevocable date for the termination of the contract: the jubilee year.
The existence of a law governing land leases in Israel testifies to the error of interpreting the Bible's prohibition against usury in charitable loans as a prohibition against all forms of interest. The decision to make a cash payment in order to acquire legal ownership of a stream of resource-generated income over a fixed period of time is identical economically to making a cash payment to buy an interest-paying bond with the same expiration date as the lease. This means that a prohibition against all interest payments must also be a prohibition against all rent payments. Yet this law establishes the legality of rent. I therefore conclude that the Bible does not prohibit interest in non-charity loans.(44)
There is no evidence that the jubilee laws were ever enforced in Israel. This may indicate that the jubilee laws sometimes were not enforced. Probably they were not enforced prior to the exile, for the seventh year of release was not honored, which is why God sent Israel into exile (II Chron. 36:21). Thus, every Israelite could safely assume that other laws beside the jubilee land law would govern leasehold contracts. Other civil laws would provide differing authority to magistrates to decide which leases would be honored and which would not. The magistrates of Israel arrogated authority to themselves to disobey God regarding the sabbatical year. How far could they safely be trusted to honor the terms of other laws? The opportunities for economic oppression must have increased, compared to rule by the sabbatical law and the jubilee land law, for there would have been less certainty about the enforcement of the civil law. The greater the degree of judicial uncertainty, the greater the amount of resources necessary to protect oneself: better lawyers, larger bribes, and higher expenditures on searching out information regarding the integrity of one's trading partners and also the moral integrity of their legal heirs. These were long-term lease contracts.
Summary Oppression in this passage applies to a contractual period of time: the years remaining until the jubilee.
It refers to a price ceiling and floor for the price of land and labor.
The price must reflect the number of years remaining and the "fruits."
The fruits have economic value.
Modern economic theory teaches that value is imputed subjectively to scarce resources by consumers and their economic agents (middlemen-entrepreneurs).
Consumers (sellers of money) are economically sovereign over producers because they own money: the most marketable good.
Consumers also possess the right not to buy.
The seller of goods and services must meet consumer demand or else forfeit ownership of whatever the highest-bidding consumer would have paid.
Producers act today as economic agents of consumers in the future.
They impute value to producer goods.
They establish prices through mutual competition.
"Years of fruit" means a expected stream of income.
Economic oppression in Israel was a two-way street: buyer or seller.
The oppressor's interests are favored by the State, which imposes sanctions: positive or negative.
The Bible offers no legal definition of economic exploitation in the cases of strictly voluntary exchange.
The Bible does not authorize civil legislation against perceived cases of economic exploitation.
The State easily becomes arbitrary.
The most likely person to be the victim of exploitation in land sales was the least informed regarding civil government.
One of the parties in an oppressive lease contract knew that the jubilee law would probably not be enforced.
This could be either the land's owner or its renter.
The failure of the civil magistrates to enforce the jubilee land laws was the basis of the oppression.
This law validated both rents and interest.
The bargainers made their estimations of value based on the expected value of future output -- rate of return -- discounted by an expected rate of interest.
A bird in hand today is worth more than a bird in hand tomorrow (or 49 years).
Interest is a discount applied to future goods in relation to the same goods in the present.
It is a payment for the present use of scarce resources.
The Bible does not prohibit interest.
A rental payment for land or equipment is not analytically different from an interest payment for money: both are payments made for the present use of scarce resources.
If interest is illegal biblically, so is rent.
Leviticus 25:14-17 established rules governing land leases, i.e., long-term rental agreements.
This means that Leviticus 25:14-17 legitimized both rent payments and interest payments.
Footnotes:
1. If he was being sold to repay a zero-interest charitable loan, his term of servitude could not extend beyond the sabbatical year (Deut. 15:12).
2. Jack Douglas, The Myth of the Welfare State (New Brunswick, New Jersey: Rutgers University Transaction Books, 1989).
3. The simultaneous and independent work of William Stanley Jevons, Leon Walras, and Carl Menger. See The Marginalist Revolution in Economics: Interpretation and Evaluation, edited by R. D. Collison Black, et al. (Durham, North Carolina: Duke University Press, 1973).
4. Any scarce economic resource with a market price is in part the product of labor. If it is not yet the product of labor, such as a waterfall, it will have to have labor (including intellectual labor) added to it before its fruits can be appropriated. Before any asset can be appropriated and used by an owner, he must perform some kind of labor.
5. Mark Skousen, The Structure of Production (New York: New York University Press, 1990), ch. 2.
6. Ludwig von Mises, Human Action: A Treatise on Economics (New Haven, Connecticut: Yale University Press, 1949), p. 63.
7. The phrase is generally attributed to W. H. Hutt. Hutt, "The Nature of Aggressive Selling" (1935), in Individual Freedom: Selected Works of William H. Hutt, edited by Svetozar Pejovich and David Klingaman (Westport, Connecticut: Greenwood Press, 1975), p. 185.
8. Ludwig von Mises, The Theory of Money and Credit (2nd ed.; New Haven, Connecticut: Yale University Press, 1953), pp. 102-3.
9. Ibid., p. 103.
10. In another place, I have discussed why value theory in economics requires the doctrine of an imputing sovereign God in order to avoid the incoherence produced by pure subjectivism's theory of autonomous man. See Gary North, The Dominion Covenant: Genesis (2nd ed.; Tyler, Texas: Institute for Christian Economics, 1987), ch. 4: "Economic Value: Objective and Subjective."
11. Mises, Human Action, p. 271.
12. Ibid., p. 330.
13. Ibid., p. 335.
14. The classic example is Ford Motor Company's introduction of the Edsel automobile, 1958-60. Ford could not sell enough cars to make a profit.
15. The cost of production is not an aspect of economic cost. What is spent is spent: sunk costs. Once spent, the producer's past costs are irrelevant to the crucial question: What can I get for my stock of goods?
16. Frank H. Knight, Risk, Uncertainty and Profit (New York: Harper Torchbooks, [1921] 1965), p. 244.
17. Murray N. Rothbard, Man, Economy, and State: A Treatise on Economic Principles (Princeton, New Jersey: Van Nostrand, 1962), pp. 408-9, 554-56.
18. Mises, Human Action, p. 333.
19. Ludwig von Mises, Socialism: An Economic and Sociological Analysis, translated by J. Kahane (2nd ed.; New Haven, Connecticut: Yale University Press, [1932] 1951), pp. 140-41. Reprinted by Liberty Classics, 1981. First edition: 1922.
20. He taught the more famous student, Milton Friedman. He studied under the more famous teacher, Max Weber, and translated Weber's 1919-20 lectures: General Economic History.
21. Knight, Risk, Uncertainty and Profit, p. 241.
22. Mises, Socialism, p. 41.
23. An interesting epistemological question can be asked at this point: If the producer and his competitors never discover that he could have charged more, has he suffered an economic loss? If pure subjectivism is true, and if God's omniscience is not part of the theoretical explanation of value, then on what basis can the economist say that the producer has suffered a loss? If there is no objective value, then there cannot be an objective loss. But if there is no subjective perception on the part of the producer or his competitors that he has sustained a loss, has he in fact sustained it? This is an unsolved theoretical dilemma of modern humanistic economics.
24. Mises, Human Action, p. 334.
25. Ibid., p. 634.
26. Ibid., p. 635.
27. An example of a piece of land that is worth less than zero would be a toxic waste site whose present owner is told by the government to clean it up at his expense.
28. Knight, "Preface to the Re-issue," Risk, Uncertainty and Profit, p. xxvi. Mises rejected the whole concept of a stream of income: "There is in nature no such thing as a stream of income. Income is a category of action; it is the outcome of careful economizing of scarce factors." Mises, Human Action, p. 390. The stream of income concept has nevertheless proven useful in discussing the discounting process of time-preference or interest: a discount applied to expected income over time. We speak of time as flowing; the same language of continuity applies equally well to the arrival of income over time.
29. On the interest rate (time-preference), see Rothbard, Man, Economy, and State, pp. 319-23.
30. On the discounting process, see ibid., ch. 7: "Production: General Pricing of the Factors."
31. Trade unions gain their economic ability to extract above-market wages from employers by their legal authorization from the State to exclude non-union members from the auction for labor services. If all trade unions opened their membership to all applicants, the unions could no longer exclude competing laborers, and the unions' ability to extract above-market returns would then disappear. Unions adopt non-price means of excluding members: race, nationality, and especially the absence of family connections. See Gary S. Becker, "Union Restrictions on Entry," in Philip D. Bradley (ed.), The Public Stake in Union Power (Charlottesville: University of Virginia Press, 1959), ch. 10. Becker won the Nobel Prize in economics in 1992.
32. Frédéric Bastiat, "What Is Seen and What Is Not Seen" (1850), in Selected Essays on Political Economy (Irvington, New York: Foundation for Economic Education, [1964] 1968), ch. 1.
33. In the United States, the largest trade union is the National Education Association.
34. James B. Jordan, The Sociology of the Church (Tyler, Texas: Geneva Ministries, 1986), Appendix A: "Biblical Terminology for the Church." See Chapter 4, above: subsection on "Congregation and Assembly."
35. North, Dominion Covenant, ch. 18: "Competitive Bargaining."
36. Gary North, Tools of Dominion: The Case Laws of Exodus (Tyler, Texas: Institute for Christian Economics, 1990), pp. 679-80.
37. The laws requiring gleaning and prohibiting interest-bearing charitable loans to fellow Israelites had no civil penalty attached to them.
38. Ibid., pp. 683-84.
39. This sounds about right for an 11-acre farm in the United States today; in ancient Israel, it would have been too much, except possibly in the inflationary era of Solomon's reign, when gold poured into his personal treasury (I Ki. 9:14, 28; 10:10, 14).
40. Especially if you are 49 years old.
41. This assumes that he is not a sharecropper.
42. Rothbard, Man, Economy, and State, pp. 313-15.
43. One critic who has understood this is S. C. Mooney. He writes: "The economic similarity between usury and the rent of property readily is admitted. However, this close connection does not serve to legitimize usury, as Locke et all suppose; but to condemn rents." Mooney, Usury: Destroyer of Nations (Warsaw, Ohio: Theopolis, 1988), p. 172. For my detailed critique of Mr. Mooney's utterly bizarre theory of interest and his equally bizarre applications, see Tools of Dominion, Appendix G: "Lots of Free Time: The Existentialist Utopia of S. C. Mooney."
44. The aforementioned Mr. Mooney has yet to reply to this argument, which I also offered in Tools of Dominion in 1990.
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