Poverty & Propositions from Lysander Spooner’s Poverty: Its Illegal Causes And Its Legal Cure.
Spooner’s four illegal causes of poverty:
In a manner to uphold arbitrary arid unconstitutional statutes against freedom in banking, and freedom in the rate of interest; thus denying the natural and constitutional right of the people to make two classes of contracts, which will hereafter be shown to be of vital importance, both to the general increase and to the more equal distribution of wealth.
In a manner to extend the obligation of certain contracts beyond their natural and legal limit, and hold men liable to pay debts no longer due; thereby condemning large numbers of men to perpetual poverty and destitution, by making their expired debts a burden upon their future acquisitions, and an obstruction to their obtaining credit for the capital necessary to the successful employment of their industry.
In a manner to reduce the obligation of the contracts of corporate bodies below their natural arid legal limit, and thus enable the privileged debtors, who have the means of payment, to withhold payment of debts actually due, and make themselves rich by making others poor.
In a manner to deny the legal rights of creditors, relatively to each other, in the property of their debtors; enabling, and, in cases of insolvency, compelling debtors to swindle one portion of their creditors for the benefit of another; making it impossible for capitalists to determine, with any reasonable accuracy, the value of personal security for loans; rendering it unsafe for them to loan capital at all to mere laborers; and this preventing the natural and more equal diffusion of credit among all those poor men, who are in want of capital upon which to bestow their labor, and who, for the want of such capital, are compelled to sell their labor to others for a price much below the amount of its actual products.
Spooner’s seven economic propositions for the labor theory of value:
Every man-so far as, consistently with the principles of natural law, he can accomplish it-should be allowed to have the fruits, and all the fruits of his own labor.
In order that each man may have the fruits of his own labor, it is important, as a general rule, that each man should be his own employer, or work directly for himself, and not for another for wages; because, in the latter case, a part of the fruits of his labor go to his employer, instead of coming to himself.
That each man may be his own employer, it is necessary that he have materials, or capital, upon which to bestow his labor.
If a man have not capital of his own, upon which to bestow his labor, it is necessary that he be allowed to obtain it on credit.
The laborer not only wants capital, on which to bestow his labor, but he wants to obtain this capital at the lowest rate of interest, at which, in the nature of thugs, lie can obtain it.
All credit should be based upon what a man has, and not upon what he has not. A debt should be a lien only upon the property that a man has before and when the debt becomes due; and not upon his earnings after the debt is due.
Creditors should have liens upon the property of their debtors, in the order in which their debts arc contracted; (with some exceptions hereafter to be named;) and the creditor having the first lien, should be paid in full, before the second receives any portion of his debt.
Spooner’s Labor Theory of Value
Spooner believed that it was a matter of natural law that every individual is entitled to his or her own labor. This was his first economic proposition. If you produce a tomato, you are entitled to that tomato. If you trade your tomato, the only fair trade would be for that which is relatively equal to your tomato. If you were to be deprived of part of your tomato, be it by the tax man or the highwayman, it would be an act of theft
Additionally, Spooner stated that the current unequal distribution of property in society was largely the result of individuals receiving property for which they did not justly labor: “It is also an obvious fact, that the property produced by society, is now distributed in very unequal proportions among those whose labor produced it, amid with very little regard to the actual value of each one’s labor producing it.” He attributed this fact to, “arbitrary and unjust legislative enactments, and false judicial decisions.” In short, the state has created laws that facilitate the unjust accumulation of resources at the expense of those who labor for them.
If human beings were to receive the full value of their own labor, without value taken by the state or the corporation, the ideal model would be self-employment. The individual must be self-employed, not work for wages. (Alternately, for what wage employment does exist the wages will rise to match the value proportional to the labor an individual could complete on their own.) This was Spooner’s second economic proposition. However, self-employment requires capital. And if the individual has no capital he must get a loan.
This is where the state comes in. Arbitrary limits on interest rates manipulate the market, according to Spooner, making it difficult for individuals to acquire capital: “The great mass of those, who, by reason of not having the most approved security to offer, cannot borrow capital at all at six per cent, could yet, without difficulty, borrow enough to employ their own hands…if they were allowed to contract for seven, eight, nine, or ten per cent.” This is counter-intuitive. It is high interest rates that often land individuals in hot water. However, Spooner argued for the abolition of usury laws and the abolition of limits on interest rates. How does this not pull people into a cycle of debt?
First, it is important to note that Spooner’s proposal is a monopoly-buster. It breaks the lending monopoly. The larger the lender the lower they are able to make interest rates. This pushes the small lender out of the market. By not legally limiting interest rates any individual would be able to make a loan at any rate. This would take the form of what is known today as peer-to-peer lending. It is highly regulated and, in many countries, peer-to-peer lending is not even legal. Thus, the state grants a monopoly to the chosen lenders. (Incidentally, thanks to the Internet peer-to-peer lending has never been as accessible as it is now.)
The lending monopoly further limits access to capital by selecting for individuals who already have capital. The individual who has enough security, or collateral, is approved for a loan. The individual who does not have that security — the one who needs the loan the most — is denied. Thus, the lending monopoly perpetuates an accumulation of wealth for some and excludes others from participation in the market. The end result is that, “these individuals, having a monopoly of capital, are able to take advantage of the necessities of all those who have not capital of their own, and are forbidden to borrow any, on which to labor. They thus compel them to sell their labor at a price that will give their employer a large slice out of the products of their labor.”
If Lysander Spooner is starting to sound like Karl Marx that is because they both shared the same propositions: value is determined by labor and monopolies force individuals to sell their labor for less than its true value.
Cash, Credit & Free Banking
Spooner saw the distinction between lending real cash and granting credit. To lend cash is to deprive oneself of an alternate use of said capital. “It can hardly be said that there is any profit in loaning money itself; for the interest obtained is generally no more than a fair price or equivalent for the crops, rents, or other incomes, which the property that might be purchased with the money, would yield.”
Lending credit, however, results in actual profits beyond the natural value of labor. This means that credit can be granted at any interest rate for a profit. Banking credit in a free market could therefore be obtained at much lower rates of interest than we see today.
However, a debt may never exceed what an individual owns. This is because the individual cannot legitimately contract more than he or she has. To do so would be illegitimate, according to Spooner, as a matter of natural law. No one can go into debt beyond his or her total assets at the time of being issued credit. The risk of credit is shared by the creditor and debtor. It no longer rests on the debtor alone. The creditor knows the debt may not be resolved when it is due, or that the debt may be resolved for less:
“Under the operation of this principle, nearly all debts would be settled at once on their becoming due; and be then settled finally and forever. The creditor would then know what he had got, and would have no occasion to spend any further time, thought, or money, in harassing the debtor by attempts to get more. And the debtor, on his part, would know that he was a free man; and would at once engage in the best employment he could find, without being liable to be disturbed or obstructed by his former creditor, in the prosecution of it. Thins creditor and debtor would be likely thenceforth to be more useful, both to themselves and society, under this arrangement, than under the opposite one, which makes the creditor the enemy of the debtor, and incites him to an expensive, cruel, perpetual, destructive and generally profitless war upon him, his family, and his and their industry.”
Spooner anticipated the objection that this would scare creditors away; “It may be supposed by some, that credit would not be given, if the legal obligation of debts were limited in this manner.” However, he rejected this on the grounds that the market surrounding credit would adapt. Creditors would add a premium or, more importantly, shift toward short-term debts and settlements. More individuals would seek and attain safe forms of credit, knowing that they cannot enter perpetual debt.
But under the principle of perpetual liability, whichever a man finds that he has made aim error in his calculations, and that it will be impossible for him to pay his debt in full, that no exertion on his part can save him from an arrearage of debt, he is apt to think and feel that he is ruined, not only in his present fortune, but in his future credit amid prospects. He therefore becomes disheartened, and perhaps idle, prodigal, and dishonest-saying to himself “I may as well die for a large sum as a small one.”
What Does This Even Mean?
This may all sound esoteric. Let’s put it in a modern context. The phenomenon of opening new credit cards to pay old ones, mortgages people cannot afford, and perpetual student loan debts: all dissolve if the state does not limit the credit market and facilitate predatory monopolies.
Lysander Spooner, writing in 1846, predicted the pattern of perpetual cycles of credit card debt common today:
“Under the present system, debtors, under certain circumstances, are almost compelled, by the necessities of their condition, to wrong their creditors. For instance-a debtor, before his debt becomes due, finds that it will be out of his power to pay the whole of his debt at the time it becomes dime…He, therefore, makes new debts to pay old ones; borrows money at ruinous rates of interest; makes desperate moves in his business; every struggle to extricate himself only sinks him deeper in the mire; finally he gets to the end of his credit; his race is run; the insolvent laws come in to settle the matter; and his whole arrearages of debt, and the consequent losses of his creditors, are perhaps ten, twenty, or fifty times greater than they would have been, if he had settled with his first creditor, by paying all he had to pay, when he first found that lie was in arrears.”
Spooner also described predatory home and business loans:
“These contracts are of this kind. An old and experienced man takes advantage of the inexperience and the sanguine anticipations of a young man, to sell him property at enormous prices, giving him credit for the whole, or a part, but well knowing, from his own superior judgment and experience, that the young man will not at all realize his anticipations, or even realize enough from the property to cancel his liability. But he sells the property to him on the calculation that the latter will be able to pay at least the real value of the property; and that, as for the balance, he is a young man, he will be able to work it out; or his friends will pay it for him; or the possession of this property will enable him to get credit of others, and thus he will be enabled to pay this debt by throwing an equivalent amount of loss upon somebody else.”
If this still sounds esoteric, here is what Spooner was saying: not everybody will be able to pay a debt. It is even a matter of natural law, to Spooner, that an individual cannot pay beyond what they have. The creditor, without the state to enforce perpetual debts, must take the natural risk that he/she/it will not be paid back. Credit takes on the form of an investment. If a debtor cannot pay, then a creditor may just lose that investment. Thus, free banking or free credit.
Implications & Results
- The safest option is for the capitalist to lend small amounts to many different individuals. This minimizes risk for the creditor as a form of diversification. It also maximizes benefit to small, new market entries — those who need the loans the most.
- With the shift to small, short-term loans individuals are more inclined to pay them back and not accumulate debt. The debt is manageable and there is the strong incentive to not ruin credit for a future loan.
- To the mutual benefit of creditors and debtors, debtors, working for themselves, are able to inherently produce more value for their labor than if they were hired for wages. This allows for greater long-term gain on the debtor’s interest, as well as favorable rates for the creditor’s investment.
This is one of many ways that free markets limit the runaway accumulation of wealth, stop artificial employment shortages and, if Spooner is to be believed, eliminate wages completely in lieu of direct ownership.
“The result of the system would be, that the future accumulations of society, instead of being held, as now, in large estates, by a few individuals, while the many were in poverty, would be distributed in small estates among the mass of the people. The large estates already acquired by single individuals, would, in two or three generations, at most, become entirely scattered.”