Usury and the Paretian Objection

Abstract

This paper has the following goals: 1) to prove that the contract of usury suffers from a self-contradiction, both from the viewpoint of the lender and the borrower; 2) to demonstrate the self-contradictory nature of the contract of usury by means of the Fisher model of the inter-temporal choice; 3) to prove that both the lender and the borrower pronounce the consent to the basic contract involuntarily because the former as well as the latter is acting under the indirect coercion; 4) to respond to Paretian objection that the Pareto improvement implies the mutual voluntariness, which is why there is no justification for the state to not enforce the contracts of usury. The author contends that from a subjective viewpoint, the contract of usury is a complex of two contracts which contradict each other: the basic contract and the super-contract. From the lender’s perspective, the basic contract is a loan and the super-contract is a sale of the loan. Since the lender negates his will to give a loan by the sale of the loan, the lender’s consent to the contract of usury as whole is self-contradictory. From the borrower’s perspective, the basic contract is a gift to the lender and the super-contract is a sale of this gift for a loan. Since the borrower negates his will to give a gift by the sale of the gift, the borrower’s consent to the contract of usury as a whole is self-contradictory. Next, the author contends that from an objective viewpoint, the contract of usury is an example of a non-equal “exchange”, i. e. a complex of an exchange (loan) and a transfer (usurious interest). Since the borrower does not give the transfer voluntarily, the lender violates the commutative justice by the contract of usury. To the Paretian objection that since both the lender and the borrower move onto a higher indifference curve thanks to the contract of usury, it must be a voluntary exchange, the author responds that the Pareto improvement does not imply the mutual voluntariness. The way how both the lender and the borrower move onto a higher indifference curve is not a voluntary exchange. There is no way to move onto a higher indifference curve in the contract of usury through a voluntary exchange. The contract of usury is neither an exchange, nor voluntary. It is not an exchange because it violates the equality in exchange. It is not voluntary, either, because it suffers from a double self-contradiction and voluntariness cannot be predicated to a self-contradictory (i. e. non-being) act of will. The author concludes that the state cannot and must not enforce the contracts of usury. It cannot because these contracts suffer from a double self-contradiction. It must not, either, because these contracts violate the commutative justice and it is the purpose of the state to protect the justice.