The Bastiat-Proudhon Debate
on Interest (1849-1850)


by Roderick T. Long

[The following remarks represent my preliminary assessment of the
Bastiat-Proudhon debate. Caveat: I’m a philosopher, not an
economist; I don’t fully understand all the details of Proudhon’s
mutual-bank proposal; and my eyes glaze over when he and Bastiat
start debating the fine details of double-entry bookkeeping. So:
feedback, comments, and suggestions definitely solicited
ideally from both Austrian-oriented and mutualist-oriented commentators.

One From the Vaults

In late 1849 and early 1850, two of France’s leading libertarian thinkers, Frédéric Bastiat and Pierre-Joseph Proudhon, carried on a debate over several months, in the pages of Proudhon’s journal La Voix du Peuple, on the subject of the nature and legitimacy of charging interest.

In 1879, American individualist anarchist Benjamin Tucker translated most of the debate into English and published it in serial form in a now-obscure labour-movement newspaper called the Irish World and American Industrial Liberator. Apart from a handful of excerpts, the Tucker translation has never been reprinted – and no wonder, given the scarcity of the original periodical and the bad condition of the available microfilm version.

Now Tucker’s translation has finally been transcribed; where the microfilm was in parts unreadable (a problem with Proudhon’s final letter in particular), conjectures have been supplied based on the original French. Finally, two items that Tucker left untranslated – the initial critique of Bastiat’s earlier essay Capital and Rent by Proudhon’s follower François Chevé, and Bastiat’s final reply to Proudhon – have been newly translated for the first time. All of this material is now online and ready to be interpreted and newly debated by new generations of libertarian scholars.

When Libertarians Collide

Bastiat’s and Proudhon’s overall positions look, at an abstract level of description, fairly similar. Both defend a voluntary social order based on individual ownership and free exchange; both oppose coercive intervention in the market and are intensely critical of the state; indeed, the two thinkers were often legislative allies when they served on the national assembly – both seated on the left – in the wake of the 1848 revolution. But Bastiat and Proudhon disagree about which forms of individual ownership are legitimate and which kinds of exchanges are genuinely voluntary. (When Proudhon proclaims that “Property is theft!” he is condemning a particular form of individual ownership, not individual ownership per se.) In particular, Proudhon and Bastiat disagree about the legitimacy of interest.

Each party regards the other as a sincerely libertarian thinker who has sadly deviated in an anti-liberty direction on the specific issue of interest. Proudhon writes:

M. Bastiat ... is an author thoroughly embued with the democratic spirit; though we cannot yet call him a Socialist, he is surely more than a philanthropist already. The clearness with which he understands and explains political economy places him ... if not far above, at least far in advance of the other economists .... M. Bastiat, in a word, is devoted body and soul to the Republic, to Liberty, to Equality, to Progress, as he has proved brilliantly time and again by his votes in the National Assembly. In spite of this, we regard M. Bastiat as a member of the Party of Resistance; his theory of Capital and Interest, diametrically opposed to the most genuine tendencies and the most irresistible demands of the Revolution, justifies us in doing so.
Bastiat, for his part, addresses himself in similar terms to Proudhon:

In all other respects do you not stand for that which is to all men a right, an attribute, a precept – Liberty? Do you not demand liberty in buying and selling? And what, indeed, is a loan but a sale of use, a sale of time? Why should this transaction alone be controlled ...? Have you faith in human nature? Try to strike off its chains, not to forge new ones for it.
The exchanges aren’t always so polite, however; in fact the two writers grow increasingly frustrated with each other over the course of the debate, until Proudhon ends by denouncing Bastiat as “a man whose intellect is hermetically sealed, and to whom logic is as nought,” and declaring him intellectually “a dead man.” Bastiat retorts that Proudhon “has ended where one ends when one is in the wrong; he is in a rage.” (We should probably bear in mind that at the time of this debate Bastiat was in the final stages of terminal illness [incidentally lending Proudhon’s metaphorical death sentence upon him an uncomfortable flavour – a celebrity death match indeed!], while Proudhon had recently begun serving a three-year prison sentence for criticising the President; so neither can have been in the best of moods. In any case, Alain Laurent has suggested that the influence of Bastiat’s arguments in the debate may have played a role in the increasingly liberal cast of Proudhon’s later thought.)

Overview of the Debate

The debate covers a lot of ground, sometimes ranging rather far afield, but the core points may be summarised as follows:

Bastiat’s position is that lending is a useful service to the borrower; from the standpoint of justice, then, it deserves to be paid, while from the standpoint of utility it had better be paid if we don’t wish to suppress the incentive to keep providing such services. Interest is the payment for the service provided by the lender.

Moreover, in addition to the direct benefit represented by the loan, the borrower receives a further, indirect benefit: the payment of interest contributes to the accumulation of capital; as the total amount of capital increases, its price falls, and so the interest rate likewise falls and the financial position of the borrowers improves, enabling them in the longer term to acquire capital themselves.

Proudhon thinks Bastiat has exaggerated the indirect benefits of interest; look around at the actual plight of debtors, he suggests, and this ever-rising status is difficult to detect. Moreover, according to Proudhon, if the price of goods is Wages plus Interest, but workers receive only Wages, then workers can never buy all the goods they produce – which is not only unfair to the workers, but means the system is inherently unstable, implying eventual starvation for the workers and bankruptcy for the employers.

Nevertheless, Proudhon agrees with Bastiat that the practice of charging interest has historically been, on the whole, beneficial. But this concession comes with two qualifications.

First, Proudhon thinks that from the mere fact that an exchange is mutually beneficial, it does not follow that it is not exploitative of one of the parties. Suppose, for example, that I demand that you pledge your life savings to me before I will agree to rescue you from drowning. You benefit from this exchange, since you’d be worse off without my offer than with it; but the exchange is still morally problematic, insofar as I am taking unfair advantage of your plight. Likewise, even when loans at interest are beneficial to the borrower, the practice of charging interest remains exploitative, on Proudhon’s view, because it allows lenders to derive an indefinitely increasing benefit out of all proportion to any effort they have put into the exchange, thus violating the principle that exchange should involve equal values.

Second, Proudhon thinks that whether an exploitative exchange counts as beneficial depends on what the available alternatives are. Suppose that in the drowning case there were other people present who would have rescued you for nothing, but I drove them off in order to substitute my vastly more expensive rescue services. In such a case my claim to be your benefactor would clearly be fraudulent. Likewise, Proudhon thinks that interest has historically been a necessary evil, since there was no viable alternative to it; but once a superior alternative does become possible, interest goes from being a necessary evil that should be grudgingly tolerated, to being an unnecessary evil that must be abolished.

In Proudhon’s judgment, economic progress has now made feasible certain financial arrangements that formerly were not feasible – specifically, the organisation of the productive classes into a “mutual bank” whose members shall lend to one another without interest. Those who lend through the bank are, to be sure, providing a service that needs to be compensated; but the payment they will receive is not interest, but instead the right to borrow through the bank on the same terms. Once it becomes possible to compensate loans by a means other than interest, a means that puts borrower and lender on an equal footing and avoids fueling the entrenched asymmetries of power that Proudhon associates with interest, loans at interest cease to be a benefit to the borrower.

Bastiat’s response is that, first, it is a mistake to take the prevailing economic plight of debtors as evidence of the natural tendency of interest, since the existing loan market is not free but is distorted by various sorts of governmental interventions. Second, those who borrow at interest must be benefiting from it or they wouldn’t keep doing it, and this is true irrespective of what historical era they’re in, so the suggestion that such transactions could be beneficial in one historical era but not another makes no sense. Finally, Bastiat thinks Proudhon’s mutual bank won’t work. Either the bank will require collateral for its loans, or it will not. If it requires collateral, then the poorest participants – the very people that Proudhon most wants to help – will not be able to borrow at all, since they lack collateral, and if interest is abolished they will not be able to compensate for their lack of adequate collateral by offering to pay higher interest rates. If the bank does not require collateral, then the payment one receives for lending through the bank – namely, the right to borrow through the bank on the same terms in the future – constitutes a guarantee backed by insufficient reserves (since there may not be enough goods on the other side for the lenders to borrow), thus making the mutual bank an inflationary paper-money scheme.

Assessment of the Debate

So who wins the debate? Tucker clearly thinks Proudhon has the better case. By contrast, Karl Marx interestingly considered Bastiat the victor – meaning not that Bastiat had the truer position, but rather that, as Marx saw it, Proudhon had argued so badly that even the simple-minded capitalist lackey Bastiat could defeat him: “He succeeds in getting himself beaten even by Bastiat and breaks into burlesque bluster when his opponent drives his blows home.”

As far as I can see, while each side makes a number of interesting points along the way, neither side wins the debate; that is, neither side succeeds in refuting the other’s position, because neither party succeeds in fully understanding what the other’s position is – nor does either party fully succeed in clearing away the confusions that beset his own. As a result, Bastiat and Proudhon end up largely talking past each other. It’s not even clear whether the thing called “interest” that Proudhon wants to abolish is precisely the same as the thing called “interest” that Bastiat wants to defend.

Because Bastiat generally proceeds by giving homely examples rather than offering formal demonstrations, Proudhon is misled into underestimating the praxeological force and scope of Bastiat’s arguments; he fails to see how the examples are meant to illustrate principles of universal application, regardless of how credit institutions may be organised. Bastiat for his part fails to see how and why Proudhon finds Bastiat’s arguments limited. So as Bastiat keeps offering his examples, Proudhon is baffled, since from his point of view he’s already accepted the point he takes them to support; and Bastiat is equally baffled, since Proudhon keeps saying he accepts the moral of the examples and yet seems not to have done so.

When either of the two makes some point that he obviously considers a telling refutation of some argument of the other, the other usually fails to recognise that the point is so much as intended as a reply to that argument; to each side the other appears to be multiplying irrelevancies and refusing to engage. “Behold my X, my crushing reply to your Y!” “Why are you changing the subject to X instead of replying to my Y?” Each is astonished at the other’s apparent evasiveness, and has no inkling of how or why his own conduct is being interpreted as similarly evasive. And so Bastiat concludes, implausibly, that Proudhon is too embarrassed to admit defeat, while Proudhon concludes, again implausibly, that Bastiat is none too bright. (Since Proudhon said he’d rather be thought dishonest than stupid, while Bastiat said he’d rather be thought stupid than dishonest, one supposes they were both content.)

Here’s one example: because the employer pays his workers less than the amount of money for which he sells the product of their labour, Proudhon charges, workers are unable to “buy back the product.” The result, he infers, is that the income of the working class as a whole must forever fall short of the price of the goods sold by the capitalist class as a whole, a result implying both the immiseration of the workers, unable to buy what they need, and the eventual bankruptcy of the capitalists, unable to find a market for what they sell. (Incidentally, it’s surprising how closely this argument of Proudhon’s against the wage system resembles the critique of taxation offered by Jean-Baptiste Say, the founder of the intellectual tradition in which Bastiat is working. In effect both Say and Proudhon are complaining, mutatis mutandis, that the extraction of “surplus value” renders the productive classes unable to buy back the value of their product.)

But Proudhon ignores Bastiat’s point that in a progressive economy the buying power of money is not static but constantly increasing (so that, in effect, real wages at t2 might well be sufficient for the labouring class as a whole to “buy back” what it had produced at t1 – assuming it wanted to). It’s not just that Proudhon disagrees with this answer, but rather that he doesn’t see that it is intended as an answer to his argument, and so complains that Bastiat has left the argument unanswered.

While their misunderstandings of one another are sincere (well, except perhaps Proudhon’s claim in his final letter not to know what Bastiat means by “false data” – I have trouble believing that one), their mutual frustration drives them into a contest to see which can be the more insultingly patronising in diagnosing the other’s confusion. (Proudhon certainly wins that particular contest.)

Moreover, from a specifically Austrian standpoint, neither Bastiat nor Proudhon has a satisfactory conception of interest: Bastiat vacillates between a deprivation theory, a time-preference theory, and a productivity theory; Proudhon, between an exploitation theory and a risk theory; and neither draws any clear distinction between interest and profit (or rent, for that matter). In addition, as we shall see, each one trips up his defense of his own position through an inconsistent grasp of the Austrian principle of the “double inequality of value”; Proudhon embraces it, but fails to apply it consistently, while Bastiat implicitly relies on it, but explicitly rejects it.

Deprivation and Equality of Values

Bastiat argues that if A lends X to B, A is deprived of X for the period of the loan, and interest is the proper recompense of A’s privation. Proudhon replies that if A is a professional lender, A’s only use for X is to lend it, so A is not deprived of anything. Bastiat’s rejoinder is that if A were a professional hatter, his only use of a hat would be to sell it, yet Proudhon does not begrudge A payment for his hat, so he has no justification for treating the lender differently from the seller. Proudhon retorts that when A sells a hat he receives an equivalent value; when A lends X, by contrast, he receives back not only an equivalent value (X again) but interest in addition.

If to this one were to make the familiar Austrian point that X now and X a year from now are not equivalent values, Proudhon would presumably reply that since A’s only use for X is to lend it, X now has no greater value for A than X a year from now. A still better Austrian reply to Proudhon, I think, would be to point out that exchange never involves equivalent values. The only way that Y can be exchanged for Z is if one party prefers Y to Z and the other prefers Z to Y (the Austrian “double inequality of value”). So when A sells a hat he does not obtain an equivalent value; he obtains something he values more than the hat. By the same token, then, if one grants that the seller is entitled to receive greater (subjective) value than what he gives up, then the lender must likewise be entitled to receive greater (subjective) value than what he gives up, i.e. he is entitled to receive interest. (cf. Guido Hülsmann’s grounding of interest on the value spread between means and ends in his article “A Theory of Interest.”)

Denis Brogan writes: “There are two classes of writers on credit, those who believe that a bird in the hand is always worth a bird plus something in the bush; and those who regard this supposed axiom as a superstition. Proudhon belonged to the second class.” Proudhon’s case against interest seems to depend crucially on his claim that all exchange must be of equivalent values; so pointing out the incoherence of this notion would be a telling reply. But Bastiat cannot officially give this reply (though he comes tantalisingly close over and over throughout the debate) because elsewhere – in his Economic Harmonies – Bastiat explicitly rejects the doctrine of double inequality of value.

Well before the Austrians, Étienne Condillac had argued that whenever two people make a voluntary exchange, society as a whole benefits, because each party gets what he values more in exchange for what he values less. Bastiat, strange to say, finds Condillac’s position uncompelling. Bastiat agrees that society benefits from trade, but only because the division of labour produces a greater total stock of goods than could have been produced by a society of autarkic individuals. But Condillac’s insight that the mere transfer of goods from one person to another, even without any increase in the stock, by itself constitutes a net social gain, is one for which Bastiat has little patience. In Chapter 4 of Economic Harmonies, Bastiat writes:

The explanation we owe to Condillac seems to me entirely insufficient and empirical, or rather it fails to explain anything at all. ... By the mere fact of their union, efforts equal in intensity produce superior results. Here there is no trace ... of the double and empirical profit alleged by Condillac. ... The reader can now well perceive the true power of exchange. It does not imply, as Condillac says, two gains, because each of the contracting parties sets more store by what he receives than by what he gives. ... It is simply that, when one man says to another, “You do only this, and I will do only that, and we’ll share,” there is better employment of labor, talents, natural resources, capital, and, consequently, there is more to share.
Hence Bastiat is willing to conclude:

When two products or two services are bartered, we may say that they are of equal value.
Or again, a chapter later:

The idea of value first entered the world when a man said to his brother, “Do this for me, and I will do that for you,” and the brother agreed; for then, for the first time, men were able to say, “Two services that are exchanged are equal to each other.”
Bastiat goes on to clarify his position:

[S]uppose my neighbor ... goes to the spring, and I say to him, “Spare me the trouble of making this trip; do me the service of bringing me some water. While you are so engaged, I will do something for you; I will teach your child to spell.” It happens that this suits both of us. This is the exchange of two services, and we can say that the one is equal to the other. Note that what is compared here are the two efforts, not the two wants or the two satisfactions; for on what basis can we compare the relative merits of having a drink of water and learning how to spell?
Bastiat is groping for a genuine Austrian point here – that quantitative measures apply only to objective exchange ratios and not to subjective utilities. But his resistance to the double inequality of value prevents him from seeing the obvious answer to his question of how we can compare the relative merits of different satisfactions. The fact that I exchanged A for B shows that the satisfaction afforded by B had greater value to me than did the satisfaction afforded by A; the fact that the other party exchanged B for A shows that the satisfaction afforded by A had greater value to them than did the satisfaction afforded by B. It’s true that we can’t compare the value of either satisfaction to me with the value of either satisfaction to the other party; Bastiat sees that clearly enough, and so his talk of exchange as involving equal values is not as anti-Austrian as it seems. Still, his clinging to the formula of equality in exchange and his official dismissal of double inequality (despite its implicit all-pervasiveness in his thought) hampers his ability to reply to Proudhon. Proudhon’s foundation-stone is Bastiat’s albatross.

Ironically, Proudhon himself elsewhere appears to argue, in rather proto-Austrian fashion, that the mere act of exchange creates value, an insight which if consistently followed out would lead to the further insight of double inequality:

[T]he metaphysical act of exchange, in addition to labor, but by a different method from labor, is a producer of real value and of wealth. ... [P]agan antiquity, as well as the Church, has unjustly aspersed commerce, upon the pretext that its rewards were not the remuneration of real services. Once again, Exchange, an entirely immaterial operation, which is accomplished by the reciprocal consent of the parties, cost and distance of transportation being allowed for, is not merely a transposition or substitution, it is also a creation.
And he invokes a similar idea against Bastiat in Letter 5:

J. B. Say has shown ... that the transportation of a value, be that value called money or merchandise, is a value in itself; that it is as real a product as wheat and wine; that consequently the service of the merchant and banker deserves to be remunerated equally with that of the husbandman and wine-grower. ... I am justified, then, in saying that it is not Capital itself, but the Circulation of Capital, – that kind of service, product, merchandise, value, or reality, which political economy calls movement or circulation, and which, indeed, constitutes the whole subject-matter of economic science, – that causes wealth.
In the passage from Say that Proudhon is relying on, however, Say, while accepting transportation as a means of increasing value, resolutely refuses to see mere exchange in such terms, and proceeds to miss Condillac’s point entirely:

Condillac .... pretends that, because all commodities cost to the seller less than the buyer, they derive an increase of value from the mere act of transfer from one hand to another. But this is not so; for, since a sale is nothing else but an act of barter, in which one kind of goods, silver for example, is received in lieu of another kind of goods, the loss which either of the parties dealing should sustain on one article would be equivalent to the profit he would make on the other, and there would be to the community no production of value whatsoever.
Proudhon, by contrast, in identifying the mere “metaphysical act of exchange” as a creator of value, has apparently gone farther in the Austrian direction than Say and Bastiat; yet Proudhon’s argument against interest, by insisting on the exchange of equal values, seems to rely on denying the very double inequality of value that at other times he seems to grasp. (Bastiat, for his part, officially denies double inequality – perhaps thanks to Say’s own influence – yet his defense of interest implicitly requires it. Thus Proudhon has the premise but won’t draw the conclusion, while Bastiat needs the conclusion but won’t grant the premise.)

Thesis, Antithesis, Synthesis

One of the points in contention between Bastiat and Proudhon is Proudhon’s use of the concept of antinomy. Once Proudhon accepts – as he does – Bastiat’s argument that interest is justified as payment for the beneficial service of a loan, Bastiat thinks the debate should be over. But Proudhon regards interest as involving an antinomy, with equally decisive arguments both for and against; rather than embracing the thesis and rejecting the antithesis, we must seek a synthesis of both.

To Bastiat it seems that Proudhon is simply embracing a logical contradiction. But an antinomy, in the sense that Proudhon is borrowing from German philosophy, is not a logical contradiction – because a contradiction would involve not just having opposite properties, but having them in the same respect; my jacket is both blue and not-blue, for example, but there’s no contradiction, because it’s blue on the outside and not-blue on the inside. This is how antinomies work too. Immanuel Kant, for instance, identified an antinomy in the concept of free will; he thought we had decisive reason to regard our wills as free, but also decisive reason to regard our wills as unfree. He resolved this antinomy, however, by maintaining that our reasons for regarding our wills as unfree all concern our wills insofar as they are objects of experience, while our reasons for regarding our wills as free do not. Hence we can maintain that our wills are unfree in their empirical aspect but free in their noumenal aspect; thus our wills are free and unfree at the same time, but not in the same respect, and so contradiction is avoided.

If that example is too metaphysical for you, here’s a homelier one. Suppose you have compelling reason to believe that you should spend New Year’s Eve in the company of a pretzel vendor (call this the thesis) – and you also have compelling reason to believe that you should spend New Year’s Eve alone (call this the antithesis). These might seem to be irreconcilable demands – until you realise that you can resolve the conflict by becoming a pretzel vendor. That way you can spend New Year’s Eve in the company of a pretzel vendor – yourself – and still be alone. What looked like a contradiction turns out not to be one once it is viewed from a different standpoint: the crucial realisation is that one can reconcile thesis and antithesis because it’s possible to be in someone’s company in one sense and in nobody’s company in another (namely when the someone is yourself).

Suppose that, after you have realised all this, some well-meaning advisor appeals to the compelling case for the thesis as a reason to reject the antithesis: you have to spend New Year’s Eve with the pretzel vendor, the advisor insists, and therefore you cannot spend it by yourself. You will rightly reject the advisor’s intervention as confused, since you have found your way to a resolution that renders thesis and antithesis compatible.

This is precisely the situation between Proudhon and Bastiat, as Proudhon sees it. We have a compelling argument on behalf of interest: a loan is a service, and services should be rewarded. We have a compelling argument against interest: it’s exploitative, it’s unstable, it perpetuates asymmetries of wealth and power, etc. But Proudhon thinks he sees a way to reconcile thesis and antithesis: establishing a mutual bank is like becoming a pretzel vendor. Everyone who lends capital through the bank receives a payment for this service (over and above the return of the principal): namely the right to borrow through the bank on the same terms in the future. Hence the thesis is satisfied; in a sense, everybody pays “interest.” But nobody has to surrender title to more capital than he has received. Hence in another sense nobody pays interest, and so the antithesis is satisfied as well. As Proudhon sees it, then, Bastiat is like the advisor who treats the case for spending New Year’s Eve with a pretzel vendor as a reason not to spend New Year’s Eve alone. Bastiat cannot fairly use his case for the thesis as grounds for dismissing the antithesis unless he can show that thesis and antithesis are genuinely irreconcilable, i.e., unless he can show that the mutualist banking system (Proudhon’s proposed means of reconciliation) is impracticable – and so Bastiat’s repeated insistence that discussion of the banking system is irrelevant now that he has proven the thesis strikes Proudhon as an evasion of the central issue in contention.

But one might argue that it is hardly Bastiat’s fault for not seeing that this is Proudhon’s point, since Proudhon never bothers to explain to Bastiat that a Kantian “antinomy” or Hegelian “contradiction” does not mean a genuine violation of the law of non-contradiction, but only an apparent violation – a tension that would be logically contradictory were a resolution not available. Instead, when Bastiat inveighs against Proudhon’s supposed rejection of the law of non-contradiction, Proudhon simply berates Bastiat as an old fogey for not being up on Kant and Hegel. Admittedly, Proudhon can fairly say that he has already explained the difference between antinomy and logical contradiction in his book Economic Contradictions – which Bastiat, after all, had read. But no one has ever accused Economic Contradictions of being a masterpiece of lucidity either.

Institutional Barriers

Both Proudhon and Bastiat agree that in a competitive loan market, interest rates tend to fall. Bastiat takes this as a point in favour of interest (see, it gets less and less burdensome, not more and more so), while Proudhon takes it as a point against (see, its natural destiny is to fall to zero!), and each is baffled at the other’s inference.

But they (implicitly) disagree – above all with each other, but to some extent even with themselves – about how to answer the question: What percentage of the current interest rate is due to unjust and unnecessary institutional barriers to competition? Proudhon thinks it’s 100% (or, sometimes, 99.25%), Bastiat apparently thinks (at least most of the time) that it’s negligible. (This is also why Proudhon thinks interest was formerly legitimate – because in his view it is only comparatively recently that the dismantling of these barriers became feasible.) Austrian analysis, by contrast, seems to imply both that, contra Proudhon, it can never be 100% (since positive time-preference and the value-spread between means and ends are ineradicable features of human action), and that – given statist legal conditions – it is nevertheless hardly likely, contra Bastiat, to be negligible.

Likewise Bastiat often writes as though all differential access to capital is the result of industry and thrift by virtuous capitalists (one might call this a “vulgar libertarian” moment in Bastiat – though given his defense of labour unions, his relentless assaults on mercantile privilege, and his overall orientation toward narrowing the gap between rich and poor, he’s certainly not a vulgar libertarian in general), while Proudhon writes as though it’s all the result of rapacity and plunder. But surely in reality it’s some of each.

Much of the two men’s mutual frustration stems from the fact that neither seems clearly to see that this is one of the main points they’re disagreeing on. For Bastiat, the fact that people are willing to borrow at interest shows that they prefer X now to X + Y later, and so are receiving a benefit. For Proudhon, the fact that the interest they pay is artificially high shows that they are worse off than they would be under Proudhon’s system, and so, within the existing unjust framework, borrowers at interest benefit only in the sense that a prisoner benefits from being fed by the guards. Quoting Atlas Shrugged: “The removal of a threat is not a payment, the negation of a negative is not a value ....” “That’s not true .... If you had a broken leg, you’d pay a doctor to set it.” “Not if he was the one who broke it.” Proudhon sees the situation in essentially similar terms. (Yes, only I would quote Ayn Rand to support Proudhon!)

Bastiat’s argument that interest must be legitimate because it “still abides ... under the reign of liberty and equity,” rather blithely assumes what Bastiat would ordinarily be the first to deny – that the society of his era could fairly be characterised as a “reign of liberty and equity.” (Another “vulgar libertarian” moment?) Yet in Bastiat’s defense, Proudhon for his part is far less successful than, say, Benjamin Tucker (whatever one thinks of Tucker’s arguments finally) in explaining what violations of liberty are supposed to be propping up interest.

Proudhon’s position, as we’ve seen, is that a practice goes from just to unjust as soon as the removal of the institutional barriers to a better alternative becomes feasible. Thanks to Proudhon’s chaotic and enigmatic writing style, however, Bastiat never quite grasps that this is Proudhon’s point; to him it seems that Proudhon is simply asserting the dubious claim that economic and moral principles are relative to historical eras. And in fact Proudhon gives some signs of believing precisely that (as for example when he holds – like Spencer and Molinari, but not Bastiat – that war and slavery, though now impermissible, were formerly excusable as necessary for social progress), although I think the argument he’s giving here, be it good or bad, is separable from that dubious premise. Bastiat grants, with Proudhon, that the existence of interest is a sign of social imperfection; but he argues that Proudhon mistakenly infers that whatever is imperfect should be abolished, whether or not a preferable alternative is available – as though we should blind ourselves because our eyes are not perfect. This misses Proudhon’s point entirely. Proudhon holds that the imperfection of an institution is not a reason to abolish it until a preferable alternative becomes available; that is why he thinks interest was permissible in the past but now is so no longer.

That Proudhon is not clearly understood here is, as I’ve said, partly his own fault, since he makes his arguments so vaguely, words his positions so confusingly, and surrounds everything with clouds of metaphysics, bombast, and bluster. (Proudhon is especially fond of saying something cryptic, and then, when he is not understood, rewording his point more clearly and thereupon berating his opponent for not understanding the original point as if it had been just as clear.) Moreover, while later mutualists such as Benjamin Tucker and Kevin Carson insist that usury is made possible only through monopoly, Proudhon himself often writes as though he thinks monopoly arises through usury; and while he occasionally points to the role of violence and forcible expropriation in the history of interest, it’s unclear how far his arguments are meant to rest on such considerations.

In Bastiat’s fables in justification of interest, the workers start out equal, until one of them acquires capital to lend to the others solely as a result of his own superior thrift, industry, and foresight. To someone like Proudhon, who tends to think that the capitalist’s position is generally owed to government-granted privilege – to political rather than economic means – such tales will naturally seem infuriating and irrelevant, like telling subjects and slaves how their position might have arisen through a social contract. But on the other hand, Proudhon often writes (see, for example, the passage beginning “Let us suppose that a colony” in What Is Property? III.5) as though, if the capitalist’s superior position had arisen in the manner Bastiat describes, it would still be “unjust and illegitimate,” and that anyone who imagines otherwise is a “debased creature” and a “galvanized corpse.” Given Proudhon’s apparent hostility toward what Hans Hoppe calls “clean” capitalism” – that is, toward an unequal distribution of capital arising solely from thrift and industry rather than from coercive means like theft and enslavement – we can see why Bastiat can legitimately regard his own just-so stories as worth explaining and defending in the context of the debate.

Just get rid of the laws restricting banking, etc., say the later Proudhonians (sounding in fact rather like Bastiat in his paean to free banking), and mutualist credit associations will easily be formed. But Proudhon says, I demand that society provide a centralised system of free credit! This way of putting the matter is hardly likely to persuade Bastiat that Proudhon is on the side of liberty – especially given that Proudhon is friendlier to the notion of achieving his aims through positive governmental methods than later Proudhonians would be (e.g., he talks of imposing a “tax” on capital, and he at least sometimes appeals to legislative assistance for the founding of his mutual bank). To Bastiat it will naturally seem that Proudhon is proposing to abolish interest through an increase, not a decrease, of restrictions. In his article “The State,” however – which Bastiat had certainly read – Proudhon does describe his program as “opening usurious credit to competition and thereby causing capital to lose its income,” which sounds more in line with Tucker. But Proudhon regards a governmentally-organised mutual bank as a legitimate second-best option, a short-term move in the direction of liberty, while we’re working toward a complete free market in banking in the long term – while to Bastiat a governmentally-organised mutual bank is one more perilous state intervention, a move in the wrong direction. (Bastiat is also quite right to grumble at Proudhon’s personification of “Society” – though Bastiat’s own tendency to personify “Capital” is not beyond reproach either.)

Bastiat to some extent misses the point of Proudhon’s digression on the Bank of France. Bastiat certainly sees, and rightly protests against, Proudhon’s absurd conflation of Bastiat’s defense of free exchange with a defense of the Bank’s governmentally-granted privileges; but what Bastiat misses is Proudhon’s argument that the operation of the Bank proves the feasibility of his own mutual banking system. On the other hand, Proudhon fails to see why Bastiat fails to see this – namely, because Bastiat takes it for granted that the Bank of France could not operate as it does without governmental privilege, so that any inference from its operations to the operations of banks in a free society is bound to be illegitimate and irrelevant. Making the whole property of the nation the security of mutual loans – even assuming that everyone’s consent to such a system could be obtained – is not going to make issues in excess of that reserve any more secure, nor is it going to erase the difference in value between present and future goods, or between means and ends.

Proudhon is also astonished at Bastiat’s equation of the Bank of France with a paper-money scheme: how, he asks, can the Bank of France be a paper-money scheme when its metallic reserve is constantly increasing? But he fails to see that, on his own evidence, the Bank’s paper issues in excess of reserves are likewise expanding – and that the security of its notes depends as much on legal tender laws as on its reserve. Under free banking, competition would limit the extent to which any one bank could successfully issue notes in excess of reserves, and so this particular form of increase would be severely curtailed. Thus Bastiat cannot see why Proudhon thinks the Bank of France is relevant to their debate, while Proudhon cannot see why Bastiat thinks it is not relevant.

Proudhon for his part never grasps Bastiat’s point that no reorganisation of credit could eliminate interest entirely, since any party to an exchange must prefer what he receives to what he gives up. (This confusion is also at the root of Proudhon’s bizarre assumption that profit and interest could not have existed in a barter economy.) That Bastiat is misunderstood here is likewise partly his own fault, since, as I’ve mentioned, his official refusal to recognise the double inequality of value means that he cannot achieve full clarity or consistency in pressing this objection. Bastiat implicitly grasps double inequality well enough to use it, rightly, as a weapon against Proudhon’s view that interest necessarily involves the creditor gaining at the expense of the debtor – but Bastiat keeps tripping himself up thanks to his agreement with Proudhon that exchange must involve value equivalents, an assumption inconsistent with the insight of double inequality.

Interest vs. Cost

Further, it’s not clear whether Proudhon really demands zero-percent interest after all. For he speaks of the reduction of interest “to three-fourths of one per cent, – that is, to zero, inasmuch as three-fourths of one per cent represents only the service of the bank.” So phrased, this formulation is perfectly consistent with Bastiat’s position – though I suspect Proudhon may be assuming, contra Bastiat, that the “service of the bank” can be computed in objective terms. (In any case, rather than seizing on Proudhon’s admission here, Bastiat oddly complains that Proudhon has set the bank’s fee too high.)

Proudhon is not actually without resource for replying to Bastiat’s objection. The problem is that the reply, like the objection, depends on the double inequality of value which neither fully accepts. In Proudhon’s banking system, the members of the bank provide one another with credit reciprocally. Presumably each member, from his own subjective standpoint, gets more value out of the banking system than he puts into it. (Otherwise there would be no point in their setting it up.) So the borrowers do pay back the lenders more value, from the lenders’ standpoint, than the lenders give up; in that sense, the lenders do receive Hülsmannian “interest,” in the sense of the difference in value between means and ends – but it isn’t calculated in monetary terms, and all participants pay it just as much as they receive it, so it isn’t what is conventionally called interest. Proudhon certainly sees all this, inasmuch as it is precisely the basis of his much-trumpeted resolution of the antinomy; yet he cannot describe it in such a way as to show its compatibility with the double inequality of value, because although he evidently understands that double inequality in one compartment of his mind, he is nevertheless committed, in another compartment, to requiring all exchanges to involve equal values. Thus Proudhon is self-prevented from clearly articulating his reply to an objection that Bastiat for his part is self-prevented from clearly articulating.

Thus each side is making both sound and unsound points, and on each side the sound and the unsound are so thoroughly entangled that neither side can make head or tail of the other’s position.

We might say that Proudhon’s error is primarily praxeological – above all, a failure to grasp the full implications of the double inequality of value – while Bastiat’s is primarily thymological – an underestimation of the degree of artificiality and coerciveness involved in the prevailing rate of interest. But Proudhon arguably also stumbles thymologically (in overestimating that same degree of artificiality and coerciveness), and Bastiat also stumbles praxeologically (inasmuch as he too only half-grasps double inequality). Moreover, when Proudhon points to prevailing economic circumstances (such as the operations of the Bank of France) as evidence that Bastiat is mistaken in maintaining that interest benefits the workers, he and Bastiat seem to switch places thymologically, with Proudhon now writing as though interest under prevailing circumstances is the interest that Bastiat defends, whereupon it becomes Bastiat who has to remind Proudhon that prevailing circumstances are permeated by statist distortions.

Indeed, this shifting back and forth seems to occur throughout the debate. Sometimes it’s Proudhon who apparently has to remind Bastiat that existing markets are not free (so that the prevalence of interest now is no proof that it would exist under pure liberty); here Proudhon sounds like a left-libertarian rebuking vulgar libertarianism in the person of Bastiat. At other times it is Bastiat who apparently has to remind Proudhon that existing markets are not free (so that abuses of interest under the present system are no argument against interest per se); here it’s Bastiat who sounds like the left-libertarian, rebuking vulgar liberalism in the person of Proudhon. (Borrowing Kevin Carson’s terminology, vulgar libertarianism is the error of using the case for a pure free market as though it justified various dubious features of the prevailing system of corporatist privilege, while vulgar liberalism is the error of using the defects of the prevailing system of corporatist privilege as though they constituted a case against a genuine free market.) All this makes their dispute somewhat difficult to track.

As for the merits of Proudhon’s banking system, I don’t feel I understand the details well enough to evaluate the proposal. On the one hand it reminds me of things I’m a fan of – fraternal societies and P2P networks. On the other hand, Proudhon’s grandiose claims for his banking system also remind me of the equally grandiose claim one sometimes sees among P2P advocates to the effect that a P2P-based society could entirely dispense with the price system – an idea I take the Austrian calculation argument to refute.

It is perhaps worth adding, though, that Proudhon’s historical speculations in Letter 7, while on the one hand they evince an apparent failure fully to grasp double inequality, yet on the other hand embody at least a partial recognition that rational economic calculation is impossible in the absence of money – a striking anticipation of Mises. In effect, Proudhon sees the need for a cardinal unit in choosing among producer’s goods, but mistakenly thinks such a unit is also needed in choosing among consumer’s goods, and so in determining whether one has fared well or badly in an exchange of such goods. (At least that’s how I read this passage.)

Incidentally, Tucker offers an interesting synthesis of the two sides: he of course insists that interest would vanish under free competition, but as far as I can tell he (like Proudhon, for that matter) tends to reserve the term “interest” for whatever exceeds the amount the lender would receive under free competition:

[C]ompetition would reduce the rate of discount, and therefore of interest on capital, to the mere cost of banking, which is much less than one per cent. And even this percentage would not be interest, properly speaking, but simply payment for the labor and expense of banking.
Thus he might be willing to countenance returns on loans as “wages” paid to the lender. At least this is what he says about “profit” – “In the absence of monopoly of any kind, whatever the merchant ‘makes’ out of his business is not strictly profit, but the wages of mercantile labor” (though see by apparent contrast this passage); while his disciple Francis Tandy seems to say that under free competition the rate of interest just is the lender’s wages. Are Tucker and Tandy thereby showing that Proudhon’s thesis can escape Bastiat’s objections? Or are they actually putting forward Bastiat’s position disguised in Proudhonian language? It’s hard to say, since when Tucker and Tandy speak of competition reducing interest to “cost,” it’s unclear what is to be included in the latter. Do Tucker and Tandy recognise that costs are subjective? As egoists they certainly ought to; and once the subjectivity of costs is recognised, the notion that the cost of surrendering an item now is fully compensated by the return of that same item later becomes sheer nonsense.

Even in a setup of the kind Tucker envisions, in which the individual borrower simply exchanges his credit for the mutual bank’s better known credit with no time delay, so that time-preference might be thought not to apply, Hülsmann’s point still applies: the mutual bank must have some inducement to make the exchange. The borrower benefits by receiving what he values more – a more widely known credit – over what he values less – his own less widely known credit. But the bank will not enter the exchange unless it receives something it values more in exchange for what it renders. Even granting Tucker’s assumption that the bank, knowing the borrower’s good credit, will value the borrower’s and its own credit equally, on an Austrian analysis such equality in value, far from facilitating the exchange, prevents it. The borrower must offer the bank more than X amount of his own credit in order to induce the bank to part with X amount of its own credit. Call this extra quantity “interest” or “cost” or whatever you like, but there it is. Competition in banking may reduce it (as the ad says, “when lenders compete, you win”), but, as Bastiat saw, it cannot eliminate it without eliminating exchange itself.

Of course Tucker would presumably reply that the foregoing objection errs in treating lenders and borrowers as distinct parties, whereas in fact each customer of the mutual bank exchanges his credit for the credit of all the other customers; the officials of the bank merely facilitate this transaction. Since each customer values what he receives more than what he gives, but all give to one another reciprocally, the inducement problem is solved without the use of interest. The problem is that Tucker, like Proudhon, cannot give this reply without relying on the double inequality of value which, like Proudhon, he cannot officially accept. (Yes, there are subjectivist versions of the labour theory of value – Kevin Carson’s, for one – but Proudhon and Tucker don’t strike me as having found their way to one.)

In any case, after reading Tucker one feels that Bastiat and Proudhon were at least to some extent fighting over opposite sides of the same shield.

Tucker, incidentally, apparently endorses Ruskin’s critique of Bastiat’s example of the plane. This seems to me both unfortunate and puzzling: unfortunate, because Ruskin’s argument is a mess (for one thing, in his revision of Bastiat’s example Ruskin assumes without explanation or justification that the borrower will never in any year earn enough to buy two new planes and so pay off the lender forever; for another, given that mysterious assumption, he never explains why the lender should be seen as an exploiter rather than as a benefactor [maybe he is an exploiter, but no argument has been given to show it]; Tucker likewise solemnly declares the situation “monstrously unjust,” but he too does not explain what is supposed to be unjust about it); puzzling, because Tucker’s own chief case against interest, whatever its merits, does not seem to rest on or resemble Ruskin’s at all. The core of Tucker’s argument is that competition will reduce the price of credit to “cost” (whatever that is), so that any charge above cost is a sign that some impediment to free competition is present. I find nothing of this in Ruskin’s argument; indeed, to whatever extent Tucker’s argument is correct it would seem more accurately described as a refutation than as a vindication of Ruskin, since Ruskin’s argument presupposes a high rate of interest in proportion to income.

Much of the discussion, both between Proudhon and Bastiat, and between Tucker and his own critics, is marred by an unfortunate phrasing of the question: “is the lender entitled to receive anything from the borrower, over and above the return of what he lent?” The opponents of interest say “no,” while the defenders of interest say “yes.” But surely the right answer, as all the parties ought in consistency to acknowledge, is: whatever the lender and borrower agreed to (assuming the agreement was not subject to any unjust constraints, etc.). Yet both sides write as though what the lender is entitled to is a fact independent of the contractual conditions of the loan. (This is particularly puzzling coming from Tucker, who might have been expected to dismiss as a “spook” any notion of an entitlement independent of the contract; and railing against payment for a loan sits oddly with Tucker’s insistence elsewhere that he had “always contended that one is justified in accepting payment, if he sees fit, for doing or saying anything that he is entitled to do or say,” a claim also apparently belied by his alarmingly Rawlsian pronouncement in another place that “neither judgment nor skill can be charged for in equity except so far as they have been acquired.” I would note that there is no plausible way to interpret this ghastly latter claim as a mere prediction about what would happen under free competition, since consumers will presumably pay the same amount for the products of talent, be the talent innate or acquired.)

(It’s important to add to all this, though, that given a Rothbard-style title-transfer theory of contracts, it can be argued – or anyway I have – that the payment of interest in excess of the money damages owed in case of non-performance could legitimately be secured only by reputational effects and not by legal force.)

From an Austrian standpoint, in any case, a crucial function of the interest rate is to guide the choice between long-term and short-term production processes, i.e., to subordinate production decisions to the consumers’ needs (determined by their subjective costs, not some objective and unvarying “labour cost”) as regards the trade-off between productivity and timeliness. This fact, of which Proudhon evidently has no inkling (though neither, for that matter, has Bastiat), casts doubt on the feasibility of any plan to eliminate interest entirely; and it’s not clear how the sort of non-monetary mutual-and-therefore-mutually-cancelling “interest” involved in the Bank of Exchange could play the role which ordinary interest plays in this regard; yet borrowers’ and lenders’ rates of time-preference are bound to express themselves in their dealings with and through the Bank one way or another, and if the Bank does not bend to them, it will break instead. (Tucker even appears to suppose that manipulating the money supply so as to bring about an artificial lowering of the interest rate would result in a “stimulus ... to business and production” and a “great increase in wealth.” In fact no surer recipe for a depression can be imagined. Interest is one more price signal, and the information it conveys is crucial to avoiding the business cycle of malinvestment and consequent liquidation. Perhaps Tucker could say in his defense that interest rates are currently artificially high, and that the alteration he envisions would thus make interest a more accurate signal; but nothing in his example seems to support that reply.)

For Tucker’s Warrenite predecessors, the “cost principle” was first and foremost a moral principle; interest and profit were denounced as unjust. While Tucker sometimes talks this way too (especially before his conversion to Stirnerism, but to some extent after as well), his usual position – which he attributes to Proudhon as well – is that the “cost principle” is a prediction about what will happen under laissez-faire. Tucker’s idea is that under free competition, if Ariel charges more for fairy cake than it costs to make it, some rival seller, Caliban, will be prompted to undersell Ariel. Tucker is quite right, of course, to say that if one seller charges more for a product than another seller is willing and able to charge, then the second will undersell the first and the lower price will dominate the market. But what is this notion “what it costs to make”? And costs whom – Ariel? Caliban?

Suppose (scenario A) it takes Ariel and Caliban the same amount of time, effort, and skill to make fairy cake, but Ariel enjoys making fairy cake while Caliban finds it drudgery; thus ceteris paribus one must offer Caliban more money to get fairy cake than one would need to offer Ariel. Hence Ariel may well be able to undersell Caliban even though Ariel is selling “above cost” (meaning above what it costs him, i.e., he would still be willing to sell at a lower price) while Caliban sells “at cost” (meaning that the price he’s currently asking is the lowest at which he’d be willing to provide the product, i.e., the lowest that compensates his cost). But wait; suppose ceteris are not paribus. Perhaps (scenario B) Caliban is desperate for material luxuries while Ariel prefers an ascetic lifestyle, so even though Caliban’s “labour costs” of providing fairy cake are in some sense higher (leaving aside arguendo worries about interpersonal comparisons of ordinal rankings) than Ariel’s, Caliban’s opportunity costs of not providing the cake are higher as well, so maybe he can undersell Ariel after all.

In the light of these sorts of complications, I just don’t know what is meant by reducing prices to “cost”; hence I continue to prefer the Austrian subjective-utility approach over cost-of-production theories, even when the latter come in sophisticated forms like Carson’s. And at least part of what keeps tripping both Bastiat and Proudhon up in the course of their debate, I think, is that each party’s theory contains subjectivist and anti-subjectivist elements muddled together. Indeed, it seems to me that the two fundamental confusions that dog both Bastiat and Proudhon throughout their debate are, first, inconsistency over value subjectivism (both parties treat it alternately as true and as false), and second, inconsistency over the extent to which prevailing economic conditions approximate those of a free market (both treat them alternately as a close approximation and as no approximation at all). A clash of the titans thus becomes a dialogue of the deaf.


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