Among the Solonic reforms that made Athens democratic was the abolition of debt-bondage. In his history of Rome, Livy wrote that the Lex Poetelia of 326 BC, abolishing debt-bondage was “the dawn, as it were, of a new era of liberty for the plebs.” It is probably no accident that Nietzsche, classical philologist that he was, took the connection between debt and subjection to its radical conclusion. Nietzsche thought the notion of moral agency underlying modern life was servile, and that this servility was revealed in the basic idea that morality is keeping one’s promises. For Nietzsche, this subjection of our future selves to promises we make today had its origins in the institution of debt. We don’t have to be Nietzscheans to think the the practice and institutions surrounding debt raises major questions regarding freedom and subjection, and these are issues that have arisen in a major way since the credit crunch of 2008.
Recently, we suggested at least one way in which the use of debt imposes an undesirable discipline on people. When debt becomes the way to gain access to basic goods it forces downwards the expectations and narrows the horizons of debtors. Our main example was the the discipline that student debt places on their subsequent educational and professional choices – they will be less willing to take risks on interesting classes, career choices with riskier or longer-term chances of having a payoff, or that are simply lower-paying. We should have added that having to take debt adds discipline on top of already existing compulsion. Since most people are forced to sell their labor in order to learn their living, it is an added, unjust imposition to say they must finance their consumption with debt burdens they have little chance of being able fully to payoff.
Over at Rortybomb, Mike Konczal reminded us of a number of other ways in which debt is connected to coercion, using what we might initially think is an odd source: corporate finance. Konczal’s post has a bunch of insights, but there was one that caught our eye in particular. Quoting another scholar, Konczal observes that
“Under financial distress, but in the absence of liquidation, the nonrepayment of debt puts the creditors in the driver’s seat. Roughly speaking, creditors acquire control rights over the firm. They need not formally acquire such rights. But they hold another crucial right: that of forcing the firm into bankruptcy. This threat indirectly gives them some control over the firm’s policies…”
Where we had discussed the disciplining effects of debt on individual’s choices, Mike reminds us of the obvious, background threat of coercion. The threat is not just of coercive enforcement of debt contracts by the state, but of handing to creditors coercive control over debtors themselves when they fail to pay up. In the case of the firm this all sounds somewhat benign because a corporate person is not a real person. In fact, in some sense, corporations can be made slaves of their creditors in ways that real persons cannot (which is incidentally another implication of corporate personhood.) Now the disanalogy between corporations and persons here regarding who can be made slaves is less relevant than the analogy. The relevant analogy here is the way the law is structured to permit or limit the kinds of coercion that can and cannot be applied. In other words, underlying all of this is a question of who controls the state (or whatever apparatus it is that enforces debt contracts). That is in fact the lesson of ancient history – when the people acquired political power, they limited the kinds of power that creditors could legitimately exercise over individual debtors. It is also a lesson of the present, as the struggle over whose claims will win out continues apace.
On the flip side, creditors are always angling for the ability to increase their control rights over debtors in the case of default. After all, what they want is a risk-free rate of return. Having a right to control the debtor in the absence of the debtor’s ability to pay is a way of grabbing hold of the value stream from the other end – not the debtor’s earnings, but his or her labor power itself. While formal debt-slavery is obviously illegal, and debtors prisons are (with creeping exceptions) banned, the recourse powers of creditors like suspending time limits on debt or ability to garnish wages and seize other assets are all similar raise similar questions about the kinds of coercion we are or are not willing to allow creditors to have over debtors. For example, when it comes to student loans, the state has made it possible to garnish funds from Social Security checks, and there is time period after which unpaid student loans are discharged, these loans stay with you for life. That means a person with student debt can be placed in a kind of debt-bondage – a life of permanently paying off a debtor.
To be clear, the issue is not the ex post one of whether debts should be forgiven or modified in certain conditions – that is a separate though related question. Rather, it is about the ex ante legally enforceable powers granted to creditors that are part of the contract itself. And the thought is that there are some kinds of coercion that might be incompatible with a democratic society – that is in some sense the point with which the demos and plebs were concerned with. No free society allows that kind of servitude to exist, no matter the promises they made.
Importantly, reducing the kinds of coercive control rights of creditors over debtors would not be any kind of threat to contracts. It would simply be risk-shifting. As mentioned, creditors always want what they can’t have – risk-free investments with high rates of return. The risk-free part is secured by increasing the kinds of control that can be exercised over debtors who miss payments. Taking away that kind of control defends some freedoms of debtors by forcing creditors to accept more risk.
Debt is not always a source of unfreedom. It is, or can be, enabling too. Economics textbooks like to point out that debt helps smooth out consumption. We borrow against future earnings to consume more now. As the FT recently had it “debt is thus a hugely efficient wealth distribution mechanism.” Of course, it isn’t that if what we are doing is substituting for lack of earnings (our point about the debt-based social model) rather than borrowing against future earnings. But even so, it isn’t just consumption choices that debt opens up. Taking a bet on the future is what makes possible innovations and long-term collective economic projects. The human potential that is set in motion when a company decides to make a new airplane is immense – from scientific research to basic manufacturing to industrial design. But we would not be free to engage in these enterprises if we could not take a bet on the future. Companies have to take out major debts to engage in the decade(s) long development of such products. The problem is not so much the taking out of these debts, but the way the laws are structured regarding access to credit, control of companies, who benefits from success, and who suffers from failure. That is true of corporate debt just as it is true of household debt. Yet the general point is still valid – even in a very different, more egalitarian and free society, making bets on our future productivity would open up present possibilities and make possible collective economic action that would otherwise be impossible.
The problem as we see it is that the structure of our economic life maximizes the coercive aspects of indebtedness relative to its emancipating aspects. And most of that has to do with the actual laws surrounding debt, as well as the radically unequal economic power of different market participants. In other words, it is a political question of who controls the state.