The ethics of debt

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A few weeks ago I attended a conference on inequality in Leeds, where I had the privilege to drink with some brilliant PhD students. With all of the being economists, a heated debate developed about the crisis in Europe, and especially Greece because some of the students were from Greece.

On particular question raised there got my attention, the question whether a country was morally obliged to repay its debt. We haven’t really talked about this question but I couldn’t stop thinking about it. So I thought I write down some short ideas and see what happens. Yet, these ideas are not meant to criticize a systems such as capitalism in general.

First, I refer to Christian Barry’s definition of the ethical status of debt, which can be found here. He presents the following two statements

i) A owes a debt to B if and only if:

(1) B has lent resources to A; and

(2) B has a claim to repayment from A that has at least prima facie legal validity.

ii) A owes a debt [with ethical status] to B only if B has a valid moral claim to repayment from A

From this, we can make the distinction between legal and ethical claims, which necessarily are the same in each case. A legal obligation must not be ethical and vice versa. For Barry, this distinction is important since the ethical status of debt depends on the actions of both actors which can shift the status of the debt.

Let’s assume B has lent resources to A on a contract and can make a valid moral claim, thus A has an ethical and legal obligation and ought to pay. However, imagine B causes A to be unable to repay, e.g. due to an accident, due to competition on a market or by raising interest rates. This would require a revaluation of the ethical status of the debt, while the legal remains the same.

Berry consequently concludes that we need a criterion for defining in which category the debt falls in. He refers to John RawlsFair System of Cooperation, in which Rawls argues that justice, the perception of how the benefits and burdens are fair distributed in society, serves best for the establishment of a moral basis for democratic institutions. Indeed, democratic governments not only have legal obligations towards creditors but also legal and, following Rawls, morally valid obligations towards its citizen. In the current debt crisis governments’ are unable to establish a system of equally distributed benefits and burdens by means of its institutions. This means that the debt obligations hinder the accomplishment of obligations towards citizens, even if we can identify an ethical status of them in the beginning.

I think Barry’s justice argument is similar to a preference utilitarian perspective on morality, in which the preferences of the majority as the greater good of society dictate the morality of actions. If we assume that the majority of citizens prefer to live in systems described by Rawls, claims of creditors would only be morally valid unless they contradict the preferences of the majority. Simply spoken, the interests of the many would certainly outweigh the interests of the few and the case would be clear. If the majority of the Euro-Area, represented by its governments, has no or little preferences in repaying the loans the governments borrowed from the financial systems, the banks had no moral valid claim.

Unfortunately, the premises of preference utilitarianism, and the justice argument, could lead to otherwise immoral actions. Let’s imagine the state holds a suspect of child murder in custody and the citizens see capital punishment as desirable and just action. Would the government then act morally by killing the suspect, based on the fact that the preferences of the many are satisfied and they would outweigh the preferences of the one?

Second, the problem is that we not necessarily face a simple trichotomy between the preference structure of state, citizens and the financial sector. One can like it or not, but banks play an important role in financing not only the governments but also for the private sector. The loss of substantial debt claims could affect the financing of firms resulting in losses of jobs which in return is presumably contrary to the preference structure of citizens. Also, I think the exemplary dichotomy from above does not occur in real life. In fact, we rather face a complex path dependency of actions in which, for instance, actions of A, induced by C, led to responses by B which causes A to be in a disadvantageous position and so forth.

Third, the moral implications of breaking a contract must be considered. Contracts are a cultural/legal practise of control where the trust in the legal systems, providing punishment for defections, outweighs the trust between two parties to honour their agreement. If a government would break the contracts without being legally punished, it could undermine its general legitimacy. Although, for instance, Machiavelli and Walzer argue that politicians could do wrong things for the greater good, it is not guaranteed that retaliation would follow from those who are affected.

How to overcome all these problems? Well, the easiest way would be to argue that debt has no ethical status at all, but that is not fun isn’t it? It is a simple solution to a complex problem.

However, if we carefully apply preference utilitarianism to assess the ethical status of debt and recognize the critical points above, we might be able to avoid the drawbacks of preference utilitarian approach. It seems best to decide from case to case, i.e. with each creditor, about the ethical status and the governments’ actions. If we can formulate a reasonable public and private preference structure that is not compromised by individually examined debt claims, they may have an ethical status. How can we evaluate these circumstances and who should be allowed to do it? I think this question is similar to abortion, where circumstances and consequences are so complex that simple and discriminating normative ethical solutions cannot work. In this case, there are committees concerned with the ethical implications of abortion and other medical treatments. Why shouldn’t we implement similar committees in regard to the question of debt?

At the end, however, I think it cannot be said that a government has no general ethical obligation to repay its debt; neither can be said it has.

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One thought on “The ethics of debt

    Stefanos Ioannou said:
    July 8, 2013 at 8:01 pm

    Really nice text….I think the Rawlesian argument that a govt also holds moral obligations towards its citizenry is a really good and strong argument…for instance the Greek state has a moral obligation not only towards its creditors, but also needs to assure lets say that all kids receive at least the basic education…furthermore, I agree that what you need is historical context (the case by case consideration that you mention)…irrespectively of whether we like capitalism or not we cannot generalise that easily a claim about the inexistence of moral obligations regarding the repayment of debt, simply because the removal of such social conventions would create more damage than good…

    Other than that I can also think about another very simple moral argument on debt: according to the basic principles of finance the interest rate is a reward for the creditor for taking up the risk of providing credit to X…so the more risky the profile of X, the higher the interest (s)he has to pay to get access to credit…but then we can simply say that since you as a creditor are compensated already for the risk of default, then you have to live with it…ie if X defaults, you (the creditor) cannot complain, since you are already compensated for such an outcome…otherwise it is not fair for your fellow creditor that chose to play it safe, therefore investing in German bonds and probably receiving less than half of the interest that you do…

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