In the much talked-about book, Sapiens, Yuval Nah Harari quite successfully attempts to provide a history of Humankind in 443 pages. Harari, who has 70,000 years to cover (that’s 158 years per page!), devotes a full 8 pages to the concept of credit. Why is that? Why would the concept of credit be significant in a book on the history of Humankind? The answer is that Credit is an embodiment of a collective idea that the future will be better than the past, and that this collective idea is essential to modern human culture and society.
To better understand this concept, Harari explains in Sapiens the following:
[In the pre-modern era]“...people seldom wanted to extend much credit because they didn’t trust that the future would be better than the present… To put that in economic terms, they believed that the total amount of wealth was limited, if not dwindling. Business looked like a zero-sum game. The profits of one [firm or person] might rise, but only at the expense of [another]... The king of England might enrich himself, but only by robbing the king of France. You could cut the pie in many different ways, but it never got any bigger.
If the global pie stayed the same size, there was no margin for credit. Credit is the difference between today’s pie and tomorrow’s pie. If the pie stays the same, why extend credit? It would be an unacceptable risk….
It was lose-lose. Because credit was limited, people had trouble financing new businesses. Because there were few new businesses, the economy did not grow. Because it did not grow, people assumed it never would, and those who had capital were wary of extending credit. The expectation of stagnation fulfilled itself….”
So, credit markets depend upon that society in general believes the future will be better (and bigger, in terms of wealth) than the past. Thus, if credit is born of this collective idea, or, in other words, something that everyone must believe in, then credit, theoretically, at least, is shared amongst all people, or is a common good.
But, this concept goes beyond theory. In practice, credit is nothing more than letting someone (the borrower) use the money that another (the lender) is not using at present in exchange for a fee. Market practice is to link that fee to the amount of time during which the borrower uses the borrowed money and to the lender’s perceived risk of the borrower not paying him or her back.
Today, it is common practice to offer your assets for others to use when you are not using them, also in exchange for a fee. Aptly named the “sharing economy”, this concept seems new and modern. Yet, credit markets have been around a lot longer than Uber or Airbnb. And, since credit is simply one person letting another use his or her money when he or she is not using it, credit is a centuries old example of the sharing economy.
Thus, in addition to being a common good in the sense that we all need to believe in a bigger, better future for credit markets to even exist, credit, in a very practical sense, is a shared good. As such, credit is a connecting force dependent on the collective to exist for any individual. What’s actually the hardest to believe is that this is probably the first time that most of you have thought of the uniting force of credit. But, at Captalys we are certain it won’t be the last.