What is Seen and Unseen
To paraphrase the greatest of economic polemicists, Frédéric Bastiat, the difference between the good economist and the bad is the very extent to which they perceive what is “unseen”. The bad economist can only grasp the façade of the issue, while the good economist penetrates the obvious and see down the path- sees the intended as well as the unintended consequences of the action- they see what is unseen.
With the election on the horizon, Arizonans have begun to debate various propositions to which they get to decide. One of which is Proposition 200. Prop 200 entails the restructuring of payday loans. In this article it would be irresponsible of me to advocate one side or another as I lack intimate familiarity with the details of the law. What I wish to do today is instead discuss the problem with popular economic reasoning that has been used to attempt to discredit the bill.
Frédéric Bastiat
The argument goes that the proposition should be voted no on grounds that Payday lending is exploitative because they charge interest rates that are exponentially higher than the standard financial institutions rate of interest. If this bill doesn’t pass, in 2010 ( I believe) the current law permitting this sort of lending will expire forcing these “predators” out of the state. I am not sure whether this is indeed correct, but the point of writing here is much less about this actual bill and much more about the theory of usury.
The left has always had a tendency to magically and arbitrarily determine which and how much profits can be labeled as “obscene”. They live in a dichotomous world where everyone fits neatly into the categories of either oppressor or oppressed. Through the prism of this worldview, they see victims everywhere, unaware of the unscrupulous and pernicious intentions of the exploiter. They want to help out. They want to protect the ignorant and uneducated victim from the victim’s own well intentioned, but misguided actions- to protect the victim from themselves.
So naturally, it should be no surprise that they see Payday loans as predatory sharks preying on the people “most vulnerable”- to quote the official line of the Arizona Democratic Party. How can a just society allow rich capitalists to profit so obscenely from those most vulnerable?
My question is: how can a just society not?
Payday loans, Cash Advancement Centers, and all Loan sharks in general serve a function that people desire. I am not even going to waste my time elaborating on the obvious point that if something is profitable on the free market, then it must be by definition demanded. What I wish to point out is that often well intentioned, caring individuals often only see what is seen: relatively extreme rates of interest, but fatally misunderstand what is not seen.
What is not seen? What is beyond stage one? Consumers utilize these services because they have some sort of need for them. These institutions allow individuals experiencing a liquidity crunch to avoid default. Perhaps their mortgage is due and they didn’t budget correctly. Perhaps their child had a sudden illness. Perhaps they did. The list continues indefinitely. There are countless amount of reasons why someone would need money fast and upfront- even if it requires a hefty fee. And that is the point: they alone determine what is best for them and what is the better trade off.
It is so easy for bourgeois leftists who don’t depend on these institutions when they need money quickly. They are accustomed to calling their parents or friends or busting out their platinum credit card. Why would anyone use this service they ask. Its inconceivable- they must be getting tricked.
But what these well-intentioned activists fail to realize that if these services are eliminated, many will have few other options. They might go to straight up mafia loan sharks, they might commit some other criminal act, or most likely- they will just default.
It is not necessary to point out that the high rate of interest exists as a risk premium for the high level of default that occurs in this line of business. No justifications needed. This article isn’t about whether these institutions are evil or not, it is about whether in a free society an individual should be able to decide on their own what are the best trade-offs, what is the best action to improve their current state of affairs.
A free society requires choice and it requires personal responsibility. The individual alone possess the ability to know what actions are most beneficial, not some paternalistic, arrogant, big brother who lacks any insight into what is unseen.
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Great article, man. Thank you.
I don’t mind payday lending establishments as long as the APR rates are clearly listed. To lend someone $100 with a $15 fee due back in 2 weeks is an effective APR of 391%. People need to seek better options. That being said, I think the marketing behind payday lending is genius and that’s what has led to its meteoric rise in the more economically-depressed areas of the United States.
Advertised or not, people sign papers allowing the institution to lend them money under agreed upon terms. As long as both parties agree to the terms of the loan, and you can guarantee they agree by having them sign contracts that layout the terms, then nothing wrong has been done. There is a serious need for such financing and given the risks associated with lending money to these borrowers a high APR would be expected. Given the amount of competition that we now see in pay-day loans, you can bet that the market is fairly efficient and that the charged rates are well within the means of “reasonable,” especially since people keep taking out these loans. I can almost guarantee you that if these people had a cheaper means of obtaining cash quickly then almost all of them would utilize those means over these loans. The shear fact that people take out these loans exemplifies their necessity and fairness.
I do agree with Tyler. Functional capitalism demands a great deal of knowledge flowing from all parties. Otherwise we end up with what is call “Asymmetrical information”. If there is to be regulation it should be that a huge sign shows the APR so everyone is aware and can make the correct informed decision. Fine print can be confusing and misleading at times.
I agree with you that better advertising will indeed improve the market. However, you don’t need the government to do that. If someone misses the fine print and they are charged an exorbitant amount on their payday loan then they will be unlikely to return to that establishment. The next time they need a payday loan they will be more likely to give their business to a company that proudly and openly advertises how much they charge and guarantee a simple, gimmick-free process. It is not the advertising of the APR I have a problem with, it is through the inefficient means of government where the problem arises.