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| Jeremy Bentham - Someone who could run Wonga? |
Jeremy Bentham (1748-1832) the great utilitarian English philosopher may have more in common with pay day loans companies than you think. In his writings he treated money just like any other good, whereas other writers saw things rather differently. They argued that money had four functions which differentiated it from normal goods namely that it was a; medium of exchange, measure of value, standard of deferred payments and a store of wealth for the future. These reasons were meant to underpin the argument that money just isn't like other goods and should be subject to different rules. The price of money, its rate of interest, is determined by many complex factors and there is in reality, a term structure of interest rates reflecting how the market for money might behave at different points in the future. All this is fine however in several cases some market rates for borrowing certain sums of money are so excessively higher than most other market rates of interest, that we begin to worry and wonder why that is.
Jeremy Bentham's arguments need to be restated to assist us in our deliberations. Adam Smith initially argued that people who borrowed money were often poor and needed help and therefore he was in favour of ceilings on interest rates. Jeremy Bentham argued that if someone lends his money to someone else he needs to be compensated for foregoing his right to that money for himself. Any laws that were designed as ceilings on interest rates would discourage lending and would mean that there was less lending for poorer people and innovative businessmen alike. This would hurt the standard of living of both the rich and the poor. If the poor could not borrow money they would turn to other ways of getting it namely crime and there would also be a burgeoning black market in loans to the poor which would be unregulated and uncontrolled. In time, Adam Smith was persuaded by Bentham's arguments and changed his stance on interest rate ceilings.
Attempts to control the market are very difficult to achieve and often prove to be unsuccessful. Higher interest rates for certain borrowers reflect the attached risk premium attached to them. The lender wishes to be compensated more because he is lending to someone who is less likely to pay everything back.
Will poor people who are trapped by high interest rates benefit more from interest rate ceilings or a larger number of ethical lenders entering the market? Although imposing an interest rate ceiling looks initially attractive -- poorer people will benefit much more from a higher number of ethical lenders who will hopefully help educate them in financial matters and lend at more reasonable rates.
The lenders who charge excessive rates can be identified and encouraged to reform themselves by being subject to public pressure ( The Starbucks Effect) but the negative aspects of an interest ceiling policy should be brought out in the open. It is not necessarily a quick fix for the poor - we need a better way.
Jeremy Bentham's arguments need to be restated to assist us in our deliberations. Adam Smith initially argued that people who borrowed money were often poor and needed help and therefore he was in favour of ceilings on interest rates. Jeremy Bentham argued that if someone lends his money to someone else he needs to be compensated for foregoing his right to that money for himself. Any laws that were designed as ceilings on interest rates would discourage lending and would mean that there was less lending for poorer people and innovative businessmen alike. This would hurt the standard of living of both the rich and the poor. If the poor could not borrow money they would turn to other ways of getting it namely crime and there would also be a burgeoning black market in loans to the poor which would be unregulated and uncontrolled. In time, Adam Smith was persuaded by Bentham's arguments and changed his stance on interest rate ceilings.
Attempts to control the market are very difficult to achieve and often prove to be unsuccessful. Higher interest rates for certain borrowers reflect the attached risk premium attached to them. The lender wishes to be compensated more because he is lending to someone who is less likely to pay everything back.
Will poor people who are trapped by high interest rates benefit more from interest rate ceilings or a larger number of ethical lenders entering the market? Although imposing an interest rate ceiling looks initially attractive -- poorer people will benefit much more from a higher number of ethical lenders who will hopefully help educate them in financial matters and lend at more reasonable rates.
The lenders who charge excessive rates can be identified and encouraged to reform themselves by being subject to public pressure ( The Starbucks Effect) but the negative aspects of an interest ceiling policy should be brought out in the open. It is not necessarily a quick fix for the poor - we need a better way.
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