An Economic Maxim

May 29, 2010

People often try to boil down the lessons of economics to a single one, the most important one. Among my nominations would be this one:

Economics deals with the choices people have, not the choices we might wish they had.

As I’ve said in the past, on economics, Planet Money is actually quite good, but they’re not perfect. This episode, about payday lending, is good, but not perfect.

The basic idea is this: people take loans from these places, on which they have to pay a borrowing fee of $1.50 per day per $100 borrowed. Without question, that is a really, really, high interest rate (550% or so per year). So then the questions asked on the podcast is: are payday lenders predators? should payday lending be illegal?

For sure, it would be nice if the people who used payday lending services were in position where they did not have such a highly inelastic demand for money now vs. money in five days, or if they had other options available to them for borrowing money. But neither of those conditions apply, and neither of them will apply whether payday lending is illegal or not.

You know this, because it’s obvious. Economics is often obvious. Well then, I ask, why is Planet Money coming so close to blaming payday lenders for causing its customers’ financial distress, when payday lenders are the only people doing anything to relieve that distress?

This is how Satan got a bad rap, I should think. You can’t really argue that Satan “caused” man’s fallen state. He just gave us the means to do something about it. And if Satan hadn’t been there, we might have gone to someone even worse! (Or, click here if you’re a Democrat)

The post got real silly, real fast. Just remember my rule:

Economics deals with the choices people have, not the choices we might wish they had.


One Response to “An Economic Maxim”

  1. […] 30, 2010 A classic article by Ronald Coase, in which Coase beats me to “my” maxim by 50 years: Actually very little analysis is required to show that an ideal world is better than a […]

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