Rocco: The first paragraph is ironic. The stuff about payday lenders and not being able to predict the future isn’t.

As you’d expect of your typical vicious fat-cat capitalist bastard, I hate poor people. I absolutely cannot stand the sight of the filthy sods. And they are filthy – what with working down mines and up chimneys. I tell you, if I had my way they’d never emerge from the dark, damp, rat infested holes they call their “homes” to walk the same streets as me, to ruin my mood by their mere proximity.

Yeah, that’s right readers – idiosyncratic titles remain the order of the day. You had your chance to change my mind last week. As no one attempted it, I’m choosing to take that as a sign of approval. So, thank you silent majority!

The truth of the matter is I’m not rich. I’m not well-off. Not even slightly. This is so much the case that I’ve met people who find it quite incredible that I argue for free markets. “How can you support capitalism when you’re so poor?” they enquire. “You’ve got the wrong end of the stick about free markets,” I reply. “Yeah, but dude – you’re so, so poor!” they say. “Alright mate, bloody hell! You don’t have to rub it in!” I shout. Seriously, I’m so poor, readers, that I had to take out a payday loan to buy a typewriter just so I could write for Bogpaper… That bit isn’t true, actually, but it’s the best segue I could think of, so you’ll just have to put up with it.

Payday loans companies are coming under fire again. “Payday loans under fire.” Now that’s a proper title. Why couldn’t I just call it that, eh? “The first paragraph is ironic” – what was I thinking? Where was I? Oh, yeah. According to MP’s, payday lenders are a bunch of smelly poo poo heads. Not only are they exploiting poor people, but get this – and this is absolutely true, I kid you not – they are “grooming” children with their colourful adverts and catchy jingles. Hang on, that last sentence should read: PAYDAY MONSTERS ARE MOLESTING OUR KIDS! Much better.

Leaving aside the ludicrous ‘advertising equals paedophilia’ claim as too silly even for this column, what are payday loans companies doing that’s so bad? Well, what it boils down to, yeah, is that they are lending money to people who want to borrow money – the dicks! Now some might say that the problem is not that they are lending money, but rather, that they are lending money at excessive rates of interest, and that this requires a spot of State intervention. This is nonsense. An interest rate is the price of borrowing money. When the price of something is felt to be too high, that is, ‘excessive’, what happens? People stop buying that thing. If you’re selling something that no one wants because it’s too expensive you don’t stay in business long. Which is to say, the problem, if it existed, would solve itself without need of State intervention. Indeed, insofar as no firm wants to go out of business, they are careful to not price themselves out of the market by charging prices that are felt to be ‘excessive’.

Even so, the interest rates do seem pretty steep. However, the quoted rates are annual percentage rates, yet payday loans are only short term loans – in fact, interest doesn’t compound past sixty days after the initial loan period. This means that those umpteen figure interest rates are completely misleading. So why on earth do these firms quote the A.P.R  figure on the adverts? To comply with regulations, of course.  Nice one, the State! Another thing to bear in mind is that the cost of setting up the loan is included in the interest.

There’s a cliche to the effect of “banks only lend you money if you can prove you don’t need to borrow it”. It’s the sort of thing that passes for a joke on Radio 4. But there’s substance to it because lending money is inherently risky, and lending money to a fellow who ‘doesn’t need it’ is seen as being less risky than lending to a fellow who really does need it. The higher the perceived risk, the more reward (ie, a higher interest rate) that is necessary to convince would-be lenders to lend. If you’ll allow  me some wordplay readers – were the State to outlaw ‘excessive’ interest rates, fewer would-be lenders would be lenders. As for the borrower’s incentive, consider this basic fact of human nature: if you want something right now, you’ll be willing to pay more for it than if you could wait. (This is not limited to exchanges involving money, either. Witness the phenomenon of “settling” in those desperate to get married.)  This is as true for borrowing as for buying, and  just like with buying a good, the more would-be borrowers there are, the more you’ll have to pay: competition on the demand side pushes up the price. Inevitably then, the interest rate (price) on loans for people who are more desperate to borrow money will be higher than for people who are less desperate to borrow.

You don’t have to be over the moon that these firms exist, but the State “getting tough” with payday lenders won’t make life better for their customers. Driving them out of business would only make things worse, because the fact is people use these lenders because they need to borrow money. If people can’t borrow money here, they’ll be forced to go elsewhere, most likely loan sharks. Don’t misinterpret me, there’s nothing wrong with loan sharks. They perform a vital service in lending to people who can’t get credit elsewhere. But the terms of borrowing from loan sharks tend to be much more burdensome than the terms offered by payday loans companies. We might also note that in countries where the State “got tough” with payday lenders (Germany and France foremost) filing for bankruptcy is an increasingly popular pursuit.

What would improve the situation for those with money problems? For the State to stop intervening. Economics is often thought of as a dry, technical, demanding subject. And this is no doubt true alot of the time. But the essential fact of economic life is incredibly simple. There’s no need to invoke an ‘invisible hand’, or any other mystical idea to explain why free markets work, and intervention makes things worse. Here: I own x, you own y. I want y more than x, you want x more than y, so we trade. I’m better off than I was, and you’re better off than you were. Dead easy! It’s only when the State forces you, contrary to your wishes, to exchange y for z, or prohibits us from exchanging x and y, that trade is not a win-win situation. An entirely free market economy would be composed of millions, billions, trillions of acts of the first type. Hence, without State intervention everyone entering into voluntary acts of exchange will be better off than they were. Of course, after an exchange is made either party may later regret their decision, although this tends to be rare in practice. But this isn’t a failure of the free market. No, it’s simply a result of men not being able to predict the future. And no amount of State intervention can remedy that. (Incidentally, mankind’s lack of omniscience is also the real culprit when it’s alleged that some particular group of market participants  – poor people usually, oddly enough! – don’t “act rationally,” and therefore need the State to tell them what to do.)

Now, “better off” is usually taken in the financial sense, and there’s nothing wrong with this. But in the most comprehensive sense it means “being happier”. That is, ‘money profit’ is merely a sub-category of ‘psychic profit’. And this  is what I was alluding to in the somewhat fictionalised conversation above. Yes, free markets allow people to make lots of money, but giving each individual as much chance as possible to improve their psychic lot, without doing so at anyone else’s expense is what they’re really all about. So, you see, it’s no surprise that someone like me should be an anarchist: I’m a nice chap!

On that note, on RGTyler’s “Help BP improve” post – and thank you, to everyone who left a comment – some sort of one page flyer that could be printed off was proposed (by regular commenter dr). As I don’t subscribe to the fiction of intellectual property, let me say that as far as I’m concerned, if anyone wants to re-blog, print off, distribute, copy in part or in whole etc, etc, etc, anything that I write on Bogpaper, they should feel perfectly free to do so.