Tim suggests that CoE-supported credit unions might not be so able to undercut Wonga. This raises an important point which Conservatives such as Jesse Norman have made - that markets are embedded in society.
Imagine two polar opposite societies. In one, individuals are isolated and anonymous. In the other, they are part of a dense social network of friends, family and colleagues.
In the latter, credit unions and Roscas have a great chance of success. The very fact that lenders already know potential borrowers mean there is no extra cost of screening loan applicants; friends and family can vouch for lenders and guarantee their loans; and borrowers are less likely to renege on a loan if it means betraying frinds and acquaintances and the social ostracism that'll result. By contrast, in an atomistic society, they do not have these advantages and so payday lenders, with their economies of scale, are more likely to thrive.
In truth, you don't have to imagine this at all. It's how microfinance works. Here's Banerjee and Duflo:
Microfinance institutions (MFIs) rely on their ability to keep a close check on the customer, but they do so in part by involving other borrowers who happen to know the customer. The typical MFI contract involves loans to a group of borrowers who are liable for each others' loans and hence have a reason to try and make sure that the others repay. Some organizations expect the borrowers to know each other when they come to borrow, whereas others bring them together by making them come to weekly meetings. The very act of meeting together every week helps clinets know each other better and become more willing to help out a group member. (Poor Economics p166-7)
This is of course by no means the only example in which social structures shape markets. It's trivially true that our peers affect our career choices, and they might even affect fund managers' performance by facilitating insider dealing. But there are many other examples:
- Low-trust societies are likely to see big markets in security firms and CCTV cameras, but thinner markets in goods and services where asymmetric information is important.
- Societies with healthy social networks might have lower unemployment rates, because friendship networks help job-finding and so reduce frictional unemployment.
- Social norms affect the size of markets. Gambling, for example, was a backstreet industry when it was frowned upon, but has become big business since the norm against gambling has weakened.
- The decline of workers' solidarity and trades unions has led to a more active market in managers, and to higher CEO pay, but also to the decline of working men's clubs.
All this said, it doesn't necessarily follow that "society" comes before markets. It can be, as Marx said, that both are influenced by technology. For example, the arrival of labour-saving household devices allowed women to enter the labour force, which has shaped labour and product markets in several ways. And it's also the case that markets shape society; a society in which everything is for sale will have different social norms from one where markets are restricted.
And herein lies a danger. The neoliberal priority of individuals over community networks can be performative; it doesn't just describe the world, but shapes it too. Having given us a society of isolated individuals, neoliberalism also gives Wonga more chance of out-competing credit unions.
"Imagine two polar opposite societies. In one, individuals are isolated and anonymous. In the other, they are part of a dense social network of friends, family and colleagues."
People in the latter stand a good chance of being refused a loan because they've fallen out for some personal reason with the person (or someone connected to them) running the credit union. Its a return to a 50s style society where everyone knew everyone else's business, and it really was a case of 'who you know, not what you know' to get on in life.
Is that what you want a return to - the curtain twitching mentality, where people who don't 'fit in' are victimised by the self appointed local arbiters?
Personally I'd prefer to take my chances in a decision making process by some anonymous person at the central office who doesn't know who I am, or have any local prejudice against me, just the facts on the form in front of them.
You seem to forget that a 'dense social network of friends, family and colleagues' can be destructive as well as supportive.
Posted by: Jim | July 31, 2013 at 10:49 PM
yes, like Jim I am not sure the prospect of having my finances overseen by the local community is that appealing.
Felix Salmon was good on this topic I thought:
http://blogs.reuters.com/felix-salmon/2013/07/26/how-not-to-compete-with-payday-lenders/
Posted by: Luis Enrique | August 01, 2013 at 10:25 AM
I really don't sympathise with all this hand-wringing over high-cost loans for the uncreditworthy.
If you have few or no assets, earn little or nothing and if your realistic furure earning potential is poor then of course credit will be expensive.
And it absolutely should be.
The scandal is that so many people cannot sustain themselves without such credit, which suggests that either their lifestyle expectations are unrealistic, their financial management skills are poor, or benefits are too stingy.
Personally, I'm not sure the CoE should be lending to the poor so much as giving to them.
Posted by: Staberinde | August 02, 2013 at 10:24 AM
A point I have made before is that people who get into serious trouble with the likes of Wonga have expenditure greater than their income. As Mr. Micawber has pointed out, this doesn't work, and a slightly cheaper loan isn't actually a fix.
Posted by: Sam | August 05, 2013 at 07:41 AM