Do we need "the plebeians are idiots" laws?

[aneeshm]

The current crisis crisis has led me to ask this question - do people need laws protecting them from their own stupidity?

And by "people", I mean not merely those who took out mortgages they couldn't hope to pay, but also the entire chain of people who made that possible - from the regulatory authorities who caved to sentiment and removed to 12:1 leverage cap, to the investment banks' managements who leveraged themselves into an impossible situation, to the people who engineered the financial instruments which concealed the risk inherent to these investments, to the mortgage salesman who offered NINA loans to people who he knew couldn't pay them back so that he could get his commission. In the free-market economy, we are all plebeians.

Other examples of these laws are those against predatory lending, which do not allow interest rates to be above a certain limit. The reason these laws were necessary in India was because many moneylenders were offering loans to peasants at ridiculously high interest rates (40%, 60%, 80% per annum were all normal in the feudal time, before land reforms), thus forcing that man into a debt spiral to the death. The stupid person in this example is, of course, the peasant, who would take a loan for a non-productive purpose without properly understanding how much it would take to pay it back. Had he been a perfectly rational actor, as classical economics assumes, then he wouldn't have taken than loan. But he isn't a perfectly rational actor and is, like most of the population, dumb, and completely incapable of assessing the consequences for his life of that action.

In fact, as one examines different sectors of the economy, one is unwillingly forced into the conclusion that most actors in the market are perversely irrational, and in the majority of cases take decisions which are massively detrimental to their self-interest. It is at this point where classical economics breaks down - in the sense that one of its assumptions no longer holds.

One way we can deal with this is by using the evolutionary approach - if a man makes a stupid decision, well, too bad, it's his problem. An economic version of the survival of the fittest. Rationality will be introduced in the system by means of the extremely painful correction it metes out to those who take decisions which are not rational. Each generation will learn from the mistakes of the previous one, and if it doesn't, it will pay the price.

However, this ignores the fact that collective and cultural memory is finite, and a lesson learned by one generation is ofter forgotten within one or two more generations.





So I repeat the question:

Do people need laws protecting them from their own stupidity?

[Zevico]

Do people need laws protecting them from their own stupidity?
Only where that stupidity does not relate to taking a risk in business by informed persons that understand what they are doing. Otherwise, where the person does not understand the effect of his actions, then yes, laws requiring he be given independent advice by a solicitor (at the cost of the other party if necessary) should be introduced.

Business risks taken by educated persons cannot be legislated against. It would stifle commerce. We put the cart before the horse in suggesting that investors have acted stupidly in bringing about this economic crisis; free market capitalism, to the extent that it exists, brought the prosperity that led humanity forwards. These stunning mistakes will happen, and will repeat themselves, but on the whole free enterprise and endeavour will cause people to innovate, act more efficiently, and make better business decisions, thereby increasing their prosperity and consequently increasing the prosperity of society as a whole.

However, in Australia, if a person enters into a contract, and is at the time of the contract under a special disability, such as illiteracy or lack of education, where it is apparent that education or explanation of a transaction is necessary, then the contract will be set aside. For an example of such a case, see Commercial Bank of Australia v Amadio, http://www.austlii.edu.au/au/cases/cth/HCA/1983/14.html. That's a classic case where a bank entered into a contract of guarantee with an old Italian couple that had a poor grasp of written English, without bothering to explain the terms of the contract at all, in the stupid expectation that the couple's son (who had never seen the contract) had explained it to them. So the contract was set aside, for lack of competent, independent advice as to its effect.


This kind of law prevents undesirable or predatory contracts by discouraging the 'predators' from wasting their time, either by (a) losing in court after the loan is set aside by their dupes or (b) losing money on the financial adviser they retained to advise their dupes, who are promptly advised not to enter into the contracts.

There will always be those who do not listen to even this basic advice, but if people wish to enter into contracts after receiving a full understanding of the facts involved and the decisions to be made, I do not think the law should have all too much to say about it.

I would, however, make an exception for the predatory lenders you mention as an example here. If interest rates offered are 40, 60, 80%, and in fact interest rates are far lower, and there is no reason to offer the rates other than to cheat the ignorant, those loans ought to be invalidated.

[aneeshm]

I would, however, make an exception for the predatory lenders you mention as an example here. If interest rates offered are 40, 60, 80%, and in fact interest rates are far lower, and there is no reason to offer the rates other than to cheat the ignorant, those loans ought to be invalidated.

That is exactly what they did.

A gray area is where moneylenders offer money to those whose credit rating does not enable them to raise capital anywhere else, but at a higher rate than normal. If, for example, a slum-dweller cannot find any market mechanism to finance his daughter's wedding - no bank will loan him the money. The moneylender comes in, and offers a rate not too much higher than market. For instance, if the market rate is 18%, he will offer 23%. This is, by the way, permissible.

This rate is, however, still too high for the man to ever be able to pay it off. He essentially becomes a debt slave to the moneylender and his collectors.

In this case, what do you suggest? Restricting either man's freedom is not an option - they are both engaging in an activity with mutual consent, with no coercion on either side. But the outcome still sits uneasy on our conscience.

What do you suggest we do?

[GePap]

Do people need laws protecting them from their own stupidity?

No, they don't need such laws. The better question is whether society benefits from such laws. The answer to that is yes.

Given that people live in groups, one's actions almost always have some effect on others. One person's stupid action could lead to some amount to harm to come to several other people. Some of the people harmed could react negatively or harmfuly to the event, creating a chain of negative consequences that in the end has no positive upside, and does nothing but increase the cost to everyone. To use that example you gave, the farmer taken loans with usurious rates not only threatens his own personal finances, but those of his family members, and if he were to renage on his obligations, that would start a possible chain of conflict between borrower and creditor, their families and friends, and so forth.

Another example are laws mandating that car owners have insurance. A true free marketer should be oposed to such a law, as it might very well inflate the price of car insurance for all, since car insurance companies know that as long as people buy cars, they will be mandated by law to buy this service. But by creating such a law you help mitigate the general harm caused by the rather common event of car accidents. Same with laws that penalize people for not wearing seatbelts.

At the end of the day, what any law does is create an incentive for individuals toward some action. It does so by threatening some negative consequence for the action, but as we all know, for some people, the threatened negative consequence is secondary to the possible gain from an action, and hence crime. But I think society as a whole benefits if it creates situations that steer people towards less risky or possibly harmful interactions, or sets up methods to mitigate possible harm, as to limit the effect.

[GePap]

Do people need laws protecting them from their own stupidity?

No, they don't need such laws. The better question is whether society benefits from such laws. The answer to that is yes.

Given that people live in groups, one's actions almost always have some effect on others. One person's stupid action could lead to some amount to harm to come to several other people. Some of the people harmed could react negatively or harmfuly to the event, creating a chain of negative consequences that in the end has no positive upside, and does nothing but increase the cost to everyone. To use that example you gave, the farmer taken loans with usurious rates not only threatens his own personal finances, but those of his family members, and if he were to renage on his obligations, that would start a possible chain of conflict between borrower and creditor, their families and friends, and so forth.

Another example are laws mandating that car owners have insurance. A true free marketer should be oposed to such a law, as it might very well inflate the price of car insurance for all, since car insurance companies know that as long as people buy cars, they will be mandated by law to buy this service. But by creating such a law you help mitigate the general harm caused by the rather common event of car accidents. Same with laws that penalize people for not wearing seatbelts.

At the end of the day, what any law does is create an incentive for individuals toward some action. It does so by threatening some negative consequence for the action, but as we all know, for some people, the threatened negative consequence is secondary to the possible gain from an action, and hence crime. But I think society as a whole benefits if it creates situations that steer people towards less risky or possibly harmful interactions, or sets up methods to mitigate possible harm, as to limit the effect.

[Imran Siddiqui]

In fact, as one examines different sectors of the economy, one is unwillingly forced into the conclusion that most actors in the market are perversely irrational, and in the majority of cases take decisions which are massively detrimental to their self-interest. It is at this point where classical economics breaks down - in the sense that one of its assumptions no longer holds.

I think you misunderstand the economic definition of a rational actor. A rational actor is someone who wants to maximize his utility and prefers actions that will increase his happiness rather than decrease them while minimizing his costs. Whether he takes actions that harm his long term utility or not is not relevant if the actor himself doesn't realize those consequences.

http://en.wikipedia.org/wiki/Rational_choice_theory

The basic idea of rational choice theory is that patterns of behavior in societies reflect the choices made by individuals as they try to maximize their benefits and minimize their costs. In other words, people make decisions about how they should act by comparing the costs and benefits of different courses of action. As a result, patterns of behavior will develop within the society that result from those choices.

[Cort Haus]

Another way to express the concept in the OP might be "Shall we abolish freedom for the lower orders since they clearly are not capable of using it wisely?".

My view is that such opposition to democratic freedoms is not the answer.

[Dauphin]

Do people need laws protecting them from their own stupidity?

Another example are laws mandating that car owners have insurance. A true free marketer should be oposed to such a law, as it might very well inflate the price of car insurance for all, since car insurance companies know that as long as people buy cars, they will be mandated by law to buy this service. But by creating such a law you help mitigate the general harm caused by the rather common event of car accidents. Same with laws that penalize people for not wearing seatbelts.

Not sure I buy that argument.

If large segments of the population have no insurance, then car insurance could become very expensive as you would have to pay premiums for accidents caused by non-insured drivers.

[fed1943]

"To finance his daughter's wedding"... and free market look do not fit well.

Best regards,

[Zevico]

A gray area is where moneylenders offer money to those whose credit rating does not enable them to raise capital anywhere else, but at a higher rate than normal. If, for example, a slum-dweller cannot find any market mechanism to finance his daughter's wedding - no bank will loan him the money. The moneylender comes in, and offers a rate not too much higher than market. For instance, if the market rate is 18%, he will offer 23%. This is, by the way, permissible.

I think this ought to be permissible. Again, if the lender knows, or ought to know, that his customer is unable to pay back a loan, and that the customer nevertheless wants to go ahead, the customer must be told to obtain independent advice. All this is quite simply put by an Australian judge back in 1956.
"The circumstances adversely affecting a party, which may induce a court...either to refuse its aid or to set a transaction aside, are of great variety and can hardly be satisfactorily classified. Among them are poverty or need of any kind, sickness, age, sex, infirmity of body or mind, drunkenness, illiteracy or lack of education, lack of assistance or explanation where assistance or explanation is necessary. The common characteristic seems to be that they have the effect of placing one party at a serious disadvantage vis-a-vis the other. It does not appear to be essential in all cases that the party at a disadvantage should suffer loss or detriment by the bargain."
Our hypothetical slum dweller is affected both by 'poverty' and 'need', being a need to pay off an extravagant wedding that he obviously cannot afford. The loan itself is one he may never be able to repay. He is in a position of disadvantage. He may well go ahead with the transaction regardless, but he needs independent and competent advice that may well dissuade him, or at the very least help plan for the future.

There may be a few other ways to address these threshold cases.

The first way is to introduce a situational law: a ban on loans at an interest above X%, other than for commercial or business reasons.

Thus the slum-dweller that borrows money and plunges himself into debt slavery is 'saved.' The problem is that this will bring more cases to the courts.

The second way is to designate permissible loans based on income. Income $10,000 and below, only a loan of $X, at a rate of $X and below, is permissible (though there is no obligation as such to provide such a loan); Income $20,000 and below, only a loan $2x [for example], at a rate of $(X+1) is permissible, and so on and so forth.

The trouble with this is that it restricts the business dealings of ordinary persons. It would probably be necessary to conduct a study of the business practices of the people you are looking at, and see how these restrictions would affect them. Ultimately the aim should be to promote commerce, but to discourage transactions that create the debt slavery of which you speak. Maybe if a bunch of people took a look at India's financial circumstances, they'd work out the possibilities.