Reason for a New Age

Loans and a Better Future

Posted by publius2point0 on 2010/01/08


Getting back to the philosophy and theory of economics, I would like to discuss loans. One of the key features of modern economics is the existence of widespread loaning. Such events as the housing crisis or payday loans can make this seem like a fairly negative practice, but this is a rather short sighted and ignorant view. I would personally argue that loans are perhaps the greatest boon to the quality of human life ever discovered.

Say for example that I want a house. As a regular waged employee at some average company, as is my wife, our household will be earning about $40,ooo a year. 40% of this goes to paying taxes, 9% goes to food, 6% to utilities, adding various other small expenses, we’ll say that we only have about 40% of our combined money left to spend on housing. A house might cost a $500,000 to buy however. If we save up for 31.25 years, we’ll finally be able to afford buying a house. But of course, during those 30-some years, we have to find someplace to live, for which we have to pay. If we live in an apartment for $800 a month, we’re out another 24% of our income, which means that we actually only have 16% to use towards buying a house. This will take us 78 years of savings. If we only start working at 22 years old, we’ll likely be dead by the time we can afford to buy a house unless we’re the very successful.

Or let’s say that I’m a young man who wants to become a doctor. To do this, I have to go to college, go to medical school, and then do a four year residency. This requires a significant amount of money to be furnished by the student. Only the children of the very successful could ever afford to go to medical school. Quite likely, we wouldn’t have enough doctors to meet our needs.

The thing is, however, a person who can afford a house if he has 31.25 years to work at it, so long as you have no reason to think that he won’t do just that, might as well be given that house now. And a person who successfully becomes a doctor, will make enough money to afford the schooling that he received to get there. If you think that he’ll actually go through, graduate, and open his own practice, then you may as well give him the money to go to school in the first place and let him pay it off later.

While a loan necessitates a commitment to your choices, if you can envision what you want in the future, and either that future or your own labor can be enough to earn what you want within your lifespan, then you can have that future now, while you’re still young enough to do something with it.

This isn’t just useful to the individuals, but to all of society. We need doctors, for example. People who want to become doctors can go out and simply be given the resources to do so for no greater price than signing his name on a piece of paper. Banks and other loan organizations know, from actuarials, that historically 90% or however many people come in asking for the money to become a doctor succeed at that. They only need to charge enough extra to cover the 10% who fail. All of the rest of the money that is paid to the loaner is actually your future self handing your present self the money.

But besides doctors, there’s people who have an idea for new technologies or new and better ways of accomplishing the tasks that humanity already does. Such undertakings require capital. Even if you’re a large company, raising capital for a large undertaking is a hardship. If you raise your prices on the products you already have, your competitors will steal your customers from you by offering a similar product for less. In end result, you don’t make any money, let alone enough to finance your breakthrough undertaking. But if you take that money from your future self instead of from your customers, and especially if you have a patent on the new technology, you can have the new product pay for itself.

Some people say that “products” are unnecessary and that defining the quality of human life on such worldly things is shortsighted, but I would have to reply that anyone who says this has never been to a third world country where people are toiling and suffering every day. Life isn’t better in the modern world because we’re more enlightened, it’s because we have the technology to support ourselves without hardly having to labor. We’re able to afford kindness and charity because most of our money goes towards frivolous things, and we can always cut back on those.  Someone who doesn’t have the technology to live without need can’t share kindness and if his neighbor threatens to disrupt his ability to produce the basic needs of his family, there is no latitude for dealing with this beyond accepting death within his own family or killing that neighbor. And of course beyond just food, we have medicine. Medicine is a technology and a product. It doesn’t come down from the clouds. People invest in (i.e. loan money to) promising medical technology and the breakthroughs from that go back into paying for that research.

One of the best statistics there is, is knowing that before medical research came into existence, 30% of children would die before the age of 5. If you would say that technology isn’t linked to the basic joys of life, I’d ask you whether you’d really accept a 30% risk of each of your youngest children dying.

The greatness of the loan is that it allows anyone who can envision a better future to be able to create it. You might think that this idea is false because a loan only works if your future self makes money off of it and intangible wonders can’t be sold, but I’d have to ask, if there was something that could make you enjoy your life more, regardless of what it may be, wouldn’t you be willing to pay for that?

Of course, then you might say that anything which does improve life should be given for free. But of course it takes time, effort, and even the aid other people to first create these things. If we simply give the resources needed to anyone without asking anything in return, we would soon go broke as everyone and their pet dog comes in saying that they have an idea they’d like to try. So then you need to evaluate these ideas as they come in, choosing to only give resources to those who seem like they have the best ideas and the strength of character to actually follow through. But then, who pays for this original capital?

Instead of charging customers for the resultant products, we could always just tax everyone. This tax money then becomes the capital for new research and development. The resultant products could then be given directly to those who request them. But, how do you decide how many products you make, and how do you decide how much each individual gets? You have to create an organization which just handles figuring out the supply and demand of the product to balance all this. How do you then do you coordinate the method of valuing the product of one organization versus another? Organization A might know that 8 people want tractors, but only 6 can be made with the amount of capital that was given from the original taxes, and organization B might know that 30 people want iPods but there is only enough supply to make 10. If the government simply looks at the number of people requesting an item, they’ll give more money to organization B. If they look at the real-world usefulness of the products, they’ll give more money to A. But they don’t really have any way to balance how worthwhile these products really are to individuals.

An open bidding market allows individuals to choose how much they value things. You don’t need one central organization like the government trying to figure out who to dole out tax money to so that products can be brought to the public. And in the end, someone has to labor to create those products to begin with, which labor needs to be created somehow. Between money or threat of force, the former is nicer, as I pointed out in an earlier blog.

Is it “nice” to charge people for the things that will make their life better? Maybe not according to Confucius or Jesus, but in all practicality it’s the only course yet found that ends up with those products actually being created, and being able to get doled out to the people who need and want them in a wholly fair way.

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