- Convenient Short-Term Loans
- The Power of the Free Market
"In terms of basic economics," he writes, "a credit transaction makes both parties better off, so long as the deal is voluntary and both sides understand the terms." This is indeed basic economics, though ordinarily the word "credit" is omitted. Still, by a basic assumption of economics, any voluntary, informed transaction makes both parties better off. So voluntary, informed credit transactions do, too.
(It is worth noting, however, that "a credit transaction" is really two transactions. Murphy's "Alice" explains: "The buyer is actually just taking a quick loan from the issuer and then paying cash to the merchant." Taking -- and repaying -- the loan is one transaction; buying the product is another.)
"In retrospect," Murphy says, "many customers of credit-card companies might regret their experience, but often the error was in 'taking things too far' ..." Agreed. We will come back to this.
"Finally, he writes, "the most interesting aspect of the giant credit-card industry is the simple fact that it works."
I guess you could say the giant credit-card industry "worked" while it was growing along with our indebtedness. Most people, since the financial crisis at least, would say that giant indebtedness is the problem. "Taking things too far" is the problem.
Indeed. Murphy himself identifies "responsible use of credit cards" as use where "the balances are paid down in full every month." But he also says "I have been carrying credit-card balances that are far too high" since grad school days. So Robert Murphy is personally aware of the problem.
Taking things too far. The problem is excessive reliance on credit. Our economy is insufficiently productive, and excessively financial. But even people who should know this -- people like Bob Murphy -- somehow fail to grasp the central issue. Stating his purpose in writing the credit-card article, Murphy says: "I want to describe some of the benefits of these seductive tools of a modern financial economy."
A modern financial economy. And that is the problem, isn't it. We want a productive economy, with finance facilitating production. What we have is a financial economy, with production serving finance.
"The responsible use of credit cards, in which the balances are paid down in full every month, can be a good way to build up a credit rating," Murphy says. "Of course, a credit rating is only necessary for people looking to borrow money."
We know that we've "taken things too far" with debt. But we also know that in this economy, we need to use credit. As Murphy says, "the ultimate reason most people pay their credit-card bills ... is that they don't want to ruin their credit score."
So... even though we've got too much debt... and even though we know we've got too much debt... we still want to keep a good credit score... because, God knows, we're gonna need to borrow more.
Does this make sense? Or have we gone through the looking glass?
Voluntary, informed transactions make both parties better off. But when most of those are credit transactions, they add a huge extra cost to economic activity. The excessive reliance on credit is fairly called "excessive" precisely because of that huge extra cost.
This brings me to Robert Murphy's conclusion, his main point, his purpose in writing: "As I have argued elsewhere, the credit-card industry shows the feasibility of allowing markets to police themselves without government enforcement."
Murphy is well aware of the economic problem. Yet for his conclusion he chooses to emphasize a political concern -- government interference -- rather than the problem he has accurately identified, the problem of excessive reliance on credit. For my part, I cannot say this often enough: If the problem is economic in nature, then the solution must also be economic in nature; and the analysis as well.