Michael Munger on Microfinance, Savings, and Poverty
Apr 18 2011

Mike Munger of Duke University talks with EconTalk host Russ Roberts about microfinance. Munger argues that cultural forces make it difficult for some families to save, and the main value of microfinance is to allow a higher level of savings. Families are willing to save via microfinance even though returns can be negative. Munger argues that this counterintuitive result is possible when other means of savings are unavailable. Munger also discusses microfinance that is used for entrepreneurship and the potential role for microfinance in development.

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Joshua Angrist on Econometrics and Causation
Joshua Angrist of the Massachusetts Institute of Technology talks to EconTalk host Russ Roberts about the craft of econometrics--how to use economic thinking and statistical methods to make sense of data and uncover causation. Angrist argues that improvements in research...
Explore audio transcript, further reading that will help you delve deeper into this week’s episode, and vigorous conversations in the form of our comments section below.


Apr 18 2011 at 10:20am

Welcome back Mike!

Keith Vertrees
Apr 18 2011 at 11:25am

How horrible it is to live in a society that discourages saving. I know: I live in the United States.

Mads Lindstrøm
Apr 18 2011 at 12:48pm

@Russ Roberts

I do not know how you destroyed the podcast, but if you accidentally deleted a file, it is often possible to get it back. When deleting computer files you are just deleting a pointer to the content, not the content itself. It is like ripping out the table of content of a book.

It was properly easier to just re-record the podcast than figuring out how to restore the file, but if you were to delete a less replaceable file, all is usually not lost.

And maybe, you already know all this.

Mike Munger
Apr 18 2011 at 1:13pm

I think Russ was trying to be nice.

The fact is that the second version is just much BETTER than the first. For example, in the first one I did not get to call him a “Chicago goofball.” (Sorry for the redundancy)

Apr 18 2011 at 3:07pm

Of course, Dr. Munger is always an econtalk favorite, but subjects like this always fascinate me besides. The failure of foreign aid, world hunger music videos, and the million other things that have been tried to “fix” the third world has always left me bewildered and a bit sad. Libertarians know that bad institutions are somehow at fault, but can’t seem to figure out how to make them better. This podcast, and some of the lessons I learned from it, gives me hope.

Apr 18 2011 at 3:20pm

This is one of the most fascinating explanations I have heard on the subject of microfinance. It is completely logical when you hear it explained this way but really takes quite an interesting angle to from the premise to the conclusion

Apr 18 2011 at 3:21pm

Relating to a much older Munger podcast, are the North Carolina price gouging laws are helping with the cleanup today?

Apr 18 2011 at 3:23pm

Munger-Robenomics Rocks!

Apr 18 2011 at 6:23pm

I’ve seen this first hand a couple times with some of my Filipino friends. As soon as they start bringing in money, the family puts immense pressure on them to share the wealth. Theres always some Aunt who is getting evicted from an apartment for not paying rent (but never misses a bingo night)and could’nt he help help her out by buying a condo and renting it to her at a loss?

It was incredibly hard for my friend to refuse. He really struggled with it.

I can see where the micro-finance setup would give people in that type of culture a socially acceptable excuse for cutting off the deadbeats in their family.

Apr 18 2011 at 10:01pm

I was just thinking about this in the US context. These community sharing norms are being enforced in the US at the federal level, so while our brothers & cousins don’t come knocking at our door for our savings, the government does on their behalf – actually it’s on behalf of other people who don’t need your stuff, but who think they are more righteous for demanding your stuff in the name of other people.

Anyway, I wonder how much of an effect this has on US saving and debt levels. The description of microfinance seemed relevant to this. After all, when accounting for all taxes and for the loss of government subsidies, taxation on lower-middle class income is probably north of 50%.
It makes much more sense to use debt to buy things (especially tax-deductible debt) than it does to save money, which will be taxed away (through loss of benefits and through straight taxation) to buy the same items.

Our government policies might be bringing us back to this same problem, but with a higher level of base income.

Pietro Poggi-Corradini
Apr 18 2011 at 11:46pm

What if “saving-down” is a much more stable system that does not generate the boom-and-bust cycles that our financial system likes to generate? Should we stop and think before trying to impose our model?

Apr 19 2011 at 2:13am

Two comments: I’m an American expat living in Japan. I was annoyed when I first came here to discover that Japan doesn’t use debit cards or checks. I have to pay for nearly everything in cash. Generally, a bill comes in the mail and I take that to any convenience store, they scan a barcode, and I pay them in cash.

Because of near 0 interest rates and very restricted atm hours, I always take out most of my paycheck every month and store it at home. Short of a natural disaster, I find that this system works well.

Also, when using a credit card most retailers require you to pay the full amount by your next cc statement.

However, I hear that personal loans are nearly impossible to get.

Apr 19 2011 at 2:16am

On another note, it seems to me that economists and aid groups who want to help the third world should be partnering up with anthropologists. During my university work it became abundantly clear that the truths of many academic disiplines didn’t hold up in historically non-Western countries.

Pietro Poggi-Corradini
Apr 19 2011 at 8:17am

Also the saving-down system seems to me as much harder to tax. It’s much easier for a govt to put his hands in bank accounts that are just lying around.

Apr 19 2011 at 10:34am

Gosh, that’s not what I took away at all. This podcast was the failure of particular institutions in a cultural context, not a failure of the precepts of economics. For instance, which of the truths of economics do you believe doesn’t translate to the non-western world? Supply and Demand? Diminishing marginal utility?

Mark D
Apr 19 2011 at 6:13pm

Hi, I just happened to have read articles about JAK before listening to this podcast, it seems to have a model that can be leveraged toward a “save first” “spend latter” mentality and which build this protection against “expending savings”.
It is a 0% interest bank that has been working for a couple decades.


Martin Brock
Apr 19 2011 at 8:52pm

Mike says something around 32:45 that seems debatable to me. He says, “All of us value the present over the future. The question is: How much?” Russ agreed. Why is this statement true? Why is a real, market interest rate necessarily positive?

A market interest rate reflects the agreeable valuation of goods currently relative to goods in the future. You exchange $X worth of goods today for my promise of $Y worth of goods in the future (adjusted for inflation). If Y > X, we accept a positive interest rate. If Y < X, the interest rate is negative. Why can't you value future goods more than current goods? Future goods are less certain, but this fact alone doesn't imply a positive interest rate. After adjusting for your assessment of the risk, you could still value goods in the future more than current goods. Imagine a population with twenty 60 year olds and five 20 year olds. The 60 year olds possess most wealth. The 20 year olds own only than their labor. The 60 year olds are less able to labor, to grow food, provide fuel to heat shelters and so on. Their productivity is declining. Since the 60 year olds wish to live as long as possible, they compete for the labor of the 20 year olds. As time passes, the oldsters are less and less able to produce without the labor and other, accumulating resources of the youngsters; therefore, their demand for the youngster's resources increases. The youngsters thus demand higher and higher prices for their goods. The oldsters understand that their infirmity can only increase and that their demand for the goods of the youngsters must increase with it; therefore, they pay a premium for the promise of goods delivered in the future. Expecting future scarcity, they pay more for the promise of perishable goods produced in the future than they pay for the same goods produced today. The youngsters have no similar preference for goods in the future, but they expect to own more capital in the future, having obtained more of it from the oldsters, and the oldersters share this expectation. The prevailing interest rate is negative. This scenario is obviously exaggerated, but when do market interest rates become negative? How rapidly must a population age? The answer cannot be "never". For the first time in modern history, certainly for the first time in the life of anyone living today, the global population seems likely to stop growing and begin declining in the next half century. This reversal of the historical norm has already occurred in Japan, and other parts of the developed world are not far behind. Are we approaching a period of real, negative interest rates? Are oldsters forcibly imposing trillions of dollars of debt on youngsters today largely because markets do not yield positive interest rates? Could market interest rates be negative for other reasons? If Mike's assumption is mistaken, his conclusions from the assumption are also mistaken.

Dave S.
Apr 20 2011 at 5:49am

Mike Munger and Russ Roberts.
Two words: Totally awesome, Man!

Apr 20 2011 at 6:35am

Great podcast again.

I’ve never heard of the “chicago economists assume institutions to be efficient” argument.
Is there a text I could read that elaborates on this?
Or is it just the assumption that the interaction between cultural norms with institutions changes the outcome of the institution’s effect?

Martin Brock
Apr 20 2011 at 8:19am

Here are the key assumptions in my earlier post.

1. People expect increasing scarcity of perishable goods, so they pay more for the promise of perishable goods produced in the future than they pay for the same goods produced today. The people cannot save these goods, because the goods are perishable.

2. Perishable goods dominate the people’s consumption. Even the durable goods they consume are effectively perishable, because either a) they liquidate their durable goods to finance consumption of perishable goods or b) they only rent durable goods.

3. The people’s stock of durable goods (their capital stock) is negligible or declining. They have only their current production of perishable goods, or a declining stock of durable goods, to exchange for the promise of perishable goods in the future.

These people accept a negative interest rate. The negative rate is agreeable to them, because (like all of us) they’ll die eventually. They must only consume until they die, so given the increasing scarcity of consumption goods, depleting their capital stock by accepting a negative interest rate is rational.

In other words, ironically, the poor people in Mike’s analysis behave like retirees in an aging population. They aren’t retirees or even prospective retirees, but the three statements above still describe them.

The statements apply to many poor people, because these people labor under very powerful monopoly rents.

Statement 2.b describes these people, because accumulating capital is not an option for them, because present owners do not sell capital. The owners only rent their capital, because renting is always more valuable than selling. These people inhabit a rentier’s culture.

Statement 1 applies for the same reason. Perishable goods are relatively scarce in the future, because productivity declines in a stagnating economy. The economy stagnates, because capital reorganization does not occur. Capital reorganization does not occur, because capitalists typically rent rather than selling.

Statement 3 applies for the same reason. When established proprietors always rent, accumulating capital is difficult.

The solution to this problem is not banking. The solution is weaker property rights, i.e. proprietors must have an incentive to sell capital rather than renting it.

Shayne Cook
Apr 20 2011 at 9:24am

Dr. Roberts, Dr. Munger:

Excellent podcast – thank you.

I would suggest that you need not necessarily go to third-world countries to study and observe this (lack of banking system) phenomena. You can see similar situations/results on American Indian reservations.

In the case of American Indian tribes, a significant contributing factor was/is U.S. Government intervention. It seems the ‘boilerplate’ treaty baseline, dating back to the late 1800s, granted all tribes a degree of sovereignty and self-determination, but that specifically excluded the right of any tribe to develop their own financial system. Instead, the U.S. Government Department of the Interior retained rights as “banker” for the tribes, with assets such as un-allocated land, mineral rights proceeds, etc. to be “held in trust” for the tribes. The recent Cobell, et.al. lawsuit illustrated just a few of the complications of such policies.

There is another (less mentioned) artifact of Cobell’s suit that may be of particular interest in the study of the significance of a ‘banking system’ to a society. It is the fact that Cobell (early in the litigation) received a “variance” that allowed a Northern Montana tribe (Blackfeet) to charter their own bank. It might be an interesting research project to compare the relative progress of the “with banking” tribe to those which haven’t evolved a financial system.

Matt H.
Apr 20 2011 at 10:29am

The book “Portfolios of the Poor” has a lot of examples from individual financial diaries in South Africa, India, and Bangladesh. It talks about the different informal savings institutions that locals erect to deal with disintermediation. Munger talks about the social pressures of sharing any excess cash, but there are also cultural norms that can deliver one time shocks to personal savings (funerals, weddings, etc.). These can wipe savings accumulated over a period of years. Insurance is difficult to obtain because these adverse events are so common. Pooling among local communities can only offer so much protection. It seems to me like upward mobility is the best hope for low income individuals in the developing world (also, widespread growth wouldn’t hurt). Obviously, that is difficult in most of those countries. How can economic mobility best be increased? (education? gov’t reforms? changes in social norms?)

Mike Munger
Apr 20 2011 at 4:51pm

Stephan: One of the most important works in the “institutions are efficient” field is Becker 1983:

Gary Becker (1983). “A Theory of Competition among Pressure Groups for Political Influence”. The Quarterly Journal of Economics 98: 371-400

An example many people use is the “common law.” So perhaps:

“Why Is the Common Law Efficient?”
Paul H. Rubin, The Journal of Legal Studies
Vol. 6, No. 1 (Jan., 1977), pp. 51-63


George L. Priest, “The Common Law Process and the Selection of Efficient Rules,” 6 J. Legal Studies 65 (1977). 17

Martin Brock
Apr 21 2011 at 6:06am


This article on Sioux land in the Black Hills illustrates my point.

“When the suit was originally filed, it was all about monetary compensation. As it evolved over the next 58 years, it became more focused on the return of land. Thirty years ago when a Sioux man or woman owed a debt they would say, ‘Toksa, (by and by or before long) when I get my Black Hills money.’ Now it is ‘The Black Hills are not for sale.'”

If their claims are upheld, these people are nominally “rich”, but they are rich in lands held in common. No individual may sell his share. Effectively, individuals may only rent the land from the commons (the Bureau of Indian Affairs or the tribal authority), and being common property, subject to the tragedy of commons, the productivity of the land (and the people on it) gradually declines.

“Serfdom” is another description of this predicament. Serfdom occurs when the lords of capital hold their capital so tightly that other users may never obtain title. Even a serf, who may not be expelled from a parcel of land, does not hold the title. The serf essentially has a perpetual lease that he may not transfer. The duty he owes to the lord is his rent.

A serf is bound to his land in the same way that common people are bound to public schools. No law prevents people from sending their kids to a private school, but public schools are “free”, and common people can’t afford the opportunity cost of declining the “free” resource. Of course, public schools are not truly free of cost. They’re a commons.

Shayne Cook
Apr 21 2011 at 8:43am

Martin Brock,

Point taken. I haven’t extensively researched features of individual treaties with individual tribes, or their modifications/challenges over the years. For example, the Crow Tribe (Southern Montana) treaty does allow “private” ownership of land, with some restrictions. “Fractionalization” has still been an artifact. But I have noted common features such as the banking/financial system restrictions – particularly relevant to the content of this podcast and research.

The upshot being that the treaties were intentionally designed to make certain the Dept. of Interior retained rights to proceeds and, more importantly, rights to control of anything that could possibly be perceived as “capital”. At the time, that was land and possibly mineral rights. But the banking/financial system restriction also effectively precluded a critical mechanism for enabling capital formation (owned by individual tribal members) in other forms – business development, etc.

The curiosity is that, as discussed in this podcast, the lack of a banking system precludes saving on the part of tribal members – or at least pooled savings that are controlled by and to the benefit of tribal members. Availability of Government handouts, ‘loans’, external funding, etc. is not the problem.

There is also the enormously strong cultural “societal support” artifact that Dr. Munger and Dr. Roberts discuss within American Indian societies. That often manifests itself in familial, clan and tribe support/alliance systems. However, those sorts of “societal support” systems also breed family, clan and tribal (political) rivalries to the same degree they provide support.

Relevant to the subject of this podcast is that a banking/financial system within a society provides a more formal (sophisticated?) mechanism for “societal support”. But it also provides a critical measure of anonymity to that support. For example, as a “clan member”, I may not loan or give money (savings) to a member of another clan due to rivalry. But with a banking system (and its supporting legal structure), I wouldn’t even be aware of to whom my savings is being loaned. Inter-society rivalry problem solved, or at least attenuated.

My point being, with the past and current U.S. Government treaty restrictions precluding the development of banking/financial systems on the reservations, there has been an attendant lack of evolution or even understanding of the “societal support” they provide. There is also a lack of understanding of the importance of legal support systems that make banking/financial systems viable for the whole society. In your terms, the result has been “serfdom” to a very high degree.

Apr 21 2011 at 9:07am

This is the best part:

What’s lacking in institutional evolution is the mergers and acquisitions we see in economics, the nature red in tooth and claw in biology. There is mutation. But there aren’t the same pressures that mean better institutions are going to take over from worse institutions, except in the very long wrong.

The whole concept of mutation without natural selection applies to so many things.

I love it!

Martin Brock
Apr 21 2011 at 10:21am


Mergers and acquisitions are not enough. The opposite process must also occur, i.e. corporations must sell off business units that lack productive synergy with the rest of the corporation.

A corporation might sell an unproductive unit to another corporation, or it might sell the unit to the unit’s employees. The latter probably happens too little to optimize productivity, either because many employees value the security of a larger corporation over the entrepreneurial opportunity or because the employees cannot obtain necessary credit while another corporation can. How can we fix that?

Martin Brock
Apr 21 2011 at 3:55pm


I’m not sure that the lack of a banking system precludes saving. The lack of something to save precludes saving.

Saving money saves a record of someone else’s debt. Being owed a favor is valuable, but if you want to hold something like a parcel of land, you must find something to buy.

If established proprietors never sell their capital, all the credit in the world doesn’t help. Borrowing to buy title to an asset can accumulate equity. Borrowing to pay rent cannot.

People came to the U.S. from feudal Europe to find things to save, because established lords in Europe had already saved everything worth saving in Europe. Lords occasionally exchanged titles among themselves, but they rarely sold title to anything worth holding to a commoner. Commoners only bought consumption goods (including leases), because nothing else was for sale to them.

Shayne Cook
Apr 21 2011 at 10:55pm

Martin Brock,

We may be in disagreement then. I am sure that the lack of a banking/financial system precludes saving.

Lee Jamison
Apr 21 2011 at 10:56pm

I found this a deeply fascinating show because it is so illustrative of the nature of the software of culture. I listened as two very well educated men puzzled at the difficulty very different societies had in dealing with concepts from western culture. Our tendency, because we’ve always been exposed to banks and savings in it’s most abstractly symbolic forms, is to think the function of those things is external to the organism (that is, US).

What if it’s not? What if the very concept of savings as we know it, including the enormously important- very western- idea “none of your business”, is a kind of software sub-routine that really is a key to being able to save and establish a society that advances by the use of the multiplying effect of capital? If that were the case the material trappings of a capital culture would not be sufficient to sustain the culture because one of the keys to the culture is revealed in our Tenth Commandment. If one’s family and neighbors are constantly seeking anything that looks like more than one NEEDS there is no way to develop the labor multiplying capital that would, at length, make their lives less demanding!

So, what is the first recognisable form of such “savings”? I would suggest it might be writing, founded in record-keeping, in one’s native tongue. I approach it this way because an abstract numerical/calculating foundation is necessary to abstractly monetize something like gourds or sheep skins. It seems to me the concept, and thus the software present in the culture, would precede the use of such symbols. It probably would develop alongside some other form of record-keeping, like astronomy. It would reflect a form of value storage based in valuing something that is inherently abstract and interchangeable with real-world objects.

As natural as this set of concepts is to you and me I would suggest that, in fact, it is attended with all manner of subtleties a child sees worked out in their parents’ references to, and instructions on, the care and feeding of money. This program, as I have characterized it, may simply not have fully developed in some cultures.

Martin Brock
Apr 22 2011 at 11:29am


If I want to save, I can buy gold or some other durable commodity and bury it in my back yard. The security of a bank might be valuable to me, but I don’t need a bank to save.

If I want to save credits, favors that other people owe me, I don’t need a bank either. I can account for these credits myself, in my head or in my own accounting ledger. Again, outsourcing this business to a bank could be valuable to me, but I don’t need a bank for this purpose.

Paying someone else to collect debts for me might also be valuable, but banks don’t perform this service. Typically, states perform the service, ultimately, because a state is the ultimate arbiter of who (forcibly) owes what to whom.

A banking system (accounting specialization) is certainly valuable. I’m not denying this value. On the other hand, much accounting is easily automated. It’s the most easily automated business I can imagine, so I’m not sure how bankers manage to get so rich these days. Seems like they should be the first factors replaced by increasingly cheap machinery.

I’m being facetious here. I am sure. Bankers are entitled to many monopoly rents, because the state is the ultimate arbiter of who (forcibly) owes what to whom.

Rich Ailes
Apr 23 2011 at 8:05am

At the end of this interesting discussion, thought occured to me that greed and selfishness have a role to play in establishing more efficient markets. I take it as a given that entrepeneurs are one of the key drivers in a market system. Capital gravitates to those who have the smarts and drive to make things that others want or need to buy. What if greed is a necessary component of that entrepeneurial spirit? Greed is one of those 7 deadly sins that our religious communities always decry (counting my Quaker faith in that group).

But greed might desensitize one to the needs of other tribal members, thereby allowing one to accumulate riches. I’m assuming that over time those greedy accumulators put that savings to good use, investing or building businesses that create jobs for the rest of us who are less greedy and more risk averse. I would imagine the development of a banking system helps this process along.

Shayne Cook
Apr 24 2011 at 9:13am

Martin Brock,

A bit of clarification may be wanted here. Certainly an individual can “save” in a variety of ways, just as you suggest – if “saving” is merely thought of as deferred consumption. However, to apply the saving mechanisms you suggest (“buy gold or … and bury it in my backyard …”) provides little, no or negative return to the “saver”. And attending, little, no or negative incentive to save. The incentive is to apply all income to current consumption. Additionally, those mechanisms provide no means of pooling savings of many individuals.

A viable banking system/financial system should indeed provide some measure of trust/security/accounting as service in its activities, as you noted. But the real purpose of a viable banking/financial system is to provide a formal means of pooling savings of many individuals in order to provide a positive return – for the individual savers and the society. The societal benefit is the access to large pools of “savings” to apply to capital formation.

And you correctly noted the role of the “state”, or the jurisdiction’s legal system. The supporting legal system must be robust enough to provide low-cost, uniform (un-biased) enforcement of contracts.

As a practical matter, how the lack of banking/financial systems (and supporting legal systems) plays out on the American Indian reservations is that, whatever monies flow into the reservations – irrespective of source – immediately flows back out. There is no local (on reservation) means of “capturing” even a fraction of those flows on-reservation. No bank, no capital (business) formation. Indeed there are “savers” that may retain a portion of their individual incomes from those cash flows, but they only have the option of saving in off-reservation banks. And indeed some of those banks will lend back to reservation members. But they do so at high risk – due to the fact that contracts enforcement on-reservation (the tribal legal system) doesn’t exist, or is at best immature, biased and/or non-deterministic.

Both in the case of the potential distributions from the Cobell suit as well as others, such as the “Black Hills” case (thank you for the pointer to that, by the way), it will be the surrounding off-reservation communities that will benefit most from those cash flows – assuming they ever happen. Reservation members will enjoy a brief spurt of higher-than-normal consumption, but there will still be little or no on-reservation capital retention/formation as a result of those cash flows. The further – and more damning – consequence is there will be no part of those flows that will be applied to creating sustainable and self-determined new cash flows.

Lee Jamison
Apr 24 2011 at 5:46pm


What you are calling “greed” is not greed at all. What I am trying to say above is that the difference between poverty/slavery and wealth/freedom in the world is that the growth of cultures’ capacity to serve a people- to gather the capital necessary to multiply the productivity of labor- REQUIRES that people not worry that other have more than they have. They MUST NOT COVET what others have in excess of their needs. This podcast shows that at work.

It is not greed to have resources more than you need. Greed is to hoard more than you need so that it is not useful- to bury your gold, to hide all of your seed grain in a bunker. The man/woman who gathers resources so that they might have two mills and process the grain of their neighbors (thus also employing people who might otherwise go hungry) provides a great service to the community. Those who think ill of such a person because he has much, without regard to the way that “much” eases the burdens on their lives truly suffer from a conceptual disease!

Martin Brock
Apr 25 2011 at 4:34pm


A for-profit corporation pools the investments of many individuals (the shareholders) seeking profit. A bank is typically a corporation, but you presumably don’t refer to the bank’s shareholders.

A bank doesn’t pool deposits and lend them fundamentally. A particular banking model could have this effect or seem to have this effect, but understanding banks this way creates much confusion among the general public.

A bank doesn’t need any deposits in principle, because its business is accounting for credit, not lending the assets of depositors. Under the gold standard, gold depositors played a role in banking more like shareholders, i.e. they bore much of the risk of the banking business, but banks didn’t lend their deposits. Banks leveraged their deposits.

Suppose, you have a house, and I want a house. You can extend me credit to buy your house. I move in and make payments to you. You hold the title until I’ve completed the payment schedule. People often finance houses this way, calling the arrangement “lease to own” or something.

If you extend me credit to buy your house, you have made a long-term investment in my productivity, and this investment potentially offers you a long-term profit. You don’t need a bank for this purpose. Outsourcing your credit accounting to a bank could be (and probably is) valuable to you, but individuals could do their own credit accounting without reducing every expenditure to consumption.

In principle, if the price of your house is $100,000, you could create 1000 $100 notes and lend me these notes. I would return the notes to you to buy the house. In this scenario, you are both the seller and the banker (and the monetary authority). Your notes are only an accounting device, representing bits of the equity of the house that I’m buying from you.

Other people, understanding that your notes represent valuable claims on the house and on my productivity as I pay for the house, might accept the notes as currency. Your notes could promise payment in gold, since you could in principle exchange your claim on the house for gold, but the notes would still represent the value of the house. Banknotes under a gold standard operate this way. The notes don’t represent the value of gold on deposit. They represent the value of a bank’s capital (its loans or the collateral securing its loans).

So you don’t need any depositors’ money to extend me credit. You only need the house. A bank doesn’t need depositors’ money (or depositors’ gold) to extend credit either, because the bank’s circulating notes don’t represent the value of deposits. The notes represent the value of collateral securing its credit. Under a gold standard, depositors’ gold only enables the bank to redeem its notes promising gold until the bank can exchange its claim on collateral for gold. If the bank is solvent, this collateral is more valuable than its gold deposits.

I agree that a lack of capital formation on reservations (and elsewhere) is the problem, but a lack of institutions accepting money deposits on the reservation is not the problem. A lack of growing capital, like improved parcels of land and buildings and productive machinery, for sale on the reservation is the problem. Money itself is not capital. Money is an accounting device. If a reservation’s members may not accumulate equity, if they may only buy consumption goods (including rents), all the banking in the world won’t make them any richer.

If reservation members may accumulate equity off of the reservation, that’s fine too, but they’re distant from equity off the reservation. People closer to this equity know its value better, so people on the reservation are always at a disadvantage when bidding for capital off of the reservation.

As an aside, the rate of interest on your loan (for your house) to me need not be positive. The bargain between us depends upon your valuation of my productivity, as I labor to pay for the house over time, relative to your valuation of the house at the same time. Selling me your house at a negative interest rate could be in your interest, and you would still invest long-term in my productivity in this scenario.

As populations age and then shrink in this century, we’ll see more market pressure toward negative interest rates and more state pressure to force rates up in response. Today’s oldsters want to retire like their parents, and they’ll try to impose the burden on today’s youngsters, regardless of the youngster’s assessment of the value proposition. This imposition is already happening to the tune of trillions of dollars of fiat debt in the United States alone every year. The picture is not pretty, and it can only get uglier.

Thanks for a valuable exchange.

Martin Brock
Apr 26 2011 at 9:25am


I share your sense of “greed”, and I’ll add one point. Hoarding resources (in your sense) is greedy. An individual consuming (distinguished from hoarding) vast resources exclusively is also greedy. This sense of “greed” seems more common. We don’t much expect “greedy” people to bury goods in a miserly fashion, like Scrooge. We rather expect them to consume goods in an extravagant fashion, far beyond their need, particularly amid much privation, like Marie Antoinette eating cake (according to legend) or Saddam Hussein with his golden toilet seats.

Greed of either sort is hardly possible without a state imposing entitlement to monopoly rents. Capital formation through proprietary monopoly is useful, but lords of propriety have a duty to invest most of the wealth they govern, like your millers, rather than consuming it.

Apr 26 2011 at 9:56pm

I taught accounting at a polytech in the Solomon Islands for 2 years 1993-94.
One expat business told me that they do 2 pay envelopes for staff. One that they make a show of receiving, so everyone in the village sees. And a second one that they come back for later in secret (or is paid straight in to a bank account) to avoid others making claims on it.

Maoris in New Zealand have the same problem you describe, of belong unable to save because their “family” have rights to anything they acquire. One tactic they use is to move to Australia – away from Family.
Hire Purchase is a very common way of funding purchases here in New Zealand – despite our modern banking system. This may be due to the save down idea you were talking about.

I think a lack of saving is a communal cultural issue, and this save down idea seems liek a great solution (dispite it being economically sub-optimal).

Stephen L
May 1 2011 at 6:22pm

So if the benefit of the microfinance is saving, but it’s difficult to save if the bank is too conveniently available because friends and neighbors will ask for money. Then I guess, all they need is CD’s then. They can’t access the money until it maturities.

W. Reed
May 4 2011 at 6:43pm

I found it interesting that this discussion was conducted as outsiders looking at a foreign practice even though it mirrors common practice everywhere (although I recognize that we have a wider variety of financial tools in the USA).

Is not my mortgage a “saving down”? It would take me decades to buy a new house in California if I had to pay using cash savings. Instead, I borrow the money and obligate myself to pay over time. This gives me immediate enjoyment of my domicile, as well as an asset which enables me to free myself of paying rent to a landlord. Further, it is harder for relatives to ask for a piece of my home to help with their problems.

This does not even take into account the likelihood of my cash savings losing value over time.

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Podcast Episode Highlights
0:36Intro. [Recording date: April 6, 2011.] Eye surgeries; destroyed original podcast by accident. Don't do a rehearsal with most people. Microfinance. What is under that umbrella, range of activities? What sort of things do we mean by finance? The kind of financial intermediaries that advanced nations have, things we just take for granted, are a savings account--a place I can put savings and have it be safe and maybe earn a small amount of interest; checking--some way of doing payment transfers so I don't have to do everything in cash; some way of getting credit or loans; and insurance of various kinds. We take all of those things for granted even to the extent of having a credit card, that if it's a debit card actually is all of those things. It's a way of paying, of getting credit, and a way of drawing off my savings account. Pretty remarkable that we take that for granted. Now, that doesn't exist in a lot of nations. They don't have financial intermediaries. That's what we think of as a market failure in the West--we call it disintermediation. Disintermediation is when the financial intermediaries are not there. And what bankers do, in some ways, is they pool together savings that a number of people have and maybe are willing to give to the bank because maybe it's safer than burying it in the yard; and the banks take that money and loan it to someone else. And the difference between what they pay on savings and what they take in from the loans is how they make their profits. They also have a bunch of other fees. These developing nations are completely disintermediated. They have some savings services, but the banks you can't really trust. Payment transfers are almost impossible. They have to pay in cash. The credit services are very attenuated. There may be Johnny down by the lightpost in the center of town, but he employs a bunch of thugs and charges 200% interest per year. So, I don't have many choices when it comes to financial intermediation. So, what's meant by microfinance generally is a bewildering array of different ways to try to provide financial intermediation. I tried to make a list; I quit at 20. There are at least 20 different kinds of microfinance. Many of them are ways of giving loans. Some of them are ways of helping people have opportunities to save. And some of them are ways to make it faster to do payment transfers. Interestingly, the new kind of work on being able to pay with your cell phone may kind of jump us ahead of all of this. You may be able to save and do payment transfers with cell phones in ten years. But in the meantime, mostly what microfinance is, is a way of providing and in some cases subsidizing by outside people who are worried that poor people in developing nations don't have access--so we provide either subsidies or the services themselves to help them get savings, credit, and checking.
4:51This harkens back somewhat to our earlier podcast on middlemen, where something comes between the two transactors to make it easier. If it didn't make it easier, you'd just go directly to the person who would lend you the money. So banks, to exist in the West, in developed and rich countries, have to provide something of value--a higher rate of interest, or a lower rate of interest, depending on whether you are a lender or a borrower. And security. A big building with lots of guards and a big thick safe which is safer than yours. Of course, works the opposite way--Willie Sutton said he robbed banks because that's where the money is. Obviously, accumulating it all in one place makes it more attractive than any one individual's back yard or mattress. But the bottom line is that in poor countries people don't have access to these services often, and the "micro" in microfinance is a reference to the fact that it's not a lot of money we are talking about, especially when we are talking about a loan or a savings account. These are very small amounts of money by rich country standards. It's partly that it's a small amount of money, and partly that it's done at a very local level. There's no branches of some kind of central bank. It's all idiosyncratic. I, as a borrower, maybe I know someone or a group of us get together and form a short term--not a corporation, but organization--a cooperative organization where we agree to help each other. And that help could be insurance but it also could be, in the case of some of these microfinance institutions, a loan gets made only if you have a group that has these activities that make it more likely that you will pay back. I was trying to think what was the closest thing that has something like this, and frankly, it's Alcoholics Anonymous (AA). It's like an AA meeting. There's actually a simple solution, and older alcoholics, if you ask them, will say: The solution is don't drink. Well, that's not that easy. So, you have meetings and you encourage each other. People you can call if you are having trouble. You have a set of steps that you go through. Public shame and embarrassment to help restrain you from your own short run interests that might conflict with your long run interests. The big problem--and there's a guy at George Mason, Tyrone--Tyler Cowen. Colleague, blog, Marginal Revolution. Almost everything that I think of that's pretty cool, he thought of and already published 5 years ago. He has an article with Karol Boudreaux, Wilson Quarterly, in 2008, where he actually went against the tide. At that time it was very important to say how wonderful microfinance was. Cowen and Boudreaux said two things: First, this is not wonderful. It effects are pretty small. And second, the most important effect is not loans--it's savings. You should think of microcredit organizations really as a way of helping people save when otherwise they couldn't. And now, three years later, that's actually the conventional wisdom.
8:47So, let's start with the conventional wisdom that they were attacking. There was a lot of hoopla and excitement about microfinance as a solution to poverty. The version I absorbed--I'm not an expert on it, but the part that drifts through the atmosphere goes something like this: Poor people are credit-constrained. They don't have access to capital. Hernando de Soto has argued that the resources that they have, they don't have title to them often, like their house. So they can't use them as collateral. As a result, they have to live in the moment. And if we could only get them access to capital, they could borrow and invest in the things they could use that would allow them to escape poverty. They could buy small amounts of equipment to start a small business. They could get advanced access to credit that would allow them to make the payments they need to start that small business. So, one claim, which has a certain appeal, is that the only thing holding back the poor people of the world is that they can't borrow; and if we could only give them access to credit--which means if we could only give them some collateral that they could use with some kind of institution, they could escape. As a result, there were a lot of organizations established to make these loans to poor people so they could buy a small amount of equipment, which might be something as small as a sewing machine--which actually would be a pretty big investment. But small pieces of equipment--a cart, things that would allow people to carry things, a bicycle, a cell phone--that these would be the ways that poor people escape poverty. A soldering iron. That was the hope--that a very tiny step could have a very big payoff in getting rid of poverty. And you are suggesting that that is not the case. It just turned out that that is not the case. There's no evidence that it has any effect on levels of poverty, either of communities or individuals. It doesn't help. Which is not to deny that entrepreneurship is good for the poor if they can do it productively. So it either suggests that those things would be happening anyway or it would not be very large. And the way people have done this--people have done a lot of empirical studies--they've done controlled studies, where they gave some people in the community access to grants, which essentially was microcredit; and others they did not; and compared them after two years. Clearly in some ways, if you give people money, it helps a little bit. They can buy stuff. But, the idea that they would invest and start up this chain that would then allow them to become entrepreneurs is just mistaken. So, there's quite a bit of controlled experiments in Africa and India that show that's not happening. But, on the other side, there is an optimism. It turns out that although the story of: we loan it to the people and they become successful and lift themselves and maybe some other people around them out of poverty--that turns out not to be true; but there is a very important positive effect that microfinance and microcredit have, and that is that it helps people to save. The problem is not that they are credit-constrained. The problem is they are savings-constrained. So, explain what you mean by that. Tyler Cowen actually comes up with an estimate for some people in central Mexico about what's the implicit rate of return on savings, and he gets -75%. That is, if I save a dollar, then it's understood that I have that in the form of cash; people expect me to pay more for village festivals and rituals; they'll come to borrow it and not pay it back; and I'll be obliged to pay because these are familial relationships. Maybe I'm a woman and saved it--my husband finds it and drinks it up. So, in order to save any large amount of money, I have to save almost four times that much. Because the rate of return on saving is actually negative. There was a study in India that said microfinance savings groups, the rate of saving that I'm actually acting on has about a -30% rate of return. That is, I'd be better off saving $100 and burning $30 rather than entering into one of these microfinance groups. So, far from a positive rate of return, they actually have a negative rate of return. The thing is, that without this intervention, it would be even worse. It might be -80%. So, the price is less; we are reducing the price of saving. We are making it possible. That seems literally incredible, unbelievable, to those of us who are used to thinking you just save. It turns out that's not true. There are a number of anthropological studies that explain why that's so difficult.
14:02Tyler's reference to a Mexican village, implicit taxes or what you might call social costs of being part of the community--I'm skeptical of that. It's hard to understand why such a dysfunctional practice, which mires a group of people in poverty, would persist, those cultural norms sound very destructive. Obviously there is a possibility they could produce something else of such great value that they could persist. But I want to step back a bit because I'm a little confused. The normal argument, and this is borne out also by evidence--one of the problems with this whole field is when we talk about "evidence" it often means I'm talking about "this" kind of microfinance or this kind of poor community or this kind of village, so it's a little dangerous to generalize. But what some people have claimed is that there are very high positive rates of return, that people take out these loans and pay a very high rate of interest, and it's still worth it, not because it's to prevent the destruction, the kind of wastefulness you are talking about, but because there is a lot that can be done, and there are just high transactions costs. So not much of it gets done, and when it gets done, it gets done at high costs. I think the answer has two parts. One is: If you think of this as a lottery, and it really makes a difference that one in ten of the people who take out these loans actually does escape to the middle class, then that is a good thing. It's not very likely, but it is possible that some people create a small business. The problem is, it's not one in ten. It's more like one in a hundred. So we are getting closer to lottery odds. And, it has no effect on communities or nations. So, there's not a way out of poverty. One of the things I think when you say "step back," I think you are right: Why is poverty so persistent? It doesn't make any sense. If all this were were credit-constrained, then all that would be necessary is for someone to say: Ah, I see the problem; I'll be able to save money because it's easy and I'll be able to invest at a 20 or 30% rate of return because we're credit-constrained. There's this thing that will solve our problem, and it's called saving. If it were as easy as providing credit, somebody would do it in just the way you suggest. That's proof that it's not credit-constrained. Well, some people claim that it is happening. Important: there are people who make a living lending money to poor people at very high rates of interest. That happens in the United States with check-cashing services and money stores of various kinds; and it happens in poor countries with banks that charge high rates of interest over short periods of time to people who borrow. There's a backlash against that from all kinds of sources, some of it well-intentioned, some self-interested from others who want access to those folks for different reasons. But the well-intentioned version of it is: it's wrong to exploit poor people and charge them high rates of interest, therefore the expansion of credit to poor people around the world should be a charitable activity. It should be done by non-profits. It shouldn't be done by financial intermediaries who are motivated by profit. I think that is a very powerful and often-held argument that is used in the policy debate on this. Sure. I don't disagree with that at all. It depends on what you are thinking is the unit of analysis. There have been since time immemorial people who make money by lending money. And there is a certain set of norms that have been built up. They charge very high rates of interest. It's implausible that you could earn enough to be able to pay somebody back 100% or 200% per year, that investment opportunities are being passed up that have a return of 100-200% a year, which is what you would have to do to pay back the local money-lender. Let's talk about the structure of one of these microfinance arrangements. There are many different ones. But the most common one, the one used by Grameen Bank, a lot of the ones that are the darlings of the media and Hollywood, works something like this. There's a group of us, maybe a circle, seven or eight; and we decide this is your month to get a loan. So, we'll give you $40. You make an immediate payment back to us of $4, 10% of the total; and every week for the next nine, ten weeks, you pay back another $4. At the end of the time you've paid back $44--the original $40 plus $4 interest. It's $4 of interest, which is something like 20 or 24%. That seems like a pretty expensive way to get access to $40 right now. Yes, but it's way better than I could get from a money-lender. That's the model. That's what Grameen Bank actually does. And then the next person takes it. And then, since there are maybe 6 or 7 of us, I get to do two of this a year. In some cases we may have an arrangement where I get to do it every month. Now, that's a pretty small amount of money. And I have to start paying it back right away, so it's not that I can invest and wait. Now, there are many people, not a high proportion but many numerically that actually work on something more like a commercial loan, where I'll borrow $200 and pay it back in a year, after I have earned something according to the business plan. Maybe it's just that I bought a soldering iron--I have a tin roof shack and I'm going to build mother boards; I'm going to assemble inexpensive mother boards with this soldering iron because I'm good at that sort of small work. Those often work and pay a high rate of return. So, if you screen for those, those guys can make 15-20% a year after repaying the loan. Numerically a fair number of those, if they could just get access to some kind of credit and initial capital, that's profitable commercially. Commercial banks make those kind of loans in India and Africa. So, that's not really what I'm talking about when I'm talking about microfinance. We're sort of hiving off the part we agree private enterprise can profitably solve, maybe with a little push, some help enforcing laws and contracts--there are some things about the culture that make it difficult, but at least in principle it's possible because there is money on the table there. It makes no sense to leave money on the table. Money on the table being the opportunity that this person is going to be able to take advantage of once they have the soldering iron. It's just imperfect capital markets. I can borrow against my future earnings and more than pay them back--that transaction should be observed in a market. And it is. Although at a slightly higher rate than you'd expect in a more developed economy; but it happens. Yes, and it happens more and more; and some of the attention that was first given to microfinance lending, it turns out that borrowing $40, owing all of it back in 10 weeks and paying it back $4 a week is not a very good way to do that. So, those guys are not now using microfinance. They're moving to much more like a traditional commercial banking model, where I borrow $200 and pay it back at the end of the year plus interest.
21:58Let's go back then into the circle. So, there's 7 or 8 of us. My understanding is they are typically women. Often. They don't have to be. One of the particular goals of Grameen bank was to make sure that women got loans because it was particularly difficult for them to get loans. So, he thought they were the most underserved population. He is Muhammad Yunus, who won a Nobel Prize. And he thought it would have the biggest impact on the family, because his claim was that women would spend a higher proportion of whatever earnings they got on food and education. Could be true. It's at least worth a bet. And it certainly is objectively true that women had a hard time getting these loans. So, what have we now learned about this kind of system? It's a strange kind of system where I get $40 but right away I am starting to pay it back and at the end of the story I've paid out a lot in interest in percentage terms. The question is: What am I doing with the money? What's the thrill here, the benefit? Why do I want to be the next person this month, for it to be my turn. The answer, it turns out, is absolutely clear: it's saving. So, if I want something, I save up and then buy it. In this system, it's impossible. You can't save. Either a lack of self-discipline, of all sorts of kinds. I don't just mean the individual--could be the family. The documentation of this was persuasive, that they're just having a terrible time saving. Let me set this up, because it seems puzzling. It's easy to save: for 10 weeks, if I just put $4 aside, I'll have $40 and I won't have paid that extra $4, which is a lot of money if you are poor. So, I just have to wait 10 weeks. That's not so bad. And that's what you should do. But there's something that stops me from doing that. If you could do that, you wouldn't see microfinance. Because it's not actually loans. It's savings. So, explain why that's true again? People have a lot of trouble saving and part of the reason was the reason that Tyler gave: when everyone is very poor, if it's known that I have a small amount, if my husband finds out that I have a small amount, it's kind of free money. I don't have any obligations for it. So if I'm saving up for something, they say: You can wait. If, however, I have an obligation. That's the next question: Why would I pay back the $4, then? How do I do that? Either way, we're assuming I get $4 a week. Right. I pay it back because I have this obligation to my friend. It's like AA. Right. I work harder to do it. So, the good part of microfinance was it created a culturally appropriate mechanism for ensuring repayments. A contract wouldn't have done anything, otherwise there would be commercial loans. But what does matter, is that these other people in my village, people I depend on and have known for a long time and with whom I would lose face because of shunning and loss of social status if it's known that I'm a deadbeat. Plus, I get kicked out of the circle--I don't get to participate any more. So, both monetary and non-monetary reasons why it works. What people call this now is "saving down." Instead of saving up, I'm saving down. I get the $40 and I spend it on food, education, clothing; I bump up the level of consumption and welfare of my family. Then I pay it off. And then, interestingly, I do it again. For a lot of these circles, they actually have outside money coming in from charitable organizations or a non-profit, everybody may borrow something every month and repay it. So, it's just saving down. All they are doing is reversing what you and I think of as the normal pattern of things--you save up and then you spend. Well, they spend, and then they save down. Having that obligation, that mutual support network, makes it okay for me to say No to my husband or my neighbor. I have to have this $4 so I can pay it off. This is third best. This is not first or second best, as a way of saving. What's interesting is that as people have come to realize this, they've actually stopped emphasizing the microfinance part of it and started working toward first-best institutions that actually facilitate savings directly. So, the Gates Foundation took $100 million that they had already pledged to microfinance and instead used it to subsidize the creation of local banks that would make saving easier, banks that were actually secure, were not fraudulent, and where I could put the savings beyond the reach--having it in my house means it may be stolen, it may be my neighbors come over and make me feel bad about it. It's possible now for me to keep it secret. So, the idea here would be something like direct deposit, automatic withdrawal. You are making it too complicated. It's just what you said before. I have $4; I take it down to the bank every week. That's the best. It's amazing that that's not possible. Then I could actually have access to $43 instead of $36. Your skepticism is well-founded. It just turns out that they didn't have access to any other institutions. What's hard for us to get our minds around is that there was no other way to save. So they used this third-best sort of institution because it was available.
28:08So, I assume there's also a very important role here of insurance that's taking place because of the availability of income. Right? Poor people in the parts of the world we are talking about aren't on an annual 12-month salary. They are doing odd jobs here and there, bringing in a certain amount of money and sometimes they don't bring in any money; and they need that $40 to pay for food that week. It's partly insurance, and the circle there plays two roles. One, I get a chance to the $40. But if I miss a payment, they'll say: Okay, we'll get you next time. We'll make up for it. So, there is pooling both over time, where I'm smoothing my income--I get this $40--and some people emphasize this smoothing part of it. There's also a cross-sectional insurance, though, where the 6 or 7 people in our group--I may be able to loan you $4 because you lent me $4 seven months ago; and there's an explicit kind of reciprocity. It's the entire group that's responsible for the loan, not any individual. Two aspects to the insurance, and those are really important. When you have nothing, having the prospect of that $40 makes a big difference. You can pay off some things, buy new shoes, buy the medicine your daughter needs. Punchline from before is that you don't have a rainy-day fund that you've built up for those things in the past, because money just disappears. It turns out that it just disappears for reasons that are complicated and differ by different cultures; but remember, we're selecting on those cultures where this was very difficult. So, one of the most interesting studies in terms of the kind of behavior they were looking for was by a fellow from the World Bank named Jonathan Morduch; they wanted to know why people behaved in this odd way. Meaning they took loans out that cost them a lot of money and that they didn't get a lot of returns from directly. More the paradox you pointed out: They want to save, and yet they don't. Yet they can save enough to pay back these loans. How can that be right? So, they wanted to try to explain that. They were working from the premise that if it was just credit-constrained, people would save enough to make the loans and then you would see the normal sort of path. Their conjecture was that they weren't credit-constrained. They were saving-constrained. But, how could that be? What they did was they asked them a pretty innocuous question, the sort of thing that reminds me what my Duke colleague here, Dan Ariely, does to try to reveal paradoxes. But they weren't looking for a paradox. They were looking for an explanation. They would give a survey and ask: Which of the following two things would you want? 250 rupees--a few dollars--tomorrow, or 280 rupees 3 months from now? If you say 250 rupees tomorrow, then you are pretty constrained, pretty interested in the present over the future. You are willing to forgo that nice chunk of change you'd get extra. So, then they asked 250 or 290; 250 or 300? At what point would you switch over and say, yes, that's enough to compensate me. I want the money plus the interest, not just the immediate gratification. Then they said: Which would you rather have 12 months from now, 250 rupees or 280 rupees? And then 250 or 290, and kept going up till they switched again. What they were looking for was what appear to be contradictions. In both cases, I'm asking you 250 versus 280, and the difference is 3 months. So, your discount rate should be constant. There's nothing that would say that your discount rate should vary over time. Your discount rate is how you value the present over the future. All of us value the present over the future. The question is: how much? It turns out there are three categories of people. Potentially there are four, but there's nobody in the fourth category. One of the categories is the one who says: I want the 250 both times. That's perfectly consistent. It means they discount the future; they want the money now. Fair enough. The first time I say 250 versus 280; the 280 is three months from now; and the person picks 250 now. Then I say a year from now, 250 versus 15 months from now 280; and the person says 250 again. So, a year from now 250, three months' extra wait 280; which would you rather have? Same appreciation of the funds over the same period of time; it's just that the whole thing is shifted by a year. A year from now versus 15 months from now is probably a more accurate measure of my sense of the future; whereas the prospect of getting it tomorrow, if I'm desperate, I have to have it. So, comparing a year to 15 months from now is more realistic, not tainted by my immediate need. By urgency. Okay, so some people say in both cases, 250 now. Means you value the present more than the future. Fair enough. And there's also quite a few people who take the 280 in both cases. In both cases they would rather wait and get the extra interest. The first type of person is the sort that might benefit from borrowing commercial loans. I get the money now; maybe I can pay it back because I have immediate needs for it. The second sort might benefit from being able to deposit money to make commercial loans. They are the sort of person who would rather get the interest. So, in fact banks are intermediaries between the first type of person and the second type of person. They are bringing them together. The absence of banks means there is money being left on the table because some people want to loan money and some people want to borrow it; and we're seeing that gap being filled by small-scale commercial enterprises already, of the sort you talked about. There's more and more of them--people who make money, act as intermediaries: say, all right, you have a low discount rate; we'll take your deposit and find somebody with a high discount rate, loan the money to them, and we'll all be better off. The interesting thing is all three of those people are better off. The middleman is better off; the person that wants to make the loan is better off; and the borrower is better off. And there's some amount that is not repaid. If this was the entire story, there would be no place for microfinance. Microfinance uniquely occupies the third niche, and that's someone where, when I say today versus 3 months from now, takes the smaller amount today; but if I say 250 in a year or 280 in 15 months, they take the 280 in 15 months. So, given a chance, they would rather wait, would rather save. But they are desperate because right now they have no mechanism for saving. So, what was interesting was the researchers, Morduch and his colleagues, went back and looked at the people who were successful in these microfinance circles, and an extremely disproportionate number of them were of that third type, people who need money immediately but who wanted to save in the sense that they valued the future more than the present. The fourth type of person would be the opposite--someone who wanted to save now but spend in the future; and there basically aren't any of those people. So, when you hear these kinds of studies, one of the questions you would ask is: We just described this over a phone line. It's a little complicated. Not only is it complicated, but it's a situation I haven't confronted anything quite like. So, you often wonder whether the responses are heartfelt versus just tossed off as a way to get the surveyer to leave me alone. Even a Duke undergrad could be perplexed by that choice. I'm simplifying it in a way that makes it sound more complicated, if that's possible. Because the actual way they asked the questions was a lot more detailed. What I asked you was, would you rather have 250 or 251? 250 or 252? And the point at which you chose was the point we locked it in. So it was actually more continuous than that. Thomas Schelling, in his book, 1984, Choice and Consequence, talked about the patient future self and the impatient future self. There's actually been quite a bit of research done on these type of surveys, that you get pretty consistent findings. What I think makes this more credible, is, if you are right--and it's a plausible conjecture that we are inferring too much from this survey--if you also ask questions, though, about: Do you borrow money? Do you loan money? Do you participate in microfinance of the Grameen Bank sort? It classifies type 1, type 2, and type 3 people with remarkable accuracy. So, just knowing how they answer this survey also allows you to predict their finance behavior: do they borrow money for small businesses, do they loan money, or do they participate in microfinance? And if their answers were random, it would be random.
38:58So, the interesting question here is if this phenomenon is widespread, of this type 3 person, or the person who is willing to forgo significant sums of money for the opportunity to get consumption today but can't manage to do it by saving--it really says that the research question is to look at the cultural. As an outsider, not a policy-maker, the issue would be what's driving, constraining people's ability to save? Is it family issues? Cultural norms? Or something else. If you look for the premise of why Grameen Bank exists, a lot of that is that women have a really hard time getting access to money. If you look at the reasons, it's the answers to the question you just posed. All of the things that would explain why it's hard for women to borrow money also explain why it's hard for them to save. Which are? Family. Community. The norm that if you have some money--and it's not specific. The problem with saving is, I'm thinking about spending this some time in the future. Maybe I have something I want to spend it on, but it's not a specific obligation. But my obligations to my husband, to my community are damaging. You said before maybe you would propose a kind of institutional evolution, where we would expect these cultural institutions over time to disappear. Maybe, but it takes a long time. I'm a Doug North student, and one of the things I thought that was most interesting about North is: there is no reason to assume institutions are efficient. Organizations are efficient; but institutions can be highly inefficient, even pathological. So, again, we are selecting on those societies that in spite of all the economic opportunity in the world have failed to grow and prosper. It's not most, but it turns out to be a lot of people. They have these cultural and personal norms that act against, militate against the ability of people to move out of poverty; and that's why poverty is so persistent. If all it took was Natalie Portman--who actually said: Now that we have microfinance, all it takes is a mouse click and we can eradicate poverty. If only it were so. It does raise the question: You are presuming that the only goal is to get out of poverty. There could be other benefits from these norms that are not obvious to those of us who do not live there. One of the big norms is insurance. It's understood that the community takes care of people who need, have obligation. But that's part of the reason it's so hard to save. If I have something and I have no specific obligation, that is I'm just trying to save--that is, I have in mind something I want to buy--but I have money and you don't, I'm obliged to provide it. All the insurance benefits we've been talking about. It's both a benefit and a curse. In the absence of other kinds of access to savings, rainy-day funds, insurance, we have to insure each other. And there's this deeply felt obligation in such societies for people in your village, in your family, to share. I don't actually have property rights to my own savings. I don't mean formally, but informally. Reminds me of what we might think of as private rent-seeking. So, you win the lottery, and now you have a lot of friends. A lot of cousins you didn't know about suddenly are so happy to see you. Would explain the athlete who signs the multi-million-dollar bonus, knowing his career is not going to be infinite. He's probably going to have anywhere from one to 10 good years. Ten would be very unlikely. He might have this one big payday. Often, no success beyond it. Particularly in basketball where people are now signing these contracts after one year of college, and very uncertain as to what their real prospects are. But you have a lot of money, and you'd think you'd be set for life. Your lifetime income stream is dramatically higher than the people you grew up with. And yet a lot of them end up bankrupt: how could they be so stupid? Well, they are not. In some cases they come from socio-economic strata of society where poverty is pretty common, and there is that social obligation. You have to keep it real. Buy your Mom a house, your Dad a car; you buy your friend from high school a car. But that's a lot of fun. I don't want to minimize that as just a tax on you. The impulse is perfectly praiseworthy. But your analogy is a good one. Certainly, if I became wealthy, it would be understood in India that I would be obliged to take care of my family. But even at the margin, even if I have some savings, it means I've been successful at something. And yes, they are willing to credit me; it means they'll be grateful when I help. But I would be acting wrongly if I deny them because I say I want to buy my daughter a dress or send her to school. So, Tyler Cowen again gives an explanation that sort of captures it. It's oversimplified, but suppose this is my week for the microfinance circle, and I get $40. I go buy a cow. It's hard for my neighbor to get part of the cow. Hard to take 10% out of the cow. Maybe they want some milk. But now I have some wealth that's indivisible. And I pay it back $4 at a time. But it would be hard for me to save up because suppose I have $24 I've been saving for 6 weeks; somebody says: Do you have any money? No, I say. And then after a while I go and buy a cow. You liar! How can you treat me that way? There are a lot of P. G. Wodehouse short stories, by the way, built on the premise of somebody trying to get a fiver out of somebody who pretends not to have it. It's the exact opposite, the British upper class. The expression Wodehouse uses is: get in between his ribs. Means, to get a loan, get $5 off him. Expression of intimacy: if you can get between somebody's ribs you are pretty close to him. You'd like to keep it under your mattress. Partly because it's safe, but partly because it's disguised. I think your analogy I haven't thought of, and I think it's right--it's just a lottery but on a smaller scale. Meaning? Oh, the winner of the lottery. Spare money generates rent seeking. Yes; and you are obliged even more so in poor societies to share it because they probably have helped you in the past.
46:50This view that microfinance is not a magic cure for poverty--I want to push back against that just a little. In particularly poor places where property rights are not defined, collateral nonexistent, I think there is some entrepreneurial activity generated by microfinance. The fact that it's not measurable at the aggregate level may not be the best test. It isn't the best test; and that's why they did random assignments of people in India, and looked at them after some years, to test just that question. The finding that there was zero significant difference is the most persuasive argument. Yeah, that's distressing. William Easterly has written about this, eloquently: There is a temptation to look for a giant, massive program to lift people out of a world where they are earning $1.50 a day to a world where they are earning $60 a day. Those aren't lying around. So modest, super-modest, tiny improvements are therefore ignored that may be able to help people. Microfinance is that. It probably does improve the quality of life of people in ways that are very hard to measure. The study with random assignment says: Are women more credit-constrained? Experimental evidence on gender and enterprise return. They did random assignment. What they found was people who got this, instead of investing it, spent it on a little bit of education, medicine, maybe a cow. There was no measurable difference in the rate of return they were earning, but almost certainly a significant difference in the quality of life. Total of only $200-$300 per family. If we could find a way to make it cheaper to save. That was the promise of microfinance--the people who were selecting being included were people who actually wanted to save but were in such an institutionally spartan environment that they couldn't manage to do it. That's something we could fix. I think that's hopeful. I take your point. The title of Boudreaux and Cowen's article was the "Micromagic of Microcredit"--not the magic bullet that some people believe in, but much more promise than we've been giving credit to, if you'll forgive me, for savings. If we can just find a way to help people save if they want to. That's an easy problem to fix. Not so sure. Why easy? All we need is banks. But I'm on my way to the bank with my $4 and someone trying to get between my ribs. But I may be able to hide it. Part of this is a little bit disturbing--my U. of Chicago sensibilities. It's a little strange that in this story, the ideal bank would be open only for a minute or two. Once you deposited the money, you couldn't get it back for a long time, couldn't get it back easily. The higher the costs the better, because when the neighbor comes and says he needs to buy a drink, you say I don't have any money. But didn't I see you go to the bank? Then let's go the bank. I don't need all the $36 you've saved so far; I just need $7. You say: The bank's closed. It's Tuesday. In this story, you want the bank closed most of the time, with all kinds of draconian, anti-consumer regulations that make it hard to get the money out. Disturbing because you Chicago people believe institutions are efficient. Don't slander me, Munger! Those are my roots. You believe institutions tend to evolve toward efficiency. Yes, I do. Not only as a Chicago thing, but a Hayekian thing. Hayek argued often that institutions evolved over time. The thing that is so awful in this story we are telling makes me wonder if there is some benefit out there we are not seeing. On that score, I prefer Hume to Hayek. There's a bunch of different ways of arranging societies, and once you have conventions we accept them and don't argue with them. It's going to turn out that some are better than others. What's lacking in institutional evolution is the mergers and acquisitions we see in economics, the nature red in tooth and claw in biology. There is mutation. But there aren't the same pressures that mean better institutions are going to take over from worse institutions, except in the very long wrong. I think we've moved much more toward market societies, and I believe that's the most efficient and best institution for people who are poor because it creates both wealth and consumer sovereignty. But we are moving in that direction, but it's very sticky.
53:06Do you know anything that's going on with efforts to create these banks that might make it easier for people to save? A number have been built; some have failed. Turns out that since the rate of return is negative on saving, people will actually save if you offer a zero rate of return. That's a positive. Some of the problem still where I'm going to the bank and somebody sees me and asks if I have any money saved rather than I'm obliged to pay this back. Saving down may still be a better answer: No, I owe this money, I have to pay it. The rate of interest they have to charge because of the chances of default or missing payments are pretty high. Difficult to be able to know. To the extent they are investing in commercial loans, there is just not enough profitable investment. The big problem--circular argument--the reason loans are not profitable is there is not enough saving. Because saving is investment. There is not enough capital in these societies to raise wages to the point where it's actually profitable to invest. We have to break through that. In the short term, the money spent by the Gates Foundation so far have had no measurable impact. Shocking, isn't it? Same with microfinance--no measurable impact. Doesn't mean it's not making people better off. Hard to measure. Given that the commercial aspect is being served, albeit at a relatively high rate of interest, what this really is about is smoothing, a form of insurance; doesn't get at the real problem of how do we raise the productivity and alternatives that people in many poor countries face. A big part of the answer is education for women, and there are so many cultural obstacles to that. I wonder if there are places where those obstacles have been overcome. The United States. We call those countries rich countries. You really think that's a barrier? Sure. I actually don't know if it's cause or effect. It may be that once countries start to move to where an educated woman's labor has a higher opportunity cost, it's no longer economically feasible for me to say I don't want women to be educated. Paying too high a cost. Now the economic benefit for an educated woman in a less developed society is not that big. Improves the quality of her life perhaps but the opportunity cost in terms of forgone labor is not that high because they have so little physical capital. So, once you save--Adam Smith right about this--once you save and have enough physical capital, that raises the marginal product and therefore the wage of labor. In particular, skilled labor. Makes it inevitable, the education of women and the more efficient use of resources. Glad we found an intellectual antecedent we can share. You Northian, you! We're all Smithians.

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