Question

Moral Issues in Business 11th Edition Chapter 4 Reading 4.2 Markets and the Role of Ethics in Capitalism Question 3

Why did Adam Smith advocate legal restrictions on usury? What lesson does Sen draw from this example?

Answer 1

Usury refers to charging of very high interest rates from borrowers of money.

Adam Smith, the father of economics suggested strict regulation on usury or charging of very high interest from borrowers because it was found that that despite making a big amount of profit from the borrowed money, the borrowers end up paying a large share of profits to the lenders, making the rich richer and poor poorer. This meant money was getting into the hands of those who were actually not doing anything productive from that money and were rather only lending it and making interest income. As a result, it was found that strict action and regulation is needed to stop this practice.

Sen learnt that is important to study the market thoroughly before setting policies. Just copying policies from one place to another would not do and it is important that all perspectives of the market are studied and examined before taking decisions.