PhilMur's thoughts on biz/tech/money/life

I’m reading Going Broke: Why Americans Can’t Hold on to Their Money by Stuart Vyse.  I have just started the book but I suppose I will eventually write a summary/review of the book here on my blog, but in the second chapter today, I encountered Vyse’s quoting this famous passage from Adam Smith’s Wealth of Nations.  Vyse provides some supplemental explanation with it — I thought it would be worth reproducing here:

“The man who borrows in order to spend will soon be ruined, and he who lends to him will generally have occasion to repent of his folly.  To borrow or to lend for such a purpose, therefore, is in all cases, where gross usury is out of the question, contrary to the interest of both parties.”

Loans for the purchase of durable goods or investment in business or production, on the other hand, had the potential to produce wealth, so these forms of lending were acceptable.

As Vyse goes on to explain, in Smith’s view of a healthy economy lending was permitted, but was only considered ideal in cases where the lending was done for the purposes of enabling production.

It is fairly ironic the Adam Smith’s thoughts and economic theories are widely referenced and his advice followed by many free market capitalists in the United States and elsewhere, and yet clearly business leaders nor the general population has taken his advice in this matter.  He calls the habit of lending for the purpose of spending “contrary to the interest of both parties”.  BOTH parties!  The recent economic meltdown, featuring headlines chronicling past years of mortgages gone bad and credit card debt handed out flippantly shows us what happens when both parties ignore this advice.  Not only are consumers’ finances ruined, but ultimately the lenders are affected as well.