The Problem of Sympathy-Seeking Projectors: Adam Smith’s Support of Usury Laws as Prudential Credit Rationing

Edward Austin Middleton

Advisor: David M Levy, PhD, Department of Economics

Committee Members: Richard E. Wagner, Stephen M. Miller

Online Location, Online
April 19, 2021, 11:00 AM to 01:00 PM


Chapter 1: The Transformation and Deception of Projectors

Economic analysis since the beginning of the 19th century has regarded the ‘projector’ as an entrepreneur: one who bears the cost of uncertainty by reorganizing the structure of production in order to reap benefits of that reorganization. In this paper we examine the preceding 2000 years of literary record to demonstrate that uncertainty and productive reorganization were not the sole concerns regarding projectors, but instead the concerns were focused on transparency, methods, and vice.

Chapter 2: Projectors as Chimerical Men of System

Jeremy Bentham accused Adam Smith of inconsistency in his Defense of Usury, characterizing “projectors” as beneficial entrepreneurs who should not be prohibited from borrowing at high rates of interest on the grounds that even their failures would lead to economic growth. A close look at Adam Smith’s work finds that Bentham misunderstands Smith’s argument; that narrowly defining projectors as entrepreneurs is inappropriately applied to the market institutions of the time; and that Smith develops and consistently applies a theory of market agency through his work that defends his advocacy of price ceilings in financial markets even as he rejects its application elsewhere.

Chapter 3: Welfare Enhancing Usury Restrictions

We employ a Constant Elasticities of Substitution function to model agents’ internal relative utilities when presented with risks that potentially yield both financial and sympathetic rewards, converting the two sources of utility into a single-dimension financial-equivalent willingness to pay. These agents offer interest rates as bids on investment funds depending on their perceived utility gain. Lenders maximize the loan portfolio’s expected profits. Interest rate price ceilings are imposed on this market to compare aggregate performance among price ceiling regimes, and the process repeated. The results demonstrate interest rate price ceilings are theoretically efficacious at excluding sympathy-seeking agents from credit markets, improving overall economic growth.