Felix Salmon and Matthew Bishop Head-to-Head

[Update: Felix Salmon responded to this post.]Felix Salmon posted, and I assume produced, a great little video debate between himself and Matthew Bishop of philanthrocapitalism and Economist fame. As an aside, I really like this content form; haven't seen anything quite like it before. You can watch it on Felix Salmon's blog or below.Watching the video, I felt the way my peer reviewers perhaps felt going over my book draft: greatly admiring their talents as thinkers and communicators, but mentally correcting them every 60 seconds. I don't hold that against them. If you want to be think and communicate about big ideas, you can't be the leading expert on everything you talk about. I might be on a different point on the spectrum between the most narrow academic specialist and the most general economic journalist, but I struggle at the same kind of margin. (And I'd hate to have my video interviews parsed too finely; I'm terrible at thinking on the fly.)My kibitzing follows.Felix: Look, are you completely against the idea of pocketing a profit from serving the poor? Prudential Insurance in the UK hit its stride in the 1850s selling life insurance to the "industrial population" (working-class folks). I assume some people got rich in the process, and without that prospect they probably wouldn't have built this business that improved the lives of millions.Matt: Actually, SKS loans average less than half the size of Compartamos loans. Yet, as you say, they are cheaper. So the economics of microcredit in India and Mexico are just different. And while I agree that charity alone won't bring enough capital to microcredit, I wouldn't dramatize the power of putting capital in the hands of the poor to end poverty. As you say, rich countries reduced poverty more by putting capital in the hands of disruptive industrialists than in the hands of the poor. (Not to be one-sided, giving workers bargaining and political power and education helped too...)Felix: Yes, in a rich country businesses can't usually turn the profits needed to service 45% loans. But in a very poor household, this can happen if, for example, a bit of capital allows a woman to raise a goat even as she watches the children, cooks the food, and does everything else she would do anyway. Her high returns owe to the cash cost of her labor being zero. What looks like return to capital is mostly return to complementary labor. Of course, she will hit diminishing returns if she raises more goats: no easy path out of poverty here.Matt: Microfinance banking is high touch---sort of. It is high touch in that client contact is frequent, and those transaction costs do drive up interest rates. But, at least in the famous group forms, it is still about mass production---"one size fits all" as Felix said---precisely because of those cost pressures. Joint liability and peer pressure let the banker delegate her job onto the borrowers. They select and monitor clients and pressure them to repay. In effect, the lender wants to learn as little as possible about the client because learning costs money and margins on tiny loans are even tinier.Felix: I agree, a big company that just comes in an injects lots of credit is more vulnerable to a community turning against it. But perhaps an alternative to banning outside equity, or a middle ground between the two of you, is to cultivate for-profit, investor-owned microfinance institutions that can take savings from (and maybe even insure) clients.Matt: Felix is right, politicians being politicians, it has to be asked why certain institutions have become vulnerable to pol-supported debtor revolts. The answer seems to have to do with credit dominance and rapid growth fueled by outside money. Growth might not always reach the point of classic implosion, which occurs without political meddling. But to my knowledge politics was not a major factor in Morocco, Bosnia, and Pakistan. The main point I'd want to add to the conversation is that credit is special. Credit markets behave differently from most markets because of positive feedback loops of mania and depression, and that creates challenges for microcredit that are special within philanthrocapitalism.