I was at a conference once and found myself in conversation with a man I had not met before. After the usual chit-chat I asked what he did for a living.
He worked for a company that provided high-interest loans to people with poor credit histories. Around 19% APR, as I recall.
I was not impressed. But I was interested. So I asked him how he responded to people who said the rate should be capped. That he was taking advantage of the poor. All the usual criticisms.
He had been asked this before. He answered calmly.
“The banks won’t lend to these people,” he said. “They don’t want this business. We know a percentage of our customers are going to default or disappear. So we set the rate accordingly. If we don’t lend to them, they won’t just go away and do nothing. They will borrow from loan sharks, from local heavies, or they will go out and steal what they need. We are providing a service. We deserve to be compensated for the risk.”
I was impressed. The man had thought about his business in terms of alternatives. He was not defending 19% as a good rate in the abstract. He was defending it as the best available option for people who had no others.
He understood incentives.
The moral critique of high-interest lending assumes a counterfactual: that if the 19% loan did not exist, the borrower would get a 6% loan from a bank instead. This is false. The bank has already refused them. The real alternative is worse: the loan shark at 100% APR, enforced with threats. Or theft. Or doing without, which may mean no way to get to work, no money for a necessary repair, no way to bridge the gap until payday.
The 19% is not a markup on a mainstream product. It is the price of a product that only exists because mainstream providers will not touch it. Remove the 19% option and you have not created a 6% option. You have removed the best option from a bad set.
But the impulse to cap rates is politically irresistible. It sounds fair. It sounds protective. It sounds like standing up for the little guy. The politician who proposes it gets applause. The damage - fewer lenders, less credit, more loan sharks - takes years to materialise and is diffuse enough that nobody connects it to the policy.
Incentives matter. The incentive of the politician is to be seen to act, not to be effective.
The same logic applies to labour markets.
Finland has no statutory minimum wage. This sounds enlightened. Leave wages to the market, let people negotiate their own terms. But Finland has something much worse: sectoral collective agreements between unions, employers, and the government that set binding minimum wage rates for entire industries. It is a minimum wage by another name, and it produces the same result.
Finland’s overall unemployment rate in May 2026 was 10.8% - the highest in the OECD and more than double the rate in the United States. Among people under 25, it was 23%.
Twenty-three percent of young Finns cannot find work.
The reason is not complicated. When you set a wage floor above the market-clearing price for young, inexperienced, low-productivity workers, those workers do not get hired. Employers are not being cruel. They are being rational. If the law or the collective agreement says you must pay someone 12 euros an hour, and that person produces 8 euros an hour of value, you do not hire them. You hire a machine, or you automate the role, or you simply leave the position unfilled.
The moral impulse behind minimum wages is the same as behind interest rate caps. It sounds right. It feels protective. The politician who raises the minimum wage gets a standing ovation. The young person who never gets the first job, who never acquires the skills and references that would let them command a higher wage later, does not appear at the press conference. They are invisible.
The tragedy is that the people most hurt by minimum wages are exactly the people the policy claims to help. The young. The low-skilled. The previously unemployed. The ones who would work for less than the floor, not because they are being exploited, but because the alternative - no job, no experience, no reference - is worse.
Rent control follows the same pattern.
Set a maximum price for housing and you get less housing. Landlords exit the market. Maintenance declines. New construction stops. The people who already have rent-controlled flats benefit. Everyone else - especially the young and mobile - finds it harder to get a home.
Every economist knows this. Every city that tried rent control has evidence of it. And every generation of politicians proposes it again, because the incentive is to be seen to act, and the costs arrive after the next election.
The pattern is general.
Whenever you see a well-intentioned policy that produces the opposite of its stated outcome, follow the incentive. The politician is rewarded for announcing the policy, not for the outcome. The regulated industry adapts in ways the policymaker did not predict. The people who benefit from the existing arrangement lobby to preserve it. The people who are hurt are diffuse, unorganised, and often never connect their misfortune to the law that caused it.
The man at the conference understood this. His 19% loan looked like exploitation. It was actually the best option available to people the mainstream had abandoned. Remove it and the alternatives are worse.
Finland’s wage agreements look like worker protection. They are actually a barrier that keeps a quarter of the country’s young people out of work. Remove them and wages might fall for some. But employment would rise, and the first rung of the ladder would be within reach.
Incentives matter. They matter more than press conferences. They matter more than good intentions. Every policy should be tested against one question: what behaviour does this reward?
The answer is almost never the one the policy’s supporters give.