One of my pet peeves is the self-righteous campaign against pay day loans.

Sure, it’s a bad idea for somebody to get a loan at a high rate, but people get in jams. If they learn the right lessons and don’t embark on a lifetime of high-interest loans, what’s the problem? At any rate, why should government make laws against the practice to satisfy the sensibilities of people who’ll never be so strapped as to need such a loan?

Scott Shane, a professor of entrepreneurial studies at Case Western University, has a great piece explaining why trying to block these loans is “the worst kind of government paternalism—using regulation to ‘protect’ people from themselves.

Opponents of pay day loans often describe the practice as “predatory,” and, indeed, anyone who made a practice of getting such loans would be wasting money. But the rates, rather than being predatory, are high to cover the large number of defaults among the kinds of people who end up in a bad situation and resort to one of these loans.

Shane writes about Wonga, a British pay day lender, which recently announced that it is going to begin to make loans to small businesses. The news was greeted with all sorts of harsh criticism. There is even an attempt to prevent this legally.

Shane makes the case both for the rates Wonga will charge and for the practice of allowing such lending to small businesses:

Many of the small businesses interested in borrowing from companies like Wonga have very high loan default rates. Unless lenders can charge high interest rates to these borrowers, they won’t extend them credit, which keeps these businesses from accessing the capital they need to operate.

If payday lenders are allowed to lend money to small businesses, some of their borrowers will no doubt have trouble paying off their loans and will fail as a result. It’s not easy for businesses to generate the cash flow necessary to service high-interest-rate loans. But denying those businesses access to these loans does not solve their problems. If they can’t get access to the capital they need to operate, many of them will fail anyway.

The effort to block small business owners from taking payday loans will fail. Small business owners routinely finance their businesses by personally borrowing (rather than filing a loan application as a business) and personally guaranteeing their business loans. If small businesses are barred from taking payday loans, their owners will likely borrow the money personally and put it to work in their firms.

Trying to block payday lenders from financing small businesses is the worst kind of government paternalism–using regulation to “protect” people from themselves. We need regulation to protect people from negative externalities. Barring chemical companies from polluting our rivers, for instance, makes sense because the money that chemical companies save from dumping pollutants instead of treating them comes at the expense of everyone else’s need to cope with contaminated water.

But high interest loans don’t create negative externalities. No one else is harmed by the small business owner’s decision to try to build a business by taking out a high interest loan. Perhaps the small business owner is gambling like his neighbor who buys Powerball tickets. Why should we stop either of them from pursuing a risky dream?

Barring payday lenders from providing credit to small businesses would be costly (because the government would have to enforce the ban). It would also be a misguided attempt by policymakers to tell small business owners that the government knows better than they do what’s good for them.

One of President Obama’s pet ways of explaining how downright mean some of us are is to say that our message to others is, “You are on your own.” Not protecting people from pay day loans is the epitome of letting them be on their own: they have every right to take a risk and bear the consequences. Some will fail; some will prosper. But it's not the correct role of government to be involved in their financial decisions.