At this year's Nobel Prize award ceremony in Stockholm, Sweden, on Dec. 10, US economist Edmund Phelps received the Nobel Prize in Economics while Bangladeshi economist Muhammad Yunus was awarded the Nobel Peace Prize.
This should have a great impact on economists at large.
In addition to Phelps being awarded for his academic research and Yunus for offering practical help to people in need, there is another striking contrast between the two. One was awarded for his work in economic theory while the other was awarded for abandoning economic theory.
In an interview with the Taiwanese magazine Business Weekly, Yunus stated he was ashamed of and resented the so-called perfection of economic theory while at the same time felt extremely helpless because contemporary economic theory was incapable of resolving the poverty problem among his fellow countrymen.
Based on his humanitarian views, he gave up his teaching job in order to concentrate on seeking a solution to the problem. He created a breakthrough program to lift the poor through the innovative microcredit system, the Grameen -- or rural -- Bank which has helped millions of impoverished people extricate themselves from penury through tiny and collateral-free loans.
Yunus was born into the well off family of a goldsmith in Bangladesh in 1940 and earned his doctorate at Vanderbilt University, one of the Ivy League schools in the US, in 1971. He first taught in the Department of Economics at Middle Tennessee State University before returning to Bangladesh to take up the post as chair of the department of economics at Chittagong University.
Yunus' primary reflection was to wonder why perfect economic theory was incapable of solving the problem of poverty. His countrymen became enslaved under high-interest loans because they were caught in traditional thinking, including prejudice against women in the workplace.
When tackling the issue of resource allocation in human society, economics relies on the market mechanism to achieve the most efficient use of resources. If this is the case, wouldn't this be a perfect world? Unfortunately not. The more efficient the resource allocation, the more resources are concentrated in the hands of resourceful people. In other words, people lacking resources will always be put in a disadvantaged position -- a situation that may persist for generations. Slave laborers and tenant farmers are just two extreme examples.
It is particularly alarming that the more we praise this kind of efficiency, the more obvious the poverty trap becomes. Globalization has brought with it high efficiency, but it also brings a risk that the middle classes will gradually disappear. This is what is meant with the "M-shaped society" -- that is, a society where the income curve has two peaks, one in the lower middle class and one at the top, a trend noticeable in many industrial societies.
What is wrong with economic theory? Why does it create such a predicament?
Based on the premise that resources are limited but desires are unlimited, the ultimate goal of economics is to make efficient use of scarce resources. The market mechanism is the means to reach this goal and the core of market competition is to make a profit which means that profit becomes the most powerful signal driving resource allocation.
The more globalized the world, the easier it will be for profit signals to spread and the easier they will be to receive, while low-profit activities are likely to be ignored by capital and forced out of the market. Competition and efficiency are but two other words for "the survival of the fittest," and it also means that it will be difficult for the already poor to move out of poverty.
How did Yunus find a solution for his Grameen Bank? He did not focus on productivity, since that is another area where the poor always lose. Instead, he looked at the investment side and that allowed him to break the vicious poverty circle. In fact, Yunus' Grameen Bank is not a charity, but rather, it is a model "social enterprise" that Yunus has long advocated.
Social enterprises move away from the sole business goal -- results, such as production and profits -- by considering how to help workers during the set up process.
Of course, a social enterprise can do so because in addition to being an innovative model, this market is also isolated from global markets, and can never attract highly efficient capital.
When technology, information and capital enter a country, this piece of the market, mainly a market for the poor, continues to exist. The realization of such a concept will depend on the convergence of creative and compassionate people. The problem that then arises is one of legislation -- at first, the Grameen Bank could not obtain an operating license.
Taiwan's Cabinet is now promoting a plan named "Big Warmth, Big Investment." Let us hope that this program will not focus on subsidies, but that it will leave more room for this kind of social enterprise. By doing so, the government would help disadvantaged groups stand up through mutual assistance and respect.
Chou Tein-chen is dean of the College of Management at Shih Chien University.
Translated by Lin Ya-ti
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