Sun, Dec 24, 2006 - Page 8 News List

Nobel Prize opens economic doors

By ChouTein-chen 周添城

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.

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