Monday, May 03, 2010

Adam Smith vs. Muhammad Yunus

In 2006, economist Muhammad Yunus won the Nobel peace prize (not the economics prize). What did he do? "He invented microcredit, the practice of lending tiny amounts of money to the poor." That is from a NY Times review of a new book by Yunus. To read the review, go to Microcredit? To Him, It’s Only a Start. In this book, Yunus proposes some ideas that seem to conflict with Adam Smith. I post some exerpts on this below, but first something about microcredit from the article:

"It was a revolutionary idea. Until then, bankers figured that such borrowers were worthy of neither credit nor trust. Along came Dr. Yunus, who demonstrated that lending to the needy could be a profitable business and transform their lives. Indeed, many of Grameen’s clients used these small sums to start small businesses and to escape the clutches of poverty."

The people who get the loans work together and make sure that they all work hard and pay back their loans. The loans are often very small, like just enough for a woman to buy a sewing machine so she can make clothes or become a seamstress.

But what does he say that might conflict with Adam Smith?

"...he calls for creation of an alternative economy of businesses devoted to helping the underprivileged."

"...they would invest leftover money in expanding their humanitarian efforts rather than paying dividends to shareholders."

"People “will be delighted to create businesses for selfless purposes,” Dr. Yunus predicts. “The only thing we’ll have to do is to free them from the mind-set that puts profit-making at the heart of every business, an idea that we imposed on them through our flawed economic theory.”"

"“You don’t need to know ‘how to do business,’ ” he writes a bit too facilely. “Much more important is your desire to solve a social problem."

In his book The Wealth of Nations, Adam Smith wrote about how self-interested people were led by the "invisible hand" to make society better off:

"But the annual revenue of every society is always precisely equal to the exchangeable value of the whole annual produce of its industry, or rather is precisely the same thing with that exchangeable value. As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestick industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the publick interest, nor knows how much he is promoting it. By preferring the support of domestick to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the publick good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it."

From the Online Library of Liberty.

So Yunus is suggesting that people start businesses to intentionally try to help society while Adam Smith thought society benefited more if people pursued their own self-interest.

Of course, Smith is more complex than this. Adam Smith's "other" book was called The Theory of Moral Sentiments. One point he made there was that we are able to sympathize with other people by trying imagine what they are going through. I wrote about that in a post last year called Science Proves That Adam Smith Was Right Over 200 Years Ago (sort of)

2 comments:

sean said...

Yeah, I've heard or read about this for some time now. It seems interesting. I'd be interested in learning some more of the specifics of how it is really run.

Cyril Morong said...

You're right. It does matter how it is run. The devil is in the details. Thanks for dropping by and commenting.