Creating a World Without Poverty: Social Business and the Future of Capitalism
This book tells the story of Dr. Muhammad Yunus and how his pioneering work in making small loans to people resulted in his receiving the Nobel Peace Prize in 2006. He attended Vanderbilt University under a Fulbright scholarship, pursuing economics studies. He was teaching at a university in Bangladesh when this saga began. He believed that very small loans (under $50) would greatly improve the lives of poor people living around the university. When he attempted to persuade local banking institutions to make these “microloans,” his efforts were rebuffed. He offered to guarantee the loans himself and still had difficulties. Eventually, the loans were made and successfully repaid. He wanted the bank to make new loans in other places. Again, he met obstacles. Eventually, the new loans were made and repaid. However, faced with what he viewed as never-ending hurdles, he began the Grameen Bank to make the loans directly. Through trial and error, he found that women were much better credit risks than men and that small, self-help groups of borrowers working together provided the most reliable results. This formula for success led to his Grameen Bank lending almost seven billion dollars to seven million poor people.
This book presents how these loans changed the lives of the recipients. In addition to business loans, the bank makes home loans. The loans are to the wife. Formerly, it was easy for the husband to divorce the wife. Now that the home is in the woman’s name, the prospect of the divorced husband having to move makes divorce much less attractive and contributes to increased family stability.
The activities of Grameen Bank were increased as it made an agreement with Groupe Danone (a French firm) in a joint venture to produce and market yogurt throughout Bangladesh. The marketing effort was spurred by the endorsement of sports celebrities who played international soccer, which is very popular in Bangladesh.
In addition to describing the operation and marketing of Grameen Bank, Professor Yunus makes some critical comments about the focus of corporate managements today on bottom- line profits in order to increase share prices and their compensation. In his view, there seems to be no place in the thinking of today’s corporate management for successful corporations to indulge in social investing, which Dr. Yunus believes will be a future avenue to reduce poverty and increase entrepreneurship. Rather than handing out money to help alleviate depressed areas, Dr. Yunus presents market-based solutions with a proven record of success.
The book is controversial for many reasons. One issue is that the book’s title itself seems to many observers to overestimate what microfinance alone could accomplish. Also, the author has singular views on the objectives and benefits of capitalism and market-based institutions. He is not anti-capitalist, and he does not call for more government or more charity spending to help the poor. Actually, just the opposite. He argues for a new form of business based on the objective of doing good rather than making profits. The firms would be financed by individual and corporate investment of funds that would otherwise go to charitable spending. While these new social businesses would repay the start-up venture capital, they would not pay dividends. The profits would be used to advance the social good, as seen by the firm. Business economists will understand why the book is controversial.
Of course, social investing is not a guaranteed success or the only path to solving the world’s problems. For example, products that are tied to changes in fashion can go out of style quickly. World marketing can be disrupted by currency crises. Individual countries or groups of countries can be affected by cyclical downturns. There is limited treatment in the book of “what could go wrong?” Yet, the loss of even one large sponsor could set the program back for some time. Nevertheless, the presentation is provocative because the success record is impressive, and loan repayments are virtually all made. The book certainly provides business economists, and through them business management, ideas on how to make social investing work and work profitably for the sponsoring group.
For the reader who is interested in the Grameen Bank, its web page www.grameen-info.org is a good place to start. For an interesting introduction to how the Grameen began, in the author’s own words, a good source is www.youtube.com/watch?v=YxpTFw Qx-A8 . The Nobel committee has a web page that contains brief remarks by Yunus at: www.nobelprize.org/ mediaplayer/index.php?id=83&view= 3.
Edmund A. Mennis
Gerald L. Musgrave
Nudge: Improving Decisions about Health, Wealth, and Happiness
As of January of this year, U.S. employers can automatically enroll their employees in 401(k) plans with diversified portfolios— without fear of lawsuits and without certain regulatory burdens. Automatic enrollment should increase participation by about one-third, and diversification should produce larger and safer returns, although employees are able to opt out of both decisions. In the future, roughly one of every two 401(k) enrollees is likely to be so enrolled.
This opportunity was created by the Pension Protection Act of 2006, which reflected the joint efforts of the National Center for Policy Analysis (NCPA) and the Brookings Institution, including Capitol Hill briefings, publications, speeches, editorials, etc. Yet the real intellectual groundwork came from University of Chicago Professors Richard Thaler and Cass Sunstein. They call the theory behind this effort “libertarian paternalism,” and they have written a book about it called Nudge.
Here is how they describe the 401(k) problem: far too many people fail to enroll—even when there is an employer match. Some do not enroll even when the employer is paying 100 percent of the contribution and they need not invest even a dime of their own money. Once in a plan, people tend to make two more mistakes. They invest either in what they know (their employer’s stock) or in what they think is safe (money market funds). The first mistake puts all of their investment eggs in one (very risky) basket. The second generates an inadequate rate of return.
The solution to this problem: automatic enrollment in diversified portfolios, leaving employees free to opt out if they choose. Thaler and Sunstein concede that, for homo economicus, a default would matter not one whit. But in a world of ordinary people, it matters a great deal. Amazingly, most people have a very strong tendency to stay wherever the default puts them.
The authors also diverge from textbook economics in other ways. Theoretically, more choices are always better than less. Yet they argue convincingly that senior citizens forced to choose among 50 different Medicare drug plans faced a decision-making nightmare and often made bad choices. Similarly, unsophisticated employees faced with myriad portfolio choices are often poor managers of their 401(k) money.
There is a pattern here. People tend to “make good choices in contexts in which they have experience, good information and prompt feedback,” such as choosing among ice cream flavors. They often make poor choices in contexts in which “they are inexperienced and poorly informed and in which feedback is slow or infrequent.” Choosing an investment portfolio is one example. Choosing a drug plan is another.
So why can’t markets solve these problems? They can and sometimes do. But often it is profitable for the sophisticated and unscrupulous to cater to peoples’ frailties and exploit them. So what can be done? Since Thaler and Sunstein are libertarians, they are not calling for big-brother government solutions. They are perceptive enough to realize that regulations often do more harm than the problems they are designed to correct. But since they are paternalists, they are intensely interested in how to get people to make good choices. Fortunately, coercion is rarely needed anyway. Often a simple nudge will do. They call the general approach that establishes the nudges “choice architecture.” According to Thaler and Sunstein, a great many social problems could be solved with simple nudges. Here are some examples from the health- care field:
- For the problem of too few organ donors, why not assume that people want to be donors and leave them free to opt out of that presumption if they choose?
- For our wasteful, inefficient medical malpractice system, why not assume that people prefer a no-fault alternative and allow them to pay more to secure their common law litigation rights if they prefer?
- Why not default seniors on Medicare into plans that minimize out-of-pocket costs and maximize coverage for their current drug needs—at least for chronically ill, poor seniors for whom government is paying almost the entire bill anyway?
As it turns out, people are surprisingly nudgeable. Buyers of new cell phones have numerous options— from the ring sound to the decibel level to the number of rings before automatic transfer to voice mail. Yet they tend to stick with whatever default choices they are given. If renewal is automatic, people will subscribe for a long time to magazines they do not even read. People who download a new piece of software tend to accept default choices as well. These are all examples of what the authors call “status quo bias.”
Another factor is “collective conservatism,” the tendency of people to conform to group norms. For example, a light eater tends to eat more in a group of heavy eaters. A heavy eater tends to eat less in a group of light eaters. This principle can be used to change behavior. Informing college students that most of their peers drink moderately, if at all, reduces binge drinking. Informing teenagers that most teens are tobacco-free reduces teen smoking. An unhappy emoticon message (indicating above average energy use) causes households to reduce their electricity consumption. However, a happy emoticon message (indicating below average use) causes them to increase their power consumption.
In one experiment, simply telling Minnesotans that 90 percent of their fellow citizens complied in full with tax law produced a greater increase in compliance than threats, pleas, or any other type of communication. (By implication, if you want to turn out more voters, don’t lament the fact that so few people vote.)
Temptation and mindlessness are other factors that affect the lives of ordinary humans—particularly with respect to such activities as binge eating, binge drinking, smoking, and gambling. Homo economicus would never voluntarily put his name on a list of people who are banned from casinos. Problem gamblers sometimes do. Smokers may choose to work in a smoke-free office—to discourage their own smoking. People who want to quit smoking or lose weight may make bets with each other on the outcome of their quests, with the loser paying a hefty sum. (Interestingly, “losing something makes you twice as miserable as gaining the same thing makes you happy.”)
Perhaps the most interesting observation in Nudge is the conclusion that it is impossible not to nudge. We are always encouraging one behavior over another, even if unintentionally. In one experiment, the lunchtime food choices of students could be altered by as much as 25 percent by rearranging the way the food is displayed. However, there is no such thing as a neutral cafeteria display. One food choice or another is always being encouraged.
John C. Goodman
National Center for Policy Analysis