Yunus on Free Market Economy

The following is part of Muhammad Yunus’ Nobel Prize Lecture. This section is titled “Free Market Economy.”

Free Market Economy

Capitalism centers on the free market. It is claimed that the freer the market, the better is the result of capitalism in solving the questions of what, how, and for whom. It is also claimed that the individual search for personal gains brings collective optimal result.

I am in favor of strengthening the freedom of the market. At the same time, I am very unhappy about the conceptual restrictions imposed on the players in the market. This originates from the assumption that entrepreneurs are one-dimensional human beings, who are dedicated to one mission in their business lives − to maximize profit. This interpretation of capitalism insulates the entrepreneurs from all political, emotional, social, spiritual, environmental dimensions of their lives. This was done perhaps as a reasonable simplification, but it stripped away the very essentials of human life.

Human beings are a wonderful creation embodied with limitless human qualities and capabilities. Our theoretical constructs should make room for the blossoming of those qualities, not assume them away.

Many of the world’s problems exist because of this restriction on the players of free-market. The world has not resolved the problem of crushing poverty that half of its population suffers. Healthcare remains out of the reach of the majority of the world population. The country with the richest and freest market fails to provide healthcare for one-fifth of its population.

We have remained so impressed by the success of the free-market that we never dared to express any doubt about our basic assumption. To make it worse, we worked extra hard to transform ourselves, as closely as possible, into the one-dimensional human beings as conceptualized in the theory, to allow smooth functioning of free market mechanism.

By defining “entrepreneur” in a broader way we can change the character of capitalism radically, and solve many of the unresolved social and economic problems within the scope of the free market. Let us suppose an entrepreneur, instead of having a single source of motivation (such as, maximizing profit), now has two sources of motivation, which are mutually exclusive, but equally compelling − a) maximization of profit and b) doing good to people and the world.

Each type of motivation will lead to a separate kind of business. Let us call the first type of business a profit-maximizing business, and the second type of business as social business.

Social business will be a new kind of business introduced in the market place with the objective of making a difference in the world. Investors in the social business could get back their investment, but will not take any dividend from the company. Profit would be ploughed back into the company to expand its outreach and improve the quality of its product or service. A social business will be a non-loss, non-dividend company.

Once social business is recognized in law, many existing companies will come forward to create social businesses in addition to their foundation activities. Many activists from the non-profit sector will also find this an attractive option. Unlike the non-profit sector where one needs to collect donations to keep activities going, a social business will be self-sustaining and create surplus for expansion since it is a non-loss enterprise. Social business will go into a new type of capital market of its own, to raise capital.

Young people all around the world, particularly in rich countries, will find the concept of social business very appealing since it will give them a challenge to make a difference by using their creative talent. Many young people today feel frustrated because they cannot see any worthy challenge, which excites them, within the present capitalist world. Socialism gave them a dream to fight for. Young people dream about creating a perfect world of their own.

Almost all social and economic problems of the world will be addressed through social businesses. The challenge is to innovate business models and apply them to produce desired social results cost-effectively and efficiently. Healthcare for the poor, financial services for the poor, information technology for the poor, education and training for the poor, marketing for the poor, renewable energy − these are all exciting areas for social businesses.

Social business is important because it addresses very vital concerns of mankind. It can change the lives of the bottom 60 per cent of world population and help them to get out of poverty.

His focus on human needs, and not on the profit potential of markets, makes this type of capitalism one which would be quite alien to most Americans. I actually think that this is more in line with the original intent of Adam Smith who viewed free markets as increasing overall utility and happiness. Of course, Smith’s vision of a moral capitalism is abandoned in the industrial revolution. American and global capitalism of today is much more Social Darwinism than Adam Smith. As a result, capitalism is no longer morally defensible (though the proto-Utilitarianism of Smith is also morally problematic).

Categories: Politics

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12 replies »

  1. Chris

    thanks for this quote. What a remarkable vision for how we could use the “freedom” or “agency” that free marketeers swear by to do more than just make our gross income, grosser.

  2. “Let us suppose an entrepreneur, instead of having a single source of motivation (such as, maximizing profit), now has two sources of motivation, which are mutually exclusive, but equally compelling − a) maximization of profit and b) doing good to people and the world.” This is a fairly old concept in b-school social business classes. The idea works only when all actor/agents are on board. Very difficult to implement when the predominant capitalism today came about somewhat by way of Smith’s utilitarianism.

    “Investors in the social business could get back their investment, but will not take any dividend from the company. …a social business will be self-sustaining and create surplus for expansion since it is a non-loss enterprise….The challenge is to innovate business models and apply them to produce desired social results cost-effectively and efficiently.”

    The social business as explained by Yunis requires a redefinition of what it means to be an investor. Does getting back one’s investment account for inflationary pressures? If not, then the investor will equate social business ROI as good as money under the bed. As for self-sustainability and new business models, I would love to see more examples. I know of a few.

    Also, from FMH, interested in your aversion to post-modernism…

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  4. ljk/fmoc,

    I think that this idea very much runs contrary to what is taught in b-schools, though b-school people like it because they like to think that it is a free-market approach to fight poverty (as a result these people completely miss the cause of this poverty). Warner Woodworth at BYU’s Marriot School of Business is an advocate of micro-credit and a leftist in his approach to economics. He is marginalized there as a result.

    I cannot think of examples that are investor focused.

    As for postmodernism, I hope to get to that soon. Though I best complete a few other tasks first. I enjoy the deconstructive nature of postmodern interpretation. Foucault is great. However, I am more interested in constructing an alternative to the current political economic order. Now, when I am at church on Sunday, it is amazing how relevant and useful postmodernism become.

  5. All major business schools (harvard, stanford, duke) have social business classes sometimes called social entrepreneurship. These are seldom core classes, but they’ve all caught on to the potential business making opportunity of microcredit. Hence, the paradox. I worked with Warner on a mc project in china, and he represents just one proponent at one university.

  6. I think that it why I do not view microcredit as strictly (or even primarily) a business venture. It is one aspect of economic (and as a result political) development. I definitely do not think that business schools have what it takes for such a task (though those you mention have plenty of smart people). Is social entrepreneurship addressed in business ethics classes?

    I teach about it in my political science senior seminar on the normative aspects (political philosophy) of global inequality and poverty. Most of the people I know who are involved in microcredit and related activities come from an education background (particularly literacy).

    “I worked with Warner on a mc project in china, and he represents just one proponent at one university.” Obviously he is just one example. He is just the only one that I know.

    I am not exactly sure what your background is, so I am not quite sure where you are coming from.

  7. Social entrepreneurship and similar projects are addressed in business ethics classes. I’ve been involved in mc off and on for the past 8 years, once as potential investor, once as planner, and mostly as observer. I have an intl relations background, minored in business at BYU, currently a calif. grad student in politically liberal environment. My interest in mc now is peripheral to my research on women’s status and transnational feminism; majority of mc borrowers are women. Are you in Utah? If so, I’m not surprised that those involved in mc are in education. I think there’s an organization based in the valley focusing on mc – literacy projects.

    By “normative aspects” to you mean Keynesian inspired developmental state? And/Or Neoliberal advocates for decreased inequality and poverty reduction?

  8. I am a political philosopher. So, I mean “normative aspects” from the perpective of liberal egalitarian moral/political philosophy-namely John Rawls’ theory of social justice. While I am looking to decrease inequality and poverty, it is more from a far left social democratic (liberal socialist) perspective. I really enjoy Amartya Sen’s work on development as well.

    My father-in-law is involved in internatial literacy. He introduced me to Paulo Friere. I tend to evaluate mc the way that Friere evaluates literacy/education efforts. I will have to explain all of the above in separate posts.

  9. I love Yunus (reading Banker to the Poor) changed my life and I’m involved to the extent possible in lending through Kiva.com for purely “social business” reasons. While I agree with his ideal here, there already are institutions that are “social businesses” . . . they are called “not for profits” or “charities.”

    People who invest their capital for social goods and don’t expect a return on it (i.e. accept that it may be used in an inefficient fashion in order to bring about a desirable social result, or may be used to transfer their wealth to another person) aren’t really “capitalists” since to be a capitalist, in my opinion, one seeks to deploy ones capital in a way that maximizes social good for ones consumers and generates a profit/return, which is a SIGN that the good one has created is greater than the costs (use of scarce resources) one has incurred . . .

    Profits are just signals – the market telling you that what you are adding to the resources you appropriate and package for trade has value . . . if you’re not making a profit, in most cases you are not using your resources wisely.

    HOWEVER, if you are TRANSFERRING your capital to others, that’s another story altogether.

    That’s what most charities and not for profits already do. I think Yunus is not recognizing that these institutions already exist, and most of these “social businesses” are funded by the capital of the “for profit” businesses.

    And, by the way, for profit businesses have already lifted more people out of poverty than any social business ever has or ever will . . . Social businesses are great b/c they help those who have not been able to participate in the blessing of the for profit business, but the for profit businesses is the real engine of social good for the greatest number . . . .

  10. I too have been inspired by Yunus. He spoke at the IESE Business School Doing Good and Doing Well conference ( http://dgdw.iese.edu/ ) which led me to choose IESE for my MBA.

    I have returned back to Canada to try and create a new job market for the homeless that applies the principles of Social Business. I have decided that if you can create a job market that is fueled and inherently sustained by the passion and creativity of the homeless it will result in a new economic system that competes with the current one.

    Ideally it will set a profit/values-driven example that inspires mainstream business to adapt some of its basic principles.

    I hope you will check out my blog and share any thoughts you think would improve the model.


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