A merry dance of Catholic social doctrine, permaculture, distributism, and other odd answers to pressing questions

Vol. I, No. 8

Poor People Have No Business Starting a Business (Right?)

2008 May 21, 12:00 Wed tags:


  • From the Editor
  • Feature Article: Poor People Have No Business Starting a Business (Right?)
  • Action & Resources: Consider a loan to a micro-entrepreneur
  • Selection: Chesterton: The Happiness Test.
  • Backmatter


Greetings! Today I "ask" a few economics writers whether they think people in the "Third World" ought to start their own businesses or work in factories. They might surprise you. Then, Chesterton proposes a simple test for this sort of question: What actually makes us happier?

Thanks for reading!

Bill Powell, Editor

The aim of human polity is human happiness. For those holding certain beliefs it is conditioned by the hope of a larger happiness, which it must not imperil. But happiness, the making glad of the heart of man, is the secular test and the only realistic test. So far from this test, by the talisman of the heart, being merely sentimental, it is the only test that is in the least practical. There is no law of logic or nature or anything else forcing us to prefer anything else. There is no obligation on us to be richer, or busier, or more efficient, or more productive, or more progressive, or in any way worldlier or wealthier, if it does not make us happier.

G. K. Chesterton, The Outline of Sanity
[Continued in our SELECTION below.]


Poor People Have No Business Starting a Business (Right?)

by Bill Powell

In 2006, the Nobel Peace Prize went to a man who's made a career of lending tiny amounts of money to poor people. Muhammad Yunus, a Bangladeshi economist, and his Grameen Bank (which also won the prize) have made microcredit one of the hottest trends in social justice. Instead of giving money way, Grameen makes a tiny business loan; far less than a normal bank would bother with, but enough for someone with nothing to start a tiny business.

I recently started researching Grameen in connection with another project, so I don't want to imply a Penny Justice Stamp of Approval just yet. Under the worldwide chorus of approval, some criticisms are worth investigating. The most serious I've seen, by Jeffrey Tucker, focuses on "social engineering"; in exchange for the loan, borrowers have to join a group and profess the "Sixteen Decisions," which includes the promise, "We shall plan to keep our families small." As Tucker points out, this is a pricey loan--reminiscent of Rumplestiltskin. Still, he fails to address all the other microcredit groups out there; perhaps they don't all have similarly Malthusian aspirations.

Anyhow, no one I've seen seems to dispute the central claim that millions of poor people really have started their own profitable businesses. Instead, people claim something quite different: that these new business owners would be better off working for Wal-Mart.

In fact, when Grameen got the Nobel prize, John Tierney wrote in the New York Times that he had another idea for the Nobel: Wal-Mart.

Other authors quickly agreed. Here's Jeremy Siegel writing "In Praise of Wal-Mart" in Kiplinger's magazine:

On the international front, those who criticize Wal-Mart for encouraging "sweatshops" in the developing world also fail to see the big picture. John Tierney, a columnist for The New York Times, recently wrote that Wal-Mart is as deserving of the Nobel Peace Prize as are Bangladeshi economist Muhammad Yunus and Grameen Bank, which he founded. Yunus and Grameen won the award in 2006 for their role in granting small loans to help poor villagers in Bangladesh start their own businesses. But, Tierney notes, Wal-Mart is responsible for the creation of far more jobs in developing nations.

So would you rather own your business, or work in a sweatshop? Let me think!

Of course, Siegel does (try to) address the "sweatshop" charge, but he seems to miss completely the deeper distinction: business vs. job.

Microcredit aims to create millions of businesses. Wal-Mart and other multinationals create millions of jobs.

What's the difference between your own business and a factory job, even a "nice" one? Ask Michael Strong, who also favors Wal-Mart over microentrepreneurs.

It may well be the case that the vast majority of Grameen Bank micro-entrepreneurs experience considerably greater pride and happiness in their work than do the factory workers hired by Wal-Mart suppliers. But most of these micro-entrepreneurs, who borrow less than $100 each and then repay the loan, do not experience as large an increase in standard of living as do those rural Chinese who move to urban areas and thereby earn an extra $1 or so per day, $365 or so dollars per year.

New business owners "experience considerably greater pride and happiness in their work." But they would make more money if they worked in a factory.

What are they thinking?

Do not seek happiness and pride in your work (not to mention control over your economic life, and staying within a hundred miles of your family and village). Seek instead to raise your "standard of living".

Later, Strong also notes that non-economists often see economics as "a form of brain damage, a cancer on our earth."

If micro-entrepreneurs were proud and happy in their work, but also still starving, of course that would be different --and how proud would they be? That's not the case.

True, an economist deals in mathematics. You can measure money; happiness is far trickier. I'm not asking economists to measure happiness, only to stop pretending to be so oblivious. E. F. Shumacher, an economist, makes this point brilliantly in his classic, Small Is Beautiful, as he discusses the need for "meta-economics".

And I'm not so sure the "average" factory worker ends up with more money anyway. None of these articles presents a thorough study of micro-entrepreneurial business growth, or compares the cost of living between urban and rural China. Which is easier, to grow your own business, or go to the factory beadle and say "Please, sir, I want some more"? These authors are dazzled by the Wal-Mart "pipeline of wealth," but when you sell to the richest company in the world, there's a reason they're the richest, not you. Which way is the pipeline flowing?

Whether or not Grameen is abusing the idea, making tiny loans to those who only need such a little money to start a business is sound. Is it better to help someone to be their own boss in their own village, or pay them to move hundreds of miles to make wares for Wal-Mart? Tough choice.

2008 May 21 Bill Powell



"The Micro-Credit Cult" (Tucker).
http://mises.org/freemarket_detail.aspx?control=215 Snobby, but largely valid. Unfortunately, Tucker doesn't bother with footnotes, but you can see the "16 decisions" for yourself here:

Certainly no one should be forced or pressured into any of these decisions, good or bad. But not all the ideas are on the level of enforcing two-child families. Tucker seems particularly allergic to the promises to dig pit latrines and take time to plant fruit-bearing trees, as if these people are being forced to demolish their indoor bathrooms and clock out of middle-class jobs to do their planting. Kinda silly.

Also, the Grameen site paints rather a different picture of their finances than Tucker's. In particular, it states that Grameen Bank hasn't taken donations since 1998. But the other Grameen companies do, so I may be missing something.

Again, it's important to realize that Grameen isn't the only microcredit agency out there. Not by a long shot.


"Shopping for a Nobel" (Tierney)

NYT reader responses: "A Nobel Prize for Wal-Mart?"

"Forget the World Bank, Try Wal-Mart" (Strong)

"In Praise of Wal-Mart" (Siegel)

But don't take Siegel's claim that Wal-Mart reduces inflation too seriously:

"The Wal-Mart debate: A false choice between prices and wages."


Investigate lending to a micro-entrepreneur.

In researching microcredit, I found out about Kiva, a web site that connects you with these would-be entrepreneurs we've been talking about.


The site looks interesting, though I haven't yet investigated it thoroughly. You can see photos of the borrowers, read how they plan to spend their loan, and follow their progress. Kiva doesn't loan to them directly, instead it passes the loan on (charging nothing for this service) to a local MFI (microfinance institution). I don't think Kiva is associated with a particular MFI (such as Grameen); instead, they work with many MFIs, and screen them for problems like exorbitant interest rates.

(Though all MFI interest rates look exorbitant to us: one page names 35% as the global average. This is one of the problems, that MFIs charge so much interest, but on the other hand, it takes a human collector just as long to collect on a $50 loan as on a $50,000 loan, and the collector needs wage too. And apparently their rates are low compared to local conventional moneylenders.)

The whole layer of intervening MFIs can stay invisible to you; you just log on and see how your entrepreneur is doing. A neat idea. I hope it works.


Chesterton: The Happiness Test

The aim of human polity is human happiness. For those holding certain beliefs it is conditioned by the hope of a larger happiness, which it must not imperil. But happiness, the making glad of the heart of man, is the secular test and the only realistic test. So far from this test, by the talisman of the heart, being merely sentimental, it is the only test that is in the least practical. There is no law of logic or nature or anything else forcing us to prefer anything else. There is no obligation on us to be richer, or busier, or more efficient, or more productive, or more progressive, or in any way worldlier or wealthier, if it does not make us happier.

Mankind has as much right to scrap its machinery and live on the land, if it really likes it better, as any man has to sell his old bicycle and go for a walk, if he likes that better. It is obvious that the walk will be slower; but he has no duty to be fast.

Machinery may be a magnificent sight, but not so magnificent as a Great Fire of London; yet we resist that vision and avert our eyes from all that potential splendour. Happiness, in a sense, is a hard taskmaster. It tells us not to get entangled with many things that are much more superficially attractive than machinery. But, anyhow, it is necessary to clear our minds at the start of any mere vague association or assumption to the effect that we must go by the quickest train or cannot help using the most productive instrument.

Many a talented torturer is left in obscurity by the moral prejudices of modern society. Nay, his budding promise is now nipped even in childhood, when he attempts to develop his natural genius on the flies or the tail of the dog. Our own strong sentimental bias against torture represses his noble rage and freezes the genial current of his soul. But we reconcile ourselves to this; though it be undoubtedly the loss of a whole science for which many ingenious persons might have sought out many inventions.

Let it be clearly understood that I note this only to make the primary problem clear; I am not now saying, nor perhaps should I ever say, that machinery has been proved to be practically poisonous in this degree. I am only stating, in answer to a hundred confused assumptions, the only ultimate aim and test. If we can make men happier, it does not matter if we make them poorer, it does not matter if we make them less productive, it does not matter if we make them less progressive, in the sense of merely changing their life without increasing their liking for it.

We of this school of thought may or may not get what we want; but it is at least necessary that we should know what we are trying to get. And those who are called practical men never know what they are trying to get.

-- G. K. Chesterton, The Outline of Sanity, IV.1 (1927)

Omitted sentences NOT marked, and paragraph breaks inserted, for a sane read. :)

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