Adam Smith and the Grameen Bank

A most thoughtful and stimulating article from Andy Mukherjee, “Nobel for Yunus Is Not a Defeat for Adam Smith, on Blomberg.com on the Nobel Peace Prize awarded to Muhamad Yunus was a pleasure to read today. Not because I agree with all of it – I do not – but because it raises issues that enable me to present Adam Smith’s views not limited to my regular critiques of the errors of his Chicago epigones, the creators of the muddle which has come to dominate the perceptions of economists.

Andy Mukhargee is burdened with trying to defend Adam Smith, or rather a version of him, by showing that Muhamad Yunus and his Grameen bank works within a modern capitalist framework while linked to ideas of Adam Smith. This seems a small problem of interpretation but it is actually a major issue of intellectual accuracy, given that what Smith actually wrote is wholly consistent with the Grameen initiative within its own corpus and it does not require manipulation of Chicago’s ideas about Smith to relate it to capitalism, a 19th to 21st century phenomenon. On the contrary, it requires the education of those imbued with Chicago’s version of Adam Smith as a theorist of capitalism, which he wasn’t.

That this is necessary can be seen in Andy Mukhargee’s final sentence: ‘Making room for Adam Smith's invisible hand will eradicate poverty faster for a greater number of people than creating clones of Grameen Bank.” His essay shows he is informed of the obstacles for the poorest to capital, which I shall discuss momentarily, but it also shows he is deficient in understanding from where Smith was coming when he researched, lectured and wrote in 18th century Scotland, about an economy roughly where much of the Third World today is at for the poorest end of the income spectrum.

Kirkcaldy Smith, unlike the Chicago version, knew nothing of the capitalism that was nearly a century away in the future with it impressive development in economics and technology, with most of the latter still on a distant horizon. Smith spent his intellectual life ‘looking backwards’, in Samuel Fleischacker’s memorable phrase, not forwards to what was to follow the relatively primitive commercial economy of his time, which he chose to inquire into for his report of what caused nations to move towards ‘opulence’. He did not write a textbook on economics and the economics that he did write about would barely fill half-a-semester of an undergraduate theory course today.

His conjectural history of society’s development began when humans were extremely poor (hunter gatherers), had little scope for the propensity to ‘truck, barter and trade’ and had hardly any division of labour. Their problem was access to ‘stock’, i.e., the saving of resources, mainly in provisions, to undertake production cycles longer than a few days.

Cutting a longer story short, until the three elements of the propensity to bargain, the division of labour and the accumulation even of minute amounts of stock occurred together, markets will not grow and people will be forced to live hand-to-mouth, which was the normal condition of human kind for hundreds of millennia back amongst the hominids. Of course, other habits are also important for the nascent steps to development can take root and allow it to flourish, among these Smith highlighted a sound system of justice, a predilection for trust and a widespread ‘mercenary exchange of good offices’ (i.e., reciprocation).

In many societies within a modern capitalist world, where the same three conditions operate only at the most primitive level, poverty is endemic. Now Smith lectured about all this from 1751-64 at Glasgow University (see his Lectures in Jurisprudence, Liberty Fund). He was thoroughly conversant with this social evolutionary model of development, as those should be who express views as to how much or little the Grameen Bank activities conform to Smith’s works.
Smith observed that human societies had passed through Four Stages, namely, hunting, shepherding, farming and, ‘at last’, commerce. As a classical scholar he was well aware – even more than normal – of the impact on Western Europe of the Fall of Rome around 476 and the destruction of commercial markets under the regimes of barbarian shepherd societies (thus his admonition that ‘defence was more important than opulence’).

The first full cycle of development came to an end in the West (it lingered on in the Eastern Empire for a millennium, then collapsed – about the time it revived again in the West). His Wealth of Nations addressed how certain countries in Europe were reviving and were back on the road to opulence, and what might be done to encourage these developments because, among other benefits, they would also relieve the very poorest from their abject poverty.

Place Muhamad Yunus in this Smithian context and we seen how close he is to Adam Smith, not how far away he might be. He certainly is far away from Chicago’s neo-classical version of Adam Smith; but he is a main player in Smithian economics.

The poor have no ‘stock’ (using Smith’s contemporary word for what we call capital). Moving from an absence of stock to a minimal amount sufficient to begin frugal accumulation in the rounds of the ‘great wheel of commerce’, requires efforts beyond the reach of most people on the fringes (though they may be a majority in some societies today) of a country developing its economy only in parts. With no property, they have no collateral for bank loans (and didn’t have in the mid-18th century). Banks were also forming in Smith’s day and it was not always a straight-forward process even then (as he reports in Wealth of Nations in the evolution of currency, bills, bonds, and fractional lending, etc.).

The experience of Grameen Bank is that by lending small sums to groups under local conditions that maximise trusting behaviour in close relationship units, the primitive accumulation of stock may be initiated. That is a pure Adam Smith thinking. This is not to discredit the measures that Andy Mukhargee envisages in developing credit terms, collateral for lending and so on; it puts it in context.
Unfortunately, Andy Mukhargee spoils his account completely with his last sentence: ‘Making room for Adam Smith's invisible hand will eradicate poverty faster for a greater number of people than creating clones of Grameen Bank.”

I won’t rehearse my oft made remarks about the Chicago myth of ‘the invisible hand’. But simply say: ‘No Andy. There is no invisible hand in the development of markets, and Smith did not say so either. But first read his ‘Lectures in Jurisprudence’ and then the early chapters in ‘Wealth of Nations’, and reflect on what the Gameen Bank is doing.

Read Andy Mukhargee’s article at:
http://www.bloomberg.com/apps/news?pid=20601039&sid=au9O.R5sGWtA&refer=home