The Adam Smith Lecture
Adam Smith Lecture at Glasgow University: Delivered by Prof. Muhammad Yunus on December 1, 2008
Distinguished Principal, distinguished members of the faculty of Glasgow University, students, distinguished ladies and gentlemen:
I am very honored to be invited to deliver the Adam Smith lecture here at Glasgow University. It is an honor and a privilege for me to be here as part of the celebrations to mark the 250th Anniversary of Adam Smith’s The Theory of Moral Sentiments. Thank you for inviting me here.
Adam Smith provided the conceptual framework of capitalism. It has been improved and elaborated throughout its long history. In the meantime the world has changed enormously. The need for reviewing the basic structure of capitalism has been felt on many occasions. But it has never been felt as strongly as it is being felt today. Capitalism is in serious crisis. Even so, no-one is calling for it to be abandoned in favor of some other system, such as socialism, because everybody is convinced that, with all its faults, capitalism is still the best economic system known to humanity.
Still, in light of the current crisis, there is strong support for a major overhaul of the system. I’ll try to explain in my lecture today why I think one major change in the theoretical framework of capitalism is necessary. It’s a change that will allow individuals to express themselves in multi-dimensional ways and address the problems left unsolved or even exacerbated by the existing conceptual framework. And although my proposal may be viewed as a significant change in the structure of capitalism, it is actually very consistent with what Adam Smith elaborated so brilliantly 250 years ago in his Theory of Moral Sentiments.
We are living in a time of unparalleled prosperity, fuelled in part by revolutions in knowledge, science, and technology, particularly information technology. This prosperity has changed the lives of many, yet billions of people still suffer from poverty, hunger, and disease. And now, several major crises have combined forces to bring even greater misery and frustration to the world’s bottom 3 billion people.
Few people foresaw these crises. The twenty-first century began with high hopes and idealistic dreams, encapsulated in the UN initiative known as the Millennium Development Goals. Many of us were convinced that the coming decades would bring unprecedented wealth and prosperity, not just for a few but for all people on this planet.
Sadly, however, 2008 will go down in history as the year of a rude awakening about the gross weaknesses in our capitalist system. It has been the year of the food price crisis, the oil price crisis, the financial crisis, and the ever-worsening environmental crisis. In combination, these crises are causing a profound loss of faith among people who thought they had full understanding of and control over the global system.
The Food Crisis
Early in 2008, the United Nations World Food Programme (WFP) reported dreadful news — more than 73 million people in 78 countries were facing the reality of reduced food rations. We saw headlines reporting news of a sort many people assumed we would never experience again: skyrocketing prices for staple foodstuffs like grains and vegetables (wheat alone having risen in price by 200 percent since the year 2000); food shortages in many countries; rising rates of death from malnutrition; even food riots threatening the stability of countries around the globe.
Since the latest peak in global food prices (which occurred in June, 2008), prices have gone down, bringing a bit of short-term relief to millions. But continuing high food prices have created tremendous pressure in the lives of poor people, for whom basic food can consume as much as two-thirds of their income.
And while short-term relief efforts are essential to stave off the immediate effects of food shortages and prevent widespread famine, it’s also important to step back and take a look at the broader causes of the crisis. We need to consider how the evolution of the world economy and, in particular, of the system whereby food is produced and distributed has led us to today’s dilemma. Perhaps surprisingly, the economic, political, and business practices of the developed world have a profound impact on the availability of food in the poor nations of the world. Thus, solving the global food problem will require a redesign of international framework, not merely a series of local or even regional reforms.
The Green Revolution of the 1950s and 1960s increased crop yields in Asia and Latin America and made many countries that had been reliant on food imports self-sufficient. Rates of hunger and malnutrition dropped significantly. The high-yield grain production made possible by the Green Revolution has been credited with saving the lives of up to a billion people.
Now, however, a series of interrelated trends has partially reversed the gains that the Green Revolution produced.
Part of the problem has been the way in which globalization of food markets has been managed over the past three decades. I am a strong proponent of free trade; I believe that encouraging people and nations to exchange goods and services with one another will, in the long run, lead to greater prosperity for all. But like all markets, global markets need reasonable rules that will allow all participants an opportunity to benefit.
Today’s global markets, unfortunately, are only partly free, and some of the restrictions and distortions that have been left in place have had devastating consequences for poor nations.
The imbalances caused by this semi-free trade are distorting markets, raising prices, and even destroying agriculture in poor countries that once boasted enormous food surpluses.
Fuel or Food?
Subsidies for ethanol in countries like the U.S. are one example of this problem. Intended to encourage the growth of corn and soy to partially replace fossil fuels in gasoline, these subsidies may have made sense when oil cost $20 a barrel. They were designed to make it economically viable to use biofuels as a partial substitute for relatively cheap and abundant oil — and they worked as intended, as shown by the fact that, in 2007, fully one quarter of the maize (corn) crop in the U.S. was used to manufacture ethanol. But these same subsidies cannot be justified when oil is at over $50 a barrel — nor can the continuing subsidies for oil production enjoyed by large, highly profitable firms like ExxonMobil. Both sets of subsidies distort markets, lead to unintended ecological, social, and economic consequences, and should be phased out as quickly as possible. Otherwise, they will continue to drive up the price of basic foodstuffs both directly and indirectly, including by diverting farmland and other agricultural resources to the production of fuel rather than food.
Food Versus Feed
Increased demand for meat has also distorted food price structures and contributed to worldwide food shortages. Growing prosperity in some of the world’s poorest nations is, of course, a wonderful thing. Over the past three decades, millions of people have been able to lift themselves out of poverty. The credit goes to increased access to free markets, technological developments, and programs such as microcredit that make capital for investments available to those who were once shut out of the capitalist system.
But prosperity is bringing its own challenges. The amount of meat eaten by the typical Chinese citizen has increased from 20 kilograms per year in 1958 to over 50 kilograms today. Similar increases have been seen in other large countries such as India, Indonesia, and Bangladesh, which together with China make up nearly half the world’s population. Not only can more and more people in these countries now afford meat, but they are shifting to meat (and away from more traditional, low-meat diets) as part of their adoption of a “modern, prosperous” lifestyle.
Unfortunately, meat-eating is a relatively inefficient use of natural resources. The number of nutritious calories delivered by meat is far lower than the calories humans can enjoy through direct intake of grains. Yet today, more and more grain and other foodstuffs are being used to feed cattle rather than human beings. By some measures, up to a third of the world’s grain production, as well as third of the global fish catch, is being used to feed livestock. And more and more of the planet’s farmlands are being diverted from the production of food for human consumption and toward the growing of grains for cattle feed. These changes add several costly steps to the process by which human life will ultimately be sustained.
As a result of dysfunctional agricultural choices such as the decision to shift land use toward ethanol and meat production, even basic foods are becoming more expensive.
There are still other factors worsening the current food crisis for the developing nations. One of these is the growing difficulty for farmers in poor nations to compete in the increasingly global food markets.
In effect, small farmers in the developing nations are suffering from the necessity to compete against large-scale producers in the developed nations. It’s a one-sided battle that, so far, has led to devastating results for the poor farmers of the world.
Increasing corporate control of agricultural resources is also harming farmers in the developing world. As large agribusinesses take near-monopoly control over seed stocks as well as control over supplies of costly synthetic fertilizers and pesticides, more and more small farms are driven out of business, unable to afford the supplies they need to compete in the new global food market. The rising cost of oil is a significant factor here, too. For example, many fertilizers are petroleum-based, which means that every increase in the cost of a barrel of oil drives up the cost of fertilizer. The World Bank reports that, over the past five years, fertilizer prices have risen by 150 percent. Of course, high oil prices also drive up the cost of irrigation, running farm equipment, delivering goods to market, and shipping foods to and from processing plants.
All of these economic and social problems are growing worse just as global environmental trends are threatening the future of agriculture around the world. Climate change, drought, and deforestation are turning vast areas that were once fertile farmlands into deserts. The UN reports that, every year, an area equivalent to the entire country of Ukraine is lost to farming because of climate change. What’s more, if current global warming trends continue, over the next century, rising sea levels can be expected to flood almost one third of the world’s farmland. It is easy to imagine what is happening to Bangladesh, the world’s most densely populated country, which is a flat country with 20% of its land less than one-meter above sea level. As the sea-level keeps rising, flooding grows steadily worse and more destructive. It is an emerging case of environmental disaster leading immediately to human disaster.
On top of the food crisis, the oil price crisis, and the environmental crisis, came the biggest crisis of all — the crushing collapse of the US financial system. Giant financial institutions along with major manufacturing firms like the auto-makers are going bankrupt or being kept alive with unprecedented government bailout packages. Many reasons have been suggested for this historic economic collapse: excessive greed in the market place, the transformation of investment markets into gambling casinos, the failure of regulatory institutions, and so on. But one thing is clear: the financial system has broken down because of a fundamental distortion of its basic purpose.
Credit markets were originally created to serve human needs—to provide business people with capital to start or expand companies. In return for these services, bankers and other lenders earned a reasonable profit. Everyone benefited. In recent years, however, the credit markets have been distorted by a relative handful of individuals and companies with a different goal in mind — to earn unrealistically high rates of return through clever feats of financial engineering. They repackaged mortgages and other loans into sophisticated instruments whose risk level and other characteristics were hidden or disguised. Then they sold and resold these instruments, earning a slice of profit on every transaction. All the while, investors eagerly bid up the prices, scrambling for unsustainable growth and gambling that the underlying weakness of the system would never come to light.
In time, the inevitable happened. The house of cards came tumbling down. And because of globalisation, this financial tsunami is spreading all over the world. Stock-markets all over the world are reporting daily about losses in the trillions of dollars. But the rich will not be the worst sufferers from this financial crisis, rather it will be the bottom 3 billion people on this planet, despite the fact that they are not responsible in any way for creating this crisis. While the rich will continue to enjoy a privileged life style, the bottom 3 billion people will face job and income losses that, for many, will make the difference between life and death.
We have only seen the beginning of these crises in 2008; it is going to be a long and painful period ahead. The combined effects of the financial crisis, the food crisis, the energy crisis, and the environmental crisis will continue to unfold in the coming months and years, affecting the bottom 3 billion with special force.
Over the past three months, world leaders have been particularly focused on the emergency situation on the financial front. This is quite understandable. But it should not be seen as a problem of high finance only. This narrow view of the financial crisis is likely to create global social and political problems. The human aspect of the financial crisis must be integrated into all policy proposals. The appropriate thing would be to treat all four crises as one crisis, since all are linked together. So far, governments have kept themselves busy coming up with super-size bail-out packages for the financial institutions which were responsible for creating the financial crisis, yet no bail-out package of any size has even been discussed for the victims of the crisis — the 3 billion bottom people and the planet that sustains us all.
For this reason, I have been repeatedly urging that this mega-crisis be taken as a mega-opportunity to redesign the existing economic and financial systems.
Capitalism is a Half-Built Structure
Even if we can overcome the immediate crises we face, we will still be left with fundamental questions about the effectiveness of capitalism in tackling such unresolved problems as persistent poverty, lack of access to health care and education, and epidemic diseases. In my view, the theoretical framework of capitalism that is widely accepted today is a half-built structure—one that prevents Adam Smith’s “invisible hand” from operating as he believed it should.
In a sense, we have chosen to disregard half of Smith’s message. His Wealth of Nations has drawn all the attention while The Theory of Moral Sentiments has been largely ignored. This book could have provided the foundation for the other, missing half of the market — the half of the market that caters to the social consciousness of the people.
The present theory of capitalism holds that the marketplace is only for those who are interested in profit only. This interpretation treats people as one-dimensional beings. But people are multi dimensional, as Adam Smith saw two and a half centuries back. While they have their selfish dimension, at the same time, they also have their selfless dimension. The theory of capitalism, and the marketplace that has grown up around the theory, makes no room for the selfless dimension of the people. If the altruistic motivation that exists in people could be brought into the business world, there would be very few problems that we could not solve.
Adam Smith’s Theory of Moral Sentiments begins with the assertion that “How selfish so ever man may be supposed, there are evidently some principles in his nature, which interest him in the fortunes of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it. Of this kind is pity or compassion, the emotion we feel for the misery of others, when we either see it, or are made to conceive it in a very lively manner. That we often derive sorrow from the sorrows of others, is a matter of fact too obvious to require any instances to prove it; for this sentiment, like all the other original passions of human nature, is by no means confined to the virtuous or the humane, though they perhaps may feel it with the most exquisite sensibility. The greatest ruffian, the most hardened violator of the laws of society, is not altogether without it.”
Smith then asks that most fundamental question: Why do we regard certain actions or intentions with approval and condemn others? At the time, opinion was divided: some held that the only standard of right and wrong was the law and the sovereign who made it; others, that moral principles could be worked out rationally, like the theorems of mathematics.
Smith took the view that people are born with a moral sense, just as they have inborn ideas of beauty or harmony. Our conscience tells us what is right and wrong: and that conscience is something innate, not something given us by lawmakers or by rational analysis. And to bolster it we also have a natural fellow-feeling, which Smith calls “sympathy”. Between them, these natural senses of conscience and sympathy ensure that human beings can and do live together in orderly and beneficial social organizations.
With these ideas in mind, we can see that Smith’s other great book, The Wealth of Nations, has probably been misinterpreted. Smith’s thesis in that book is generally summarized as an argument that all will be well if people are allowed to follow “self-interest”. The world has interpreted “self-interest” as equal to profit maximization. But with human beings as they are, driven by conscience and sympathy as well as the desire for profit, we see that “self-interest” includes both profit maximization and social contribution. That’s what Adam Smith elaborated in The Theory of Moral Sentiments, which attached great importance to justice and other moral virtues, perhaps to clarify the boundaries of “self-interest”.
The present structure of economic theory does not allow these other dimensions of people to play out in the market place. I argue that, given the opportunity, people will come into the market place to express their selfless urges by running special types of businesses specifically designed to improve the lot of humanity in general. In the absence of such an opportunity in the market place, people will express their selflessness through charities. Charitable efforts have always been with us, and they are noble, and they are needed. But we have seen that business has a greater ability than charity to innovate, to expand, and to reach more and more people through the power of the free market. Imagine what we could achieve if talented entrepreneurs and business executives around the world devoted themselves to goals such as ending malnutrition, providing shelter for the homeless, and eradicating disease.
With this in mind, I am proposing a second type of business to operate in the same market along with the existing profit maximizing businesses. I call this new type of business “social business,” because it exists for the collective benefit of others.
A social business is a business whose purpose is to address and solve social problems, not to make money for its investors. It is a non-loss non-dividend company. The investor can recoup his investment capital, but beyond that no profit is to be taken out as dividends by the investors. These profits remain with the company and are used to expand its out reach, to improve the quality of the product or service it provides, and to design methods to bring down the cost of the product or service. If the efficiency, the competitiveness, and the dynamism of the business world can be harnessed to deal with specific social problems, the world will be a much better place.
The concept of social business crystallized in my mind through my experience with the Grameen companies. Over the years, Grameen has created a series of companies to address different problems faced by the poor in Bangladesh. Whether it is a company to provide renewable energy, a company to provide healthcare, or yet another company to provide information technology to the poor, we were always motivated by the need to address the social need. We designed these businesses as profitable companies, but only to ensure their sustainability so that the products or services they provided could reach more and more of the poor – and on an ongoing basis. In all these cases, the social need was the only consideration; earning a profit was no consideration at all. That is how I realized that businesses could be built that way, from the ground up, around specific social needs, without relying on the motive of personal gain.
The concept of social business got international attention when Grameen Bank launched a joint venture with Danone, a multinational company from France. Grameen teamed up with Danone to bring nutritious fortified yogurt to the undernourished children of rural Bangladesh. The aim of this social business is to fill the nutritional gap in the diet of these children. We sell the yogurt to the poor children at an affordable price, charging just enough to make the company self sustaining. Beyond the return of the original investment capital, neither Grameen nor Danone will make any money from this venture, by agreement. We have one yogurt plant already operating in Bangladesh, and in time we hope to have 50 such plants throughout the country.
Grameen Danone is just the first social business we have launched. We also have built an eye care hospital on social business principles. And we have created a joint-venture with Veolia of France to deliver safe drinking water in the villages of Bangladesh. This joing venture is building a small water treatment plant to bring clean water to 50,000 villagers, in an area of Bangladesh where the existing water supply is highly arsenic contaminated. We will sell the water at a very affordable price to the villagers to make the company sustainable, but no financial gain will come to Grameen or Veolia. Now more and more companies are coming forward to partner with us to set up new social businesses. We feel excited about creating a series of examples of social businesses, which, hopefully, will encourage others to join in.
Some people are skeptical when I describe the concept of social business. Who will create these businesses? Who will run these businesses? Why would anyone devote time, energy, and money to projects with no hope of personal gain? I always say that, to begin with, there is no dearth of philanthropists in the world, no dearth of donor countries giving grants. People give away billions of dollars every year. So do donor countries. Imagine if those billions could be used by social businesses to help people. These billions would be recycled again and again, and the social impact could be all that much more powerful. In the same way, money allocated by companies to corporate social responsibility projects could easily go into social businesses. Each company would create its own range of social businesses. We can also create Social Business Funds to pool funds from many sources and invest them in social businesses. The opportunities for launching social businesses are really limitless.
Business Owned By the Poor
Even profit maximizing companies can be social businesses if they are owned by the poor. This constitutes a second type of social business. Grameen Bank falls under this category of social business. It is owned by its poor borrowers.
The borrowers buy Grameen Bank shares with their own money, and these shares cannot be transferred to non-borrowers. A committed professional team does the day-to-day running of the bank. Every year, dividend checks are sent to the borrowers, representing their share of the bank’s profits.
Bilateral and multi-lateral donors interested in supporting economic development could easily create social businesses of this type. When a donor wants to gives a loan or a grant to build a bridge in the recipient country, it could create instead a “bridge company” owned by the local poor. A committed management company could be given the responsibility of running the company. Part of the profits earned by the company would go to the local poor as dividends, while part would go towards building more bridges. Many infrastructure projects, like roads, highways, airports, seaports, and utility companies could be built in this manner.
Once the concept of social business is included in economic theory, thousands of people will come forward to invest in social businesses because of the social dreams they have in their hearts.
Social Stock Market
To connect investors with social businesses, we will need to create a social stock market where only the shares of social businesses will be traded. An investor will come to this stock-exchange in order to find a social business, which has a mission to his or her liking, just as someone who wants to make money goes to the existing stock-market.
To enable a social stock-exchange to perform properly, we will need to create rating agencies, standardization of terminology, definitions, impact measurement tools, reporting formats, and new financial publications, such as, The Social Wall Street Journal, and new electronic media, such as, Social Bloomberg. Business schools will offer courses and business management degrees to train young managers how to manage social businesses in the most efficient manner, and, most of all, to inspire them to become social business entrepreneurs themselves.
We live in a globalized world, for better or for worse. What we do in one part of the world has a direct impact on another. We are now connected and inter dependent in an unprecedented way. This can be a good thing, this can be a bad thing. Good waves spread quickly. So do bad waves. The shock-waves from the collapse of the financial system in the USA are being transmitted globally. The whole world now suffers for something which happened in the USA.
The wrong doings of the rich world impact heavily on the lives of the poor. The life-style of the North can make lives in the South unsustainable. The issue of climate change is a very good example of this.
The world has many resources but many of the most important resources are non renewable. We have to understand that the patterns of our consumption, and the path to development that the world is taking could seriously endanger our future on this planet. The food crisis is in part caused by changes in climate patterns produced, scientists believe, by human activity.
My country, Bangladesh is one of the countries that will be most affected, and most quickly, by the effects of climate change. But in the long run, every country will suffer the consequences of global warming. We have to understand that we all have to share this world with everyone today, and also with future generations.
We have to design a new global economic architecture to make sure that one person’s enjoyment of life does not take away another person’s right to survival, and that one generation’s enjoyment of life does not put another generation in peril.
The Role of Social Business in Globalization
I support globalization and believe it can bring more benefits to the poor than any alternative. But it must be the right kind of globalization. To me, globalization is like a hundred-lane highway criss-crossing the world. If it is a free-for-all highway, its lanes will be taken over by the giant trucks from powerful economies. Bangladeshi rickshaws will be thrown off the highway. In order to have win-win globalization, we must have traffic rules, traffic police, and a traffic authority for this global highway. The rule of “strongest takes all” must be replaced by rules that ensure that the poorest have a place and a piece of the action, and are not elbowed out by the strong. Globalization must not become financial imperialism.
Powerful multi-national social businesses can be created to capture a share of the benefits of globalization for poor people and poor countries. Social businesses will either bring ownership to poor people, or keep the profit within poor countries, since taking dividends will not be their objective. Direct foreign investment by foreign social businesses will be exciting news for recipient countries. Building strong economies in poor countries and protecting them from plundering companies will be a major area of interest for social businesses.
The Worst Crises Offer the Best Opportunities
Most important, the current mega-crisis should not distract donors and world leaders from the search for long-term global solutions. Instead they should see this as a mega opportunity to address long-term problems in their integrated solution packages.
The current multiple-crises offer us all a valuable lesson in the inter-connectedness of the human family. The fate of Lehman Brothers and that of poor sisters working in the garment factory in Bangladesh are linked together. The fate of a rice farmer in Bangladesh, a maize farmer in Mexico, and a maize farmer in Iowa are all intertwined; and while short-term trends may appear to benefit a few of us at the expense of many others, in the long-run, only policies that will allow all the peoples of the world to share their progress are truly sustainable.
In the coming months the multiple-crises will reveal more of their ramifications in economic and human terms. This is the time to bring the world together to face this crisis in a well planned and well managed way; to take this crisis as the best opportunity to design and put in place a new economic and financial architecture so that this type of crisis will never recur again, long-standing global problems will be addressed decisively, and the incoherence and deficiencies of the current economic and financial order will finally be removed.
The most important feature of this new global economic architecture will be to bring the half-built theoretical framework of capitalism to completion by including the second type of business, the social business, in the market place. Once it is included in the framework, it can play a very important role in solving the financial crisis, the food crisis, the energy crisis, and the environmental crisis. I It will also provide the most effective institutional mechanism for addressing the unresolved problems of poverty and ill-health. Social business can address all the problems which are left behind by the profit-making businesses, at the same time as it tones down the excesses of the profit-making businesses.
We can start introducing social businesses in the bail-out packages for the bottom 3 billion people, by creating a global social business fund to provide loans and equity for:
a) Expanding microcredit programs
b) Supporting other poverty reduction programs
c) Providing technology infrastructure for the poor
d) Improving agriculture in the developing world (through programs such as agricultural credit; local, national, and international marketing; storage; introduction of new technology; insurance; price and wage guarantees, and so on)
e) Providing healthcare and health insurance
f) Protecting the environment and providing renewable energy
g) making globalisation work for the poor
Poverty can be overcome
As we devote ourselves in crafting a new economic and social architecture, what should members of the younger generation, like you, be getting ready for ? I see one exciting option for you — to list all the features of the new world you want to create, and then work for it. I hope among all the features in your wish-list an important one will be to create a world without poverty.
The thought that always energizes me is that the poverty is not created by poor people. Poverty is an artificial imposition on the people. Poor people are endowed with the same unlimited potential for creativity and energy of any human being in any station of life, any where in the world. It is a question of removing the barriers faced by poor people to unleash their creativity to solve their problems. They can change their lives, if we only give them the same opportunities that we have. Creatively designed social businesses in all sectors can make this happen in the fastest way.
I always insist that poverty does not belong in civilized society. Poverty belongs only in a museum where our children and grandchildren will go to see what inhumanity people had to suffer, and where they will ask themselves how their ancestors allowed such a condition to persist for so long.
You, the next generation, have to make a pledge that it will be your generation that will ensure the elimination of poverty from this planet. We overcame slavery. We overcame apartheid. We have done other things that people once thought impossible. We have put human beings on the moon. We can overcome poverty, if we only decide that poverty does not belong to the world that you want to create. It is up to your generation to decide that the world you choose to live in will not contain the scourge of poverty.
You Can Make it Happen
We are fortunate enough to have been born in an age of great ideas and great technologies. A lot will rely on your asking yourself, “What use do I want to make of my creative talent?” Do you want to focus exclusively on making money? If you must, go ahead; but while making money through profit maximizing businesses do make sure that your businesses make a positive impact on people’s lives, or at least, make no negative impact. Alternatively, you could use your talent to change the world by harnessing the power of creative social businesses to address human and social needs.
Of course, you can do both types of businesses. Making money through responsible profit-maximizing businesses could be the means, while using that money for social businesses could be the exciting end.
The solutions to many of our world’s pressing problems could be accelerated through the creation of social businesses.
It is up to you to make it happen.
If you choose this path, paying attention to your conscience and to human sympathy as well as to the design for wealth, you will be the true economic person Adam Smith had in mind.