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April 22, 2013

What is the Impact of Muhammad Yunus?

By Jonathan Morduch

Muhammad Yunus spoke to an overflowing crowd at NYU on April 15, an event jointly sponsored by the Wagner School of Public Service, Stern School of Business, and Financial Access Initiative.

Professor Yunus is known for fighting to improve the lives of millions of poor families around the world, the quest that was celebrated by the 2006 Nobel Peace Prize. These days there is a lot of talk about the impact of microcredit. But here was an opportunity to ask: what is the impact of Yunus? Given where we were, more specifically, how has Yunus changed the way we--economists, academics, policy makers and influencers--think about problems?

On one level, Yunus’s impact on the academy is obvious. It can be seen in our curricula. Yunus’s push to build “social businesses” has translated into a widening array of university courses. After the lecture, Yunus turned to Dean Peter Henry of Stern and said with a smile, “You should teach a course on social business!” Yunus would be happy to know that Stern already teaches a group of classes. These include an MBA in Social Enterprise and an MBA in Social Innovation and Impact. Wagner similarly offers a wide range of courses on social entrepreneurship. Check out this list that covers everything from finance to advocacy to policy to management of social enterprises.

The university has an active cross-university program on social enterprise, with a slate of fellows and regular speakers. My colleague Paul Light has written a book, “The Search for Social Entrepreneurship” and Jonathan Conning and I have been drawing relationships between social business and corporate finance.

Raymond Fisman, who sat in the front row at Yunus’s talk, is director of the  social enterprise program at Columbia Business School. His new book with Tim Sullivan, The Org , gives great examples of organizations that could be considered social businesses. Sitting behind Ray was Ryan Bubb from NYU Law, who has been doing related work on financial institutions like credit unions.

Students are even more engaged with social business than the faculty, led by clubs such as the NYU Social Enterprise Association or the Microfinance Initiative at NYU  or Microlumbia.

But has Yunus changed how we think? In the decade after Yunus received his Ph.D--at around the time that Yunus was starting his first experiments with microcredit in Bangladesh -- the economics profession was waking up to the revolution that we now call “the Economics of Information.” Pioneers included Joseph Stiglitz, George Akerlof, and Michael Spence, who is now at NYU Stern. The three shared a Nobel Memorial Prize for their independent work.

That revolution in economics fundamentally changed the way we view the roles of governments and markets, and it became a foundation for modern corporate finance theory. But, looking back, there is a way in which the revolution in economic thinking was strikingly conservative.

For economists, the game is constrained optimization, and the Economics of Information showed that, given constraints (most important, the lack of shared information between buyers and sellers), markets do not always work. The contribution of the economic theorists was to describe why markets can systematically deliver outcomes that are fundamentally unfair and inefficient. In all of this work, credit markets were prime examples.

And that’s where it stopped, since under the assumptions, there is no market-based improvement possible. Sometimes the government can intervene to nudge outcomes toward better equilibria, but governments often have worse information than other participants.

Yunus built a bank that looked very different from its contemporaries (and still does), built on fundamentally different assumptions. Customers are assumed to act in ways that help the bank, by forming into groups and supporting each other with the struggles to repay loans and accumulate savings. Customers are assumed to value the bank, not just as a source of cash but as a partner in navigating through life. Customers, it is then assumed, will work hard to stay in good standing over time. Sure, customers are self-interested, but not exclusively so. And the same holds for the bank.

For an hour during Yunus’s speech, the audience willingly suspended disbelief about the challenges and limitations of social business.  The next morning we were getting back to thinking about the hard questions about how social businesses actually work, and what keeps them from falling apart. The answer is that it’s often complicated, and they won’t always work, nor are they always the best solution. But they sometimes will work, and can open opportunities we had not seen before.

To get to that conversation, you need to start by questioning the original assumptions that delivered the conclusion that nothing more can be done -- the assumption that we’re already in the best of all possible worlds. What Yunus achieved – as much through his actions as through his writing – was to push us to question the assumptions. Why assume that banks can’t acquire better information. Or that they can’t develop contracts or processes that make the lack of shared information less of a problem? If the constraints are the real problem, work to undo the constraints.

This is Yunus’s legacy: To demonstrate that -- one way or another, through trial and error and rethinking assumptions -- something more should be done, and can be done.

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