In this edition, read a feature on lessons from microfinance experiments in developing countries. Next, book notes from Rethinking Economics and the answer to what makes a person an entrepreneur?
This Week's Article
The Microfinance Silver Bullet
A silver bullet is an action that cuts through complexity, providing an immediate solution to a long-standing problem. Is microfinance that bullet to the issue of global poverty?
To learn about microfinance in developing economies, read the article using this link.
Rethinking Economics: An Introduction to Pluralist Economics (2017)
Edited By Liliann Fischer, Joe Hasell, J. Christopher Proctor, David Uwakwe, Zach Ward Perkins, Catriona Watson
“A group of economists suggested that institutions should be re-introduced into the picture. For example, in an influential paper studying the historical growth of international maritime trade from the seventeenth to the nineteenth century, Douglass North (1968) argued that technological change was not the preeminent driver of increased productivity that many economic historians had claimed. More important was the reduction in piracy, the development of a few large ports, and the growth of larger, more organised markets. These developments were related to more effective political, military and legal institutions, and they helped explain much of the productivity gains since 1600.”
This book is full of such revelations, especially for a student of economics bounded to the realms of the neo-classical school of thought. Each of the ten chapters introduces a new heterodox field – behavioral, institutional, complexity economics, and so on.
Claims of increased productivity are owed to technological change in academic texts, as far as I have seen and read. We blame automation for taking away jobs and leaving humans to be redundant for any productive activity in the future – the future of work is (almost) no work if we take it for the word of AI and tech companies!
This idea, though drawn from an earlier period, adds a fresh perspective to the debate. It was not technology that drove growth but the rise of organized markets and a decline in piracy. The free markets cannot facilitate this alone. It requires political, legal, and economic institutions to be effective and, at the same time, incorruptible. The only issue - neo-classical economics does not, for the most part, factor in the role of institutions in productivity gains. That is why there is a need to rethink economics, as the book argues, and it sure does a compelling job.
What are we Thinking?
Is everyone an entrepreneur, and does everyone need credit for production purposes only?
This week's article unravels the impact of microfinance on developing countries. Credit, in the form of microfinance, is a critical input to the production process that an entrepreneur uptakes.
The answer to this question of one being an entrepreneur ranges from - no, it requires business skills, innovative mindset, and whatnot - to - yes, everyone today is an entrepreneur in some way or the other. The modern-day entrepreneur tries to localize an already existing solution with some added features and filters – India, for example, has Flipkart and many others, a proxy for when you can't find something on Amazon.
An entrepreneur is someone initiative, willing to take calculated risks, and has a business sense. It is not easy to be one. Some might instinctively be entrepreneurial, while others struggle to be one. Hence, microfinance cannot be a one-size-fits-all approach to all microentrepreneurs.
Some researchers acknowledge this gap and engage beneficiaries to receive business or financial training along with microcredit loans. The effects of this strategy have been inconclusively positive, and there has been a gender gap in impacts from training and business loans.
On the other hand, evidence also suggests that borrowers used microfinance "loans" for consumption purposes, even though they knew they have to return the sum and that too with some added interest. Others used microfinance loans for purchasing non-productive durables – buying a television, fridge, etc.
It begs the question - can a business sense be taught? If yes, how long does it take, and how can one measure the entrepreneurial-ness of beneficiaries? Do revenues and profits earned provide an evaluation, or do we need qualitative measures?
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To read my previous blogs, visit my website, What-if Economics.