Want to Help the Poor? Start a Business!

So you want to help the poor?  Socialism is not the answer.  It’s a dead end.  Socialism doesn’t create any wealth and it uses the resources it takes from others inefficiently.   It sickens, and eventually kills, the productive institutions it depends on. 

A recent example of this is Venezuela, where the Socialist utopia promised by Hugo Chavez has predictably descended into poverty, starvation, and chaos.  In the words of a much wiser Hugo, Victor Hugo, in his epic novel Les Miserables, the redistribution of wealth promised by Socialism “is a distribution made by the butcher, who kills what he divides….To kill wealth is not to distribute it.”  Socialism creates dependency on the government and takes away the initiative of its citizens, making everyone worse off.     

Charities do some great work but have also proven unable to solve the poverty problem.  Like government most charities are inefficient, but for a completely different reason.  Government is very efficient at collecting money through taxes, but is inefficient when spending it.  Charities have the opposite problem, finding it necessary to expend great time, effort, and money in soliciting more donations. It is also easy for charities, if they are not careful, to promote dependency on the charity instead of self-sufficiency. 

So if Socialism and charitable giving are not the answers to poverty, what is?  Muhammad Yunus, Nobel Peace Prize winner, micro-lending pioneer, and the person who has perhaps done more than any single person in the last fifty years to fight poverty provides an emphatic answer in his fantastic book Banker to the Poor: Start a business!

Yunus writes:

“We can condemn the private sector for all its mistakes, but we cannot justify why we ourselves are not trying to change things, not trying to make things better by participating in the economy.  The private sector, unlike the government, is open to everyone, even those not interested in making a profit. 

The challenge I set before anyone who condemns private-sector business is this: If you are a socially conscious person, why don’t you run your business in a way that will help achieve social objectives?” 

Yunus sees three advantages of businesses over government or charities in the fight against poverty: 

(1)   The first is that businesses, by necessity, are much more efficient than governments or charities.  If businesses are not efficient they will not be around for long.  Yunus writes:

“Competition in the marketplace of ideas almost always has a powerful positive impact.  When a large number of people are vying to do the best possible job of developing and refining an idea – and when the flow of money toward them and their company depends on the outcome of competition – the overall level of everyone’s performance rises dramatically.”

Yunus adds: “A social business is not a charity.  It is a business in every sense.  It has to cover its full costs while achieving its social objective.  When you are running a business you think differently and work differently than when you are running a charity.  And this makes all the difference in defining social business and its impact on society.” 

In short, the efficiency demanded for survival in the private sector means that businesses are capable of using the world’s resources much more efficiently than governments or charity in the fight against poverty.    

(2)   Second, businesses are self-sustaining.  Yunus states, “There is no need to pump in money every year.  It is self-propelling, self-perpetuating, and self-expanding.  Once it is set up, it continues to grow on its own.  You get more social benefits for your money.”

This really gets to the heart of why free-market economies have less poverty than centrally-controlled economies.  Businesses create additional wealth.  Instead of a butcher dividing the meat from a slaughtered cow, free markets grow the herd.  While government programs and charities require a continuous influx of new money to keep them going, businesses grow under their own power. 

(3)   Third, and perhaps most important, businesses are much more likely to unleash the creativity and potential of the poor.  Yunus states, “The first and foremost task of development is to turn on the engine of creativity inside of each person.  Any program that merely meets the physical needs of a poor person or even provides a job is not a true development program unless it leads to the unfolding of his or her creative energy.” 

The tragedy of poverty is that is prevents so many people from reaching their potential.  Indeed, Grameen Bank, the bank Yunus founded to provide microcredit loans to the poor of Bangladesh, was built on the belief that, “…people have endless potential, and unleashing their creativity and initiative helps them end poverty.”  Businesses are better positioned than government or charities to meet not just the physical needs of the poor, but to unleash their creativity and help them reach their potential.

To be fair, Yunus isn’t just calling for more businesses, but more social businesses, which he describes as “non-loss, non-dividend enterprise[s], created with the intention to do good to people, to bring positive changes to the world, without any short-term expectation of making money out of it.”  He contrasts this with standard businesses which he calls profit-maximizing businesses.

A social business’s primary focus is not to make money, but to do good.  However, it must do this without losing money, which forces it to be efficient. 

Yunus sees the need for two kinds of social businesses.  The first is a business that provides goods and services to the poor at a price they can afford.  The second is a business that is owned by the poor themselves, and provides goods and services to both the poor and others. 

Of course, the best kind of social business fills both of these functions and Yunus has shown how this might be done through Grameen Bank, the bank he founded in 1976 to provide no-collateral micro-credit to help the poor of Bangladesh start their own businesses.  Grameen provides a vital service to the poor and it is owned by the borrowers themselves.  In addition, Yunus is very proud of the fact that Grameen is profitable, allowing it to grow under its own power.

The book Banker to the Poor describes the beginnings and growth of Grameen Bank, the spreading of the idea of micro-credit throughout the world, and Yunus’ ideas on social businesses.  It is by far the best book I have ever read on finding solutions that actually work in the fight against poverty, and I highly recommend it.   

Hundreds-of-millions of people have been brought out of poverty in the last fifty years, not through government programs or charity, but through free-enterprise.  The evidence is overwhelming that free-enterprise is the best poverty-fighting tool available and the only system that provides real, long-term solutions. 

It is past time for those who care about the poor to recognize this and, instead of demonizing capitalism, use its power to make the world a better place.  Banker to the Poor is a clarion call to do just that.  Yunus concludes:

“Somehow we have persuaded ourselves that the capitalist economy must be fueled only by greed.  This has become a self-fulfilling prophecy.  Only the profit maximizers get to play in the marketplace and try their luck.  People who are not motivated by profit making stay away from it, condemn it, and search for alternatives. 

…I profoundly believe, as Grameen’s experience over twenty years has shown, that personal gain is not the only possible fuel for free enterprise.  Social goals can replace greed as a powerful motivational force.  Social-consciousness-driven enterprises can be formidable competitors for the greed-based enterprises.  I believe that if we play our cards right, Social-consciousness-driven enterprises can do very well in the marketplace.”

In other words, if you really want to help the poor, stop complaining about the one economic system that actually works in the fight against poverty and start, invest in, or support a social business!