A Sobering Look at Microcredit and Microenterprise

Randall Kempner, writing on the Harvard Business Review blog:

Development agencies have promoted microfinance — the provision of small financial loans to poor people — because it is supposed to help poor people move out of poverty. After a comprehensive review of existing studies, with particular focus on recent randomized control trials, [researcher David] Roodman says that just isn’t true. “On current evidence, the best estimate of the average impact of microcredit on the poverty of clients is zero,” he argues. . . .

Another reason for justifying microcredit is that it offers poor people, particularly women, greater control over their financial lives. Roodman says the evidence is mixed on that count too. Some women may have been empowered, but others have been forced to repay loans when it wasn’t best for them. Cross-collateralization groups become burdensome, not emancipating, and at their worst, they lead to situations where people rob from each other to pay off their debts.

The reference is to David Roodman’s 2011 book Due Diligence: An Impertinent Inquiry into Microfinance. I have written skeptically about microfinance in the past. While effective capital markets, including those for very small loans, are critical elements of a market economy, it is unclear that microlending per se matters much, and the current emphasis on microenterprise ignores the fact that, historically, economic development is typically driven by large-scale enterprise, capital accumulation, and scale economies, not indigenous small business.

My Kind of Reality Show

I am in Georgia giving some lectures on entrepreneurship and economic development at the Free University Tbilisi. On the local news I heard about a Georgian reality show, described here by the BBC, in which participant-entrepreneurs compete for funding — similar to Shark Tank, but more authentic. A similar British show is in the works. Could this be a new trend? We’ve done singing, acting, modeling, cooking, house design. . . . I just hope there won’t be a future reality show for aspiring professors.

Bypass Entrepreneurship

FOX News writes about the recent accident at Heart Attack Grill in Las Vegas, NV. A male guest to the restaurant, who had ordered a “triple bypass burger,” suffered cardiac arrest while attempting to beat the burger. An ambulance was called to transport the man to a nearby hospital.

This is of course a tragedy for the man (whom we’re told survived and is in relatively good health considering the circumstances). But it is nevertheless an event that raises a number of questions about the responsibility of entrepreneurs. These questions were immediately bypassed (pun intended) and an “obvious” answer assumed as politicians, government agencies, and lobbying groups supposedly looking after our health call out for regulation. But for the not-so-quick-to-jump-the-gun when something happens, the questions still need answering. Regulation of what?

In this particular case, the guest to the restaurant ordered the “heart stopper” despite its name (“triple-bypass burger” – and the fries are called “flatline fries”) as well as signs on the door saying the food is hazardous to your health. Does the entrepreneur’s responsibility go further than declaring what he’s selling (and selling what he’s declaring)? And if it does, how far does this responsibility go? And what is the responsibility of the authorities?

But these questions lead back to the implied yet fundamental question that must first be answered: what is the responsibility of the consumer? If, as in this case, the consumer is fully informed (as in economic models) yet suffers adverse effects from his choice. Do we have a right to take this freedom and responsibility away from him (whether for his own good or not)?

From a scientific point of view, the important question is what are the effects on the functioning of the market. If we transfer responsibility for actions to someone who is not the actor – what are some far-reaching economic consequences? And this raises the question: how is entrepreneurship (using whatever definition) affected? Regulating “bypass” burgers could very well bypass entrepreneurship, and the consequences in terms of economic growth may be devastating. This means: devastating to people’s health, since without innovation, invention, and new approaches – that is, entrepreneurship – we may not make the advances in health or health care that we otherwise would.

The problem, of course, that we cannot see these effects. We cannot even imagine them, since what the future brings is what entrepreneurs themselves imagine. So how can we tell? Do we dare to regulate?

via Russ Coff’s Facebook post

Market “Solutions” as Social Engineering

In an article on the HBR Blog Network yesterday, The Market needs a Market Maker, Tammy Johns writes about the competency mismatch in the labor market. This is correct observation: there is at the same time a great surplus and a great shortage of labor. The reason for this is that the existing labor does not have the skills and competencies that employers seek, which causes both unemployment and suboptimal production. The labor market simply isn’t functioning.

Johns offers a Grand Idea for how to solve the problem: a centralized labor market maker, “a team that proactively manages supply and demand.” While this may intuitively seem like supplying a force of which the market seems short, it is quite a Soviet-style solution. And it completely disregards the question of why the labor market isn’t functioning, and what we may learn from the “strange” present state of it. In other words, to solve the problem, shouldn’t we first ask why there is too much supply and too much demand at the same time?

So why doesn’t Johns ask this question? We don’t know. But we can answer it. Rather than appointing a “maker” to force supply and demand to equilibrium (a point toward which one would expect market forces to lead), it can easily be shown that the problem in the market is due to the boom-bust cycle. The available, employable labor is educated according to the misguided structures of production during the boom – which in retrospect were unsustainable. We are therefore currently in a situation where we know that there is a huge social malinvestment in skill and education.

This is actually what also happened during the Great Depression. While we read about very high unemployment during the depression, what we do not often hear is that unemployment was very high for some and not at all high for others. They experienced then what we experience now: a structural malinvestment in skill that comes crushing down in need of correction as the true market demand for products and services is finally revealed.

Nobody is interested in hiring coachmen in the age of automobiles. But this is in itself not a problem, since society doesn’t instantaneously shift from horse-and-carriage to automobiles. The shift is gradual, so while there is unemployment for some individuals it is not a structural problem. And we wouldn’t expect a whole generation to seek apprenticeships to be coachmen while society is tending toward automobiles. We have a structural problem if, for whatever reason, supply of coachmen is artificially kept way above the market rate.

Johns’s is here to, when the problem becomes apparent, institute a resourceful (and omniscient?) government team to reeducate the apprentices and make everybody into automobile mechanics. But is this a prudent solution? It doesn’t address the cause but only attempts to do away with the symptom, and who knows what problems we might face after driving a whole generation into becoming Ford Model T mechanics? Perhaps we find ourselves in a situation where we have further progress and innovation so that the Model T is replaced with a new car – with a whole generation of Model T mechanics but nobody to deal with the new types of automobiles.

A “labor market maker” is but a kind of theoretical political entrepreneurship that amounts to nothing less than social engineering. And there is much evidence that the current problem in the labor market is not a problem of the market – but of politics and social engineering. Is more of the same thing really a solution to the problem? Probably not. To solve the problem we must understand what caused it, which means we must turn to economic theories of what caused the boom – and what caused the bust.

Learning from Angie

Angie Hicks, the founder of Angie’s List, writes on the HBR Blog Network. The article is focused on lessons learned and, consequently, tips for how companies should deal with online reviews and feedback. The advice is formulated in four points, which can be simplified and restated as (in order): identify your real customers, deal with the problem, take their complaint seriously, and fix what’s broken. While companies can undoubtedly learn from Ms. Hicks’ experience, it is fascinating that what we learn in the article boils down to “take your customers seriously.”

The obvious question that follows is: why don’t companies take their customers seriously? Perhaps because it may be costly to deal with customers, and we may need to prioritize some over others. Or perhaps choose not to deal with some of them even though it is not immediately intuitive that there may be cost reasons not to take customers serious. Or, as Ms. Hicks hints in the article, companies may not know who their customers are.

Furthermore, they may not have established relationships with customers or offer means for customers to communicate feedback directly to them. Or they may not have initiated or encouraged a dialogue with customers and are therefore left unaware of how their products are received in the market. But this only brings us back to the question: why don’t the companies take their customers seriously?

Naturally, the question may be phrased the wrong way and could therefore fail to capture the real issues. The alternative seems odd: Could these problems amount to an entrepreneurial opportunity for above-normal profits – through taking customers seriously?

Mom: The Ultimate Small Business

Nicolai Foss to Deliver Hibbs Lecture at Missouri

The McQuinn Center is co-sponsoring the 2012 Sherlock Hibbs Distinguished Lecture in Business and Economics, delivered by Nicolai J. Foss of the Copenhagen Business School and the Norwegian School of Economics and Business. The lecture, “Open Entrepreneurship: The Role of External Knowledge Sources for the Entrepreneurial Value Chain,” is Tuesday, March 6, 2012, 10:00-11:30am, in 205 Cornell Hall on the University of Missouri Campus. Further details are available here.

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