This year's Nobel Prize Laureate for Economics is Prof. Edmund Phelps. Phelps deserves the prize, and probably should have won it years ago.

 

What was Phelps' contribution? Economists - mainly, Keynesians - believed that you could get less unemployment if you created or accepted more inflation. This theory was called the Phillips Curve. It was the basis of economic policy for many years.

 

Phelps said, sure, this may be true in the short run. Unexpected inflation means that 'real' (inflation-adjusted) wages decline. Labor is cheaper, so more workers are hired. But in the long run, people build the added inflation in to their wage demands and interest rate expectations. The 'real' wage rate goes back to what it was, and so does unemployment - except, inflation is now ratcheted a notch higher. America, and much of the world, experienced this 'stagflation' (higher inflation with higher unemployment) in the 1970's. It was Phelps who explained why. 

 

But the REAL economics Nobel Prize this year went to Mohammed Yunus, a Bangladesh economics professor. Yes, he was in fact awarded the Nobel Peace Prize. However, I believe Yunus practiced true 'grounded' economics - theory whose validity is tested by doing, not by writing papers or words or equations - grounded theory whose validity is proven by making millions of lives better.

 

Yunus won a Fulbright fellowship to Vanderbilt University in the U.S., got his Ph.D. in economics, then returned home to Chittagong Univ. to teach. 

 

In 1974, there was a disastrous famine; 1.5 million Bangladeshis died. Yunus grieved.

 

"While people were dying of hunger on the streets," he says, "I was teaching elegant theories of economics." "I started hating myself for the arrogance of pretending I had answers. We university professors were all so intelligent but we knew absolutely nothing about the poverty surrounding us."

 

Yunus began going out to Jobra, a village near the university. He met a woman who made bamboo stools. She had no capital, and had to borrow 15 p. for bamboo for each stool, at exorbitant interest rates that left her with no profit. Banks, of course, would not dream of lending her money.

 

On the spot, Yunus took the cash out of his pocket and lent it to the woman and to 40 others. That tiny loan was paid back in full, and made a huge difference to those 41 lives. As a result of this field trip, Yunus invented what is today known as microfinance, and founded the Grameen Bank, which makes small loans without collateral to villagers at low interest. The key: 98 percent of the loans are repaid (compared to, in some countries, 40-50 percent repayment for loans with collateral). 

 

"The poor do everything to pay back the loan, for their self-respect," says Yunus.

 

Grameen Bank has since lent $5.3 billion, and Yunus' model of microfinance has been copied in 50 countries (including a project funded by the Haifa-Boston collaboration for Ethiopian-Israelis), improving the lives of 100 million people. 

 

So, as an economist, my admiration goes to Ned Phelps. But my love and respect goes to Mohammed Yunus. Unlike most of us scribblers, Yunus is a real economist. I wish there were a lot more like him.