Wise Economics: Review of “Small Is Beautiful” by E. F. Schumacher

The New Republic, June 15, 1974

I HAD NEVER HEARD of E. F. Schumacher before reading this book.  After reading it I am ready to nominate him for the Nobel Prize in economics, or at least for the Peter Kropotkin memorial foun­tain pen.

The introduction by Theodore Roszak identifies Schumacher as a former Rhodes scholar, an economic adviser to the British Control Commission in post­war Germany, a director of the Scott Bader Company (about which more later), and, for 20 years prior to 1971, the top economist and head of planning for Britain’s nationalized coal industry — a most reputable vita indeed.  But that is not the end of it.  Schumacher is also, according to Roszak, a member of that subterranean tradition of organic and de­centralized economics we might call anarchism, if we mean by that much abused word a libertarian political economy that distinguishes itself from orthodox socialism and capitalism by insisting that the scale of organization must be treated as an inde­pen­dent and primary problem.”  And Roszak goes on: “It would be no exaggeration to call [Schumacher] the Keynes of post-­industrial society.”

E. F. Schumacher

Roszak’s build-up both intrigued me and put me off.  I tend to be leery both of anar­chists and of anyone placed on a pedestal as high as Keynes’.  I needn’t have worried.  Schumacher turns out to be an eminently practical, sensible and eloquent chap, as versant in the subtle­ties of large-scale business management as, say, Peter Drucker, yet equally in touch with the down-to-earth realities of a simple Indian village.  His book is a most unusual economic treatise, enor­mously broad in scope, pithily weaving together threads from Galbraith and Gandhi, capitalism and Buddhism, sci­ence and psychology.  The reader is left wishing that somehow an economist of Schumacher’s vision could be scooped from his subterranean hide- away and ushered into the White House dis­guised as Arthur Burns.

Schumacher’s point is that the fore­most concern of economics should be people, not goods.  People do need goods, of course, but they need much more to utilize and de­velop their facili­ties through meaningful work.  If this sounds like a simple — indeed almost simplistic — premise, its implications are nonetheless far-reaching.  An econ­o­my that makes work meaningless, stul­tifying and nerve-wracking is not doing people very much good, even if it raises their level of consumption.  The same is true for an economy that constantly replaces workers with machines.

The Gross National Product may rise rapidly, as measured by statisticians but not as experienced by actual peo­ple, who find themselves oppressed by increasing frustration, alienation, insecurity, and so forth.  After a while, even the Gross National Product re­fuses to rise any further, not because of scientific or technological failure, but because of a creeping paralysis of non-cooperation, as expressed in vari­ous types of escapism on the part not only of the oppressed and exploited, but even of highly privileged groups.

Another of Schumacher’s primary themes is that Western economics some time ago abandoned wisdom, by which he means a sense of man’s place in the universe.  Most economists proudly ac­cept the notion that the problem of production has been solved.  But has it?

We are, at an ever-accelerating rate, squandering at least three kinds of ir­replaceable assets — treating them, in economic terms, as income when they should be considered as capital: fuels, the tolerance margins of nature, and the psychological stability of man.  Thus if the rich nations continue stripping the world of its nonrenewable energy re­sources at approximately their present rate, and if the poor nations only slight­ly increase their current rate of con­sumption, we will be 1) out of fossil fuels in a relatively short time, and 2) awash in pollution the likes of which have never been seen.  In addition the scramble for diminishing resources will become a maim: source of international conflict, if it hasn’t already.

HOW DOES WISDOM, or the lack of it, figure into this?

From an economic point of view the central concept of wisdom is perma­nence.  Nothing makes economic sense unless its continuance for a long time can be projected without running into absurdities.

Yet what is economics currently counseling?

Far from being interested in studying the possibilities of alternative meth­ods of production and patterns of liv­ing—so as to get off the collision course on which we are moving with ever-increasing speed—we happily talk of unlimited progress along the beaten track, of “education for lei­sure” in the rich countries, and of “the transfer of technology” to the poor countries.

In much the same vein Schumacher contends that economics has become a science of measurement, but has for­gotten what really ought to be meas­ured.  Economic decisions, both macro and micro, are made by quantifying goods at some ephemeral market value, with little or no consideration given to qualitative differences.  A dollar’s worth of hotel accommodations is presumed to be economically equal to a dollar’s worth of petroleum, even though the latter is a nonrenewable primary re­source, the depletion of which has vast consequences.  Some “goods” that never appear on the market are left entirely out of econ­omic calculations—clean air, for example, or a person’s satisfaction with his work.  And the calculations on which economic decisions are based are always short-range and narrow: each decision-maker asks what will be momentarily profitable for him, not what will be beneficial for a larger com­munity over the long run.

There are two philosophic premises behind all this.  One is that only an ever-increas­ing production of goods will lead to human tranquility.   The oth­er is that such ever-increasing produc­tion can only be achieved through glori­fication of the cardinal sins.   Thus Keynes was moved to write in 1930:

For at least another hundred years we must pretend to ourselves and to everyone that fair is foul and foul is fair; for foul is useful and fair is not.   Avarice and usury and precaution must be our gods for a little longer still.   For only they can lead us out of the tunnel of economic necessity into daylight.

To Schumacher this is dangerous non­sense, possibly valid in the 1930s but certainly no longer so.  Avarice will not lead to daylight; only restraint can.  Fair is useful and foul is not.  Greed builds up a never-ending spiral of wants that must inevitably exceed the earth’s ability to provide.  What we need are not bold Nixonian promises of energy self-sufficiency by 1980 but a return to wisdom, a reorientation toward an economics of permanence.

What would such a reorientation con­sist of?  A de-emphasis on quantitative growth, but for Schumacher that is only one of several ingredients.  The basic ground rule of a “wise” economics would be that work, technology and ownership patterns should be on a hu­man scale.  Jobs would be designed so that people could productively, cre­a­tive­ly use their hands and brains.  (“Even children would be allowed to make themselves use­ful, even old peo­ple.”)  Science and technology would stress the development of first-class tools rather than labor-displacing machinery.

Economic enterprises would be scaled and structured in such a way as to reconcile the convenience, humanity and manageability of small production units with the need for planning and coordination.  Ownership would be tailored to the nature of the enter­prise.  For small-scale enterprises individual or family ownership would be appro­pri­ate.  For medium-size enterprises co­operative ownership by workers makes sense.  For large-scale enterprises some form of social ownership would be proper.  The guiding principle would be that proprietary rights should accompany actual involvement in an enterprise wherever possible, and where this is impractical they should inhere in a broad community whose prime interest is not the reaping of unearned gains.

THE READER IS PROBABLY thinking: all this is splendid, but it’s a starry-eyed dream, a vision of some armchair anarchist who has never met a payroll.  Perhaps.  But Schu­macher is persuasive precisely because his theories are grounded in long ex­perience.  At the British Coal Board the problem was to convert an enormous gov­ernment-owned monopoly into a confederation of human-scale units.  Self-contained “quasi-firms” were set up for 17 sepa­rate mining regions.  Additional “quasi-firms” were established for transport, brickworks and other diverse activities.

“The monolith was transformed into a well-coordinated assembly of lively, semi-auto­nomous units, each with its own drive and sense of achievement,” Schumacher writes.   If all is not bliss at the Coal Board — the recent miners’ strike would indicate that it is not — the fault, Schumacher would presumably argue, lies with national leaders and their policies rather than with the de­centralized structure of the enterprise.

The Scott Bader Company began in 1920 as a family-owned plastics busi­ness; by 1950 it was a prosperous me­dium-size firm employing 161 persons.  Ernest Bader decided to introduce “rev­olutionary changes” in ownership and organization.  He set up the Scott Bader Commonwealth, in which he vested ownership of the company.  Over the next few years the members of the Commonwealth, which is to say the workers of the com­pany, drew up a constitution setting forth several basic rules.

The directors of the com­­pany would be appointed by and fully ac­countable to the Commonwealth.  The com­pany would be limited to approxi­mately 350 persons; if there was a de­mand for growth beyond that point, it would be met by setting up new firms organized along Bader lines.  Since members of the Commonwealth would be partners, not hired hands, they could not be dismissed by their co-­partners for any reason other than gross per­sonal misconduct.  The highest paid worker within the com­pany would re­ceive no more than seven times the pay of the lowest.  Of the profits taken out by the Common­wealth, half would go for bonuses to workers within the com­pany and the other half for charitable purposes outside the company.  Finally, none of the products of the company would be sold to customers known to use them for war-related purposes.

When Bader and his colleagues intro­duced these changes it was freely pre­dicted that the firm would soon col­lapse.  In fact, says Schumacher, the company “went from strength to strength, although difficulties, even crises and setbacks, were by no means absent.  In the highly competitive set­ting within which the firm is operating, it has, be­tween 1951 and 1971, “in­creased its sales and profits enormous­ly; large bonuses have been distributed to the staff,” and an equal amount has been donated by the Common­wealth to charitable purposes outside; and sev­eral small new firms have been set up.”

If this is anarchism, it seems functional enough.  The trick, as with any vision of a better society, is getting from here to there.  Schumacher’s blueprint for me­dium-size firms is Baderization; this pre-supposes, of course, the existence or creation of entre­preneurs as enlighten­ed as Mr. Bader.  For large-scale indus­tries, Schumacher pro­poses that the public convert its present right, em­bodied in the tax laws, to 48 percent of corporate profits, to half ownership without a corporate income tax.  He warns, how­ever, in some strong criti­cism of doctrinaire British socialists, that public owner­ship, or public half-ownership, is not an end in itself but merely a means to the end of a human­ized economy.  In addition, Schumacher urges a much higher degree of indica­tive planning, so that economic deci­sions are not made entirely on the basis of what is best for each individual en­terprise, but incorporate elements of a broader wisdom.

It would be easy to nitpick at many of the details and ramifications of Schu­macher’s tour d’horizon.  I choose instead to nominate him for a prize of some stature.  And why not?  The most recent economists to win the Nobel Prize have been measurers, tink­er­ers, growth ad­dicts.  It’s time to turn the spotlight around, to start digging out some sub­terranean wisdom before we are all buried under a billowing cloud of mad­ness and sludge.