At a time when there is great awareness that mainstream economic theory is seriously flawed, many of us are looking for alternative models of economic thinking. I have in my collection a book by an English economist EF Schumacher called “Small is Beautiful,” first published in 1973, but never read it. Last month, I finally read it and was overwhelmed by its brilliant and unconventional approach to economic thinking. 

The book became almost cult reading when it came out 40 years ago, in the aftermath of the first energy crisis. The author was a Jewish refugee from Germany to England who studied in Oxford and Columbia Universities. He became economic adviser to the British National Coal Board and was sent in 1955 to work in Burma as an economic development adviser. It was from his experience there, including staying in a Buddhist monastery that he evolved a non-Western way to consider human development, including living within the limits of natural resources and using intermediate technology. This explains why Chapter 4 of this book was called Buddhist Economics.

The book is actually a collection of essays written at different times. Like his teachers, Keynes and John Kenneth Galbraith, Schumacher wrote in elegant and striking prose:

“One of the most fateful errors of our age is the belief that the problem of production has been solved. The illusion … is mainly due to our inability to recognize that the modern industrial system, with all its intellectual sophistication, consumes the very basis on which it has been erected. To use the language of the economist, it lives on irreplaceable capital which it cheerfully treats as income.”

He immediately plunges into an attack on the whole philosophy of modern economics that reduces everything into monetary values as measured by GDP, arguing that the logic of limitless growth is wrong:

“… that economic growth, which viewed from the point of view of economics, physics, chemistry, and technology, has no discernable limit must necessary run into decisive bottlenecks when viewed from the point of view of the environmental sciences. An attitude to life which seeks fulfillment in the single-minded pursuit of wealth ― in short, materialism ― does not fit into this world, because it contains within itself no limiting principle, while the environment in which it is placed is strictly limited.”

Being a system-wide thinker, he deplored the narrowness of economics: “Economists themselves, like most specialists, normally suffer from a kind of metaphysical blindness, assuming that theirs is a science of absolute and invariable truths, without any presuppositions.”

He was probably the earliest to recognize that the concepts of GDP ignored the costs of depletion of natural resources and the high social damage through pollution: “it is inherent in the methodology of economics to ignore man’s dependence on the natural world.”

Most recent reviewers of his book commended him on the accuracy of his forecasts (40 years ago) on population and the rate of consumption of energy resources. Some reviewers consider that the book brilliantly explained the “why” of the need to conserve, but not the “how.” I think he went deeper than that.

Schumacher was not just a social philosopher but a practical observer of large scale social organizations, particularly bureaucracies. The realist side of him can be found from this quote: “An ounce of practice is generally worth more than a ton of theory.”

Indeed, he was very insightful of the importance of smallness in large organization. This was because as organizations become larger and larger, they become more impersonal. He recognized the inherent contradictions within large organizations that have alternating phases of centralizing and decentralizing. Here, he noted that the solution is not either-or, but the-one-and-the-other-at-the-same-time. In other words, contradiction and illogical situations are inherent in large systems.

This is because all organizations struggle to have “the orderliness of order and the disorderliness of creative freedom.” Every organization struggles with the orderly administrator versus the creative (disorderly) entrepreneur or innovator.

From this basic contradiction, Schumacher has a theory of large-scale organization divided into five principles, which are worthwhile researching further.

The first principle is subsidiarity ― which is that the upper authority should delegate to the lower level powers where it is obvious that the lower levels can function more efficiently than the central authority.

The second principle is vindication ― namely, governance by exception. The center delegates and only intervenes under exceptional circumstances which are clearly defined.

The third principle is identification ― the subsidiary must have clear accounting in the form of balance sheets and profit and loss account.

The fourth principle is motivation ― here he recognizes that motivation at the lower levels of large organization has little motivation if everything is directed from the top. This is where the values of the organization become critical in addition to rewards in terms of money.

The fifth is the principle of the middle axiom. He notes that “the center can easily look after order; it is not so easy to look after freedom and creativity”.

The word “axiom” means a self-evident truth. The principle of the middle axiom is “an order from above which is yet not an order.” In practical terms, you set out an objective, but do not detail and direct how that objective is to be achieved, giving some degree of innovation and freedom for the subsidiary levels of the organization to achieve the objectives.

What is amazing is that 40 years ago, Schumacher quoted Chairman Mao for the best formulation of the necessary interplay between theory and practice: “Go to the practical people, learn from them; then synthesize their experience into principles and theories; and then return to the practical people and call upon them to put these principles and methods into practice so as to solve their problems and achieve freedom and happiness”.

All these sound very simple, but are actually quite hard to practice. Schumacher has certainly convinced me that there are good alternatives to current conventional economic thinking.

By Andrew Sheng

Andrew Sheng is president of the Fung Global Institute, a Hong Kong-based, independent and non-profit think-tank. ― Ed.

(Asia News Network)