Small is Still Beautiful: Economics as if Families Mattered by Joseph Pearce

From the Publisher

A Third of a century ago, E. F. Schumacher rang out a timely warning against the idolatry of giantism with his book Small Is Beautiful. Few books before or since have spoken so profoundly to urgent economic and social considerations. Humanity was lurching blindly in the wrong direction, argued Schumacher. Its obsessive pursuit of wealth would not, as so many believed, ultimately lead to Utopia but more probably to catastrophe.

Schumacher's greatest achievement was the fusion of ancient wisdom and modern economics in a language that encapsulated contemporary doubts and fears about the industrialized world. He saw that we needed to relearn the beauty of smallness, of human-scale technology and environments. In Small Is Still Beautiful, Joseph Pearce revisits Schumacher's arguments and examines the multifarious ways in which they matter now more than ever. Bigger is not always best, Pearce reminds us, and small is still beautiful.

About the Author:
Joseph Pearce is currently editor of the Saint Austin Review and Writer in Residence and Associate Professor of Literature at Ave Maria University

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Table of Contents

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Small Is Still Beautiful

ISI BOOKS

Chapter One

What is economics? Since that discipline was the subject of Small Is Beautiful, according to the book's subtitle, it is appropriate to begin by defining our terms. Yet at once we are in danger of falling into a crucial error, for economics as it is commonly defined has a different focus from that which concerns Schumacher. Collins English Dictionary defines the term as "the social science concerned with the production and consumption of goods and services and the analysis of the commercial activities of a society." According to this conventional definition, people are either producers or (as individuals, more likely) consumers of goods and services. For Schumacher, this understanding of personhood is clearly incomplete. The discipline of economics must be ordered to an end that is determined by factors more than purely economic. Indeed, Schumacher argued that the science of economics should be wholly devoted to this truth.

People matter because they are not just matter. They are spirit; they possess a soul. This was central to Schumacher's conception of economics, as was confirmed by his choice of the following quotation from the economic historian R.H. Tawney as the epigraph at the beginning of Small Is Beautiful:

The most obvious facts are most easily forgotten. Both the existing economicorder and too many of the projects advanced for reconstructing it break down through their neglect of the truism that, since even quite common men have souls, no increase in material wealth will compensate them for arrangements which insult their self-respect and impair their freedom.

Tawney concluded with the assertion that any "reasonable estimate of economic organization ... must satisfy criteria which are not purely economic." There was, in fact, no such thing as a purely economic problem because economics deals with human beings. Put simply, economic problems cannot be solved using purely economic methods. This conundrum was at the heart of Schumacher's book and it is the same conundrum facing any discussion of economics today.

The Death of Economics

The inability of economics to address the deepest issues of the day exposes its inadequacy and insufficiency and has caused some economists to question the very nature of their profession. Paul Ormerod studied economics at Cambridge and Oxford before becoming Head of the Economic Assessment Unit at The Economist. For ten years he was director of economics at the Henley Centre for Forecasting and he has been a visiting professor of economics at London and Manchester. In The Death of Economics Ormerod exposed "the highly tenuous nature of modern economic orthodoxy." He argued that conventional economics offers "a very misleading view of how the world actually operates, and that it needs to be replaced." His fellow economists had, Ormerod wrote, "erected around the discipline a barrier of jargon and mathematics which makes the subject difficult to penetrate for the noninitiated." As a result, even intelligent members of the public found economics intimidating, enabling professional "experts" to pronounce with great confidence in the media without fear of contradiction or recrimination. "Yet orthodox economics is in many ways an empty box. Its understanding of the world is similar to that of the physical sciences in the Middle Ages. A few insights have been obtained which will stand the test of time, but they are very few indeed, and the whole basis of conventional economics is deeply flawed."

To illustrate his point, Ormerod singles out the woeful inaccuracy of economic forecasts. In a twelve-month period in 1993-94 forecasters had failed to predict the Japanese recession, the strength of the American recovery, the depth of the collapse in the German economy and the turmoil in the European Exchange Rate Mechanism. This appalling inaccuracy on the part of economic "experts" should have led to their forecasts becoming the subject of open derision. "Yet to the true believers, within the profession itself, the ability of economics to understand the world has never been greater," writes Ormerod.

There is no shortage of true believers. Economics dominates political debate to such an extent that it is almost impossible to pursue a successful political career in most western countries without being able to repeat parrot-fashion the latest fashionable economic orthodoxies. The media seek out the views of economists on Wall Street and in the City of London, anxious that the viewing public should be informed of the impact of the latest statistic on the entire economy over the coining years. With the status of economics so much in the ascendant it is scarcely surprising that the number of career-minded students seeking to major in economics grew dramatically during the 1980s and '90s.

Economics, it seems, is almost attaining pseudo-religious status, with conformity essential and heresy shunned. It has become iconomics, before which every knee must bend. The dissident voice of Paul Ormerod is like the lone voice in the cheering crowd who dared suggest that the emperor was wearing no clothes. Ormerod exposes a simple truth: "Good economists know, from work carried out within their discipline, that the foundations of their subject are virtually nonexistent."

Pandora's Box

Ormerod's claim that conventional economics "is in many ways an empty box" is partly right. But perhaps it is better thought of as Pandora's box, full of unforeseen dangers. In both cases the unwise opening of the box has unleashed the objects of desire upon the earth, dispersing them to play havoc among humanity so that nothing remains except Hope. If such an analogy appears a trifle melodramatic, a good hard look at the facts will show that even the power of myth does not do justice to the truth.

The unleashing of desire in the form of consumerism is today stretching nature's tolerance to the very limits, threatening global ecological turmoil. The accelerating depletion of the earth's finite resources to meet ever-expanding demands for energy and consumer goods has no foreseeable end. The worship of economic growth as an end in itself is based on the highly questionable assumption that there are no limits to the planet's ability to sustain it. Yet none of these pressing issues are addressed by conventional economics. It doesn't have the answers because it doesn't even ask the questions.

That man exists for consumption remains unquestioned. The health of persons, communities, and the land itself may be sacrificed so that desires may be satisfied more quickly, more cheaply, and more efficiently. As Wendell Berry writes in What Are People For?, since we have ourselves been reduced to "economic units," all other "creatures and things may be considered purely as economic units or integers of production." We are members of, and have made all creation into, a "covetous machine." To amend a wall-worn cliché, there are lies, damned lies, and conventional economics.

Chapter Two

In his book Phases of Capitalist Development, Angus Maddison charts the growth of what are now the Western economies over the past fifteen hundred years. He estimates that during the thousand years between AD 500 and 1500, gross domestic product (GDP) grew on average by only 0.1 percent a year. As such, the volume of economic activity in 1500 was between 2.5 and 3 times as great as it had been a thousand years earlier. To put this in perspective, the Western economies grew as much in percentage terms in the twenty years between 1950 and 1970 as they had done in the thousand years between 500 and 1500. And, of course, the much higher base at the start of the 1950s means that the absolute increase in goods and services was enormously greater. Today the growth of world GDP regularly exceeds 3 percent per annum.

Growth began to accelerate around 1500, and between then and 1700 Maddison estimates that total economic output almost doubled. The acceleration continued and throughout the eighteenth century annual growth was over 0.5 percent a year, with the more active economies, such as Britain, experiencing growth of the order of a full 1 percent a year. Such growth was dramatic. Major changes were experienced in a single lifetime, placing enormous pressure on cultural tradition and giving added impetus to the notion of "progress." Economic growth both caused and exceeded the surge in population, ensuring that relative material prosperity for some was accompanied by major social upheaval for others. The sheer magnitude of the growth was without precedent in human history, and it was only just getting started.

By the end of the eighteenth century, the industrial revolution had hardly begun. Its impact throughout the nineteenth century not only ensured that the pace of growth accelerated as never before, hut facilitated, through the expansion of the British Empire, a huge increase in the flow of trade around the world. The process of globalization had commenced on a scale that would have been inconceivable to previous generations. This process gained momentum at the end of the nineteenth century with the emergence of the United States as a major economic force.

In 1870 the population of America was thirty-nine million, eight million more than the population of Britain at the time. Income per head in America was about 80 percent of that in Britain. The combination of a higher population and a lower income per head meant that the size of the American domestic market was very similar to that of the British. Yet by the beginning of the First World War, less than half a century later, the United States had overtaken its main competitor. Instead of its average income being 20 percent lower than that in Britain it was now 20 percent higher. Instead of their domestic markets being in virtual equity the American market had become two and a half times larger than the British.

Why did the United States rise to a position of global economic dominance? There is no doubt that technological advances, such as the expansion of the railways and the invention of the telegraph, played an important part in continuing and accelerating economic growth, but these advances were applicable to the economies of both the United States and Europe. In large part America's new position was due to the rapid rise in the U.S. population, and therefore the rapid growth of its domestic market, but it was helped considerably by a particular piece of legislation that would determine the shape and size of American industry-the Sherman Antitrust Act.

During the 1870s and 1880s many manufacturers in both Europe and America formed trade associations, the purpose of which was to allow companies to control markets and fix prices so that profits could be maximized. In America, Congress responded by passing the 1890 Sherman Antitrust Act, which declared such associations to be illegal. The passing of this act in America, and the absence of anything similar in Europe, was to tip the scales of advantage firmly in America's favor: not, however, because the act succeeded but because it failed. Large companies simply outmaneuvered the legislation by formalizing the illegal associations through legal mergers and acquisitions. The results were revolutionary. Before the act a large number of small and medium-size companies had worked together to control the market; after the act a small number of large companies simply swallowed up their smaller rivals, destroying the competition and gaining an even tighter control of the market than before.

Birth of the Big

The Antitrust Act was hugely influential to the future development of the world economy. It gave birth to the Big as a major economic power, and smothered the Small. Like a Sherman tank it rolled relentlessly across the economic landscape. By the turn of the century the merger and acquisition movement was unstoppable, laying the foundation for America's economic supremacy. Companies of enormous size dominated and outgrew the domestic economy, seeking opportunities to make inroads into foreign markets. The age of the multinational had arrived.

This potted history of economic development over the past fifteen hundred years raises an obvious question. Is the process of unprecedented and accelerating economic growth benign or malignant? Almost without exception, the world's economists, lining up rank upon rank, will sing in chorus that economic growth is overwhelmingly beneficial. Any problems caused by such growth are outweighed by the enormous benefits accrued to mankind by the added wealth it produces.

Superficially at least, this appears to be a persuasive argument. Few would dispute that most people in the "developed" world are better off in monetary terms or in terms of the number of things they possess. The problem arises once one goes deeper than the monetary or the material. Other questions must be asked before a judgment can he reached on the benefits or otherwise of economic growth, for example:

What is wealth? Is it quantitative or qualitative? If it is qualitative, can it be measured economically? If it is quantitative, what does wealth cost? Does it cost more than it is worth? Does money buy happiness? Can material possessions prevent personal sorrow or suffering? Does everything have its price, or are some things priceless?

Is there a difference between price and value? If there is, does price distort value?

At root the problem lies with the mechanistic materialism of most economists. Implicitly at least, they work on the assumption that, as a general rule, if someone is 10 percent richer in monetary terms, they will be approximately 10 percent richer in qualitative terms. But does material wealth guarantee the health and well-being of communities? If economic growth brings extra material wealth, will it bring greater happiness?

The Paradox of Prosperity

In the early seventies Professor Richard Easterlin compared the results of public opinion surveys in the United States. He concluded that there was no clear relationship between average per capita income and the degree of happiness. On the contrary, most Americans, on balance, believed themselves to be less happy in 1970 than they were in 1957. In the years since Easterlin's work many other studies have reached similar conclusions. In late 1999 a report from the Henley Centre, entitled The Paradox of Prosperity, concluded that rising prosperity in the new millennium would be accompanied by worsening social upheaval. There would be more broken marriages, worsening drug dependency, higher levels of workplace stress and increased loneliness. In short, the paradox of prosperity was that greater overall wealth meant more misery. Such evidence is, of course, open to misinterpretation and abuse. As with most statistics, its use is limited and should not be overstated. Yet similar studies, before and since, continue to question seriously whether there can be any reliable correlation between happiness and material wealth. At the very least, the whole concept is open to debate.

The question of economic growth is thrown into further confusion by the methods used to measure it. Fundamentally, economics is myopic. It measures reality by its current market price. The intrinsic value of real things, their essential character which remains unchanged even when their price on the market fluctuates, is not an issue to the economist. He is, like Oscar Wilde's cynic, someone who knows the price of everything and the value of nothing. Forced by his own preconceptions to keep a watchful eye on current market forces, he is consigned permanently to the present, spurning both the past and the future. Henry Ford, that great champion of industrialism, expressed his contempt for the past by dismissing all history as "bunk." Meanwhile, the celebrated economist John Maynard Keynes exemplified the emphasis on the short as opposed to the long term in economic judgments with the cheerfully brutal reminder that in the long term we are all dead. The conservation of our natural and cultural heritage, and the future destiny of unborn generations, are scarcely in safe hands where such short-sightedness holds sway.

(Continues...)

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Excerpted from Small Is Still Beautiful by JOSEPH PEARCE Copyright © 2006 by Joseph Pearce. Excerpted by permission.
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