An alternative to our modern theory of growth that has stood the test of time

PUBLISHED : Saturday, 18 February, 2012, 12:00am
UPDATED : Saturday, 18 February, 2012, 12:00am


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

The book gained a cult following after its publication in the aftermath of the first energy crisis. The author was a Jewish refugee from Germany who had studied at Oxford and Columbia universities. He became economic adviser to the British National Coal Board and, in 1955, was sent to work in Burma as an economic development adviser. It was from his experience there - which included a stay at a Buddhist monastery - that he evolved a non-Western way to consider human development. This involved living within the limits of natural resources and using intermediate technology.

The book is a collection of essays written at different times. Like his teachers, John Maynard Keynes and John Kenneth Galbraith, Schumacher wrote in elegant 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 recognise 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 attacks the whole philosophy of modern economics that reduces everything to monetary values as measured by gross domestic product: 'An attitude to life which seeks fulfilment 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.' He was one of the first theorists to recognise that concepts like GDP ignored the costs of environmental depletion and damage.

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

Schumacher was a practical observer of large-scale social organisations, particularly bureaucracies. 'An ounce of practice is generally worth more than a ton of theory,' he said, revealing his realist side.

Indeed, his observation of the importance of smallness in large organisations was insightful. This was because as organisations become larger and larger, they become more impersonal. He recognised the inherent contradictions within large organisations that have alternating phases of centralising and decentralising. 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 organisations struggle to have 'the orderliness of order and the disorderliness of creative freedom'. Every organisation struggles with the orderly administrator versus the creative (disorderly) entrepreneur or innovator.

From this basic contradiction, Schumacher derives a theory of large-scale organisation divided into five principles, which are worthy of further research.

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

The second principle is vindication - namely, governance by exception. The centre delegates and only intervenes under exceptional circumstances that are clearly defined. Third is identification - the subsidiary must have clear accounting in the form of balance sheets and a profit-and-loss account.

The fourth is motivation - here Schumacher recognises that the lower levels of a large organisation have little motivation if everything is directed from the top. This is where the values of the organisation become critical in addition to monetary rewards.

The fifth is the principle of the middle axiom. He notes that top management may know what ought to be done in the organisation, but finds it hard to get it done while not stifling creativity. This solution 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 to achieve the objectives.

What is amazing is that Schumacher quoted Mao Zedong for the 'best formulation of the necessary interplay between theory and practice': 'Go to the practical people, learn from them; then synthesise 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.'

These principles may sound simple, but are hard in practice. Schumacher has certainly convinced me that there are good alternatives to current conventional economic thinking.

Andrew Sheng is president of the Fung Global Institute