E.F. Schumacher – Small is Beautiful

Coming Home: E F Schumacher: The Reinvention of the Local Economy

E F Schumacher, photographed near his home in Caterham, Surrey, in the 1970s. Photograph: Observer

A crank is a piece of simple technology that creates revolutions

- E.F. Schumacher

Introduction

Man is Small. Therefore Small is Beautiful – The late E.F Schumacher’s book Small is Beautiful has been voted one of the 100 most influential books since World War II. Schumacher was a respected economist who worked with John Maynard Keynes and John Kenneth Galbraith, and for twenty years as the Chief Economic Advisor to the National Coal Board in the United Kingdom. He was opposed to the tenets of neo-classical economics, declaring that single-minded concentration on output and technology was dehumanizing. He held that one’s workplace should be dignified and meaningful first, efficient second, and that nature (like its natural resources) is priceless.

Schumacher proposed the idea of “smallness within bigness”: a specific form of decentralization. For a large organization to work, according to Schumacher, it must behave like a related group of small organizations. Schumacher’s work coincided with the growth of ecological concerns and with the birth of environmentalism and he became a hero to many in the environmental movement. (Source: Wikipedia)

 

  • A Buddhist economist would consider this approach excessively irrational: since consumption is merely a means to human well-being, the aim should be to obtain the maximum of well-being with the minimum of consumption…. The less toil there is, the more time and strength is left for artistic creativity. Modern economics, on the other hand, considers consumption to be the sole end and purpose of all economic activity.
  • It is clear, therefore, that Buddhist economics must be very different from the economics of modern materialism, since the Buddhist sees the essence of civilisation not in a multiplication of wants but in the purification of human character. Character, at the same time, is formed primarily by a man’s work. And work, properly conducted in conditions of human dignity and freedom, blesses those who do it and equally their products.
  • The most striking thing about modern industry is that it requires so much and accomplishes so little. Modern industry seems to be inefficient to a degree that surpasses one’s ordinary powers of imagination. Its inefficiency therefore remains unnoticed.
  • Wisdom demands a new orientation of science and technology towards the organic, the gentle, the non-violent, the elegant and beautiful.
  • The way in which we experience and interpret the world obviously depends very much indeed on the kind of ideas that fill our minds. If they are mainly small, weak, superficial, and incoherent, life will appear insipid, uninteresting, petty, and chaotic.

The Four Parts of the Book

The book is divided into four parts:

Part 1: The Modern World

Ch. 1: The Problem of Production

Schumacher argues that the modern economy is unsustainable. Natural resources (like fossil fuels), are treated as expendable income, when in fact they should be treated as capital, since they are not renewable, and thus subject to eventual depletion. He further argues that nature’s resistance to pollution is limited as well. He concludes that government effort must be concentrated on sustainable development, because relatively minor improvements, for example, technology transfer to Third World countries, will not solve the underlying problem of an unsustainable economy.

He faults conventional economic thinking for failing to consider the most appropriate scale for an activity, blasts notions that “growth is good,” and that “bigger is better,” and questions the appropriateness of using mass production in developing countries, promoting instead “production by the masses.” Schumacher was one of the first economists to question the appropriateness of using gross national product to measure human well being, emphasizing that “the aim ought to be to obtain the maximum amount of well being with the minimum amount of consumption.”

Part 2: Resources

 

Part 3: The Third World

 

Part 4: Organization and Ownership

Schumacher’s philosophy is one of “enoughness,” appreciating both human needs, limitations and appropriate use of technology. It grew out of his study of village-based economics, which he later termed “Buddhist economics,” which is the subject of the book’s fourth chapter.

Why did Schumacher’s Important Ideas not Catch On Earlier?

Given the obvious importance of Schumacher’s ideas, why did they not catch on earlier? Two reasons:

1. The consumerist growth model that has dominated western and most developing country economics for the past 100 years

It has led to the fastest improvements in living standards in history, not just for the rich, but also for the poor. This has come at two great expenses, however:

  1. It took major political struggle to ensure some sharing of the fruits of progress among the working classes
  2. Local and global environmental degradation have been ignored, heaping up the major problems we now face

2. Strong vested interests in the current Consumerist Growth Model

Those who are benefiting the greatest from the current system (basically the 99% of those in political and business power don’t want things to change very much. Multinational companies do their best to lobby against anything that would make technology smaller, cheaper and more beautiful.

Only a few years ago, it was impossible to imagine what cataclysm could change the mindset of those driven by profit and expansion. It took the convergence of multiple crisis in economic bubbles, government debt crisis, Wall Street greed, resource depletion, Peak Oil and global warming to drive Schumacher’s message home.

The Schumacher Institute

Named in honor of E.F. Schumacher, the institute carries on E.F. Schumacher’s tradition of a crank – a piece of simple technology that creates revolutions. The Schumacher Institute for Sustainable Systems works at local, national and international levels applying systems thinking to today’s challenges.  The institute believes that people, rather than money, lie at the heart of life. The Schumacher institute describes itself as a “think” and “do” tank that does fundamental research and tests their ideas through experiment and action projects such as:

  • imagining new, fairer, fulfilling and sustainable futures
  • consider a range of planetary limits such as resource depletion, climate change and biodiversity, as an integrated whole to reduce the possibility of un-intended effects
  • develop a range of ‘Desirable Futures’ that do not merely seek to preserve our ecosystem but aims to develop ideas of how a sustainable society, be it high tech or low tech, might look
  • seek to specifically engage with concepts and principles of equality including fair access, security, ethics, democracy and economic participation
  • initial project definition phase which will run for approximately six months from June 2012 to develop the scope of Project Imagine, develop a set of processes and identify suitable techniques and stakeholders
  • project definition phase will develop an outline baseline or ‘do nothing’ scenario as a guinea pig to scope the project, develop methods and techniques and as a comparison against which ‘desirable’ futures can be assessed. The baseline scenario will extrapolate current trends as if we, as a society, simply continued with our current behaviours, ignoring the warning signs around us.
  • provide a range of outputs and briefings as it develops and matures.  For more information: info@schumacherinstitute.org.uk

Over the next few decades many global, socio-ecosystem trends will combine to have profound effects on all aspects of our livelihoods. We need a process to prepare for these changes.People are talking about crises such as:

  • climate change
  • environmental pollution
  • resource depletion
  • economic collapse
  • social disorder
  • migration

And at the same time there are many initiatives that are starting that recognize these challenges and are attempting to solve them such as:

  • transition movement
  • peak oil movement
  • local food, food cooperatives & local economies
  • cradle-to-cradle design
  • holistic design
  • returning to a sense of community
  • anti-globalization
  • monetary reform

Prepare for Change consists of:

Monitoring Unit

  • perform horizon scanning
  • collect the early signals of change
  • listen to what experts are predicting
  • present the results within a system thinking perspective
  • Use a ‘wiki’ approach to gather predications, forecasts and opinions

Workshop Series

  • analyze the output of the monitoring
  • explore the consequences and the systemic interactions
  • suggest actions that can improve resilience or to take advantage of opportunities for new products and services

 Research Program

  • collect and interpret the work from around the world on both resilience thinking and new technologies
  • provide an expert level input to the workshops and conversations

 Conversation

  • A network of people who wish to be part of the project and contribute to the conversations – even if only to listen.

This project recognises that there is considerable talent and ‘energy’ that could be tapped into in a number of ways:

  • inviting people to help research background information and supporting data or highlighting ideas and initiatives from other areas of the world
  • uses unemployed volunteers to produce small-scale community projects
  • by supporting volunteers through self-development and into work, the program produces two social benefits at once.
  • based on the simple idea that the recession can be beaten one person at a time through building new social capital in our communities
  • the Schumacher Institute provides a platform for young adults who are looking for work to create and run a project that has social value
  • it gives them a package of coaching, training and mentoring in order to identify and achieve career goals
  • by creating new social capital in Bristol  it makes their city more resilient to a prolonged recession
  • pilot programme is running in Spring 2012
  • volunteers received a full curriculum of personal development training and mentoring based around the ideas of sustainability and systems thinking

 

Return to a Local Economy – Michael Shuman

Michael Shuman is a fellow of the Post Carbon Institute, director of research for Cutting Edge Capital and director of research and economic development at the Business Alliance for Local Living Economies (BALLE). He is a champion of local economies as the way to recreate society in a healthy way.

Michael talks about the power of investing local and the idea of a Local Stock Exchange
 

In this TED Talk, Michael Shuman provides a compelling argument for the case of local economies. He uses the Obama administrations attempt to create employment in the US as an example of fundamentally bad economics. Obama’s stimulus plan created jobs for large corporations. Shuman demonstrates how it costs far more money to create jobs for large multi-national corporations than to create jobs for small businesses in the local economy.

 

  
      • In the case of the US Job Stimulus package, Christina Romer, Chairperson of the Council of Economic Advisers, United States government revealed that  the Obama administration spent $760 billion dollar on their Job stimulus plan and created 2.5 to 3.5 million corporate jobs from that. Shuman asks us to do some simple math to come up with a cost of over $300K investment to create each non-local job! In comparison, the cost to create a local job is at least 30 to 60 times less. Local businesses are very resilient and profitable and each local job created comes with a multiplier effect; investing in each local economy job creates 2 to 4 times more jobs. This means for each dollar spent on local businesses, it produces 2.5 more dollars from local jobs.
      • And finally, local jobs are resilient. The percentage of local jobs has rarely fluctuated in decades, moving from 53% in the early 1990’s to 51% in 2006.
 
      • In a local economy, statistics show that sole proprietorships make up the bulk of the type of business and they are 3 times as profitable as large C-corporation jobs.
      • When Oil supplies begin to severely contract due to peak oil, the cost of shipping goods from China to anywhere  else in the world will far exceed the cost of labor and it will no longer become viable for China to be the world’s leading exporter. More local energy and local community manufacturing jobs will be created out of necessity
      • However, how prepared are the citizens to invest in the local economy in anticipation of this major shift? A look at the investment profile of US Household finance reveals the sad truth: Out of 26 trillion dollars in a variety of savings, zero is invested in the local economy!

Mission Markets is part of the new generation of organizations that recognizes the huge funding gap for local economic investment and assists communities to create their own local stock exchange for gathering local investments into the community. It supports a diverse universe of local community, impact and sustainable markets stakeholders. Mission Market members can raise capital, discover investment and crowdfunding opportunities, access data, metrics and comprehensive investor and community building tools and promote valuable products and services to market stakeholders. Additionally Mission Markets supports transactions for a variety of environmental credits and market based mechanisms.

 

On March 2009, Shuman blogged on his Small-Mart blogsite an insightful piece entitled ” Local Clusters of Self-Reliance: The Key to Rural Prosperityin which he analyzed a number of case studies that show that the key to community prosperity lay in serving the local community, not the global economy. While the recent decades have seen an export trend to satisfy global markets, Shuman advises the exact opposite; produce for your own community. In this respect, he is in concurrence with author Jane Jacobs, who argues in Cities and the Wealth of Nations that import-replacement is, paradoxically, the key to a community competing effectively in the global economy. Shuman cites these cases to disprove the mainstream model of rural community development  – one focused on expanding existing clusters of export-oriented business.

Shuman argues that focusing on one or two special clusters that serve global markets creates dangerous dependencies which will ultimately lead rural communities down a road to destitution, because “the powerful forces of globalization are eclipsing their existing natural resource industries like farming, ranching, forestry, mining, and fishing. This, in a nutshell, is why rural communities should tell economic developers to take a nice long vacation while they do exactly the opposite: create new, import-substituting clusters.”

Shuman cites a number of examples shows how communities that were written off came back to vibrant life by replacing the much touted export strategy with an import one. For 3 examples of successful local food economies, click here.

Diversification leads to Resiliency

Clusteritis, the tendency to focus on a small number of critical sectors can be deadly to a rural economy.  We’ve all heard stories about the one-industry town; when that industry leaves, the town dies. This absence of economic diversification, often a side-effect of today’s economic developers with an eye on global markets, is a rural communities greatest vulnerability. Such local economies will suffer a potential death blow when that one global market contracts, shifts, or disappears. Rural communities therefore need to avoid focusing on existing clusters; rather they must develop multiple new business sectors that expand the local skill base, increase entrepreneurship, and reduce the town’s vulnerability to the uncertainty of global markets. It needs, in short, to develop new clusters.

Plugging the Leaks: Leakage Analysis

Building a local economy is based on a simple premise: purchase the majority of products or services locally. When community consumers do not do this, they are effectively giving away their wealth. By supporting big box stores, international and national chains, you are effectively creating the very inequity that keeps rural communities poor.

A leakage analysis is the name given to a study which identifiies all those sectors in the economy where a community is unnecessarily importing goods and services. Every unnecessary import represents a loss of community wealth and a loss of the “multiplier” impacts it could have locally. It also represents a loss of many other benefits such as:

      • community bonding
      • increased local knowledge base
      • increased local skills base
      • tax revenue
      • charitable giving
      • revitalized community
      • tourism
      • stronger civil society
      • political participation and activism

Shuman has done about a dozen such leakage studies, mostly in rural communities and has found a recurring pattern of “leakages”. Beyond food and energy, Shuman has found leakage in these areas:

Finance – local banks and credit unions have:

      • lower overheads
      • lower default rates
      • higher interest rates on savings
      • lower fees on checking

They are much less likely to engage in predatory lending and global securitization, and therefore are much less prone to the spectacular collapses now common. Finance is closely tied with two of the largest expenditures rural residents make – shelter and transportation. Therefore, localizing finance allows you to localize spending on housing (typically the largest item in a family budget) and localize about half your car spending.

Services – A significant amount of our budget is spent on services such as:

      • health care
      • education
      • auto repair
      • accounting

Most services are inherently local and can be competitively delivered by professionals working out of their homes (the real and largely unappreciated “industrial development parks” in rural areas). Rural communities have all kinds of service gaps that lead residents to travel elsewhere. A great strategy for rural development is to identify these gaps, encourage existing service providers to expand into these areas, and target entrepreneurship efforts on creating these kinds of professionals.

Entertainment – One of the biggest gaps in rural communities is entertainment. There is not just an opportunity but a necessity for a thriving creative industry; it is essential to convince the young to stick around. With a little bit of creative thinking, rural communities can design a year-round calendar of festivals, sporting events, concerts, plays, etc. that display and nurture local art, music, and culture and can be a source of tourism.

Charity – Donations should be encouraged towards local causes.

Investment – In many developed countries, outdated securities laws prevent the development of local investment instruments and local stock exchanges. If these laws are reformed, cost states or provinces nothing except legislative time, much of our pension and insurance money can begin to stay local.

Healthy Lifestyles – If more rural residents exercise more (and more rural governments rethink their zoning to encourage smart, walkable, bikable communities), they will drive their nonlocal cars less. Kicking the nonlocal tobacco and liquer habits means less need for nonlocal medical treatment. Eating healthier, local, unprocessed food means less obesity and diabetes, thus fewer visits to nonlocal hospitals and surgery clinics.

Green Markets – Rural farmers eeking out an existence inherently know and practice cradle-to-cradle methodologies; that waste = food.

By recycling “waste” completely, new industries can be created:

      • organic waste should become compost or energy
      • paper to renewed fibre or energy
      • metal to new metal feedstock
      • old vehicles harvested for parts and metal, rubber and plastic recycled to feedstock

Personal Frugality – Buying new items from global dealers and chain stores is a major source of capital flight from the local economy while buying used products encourages local spending.

Leakage Calculators

Shuman’s other organization, the Business Alliance for Local Living Economies (BALLE) has, in fact, developed Leakage Calculators for the United States based upon zipcodes. The new BALLE Leakage Calculators are designed to answer those questions:

      1. How self-reliant is your county or zip code?
      2. What are the opportunities for job-creating, leak-plugging new businesses?
      3. How self-reliant is your town in food?
      4. Where can you find the nearest local bank or credit union?

Benefits of using the calculators:

These dynamic tools instantly provide the serious local-living-economy planner with critical information. Designed to help decipher exactly what your community buys and imports, the calculators reveal the obvious in-demand business and job creation opportunities that are available.

According to BALLE, calculating leaks can be invaluable for living economy economic development for six reasons:

      • Policymakers have a clearer vision of how to allocate scarce public dollars for economic development
      • Existing small-business proprietors have a better sense of promising opportunities for expansion, and entrepreneurs see the most profitable markets for start ups
      • Equipped with a community-wide marketing analysis, local banks, lenders and investors can better calibrate their allocations of commercial capital
      • Foundations, nonprofits, and grassroots groups have a better sense of which economic sectors should be targeted for community action
      • Consumers can better appreciate the potential payoffs of buying more goods and services locally

Also, a BALLE network can begin to measure, year by year, the specific benefits LLE initiatives are conferring on a given community.

Every good or service imported unnecessarily from outside the community means lost income, jobs, and taxes from the business that might have supplied these items locally.  Just as the shadow side of problems is solutions, the problem of detected “leaks” are the shadows of the opportunities for new or expanded local business.

Figure 1: BALLE leakage calculators (Source: BALLE)

 

      • Overview Calculator. The leakage calculator tells you exactly how many jobs are possible in each 1100 sectors of your economy, and enables you to focus your economic-development efforts accordingly.
      • Food Leakage Calculator.  Here you can dig deeper into opportunities for creating jobs through food localization.  For example:  How many more cows and steers does my community need to feed itself meat and dairy products?  What’s the “import substitution” opportunity for raising chickens and pigs, or for growing fruits, vegetables, and grains?
      • Financial Leakage Calculator.  This tool will allow you to easily find local banks and credit unions. You’ll find estimates of the kinds of long-term financial resources sloshing around in your community’s savings, checking, and pension accounts. You’ll know what kind of investment capital is available for the next generation of great local businesses in your community.

(Source: BALLE)

Achieving Greater Rural Prosperity

Rural producers will obviously not be able to produce the latest iPAD, flat screen tv or cellphone. However, studies indicate that rural communities do not spend a lot on those kinds of things. In the typical U.S. community, about 58 percent of all spending is on local business, nonprofits, or government agencies. In a rural community, that number climbs to 70 to 75 percent. Employing a leak-plugging strategies could move that to 85 percent. In developing country context, the numbers can be even higher. Over the next few years, that might mean the difference between depression-level unemployment and the real economic growth seen in Shuman’s case studies such as  Hardwick,  Güssing and Ann Arbor Michigan.

Shuman says that these strategies require commitment from communities in order to work. It takes time and resources to perform leakage analysis that will:

      1. identify the most promising new clusters
      2. refocus entrepreneurship and business development programs on these new clusters
      3. realign local consumers, investors, and policymakers with these ideas

Continuing the massive subsidies and giveaways associated with traditional clusteritis may only delay the inevitable of degenerating communities. In the long run, it will be far cheaper to invest in a local development strategy. Rural decision makers have an opportunity to guide their communities towards resiliency in all aspects of their local economy.

Local Food Economy

Of particuliar importance to communities around the world is a shift to local food economies. Shuman, along with coathors Brad Masi and Leslie Schaller studied the impact of a 25% shift to local food production in the Milwaukee area and concluded that it would create 27,000 new jobs. For more on the benefits of a local food economy and Community Food Enterprises (CFE) go here.