of a new Nobel prize in economics in 19681 can be taken as a suitable marker of the profession’s coming of age. Still, there is a discordant note in all this, for the rise of economics as a science and a profession has not been accompanied by any noticeable improvement in the ability of societies to manage their economic affairs.
It’s ironic, in fact, how few benefits industrial societies seem to have gained from their economic experts in the last few decades. Beginning around 1980, when many of the world’s industrial nations adopted a market-centered economic philosophy based on recent revisions of Adam Smith’s ideas, it has become routine for government policies to have results completely different from, and far less pleasant than, those predicted for these policies by public and private economists alike. From the deregulation of utilities in the early 1980s, which was supposed to cause prices of utility services to go down (and made those prices go up), through a litany of failures culminating in the drastic cuts in interest rates that followed the 1999–2000 tech stock crash, which was supposed to restore economic stability (and launched an even more drastic cycle of boom and bust), it has become uncomfortably clear that whatever the talents of today’s economic profession happen to be, making meaningful predictions about economic policy is not one of them.
There has been plenty of discussion of these failures, to be sure, and a great many attempts to tinker with the structure of contemporary economic thought; many writers in and out of the profession have attempted to explain the failures and prevent their recurrence. Still, as this book will try to show, most of these efforts stop short of the changes that will actually be needed to bring economics back in line with reality. The problems with contemporary economics cannot be fixed by minor adjustments to existing models. They reach down to the basic assumptions on which Adam Smith and his successors based the science of economics, and can be fixed only by recognizing the flaws in those assumptions and exchanging them for others more in keeping with the way the world actually works.
It is not going too far to compare Smith to Claudius Ptolemy, the great classical astronomer whose writings became the foundation for all cosmological and astronomical thought for a millennium after his time. Ptolemy’s theories were clear and compelling, and they corresponded closely enough to the way the heavens seemed to work that most of the astronomers who built on his work took his models for hard fact. Underlying those models, though, was a fundamental mistake: Ptolemy’s conviction that the Earth was located at the center of the cosmos and everything else rotated around it. That mistake forced Ptolemy’s successors to come up with one workaround after another for celestial motions that never quite did what the model said they should do, until Nicolaus Copernicus eventually figured out where the problem actually was. By turning the cosmos inside out, moving the supposedly central Earth to a peripheral position and putting the Sun at the center, he solved problems that could not be solved from within Ptolemy’s analysis, and also opened up avenues of inquiry that made possible Kepler’s discovery of the laws of planetary motion, Newton’s theory of gravitation and a great deal more.
Economics is badly in need of a Copernican revolution of its own, one that will recognize that the center of economic activity is not where today’s economists think it is. Fortunately, the field has already had its Copernicus.
Ernst Friedrich Schumacher was born in Bonn in 1911 and attended universities there and in Berlin before going to Oxford in 1930 as a Rhodes Scholar, and then to Columbia University in New York, where he graduated with a doctorate in economics. When the Second World War broke out he was living in Britain, and was interned for a time as an enemy alien, until fellow economist John Maynard Keynes arranged for his release. After the war, he worked for the British Control Commission, helping to rebuild the West German economy, and then began a 20-year stint as chief economist and head of planning for the British National Coal Board, which at the time was one of the world’s largest energy firms.
He also served as an economic adviser to the governments of India, Burma and Zambia, and these experiences turned his attention to the economic challenges of development in the Third World. Recognizing that attempts to import the industrial model into nonindustrial countries usually failed due to shortages of infrastructure and resources, he pioneered the concept of intermediate technology — an approach to development that focuses on finding and using the technology best suited to the resources available — and founded the Intermediate Technology Development Group in 1966. His interest in resource issues also led to an involvement in the organic agriculture movement, and he served for many years as a director of the Soil Association, Britain’s largest organic farming organization.
It was these practical involvements that predisposed Schumacher to see past the haze of unrecognized ideology that makes so much contemporary economic thought useless when applied to the real world. The academic side of the economics profession is notoriously forgiving of even the most embarrassingly inaccurate predictions, and a professor of economics can still count on being taken seriously even when every single public statement he has made about future economic conditions has been utterly disproven by events. This is much less true in the business world, where predictions have results measured in quarterly profits or losses. Working in a setting where consistently bad predictions would have cost him his job, Schumacher was not at liberty to put theory ahead of evidence, and the conflict between what standard economic theory said and the realities Schumacher observed all around him must have had a role in making him the foremost economic heretic of his time.
His economic ideas cover a great deal of ground, not all of which could be explored even in a book many times the length of this one. Four of his propositions, however, will help sketch out the gap he discovered between economic theory and the behavior of economic systems in the real world.
First, Schumacher drew a hard distinction between primary goods and secondary goods. The latter term includes most of what is dealt with by conventional economics: the goods and services produced by human labor and exchanged among human beings.
The former includes all those things necessary for human life and economic activity that are produced not by human beings, but by Nature. Schumacher pointed out that primary goods need to come first in any economic analysis, because they supply the preconditions for the production of secondary goods. Renewable resources, he proposed, form the equivalent of income in the primary economy, while nonrenewable resources are the equivalent of capital; to insist that an economic system is sound when it is burning through nonrenewable resources at a rate that will lead to rapid depletion is thus as silly as claiming that a business is breaking even if it’s covering up huge losses by drawing down its bank accounts.
Second, Schumacher stressed the central role of energy among primary goods. He argued that energy cannot be treated as one commodity among many without reducing economics to gibberish, because energy is the gateway resource that gives access to all other resources. Given enough energy, shortages of any other resource can be made good one way or another; if energy runs short, though, abundant supplies of other resources won’t make up the difference, because any economy needs energy to bring those resources into the realm of secondary goods and make them available for human needs. Thus the amount of energy available per person puts an upper limit on the level of economic development possible in a society, though other forms of development — social, intellectual, spiritual — can still be pursued in a setting where hard limits on energy restrict economic life.
Third, Schumacher stressed the importance of a variable left out of most economic analyses — the cost per worker of establishing and maintaining a workplace. Only the abundant capital, ample energy supplies and established infrastructure of the world’s industrial nations, he argued, made it possible for businesses and governments in those nations to treat replacing human labor with technology as a benefit. In the nonindustrial world, where the most urgent economic task was not the production of specialty goods for global markets but the provision of paid employment and basic necessities to the local population, attempts at industrialization have commonly turned into costly mistakes. Schumacher’s involvement in intermediate technology unfolded from this realization; he pointed out that in a great many situations, a relatively simple technology that relied on human hands and minds to meet local needs with local resources was the most viable response to the economic needs of nonindustrial nations.
Finally, and most centrally, Schumacher pointed out that the failures