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Introduction: A Guide for the Perplexed

More than two centuries have passed since Adam Smith, a Scots philosopher with a clergyman’s training and a previous reputation mostly as a moralist, launched the modern science of economics with a book entitled The Wealth of Nations. The first widely accepted analysis of how markets guide economic behavior, Smith’s book quickly took on the status of a classic. Its approach to the subject of economics has dominated the field ever since; just as Bertrand Russell famously defined all of Western philosophy as “footnotes to Plato,” it would be by no means inappropriate to define all of modern economic thought as footnotes to Smith.

While Smith’s work deserves its reputation, the timing of its publication also had a good deal to do with the way it came to dominate the field it brought into being. It was published the same year that America’s Declaration of Independence was signed, and just as Britain was launching the social and technological transformations that would make it the world’s first industrial society. Smith’s central thesis — that a market economy governs itself through what would today be called feedback loops, and thus does not need close government supervision — appealed to audiences who were well primed by the events of the day to question the need for government intrusion in private economic affairs, while the rising class of industrial entrepreneurs found their own reasons to support an analysis that claimed to justify their interest in making as much money with as little interference as possible.

The meteoric expansion of the industrial economy over the two centuries that followed was marked, in turn, by the rise to prominence of the profession of economics. In Smith’s time, professional economists did not yet exist; today they rank among the most prominent figures in contemporary intellectual life. The creation 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 of contemporary economics could not be solved by improved mathematical models or more detailed statistics, because they were hardwired into the assumptions underlying economics itself. Every way of thinking about the world rests ultimately on presuppositions that are, strictly speaking, metaphysical in Nature: that is, they deal with fundamental questions about what exists and what has value. Trying to ignore the metaphysical dimension does not make it go away, but rather simply ensures that those who make this attempt will be blindsided whenever the real world fails to behave according to their unexamined assumptions. Contemporary economics fails to predict the behavior of the economy because it fails to criticize its own underlying metaphysics. Thus, a hard look at those basic assumptions is an unavoidable part of straightening out the mess into which current economic ideas have helped land us.

These four propositions are among the key points made in Schumacher’s most famous book, Small Is Beautiful: Economics As If People Mattered, which was published in 1973 to immediate acclaim. Theodore Roszak spoke for many perceptive thinkers at that time in the closing words of his introduction: “We need a nobler economics that is not afraid to discuss spirit and conscience, moral purpose and the meaning of life, an economics that aims to educate and elevate people, not merely to measure their low-grade behavior. Here it is.”² The more thoughtful end of the alternative scene of the seventies took Schumacher’s ideas as one of the core foundations of its thought and practice; it’s no exaggeration to say that any bookshelf in that decade that had a copy of The Whole Earth Catalog and Mother Earth News on it generally had a copy of Small Is Beautiful perched nearby.

Like the rest of the alternative thinking of that decade, Schumacher’s work went into eclipse in the following decades as industrial societies abandoned the promising steps toward sustainability taken in the seventies and embraced a radical new ideology that insisted on the free market’s infallibility. For a while, that new ideology seemed to work, but its successes rested on a foundation rarely discussed, then or later. The seventies had been defined in part by repeated energy crises and resulting economic troubles. Those difficulties helped catalyze a sharp decrease in energy use in the world’s industrial nations; it also drove frenzied efforts to locate untapped petroleum reserves — efforts that, as it happened, turned up large fields in the North Sea and Alaska’s North Slope.

A reasonable approach to energy policy would have treated those discoveries as vital sources of energy to fill in the gaps while industrial nations made the transition to a new economy powered by renewable sources and structured to maximize energy efficiency — exactly the policy that Schumacher, among many others, detailed in his writings. Unfortunately for all of us, that was not what happened. Instead, the North Sea and North Slope fields were pumped at a breakneck pace, flooding oil markets around the world with cheap oil and sending prices plummeting to what, corrected for inflation, was their lowest level in history. As the efficiencies and innovative programs of the seventies gave way to the extravagances of the eighties and nineties, the possibility of a smooth transition to a sustainable future went by the boards.

We are now living with the first consequences of that monumentally short-sighted decision. The wild swings in energy costs, the even wilder cycles of economic boom and bust and the sharp impacts of all this volatility on the social and political fabric of the world’s industrial nations have their source in the disastrous mismatch between an economic and technological system geared to exponential growth and the hard limits of a finite planet.³ The consequences to our descendants will be even more extreme. Still, it may be possible to mitigate the worst of those consequences, and make life considerably easier for generations to come, by revisioning the ways that human societies deal with the production and distribution of goods and services. The crisis of the present makes such a revisioning necessary, but it also provides a window of opportunity in which such a revision might just be able to find its way from theory into practice.

This book is meant to further that hard but necessary process. I am not a professional economist, and the cult of expertise that pervades modern culture may make it seem presumptuous for someone without an economics degree to suggest a redefinition of contemporary economics. It may seem even more presumptuous in that several movements toward an ecologically sane economics have risen since Schumacher’s time; economists such as Nicholas Georgescu-Roegen, Kenneth Boulding, Herman Daly and Robert Costanza have presented densely reasoned works of economic theory arguing for the inclusion of the value of “natural capital” — in Schumacher’s terms, primary goods — in economic calculations, and challenging the simplistic ways that conventional economic thought brushes aside environmental destruction and resource depletion as nonissues.

Still, it may be worth noting that Adam Smith did not have an economics degree, and his pathbreaking study of economics lacked any trace of the intricate mathematical formulations that today’s economists too often consider essential to their craft. Smith worked instead on the level of fundamental ideas; Schumacher, whose writings are just as sparse in their use of calculations, did the same; so, in its own way, does this book. Like Smith’s and Schumacher’s works, too, this book is not addressed to economists. Rather, its goal is to communicate the failure of modern economics, and potential solutions to the crises driven by that failure, to the audience that has the final say in matters of public policy: the public itself.

The predicament into which industrial civilization has backed itself at the end of the age of cheap energy, the subject of my previous books The Long Descent and The Ecotechnic Future, has a crucial economic dimension, and The Wealth of Nature is intended to help make sense of that dimension by applying E. F. Schumacher’s Copernican revolution in economic thought to the crisis of our time. If the ideas suggested here inspire others to rethink the foundations of contemporary economics, and set aside some of the mistaken ideas that have so consistently blocked a sane response to the largely unacknowledged roots of our current troubles, this book will have done its work.