Almost every day we hear of mergers and takeovers: Britain enters the European Economic Community to open up larger markets to be served by even larger organizations. In the socialist countries, nationalization has produced vast combines to rival or surpass anything that has emerged in the capitalist countries. The great majority of economists and business efficiency experts sup- ports this trend towards vastness.
— E. F. Schumacher, opening lines of Ch. 16
We all recognize, I think, that these are times of rapid change when we need to welcome innovative, better ways of doing things. Many traditionally monopolistic public services need to be opened up to entrepreneurs and others with good idea… But governments can and too often do discourage experimenting, and prevent or delay privately undertaken initiatives that trespass into their traditional preserves. All central planning is at odds with multiple and diverse experimenting. To be sure, small bureaucracies can be as brain-dead as big ones, but at least if they are multiple, when one says no or just doesn’t get it, the old saying applies; not all the eggs are in that basket.
— Jane Jacobs, author of The Death and Life of the Great American Cities, 25th anniversary edition (1999)
As the world enters its third millennium seemingly afflicted with ever-larger institutions, has the Schumacher legacy been repudiated? Not at all. True, Bigness seems to be on the march. But operating underneath galloping globalism, men and women in thousands of local communities are acting bravely in his tradition to create human scale institutions, appropriate technology, community land trusts, environmental improvement, local currencies, cooperatives, alternative health care, new energy technologies, home food production, rewarding self-employment, and entrepreneurship. The forces of the global economy, the great corporations, the international labor unions, the mega-universities, the mass media, are really powerless to stop this movement toward a new society. Indeed, the wonders of new technology have opened new possibilities for the decentralist movement. The one exception is the baneful influence of Big Government…”
— John McClaughry, Vermont politician, speech-writer and author of The Vermont Papers, 25th anniversary edition, (1999).
This chapter takes a logical and step-by-step approach to the problem of massive, inhuman organizations. As such, it may be the only chapter that fits the title of the book.
It first appeared in the fall of 1967 as ‘Management Decision’, Quarterly Review of Management Technology in London.
What the chapter says…
Schumacher carried on: “In contrast, most of the sociologists and psychologists insistently warn us of its inherent dangers – dangers to the integrity of the individual when he feels as nothing more than a small cog in a vast machine and when the human relationships of his daily working life become increasingly dehumanized; dangers also to efficiency and productivity, stemming from ever-growing Parkinsonian bureaucracies.”
Northcote Parkinson had written Parkinson’s Law because, as a naval historian, he famously noticed that there had been around 2,000 civil servants working at the British Admiralty at the outbreak of the First World War in 1914 to administer a navy of 146,000 seamen. By 1928, just fourteen years later, that figure had grown to 3,569 civil servants to manage 100,000 seamen.
Schumacher appears to have noticed Parkinson’s efforts to get his ‘law’ discussed (that the work expands to fill the time available). Yet even though he has mentioned Parkinson in three chapters so far, he doesn’t call him in aid or support – instead he calls on fans of Franz Kafka
“Modern literature, at the same time, paints frightening pictures of a brave new world sharply divided between us and them,” writes Schumacher, “torn by mutual suspicion, with a hatred of authority from below and a contempt of people from above. The masses react to their rulers in a spirit of sullen irresponsibility, while the rulers vainly try to keep things moving by precise organization and coordination, fiscal inducements, incentives, endless exhortations and threats. Undoubtedly this is all a problem of communications. But the only really effective communication is from man to man, face to face…”
He then relates the story of Kafka’s nightmarish novel, The Castle which, he says, “depicts the why”:
“Mr K, the land surveyor, has been hired by the authorities, but nobody quite knows how and meets all tell him: ‘Unfortunately we have no need of a land surveyor. There would not be the least use for one here.’ So, making every effort to meet authority face to face, Mr K approaches various people who evidently carry some weight; but others tell him: ‘You haven’t once up till now come into real contact with our authorities. All these contacts are merely illusory, but owing to your ignorance … you take them to be real.’ He fails utterly to do any real work and then receives a letter from The Castle: ‘The surveying work which you have carried out thus far has my recognition…. Do not slacken your efforts! Bring your work to a successful conclusion. Any interruption would displease me … I shall not forget you.’”
The Castle was the last novel that Kafka wrote. He began it in January 1922 when he arrived at the Alpine clinic where he was being treated for tuberculosis.
He had been planning the book since before the First World War. It stops in mid-sentence, where he abandoned it – explaining to his friend and executor Max Brod that it was going to finish with K. on his deathbed, still living in the village – when the the castle would notify him that his “legal claim to live in the village was not valid, yet, taking certain auxiliary circumstances into account, he was permitted to live and work there.”
Even so, on 11 September 1922 in a letter to Brod, he wrote that he was giving up on the book and would never return to it.
Stomacher takes the obvious and mainstream takes the obvious and mainstream interpretation of the novel – that it was primarily about bureaucracy. It was not, for example, a complex novel about God.
B rod said that the 20th century will one day be known as the ‘century of Kafka’. And he made such a reputation possible by promising his friend that he would ignore any instructions as am executor to destroy his manuscripts (including The Castle).
“Yet, it seems,” said Schumacher, “large-scale organization is here to stay. Therefore it is all the more necessary to think about it and to theorize about it. The stronger the current, the greater the need for skilful navigation. The fundamental task is to achieve smallness within large organizations [my emphasis].”
“Once a large organization has come into being, it normally goes through alternating phases of centralizing and decentralizing, like swings of a pendulum. Whenever one encounters such opposites, each of them with persuasive arguments in its favour, it is worth looking into the depth of the problem for something more than compromise, more than a half-and-half solution. Maybe what we really need is not either/or but the-one-and-the-other-at-the-same-time.”
Then he introduces the five principles with which he plans to find a way forward for big organizations.
“This very familiar problem pervades the whole of real life, although it is highly unpopular with people who spend most of their time on laboratory problems from which all extraneous factors have been carefully eliminated. For whatever we do in real life, we must try to do justice to a situation which includes all so-called extraneous factors. Find we always have to face the simultaneous requirement for order and freedom.”
1. The Principle of Subsidiarity
This means that people need to be governed by decisions taken as close as possible to them. Schumacher borrowed this idea from Catholic social doctrine, under Pope Leo XIII. It was never quite clear where the idea derived from, though persistent rumours suggested that it came from John Ruskin, via Cardinal Henry Manning (see Chapter 18).
In fact, Schumacher quotes the papal encyclical ‘Quadragesimo Anno’, published as the title says – four decades later, in 1931 – drafted in this case by two German Jesuit theologians Oswald von Nell-Breuning and Gustav Gundlach, and published by Pius XI.
The main function of ‘Quadragesimo Anno’ was to condemn socialism and capitalism equally, and develop the idea of subsidiarity:
“The opposites of centralizing and decentralizing are now far behind us: the Principle of Subsidiary Function teaches us that the centre will gain in authority and effectiveness if the freedom and responsibility of the lower formations are carefully preserved, with the result that the organization as a whole will be ‘happier and more prosperous’…”
But how can it be achieved, given that so many vast organizations now dominate our lives? Answer: by splitting the big organizations up into as many local divisions as possible, with the maximum of leeway and the minimum of control.
2. The Principle of Vindication. “To vindicate means: to defend against reproach or accusation: to prove to be true and valid; to justify; to uphold; so this principle describes very well one of the most important duties of the central authority towards the lower formations. Good government is always government by exception. Except for exceptional cases, the subsidiary unit must be defended against reproach and upheld. This means that the exception must be sufficiently clearly defined, so that the quasi-firm is able to know without doubt whether or not it is performing satisfactorily.”
The problem, says Schumacher, is that those at the centre want to control everything:
“Administrators taken as a pure type, namely as men of orderliness, are happy when they have everything under control. Armed with computers, they can indeed now do so and can insist on accountability with regard to an almost infinite number of items – output, productivity, many different cost items, non- operational expenditure, and so on, leading up to profit or loss. This is logical enough: but real life is bigger than logic. If a large number of criteria is laid down for accountability, every subsidiary unit can be faulted on one item or another; government by exception becomes a mockery, and no-one can ever be sure how his unit stands.”
3. Principle of Identification.
Every subsidiary unit or quasi-firm should have both a profit and loss account and a balance sheet, says Schumacher:
“Business operates with a certain economic substance, and this substance diminishes as a result of losses, and grows as a result of profit. What happens to the unit’s profits or losses at the end of the financial year? They flow into the totality of the organization’s accounts: as far as the unit is concerned, they simply disappear. In the absence of a balance sheet, or something in the nature of a balance sheet. the unit always enters the new financial year with a nil balance. This cannot be right.”
That means profits and losses are carried forward and not wiped out:
“Every quasi-firm should have its separate balance sheet, in which profits can appear as loans to the centre and losses as loans from the centre. This is a matter of great psychological importance.”
4. The Principle of Motivation.
“For a large organization, with its bureaucracies, its remote and impersonal controls, its many abstract rules and regulations, and above all the relative incomprehensibility that stems from its very size, motivation is the central problem.”
And when intellectuals pretend that work can never be more than a necessary evil – soon to be abolished for the majority – then “the urge to minimize it right away is hardly a surprising reaction, and the problem of motivation becomes insoluble… However that may be, the health of a large organization depends to an extraordinary extent on its ability to do justice to the Principle of Motivation. Any organizational structure that is conceived without regard to this fundamental truth is unlikely to succeed.”
5. The Principle of the Middle Axiom.
Top management in a large organization inevitably occupies a very difficult position. How do you make things happen from there? In reply to his own questions, Schumacher tells a story from the National Coal Board, which – under Lord Robens – really took his advice on splitting itself up:
“Some years ago, the most important truth to be enunciated by the National Coal Board was concentration of output, that is, to concentrate coal-getting on fewer coal faces, with a higher output from each. Everybody, of course, immediately assented to it, but, not surprisingly, very little happened.”
What they did was to ask any coalfields that were making changes to answer a series of questions, like:
- Why can this particular coalface not be laid out in such a way that the required minimum size is attained?
- Why does this particular bit of coal have to be worked at all?
- What is the approximate profitability of the coalface as planned?
Finally, he draws his thoughts together in a thoroughly English, pragmatic way:
“Many of us have been struggling for years with the problems presented by large-scale organization, problems which are becoming ever more acute. To struggle more successfully. we need a theory, built up from principles. But from where do the principles come? They come from observation and practical understanding… The best formulation of the necessary interplay of theory and practice. that I know of, comes from Mao Tse-tung. Go to the practical people, he says, and learn from them: then synthesize 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.”
What happened next?
To return to Parkinson’s Law, which – as you may remember – started life when a naval historian noticing that however few warships the Royal Navy had, the number of civil servants administering them stayed the same (see Chapter 10). Some years ago, I found out what the numbers were now.
There were then (2010) only 38,000 personnel in the Royal Navy, and they were serviced by only 1,800 civil servants. On the other hand, those are just the ones assigned entirely to the navy, so we have to delve a little deeper. You would also have to assign some of the 19,200 civil servants running the Ministry of Defence in London, and some of the 14,300 civil servants looking after defence equipment. Of course, modern missiles and computers are more complicated than shells and range-finders, but Parkinson’s Law still seems to apply [these are 2010 figures]. “The number of officials and the quantity of the work are not related to each other at all,” said Parkinson.
Clearly, Schumacher was right that the the drift towards ever bigger organizations was probably unstoppable. Certainly, neither he nor Leopold Kohr nor Kirkpatrick Sale (the author of Human Scale) have been able to prevent it.
The National Coal Board – where Schumacher learned this approach and experimented with it – has long since shuffled off into history, as most nationalized industries have done in the UK.
Equally, most if not all the former nationalized industries have stayed vast and unresponsive in private hand, just as they were in government hands. For some reason, we don’t see this very clearly – that this has something to do with scale and not to do with the company’s ownership structure.
Margaret Thatcher’s government in the UK which invented the idea of privatization when they sold British Telecom back to the public – and then spread it to the world – promised that the new owners would be entrepreneurial and flexible. Nothing could have been further from the truth.
Tragically, the only contemporary industrial or business leader who came close at least to emulating what Schumacher was trying to do was Jack Welch, CEO of the massive conglomerate GE. It was Welch who spoke about the importance of making a huge company feel small.
It is strange that a man who thought as big as Welch should have been so sceptical about what he was doing. When Jack Welch took over GE in 1981, one of the world’s wealthiest companies, it was earning $1.5 billion a year and had 400,000 employees. When he left twenty years later, it was earning $126 billion. The number of employees had long since been slashed to 270,000, earning Welch the nickname ‘Neutron Jack’, a reference to the bomb which kills people but leaves buildings standing.
Welch joined General Electric as an executive in 1960. In fact, he had accepted another job quite early in his career at GE, but was taken out to dinner and persuaded to stay by a young executive called Reuben Gutoff, who promised to work with him to cut bureaucracy and create a small-company environment.
He set about transforming a corporate monolith that he believed was throttling itself in its own processes. That meant dumping the idea of strategies. Who reads them after they are written so laboriously? It meant abandoning the great edifice of corporate measurement. “Too often, we measure everything and understand nothing,” he said.
Under Welch, GE would just measure customer satisfaction, employee satisfaction and cash flow. It also meant, as far as possible in a huge company, striving for informality. It wasn’t a small company, heaven knows, but Welch wanted it to feel like one.
None of this suggests that Welch was a leader to be copied in any other way than this – his record on the environment was appalling. But he knew that the kind of people he needed would sometimes be different from the ones he had got. Take away the structures of bureaucracy and people look different. “Now you see some of them wilt,” he said, about some senior executives after the process of ‘de-layering’. “That’s the sad part of the job. Some who looked good in the big bureaucracy looked silly when you left them alone.”
That implied that recruiting the right people was absolutely central, which is why Welch said he spent half his time recruiting the top positions in the company.
Two decades on, the Welch message has filtered down through corporate America. McDonalds CEO Jim Skinner now personally interviews his top 200 managers. Welch’s successor at GE, Jeff Immelt, meets his top 600 staff before they are appointed. Unfortunately, Welch set up a particularly ferocious system that graded all GE staff every year as A, B or C. The As were promoted and the Cs sacked. “Move them out early,” he advised. “It’s a contribution.” But then, as I said, not everything about Welch’s reign over GE was admirable.
Schumacher keeps up his asides about the measurement obsession of the culture:
“I don’t see why you can’t do that,” says John Timpson – the maverick chief executive of the Timpson’s key-cutting chain, and the author of How to Ride a Giraffe – about managing without the usual business ‘rules’. “But the first thing that would happen would be that you would get loads of people coming to you and saying why it won’t work. Then you’ll have lots of people telling you what a good idea it is but not actually doing it. It only works if the person at the top believes with a passion that it must happen.”
It is difficult to achieve, John McClaughry – former Reagan speechwriter and author of The Vermont Papers – wrote in the 25th anniversary edition (Hartley & Marks, 1999):
“Even as the opportunities appear for a decentralist future, Big Government constantly centralizes power over its subjects, pries into their privacy, confiscates their earnings, regulates their every activity, dictates their choices, removes what once were local civic decisions to higher and more distant bureaucracies, and all too often – alas – stifles the upwelling energies of the human spirit.”
Questions for discussion…
- This chapter suggests a compromise between big and small organizations. Why doesn’t Schumacher just face down the big ones?
- Why is it so difficult, in practice, to get our leaders to act on the issue of scale?
- What McClaughry and others quoted here provide is much more about working for big organizations, or being messed around by bureaucrats – about the psychic load of that in our lives. Why did Schumacher not tackle this in support of his title?
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