Call a thing immoral or ugly, soul-destroying or a degradation of man, a peril to the peace of the world or to the well-being of future generations: as long as you have not shown it to be ‘uneconomic’ you have not really questioned its right to exist, grow, and prosper…
— E. F. Schumacher, Small is Beautiful, Chapter 3.
Schumacher argued that profitability alone is not an adequate measure of whether something is ‘economic’ or not. A new economics is needed that takes into account not only the profitability of a given activity, but also its effect upon people and the environment, including the resource base.”
— George McRobie, author of Small is Possible and co-founder of the Intermediate Technology Development Group (now Practical Action)
“A man who knows the price of everything and the value of nothing…”
— Oscar Wilde defines a cynic, Lady Windemere’s Fan (1892)
This chapter continues and extends the argument in previous chapters about economic measurement, and the failure of modern economics to understand the quality of life matters at least as much as the quantity of money.
What the chapter says.
The Liberal political philosopher John Stuart Mill (who Schumacher quotes) looked upon political economy “not as a thing by itself, but as a fragment of a greater whole; a branch of social philosophy, so interlinked with all the other branches that its conclusions, even in its own peculiar province, are only true conditionally, subject to interference and counteraction from causes not directly within its scope.”
Even Keynes rather contradicts himself – from the importance of “foul” being useful (see Chapter 2) – he advises economists not to “overestimate the importance of the economic problem, or sacrifice to its supposed necessities other matters of greater and more permanent significance.”
Perhaps, says Schumacher, economics should derive its aims and objectives from studying human beings and its methodology from studying nature. but it doesn’t seem to stick to any of these principles.
“In the market place, for practical reasons, innumerable qualitative distinctions which are of vital importance for man and society are suppressed; they are not allowed to surface. Thus the reign of quantity celebrates its greatest triumphs in ‘The Market’. Everything is equated with everything else. To equate things means to give them a price and thus to make them exchangeable. To the extent that economic thinking is based on the market, it takes the sacredness out of life, because there can be nothing sacred in something that has a price. Not surprisingly, therefore, if economic thinking pervades the whole of society. even simple non-economic values like beauty, health, or cleanliness can survive only if they prove to be ‘economic’…”
Next, he takes aim at the idea of cost-benefit analysis, which he describes as a “procedure by which the higher is reduced to the level of the lower and the priceless is given a price, It can therefore never serve to clarify the situation and lead to an enlightened decision. All it can do is lead to self-deception or the deception of others; for to undertake to measure the immeasurable is absurd and constitutes but an elaborate method of moving from preconceived notions to foregone conclusions…”
As he says, “what is worse, and destructive of civilization, is the pretence that everything has a price or, in other words, that money is the highest of all values.”
Schumacher then pretends to call in aid the celebrated presidential address by Professor Sir Henry Phelps Brown, to the Royal Economic Society on ‘The Underdevelopment of Economics’ in 1970. Phelps Brown had talked about “the smallness of the contribution that the most conspicuous developments of economics in the last quarter of a century have made to the solution of the most pressing problems of the times.”
And among those ‘pressing problems’, he listed: “checking the adverse effects on the environment and the quality of life of industrialism, population growth and urbanism.”
Even so, Schumacher is pretty dismissive; “As a matter of fact, to talk of ‘the smallness of the contribution’ is to employ an euphemism, as there is no contribution at all; on the contrary, it would not be unfair to say that economics, as currently constituted and practised, acts as a most effective barrier against the understanding of these problems…”
Why? Because, says Schumacher, of the addiction to “purely quantitative analysis and its timorous refusal to look into the real nature of things…”
The paradox is that economists deal with a limitless variety of goods and services, produced and consumed by an equally limitless variety of people, so it would not be possible to develop any economic theory at all, unless they are prepared to “disregard a vast array of qualitative distinctions”, he says:
“But it should be just as obvious that the total suppression of qualitative distinctions, while it makes theorizing easy, at the same time makes it totally sterile…”
To help fellow economists, Schumacher then comes up with a minimal set of different categories of ‘goods’ which they should not disregard – indeed, they can’t disregard them “without losing touch with reality…”
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‘Goods’ |
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Primary |
Secondary |
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| non-renewable | renewable | manufactures | services |
| (1) | (2) | (3) | (4) |
“The market knows nothing of these distinctions. It provides a price tag for all goods and thereby enables us to pretend that they are all of equal significance. Five pounds’ worth of oil (category 1) equals five pounds’ worth of wheat (category 2), which equals five pounds’ worth of shoes (category 3) or five pounds’ worth of hotel accommodation (category 4). The sole criterion to determine the relative importance of these different goods is the rate of profit that can be obtained by providing them. If categories 3 and 4 yield higher profits than categories 1 and 2, this is taken as a ‘signal’ that it is ‘rational’ to put additional resources into the former and withdraw resources from the latter... [W]ithout going into any further details, it can be said that economics, as currently constituted, fully applies only to manufactures (category 3), but it is being applied without discrimination to all goods and services, because an appreciation of the essential, qualitative differences between the four categories is entirely lacking.”
Towards the end of the chapter, he broadens the attack on the economics mindset, arguing that this obsession with ‘hidden hands’ at the expense of differing categories of goods and services, leads to a kind of obsession with means rather than ends.
“The trouble about valuing means above ends – which, as confirmed by Keynes, is the attitude of modern economics – is that it destroys man’s freedom and power to choose the ends he really favors; the development of means, as it were, dictates the choice of ends. Obvious examples are the pursuit of supersonic transport speeds and the immense efforts made to land men on the moon. The conception of these aims was not the result of any insight into real human needs and aspirations, which technology is meant to serve, but solely of the fact that the necessary technical means appeared to be available.”
What happened next?
The critique of economics by the new economics has normally echoed what Schumacher says here about trying to force a wide variety of things into the same narrow values system.
After he gave the lecture on which this chapter was based – to the National Society for Clean Air in London in 1967 – but before this book was published six years later, there was an attempt by the UK government to carry out the biggest cost-benefit analysis ever attempted. This was to remove the human factor in the decision where to build the third London airport – the so-called Roskill Commission.
Three teams were sent out to do a thorough cost-benefit analysis on the three sites, Thurleigh in Bedfordshire, Cublington in Buckinghamshire, and at the last moment, the TCPA (Town and Country Planning Association), a small ginger group, put in a planning application to build an airport on reclaimed land in the Thames estuary called Foulness or Maplin Sands.
Rather as Schumacher suggested, the teams quickly ran into difficulties. How should they value, for example, the demolition and the loss of St Martin’s 12th century church in Stewkley? They ended up basing it in its fire insurance value, only about £12,000.
Then, at the end of the process, there was an awkward moment, when the teams all came together theatrically and added up the totals, and – to everyone’s horror – the conclusion turned out to be ‘wrong’. The cost-benefit analysis suggested the airport should be built at Cublington – which nobody thought was a good idea.
One of the commissioners, the eminent transport planner Sir Colin Buchanan, put out a dissenting report saying that this would be an “environmental disaster”. He urged his government to choose Maplin Sands instead – which they did, until the energy crisis intervened and the whole project was canceled. The Roskill Commission had been excellent, said Buchanan. “It just got the small matter of the site wrong.”
The third London airport was eventually built at Stansted, without a cost-benefit analysis.
Even so, cost-benefit has become a great deal more sophisticated since those days. Economists use a concept like ‘Willingness to Pay’ (WTP) or ‘Willingness to Accept Compensation’ (WTA). After surveying people to find out what they would be willing to pay to protect the world’s elephant population or the Grand Canyon, for example, then you multiply it with the number of people affected and – hey presto! – you have something approaching a value for them.
Even so, by the turn of the century, I couldn’t help noticing how many things were valued at a round $1 million. The world’s elephants, for example, the moon, and the entire genetic heritage of Costa Rica, because that is what the pharmaceutical giant Merck paid them for it. One Washington economist said that the elephants valuation was because $1m was “easy to remember”.
The trouble with cost-benefit is that about a quarter of people refuse to answer the WTP question on the grounds that you can’t put a value on these things, and of course some things are beyond price – as a Frankfurt woman called Frau Kraus showed in 1989, when she found she had a veto over a proposed new skyscraper next door to where she lived.
She refused to budge for the million Deutschmarks they offered her. She also refused to accept ten million. “Not even if they offered me twenty million would I change my mind,” she said. “It would block out my sunlight and spoil the place where I was born and bred.”
The British geographer John Adams said cost-benefit analysis has a particular problem – just as Schumacher says – with valuing intangibles. He called the process a ‘horse and rabbit stew’. “The rabbit is skinned and dressed with great care; the horse – size unknown – is just tossed into the pot with no preparation at all,” he wrote. “It is an ethic that debases that which is important and disregards entirely that which is supremely important.”
Briefly, new economists tried something different, which involved measuring success by range of different indicators – like Seattle which by the 1990s, was measuring their success by the number of salmon in local streams. In Dundee, it was the number of empty houses. In Lima, it was the number of days you could see the Andes from the city center. Or in Hazel Henderson’s Calvert-Henderson quality of life indicators for investors, which measured every nation according to their performance on the environment, health, human rights and so on.
The OECD was suddenly measuring national performance using 105 different indicators, and a whole movement was developing dedicated to measuring with no bottom lines. Unfortunately, thanks to the involvement of Mckinsey, and similar consultancies, the whole thing became subsumed into the New Public Management – and the radical elements were lost in a welter of management-speak.
Something similar happened with ‘social auditing’, developed by Simon Zadek at the New Economics Foundation from 1995, when one of their first challenges was to research a ‘Values Report’ for the Body Shop.
But Body Shop CEO Anita Roddick turned against the idea of social auditing, which seemed to her to hand over responsibility for the company’s ethical policies from the board to the accountancy function – rather as Schumacher warned that it would. So she sold the Body Shop’s in-house social auditing team to accountancy firm PWC.
There was no way that the New Economics Foundation, which had originally trained the team, could compete with PWC, so that was nearly the end of social auditing as a radical act.
Questions for discussion…
- What role should measurement play – if any – in public ethics?
- How should you tell the difference between people’s ‘need’ and their ‘greed’, in practice?
- Without cost-benefit analysis, can you debate with other nations how much the rich should pay for climate change adaptation? Does that mean there is a use for cost-benefit analysis after all?
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