business current affairs economics energy

Two lessons from Schumacher for stimulating the economy

There are all kinds of things in Schumacher’s writings that are ripe for rediscovery. Here are just two that caught my eye in my recent re-readings as being particularly relevant:

The energy connection
As a young man, Schumacher studied the problems of his country’s reconstruction efforts after the First World War. Germany’s coal production was essentially being confiscated as part of the compensation/punishment package agreed during the peace deal, leaving the country’s industry starved of cheap energy. Schumacher made a vital connection: that economics was inseparable from energy. For the rest of his career, he would continue to ask how new developments, policy or technology related to the energy problem.

80 years later, that message still hasn’t sunk in. Energy policy and economic policy are still developed separately, with energy under pressure to keep up with goals that we’d know were unrealistic if we factored it in from the start. So new ‘eco-estates’ are built on the edges of towns, where the residents will have no choice but to drive to their workplaces or to go shopping.

Or take our energy companies. As corporations, they are duty bound to increase shareholder value, but they are also compelled by law to encourage energy efficiency. If you’re going to both expand as a company and sell less of your product at the same time, you’re going to have to a) grow by taking over other companies, leading eventually to monopolies, b) pay out dividends at the expense of long term investment or c) consistently raise prices for your customers. Any of those sound familiar?

This also applies to the way that the government has chosen to stimulate the economy. By directing funds towards road-building, scrappage schemes, or cutting taxes on petrol, we prolong and promote motoring. But we’re a net oil importer and the price of oil is on a long term upward trend. Far from stimulating the economy, throwing money at motoring exacerbates our trade deficit and pushes us further into external debt, while undermining the very things that could offer a solution to our unsustainable transport problems.

The best investments we could be making right now are ones that will save us money in the long term as energy prices increase: renewable energy, insulation and efficiency measures, public transport.

And before any policy is adopted or any new development is authorised, whether it’s national or local, that question needs to be answered: ‘how does this relate to energy?’

Intermediate workplaces
When Schumacher toured India to investigate new ways to encourage development, he realised that there was a connection between average wages and the cost of a workplace. Where wages were high, it was possible to create jobs by investing in large-scale installations or factories. In low income countries, the economics was different. The upfront capital required to build exactly the same factory would be comparatively much larger. The economic activity created by the factory would not be enough to offset the capital costs, unless they were dependent on external finance.

If low income countries wanted to create employment and finance development themselves, they needed an ‘intermediate technology’ that created smaller businesses using more accessible technology. For example, an intermediate workplace might be a sewing machine in a corner of a living room. It’s a jump up from hand-stitching, but the capital costs are tiny compared to attempting to build a textiles factory.

The idea gave rise to ‘appropriate technology’, but it was actually the cost of creating a workplace that first inspired the idea.

We can learn from this in Britain today because we are currently in a ‘jobless recovery’. The recession is officially over, but unemployment remains high and jobs are not being created. Why? Perhaps it’s partly because all our attempts to stimulate job creation are pitched at big business, through cuts to business taxes, changes to the law to make it easier to employ people (and fire them), or government funded apprenticeships.

Now, we’re not a low income country, but there are similar principles of scale at work here. It’s a lot easier to create small scale jobs than big ones, to re-open a closed down café than to build a new supermarket. It’s cheaper to support small scale solar fitters than fund a new power station. Our economic stimulus should be aimed at the bottom, helping cottage industries, local producers and small scale entrepreneurs.

The government has acknowledged this somewhat late in the game, and is talking up small and medium sized enterprises. So far it hasn’t announced a detailed strategy for assisting them, but the idea of creating ‘intermediate workplaces’ could be worth exploring. Perhaps the idea could be combined with the suggested and never implemented ‘people’s bank‘, with the Post Office offering a form of ‘intermediate finance’ for business start-ups.

3 comments

  1. “cheaper to support small scale solar fitters than fund a new power station” – honestly how effective do you think solar energy can be in the UK. If you want to create jobs you could subsidise whatever you please to create jobs, preferable something which does not involve importing expensive goods from abroad. If your goal is an effective energy policy then you should spend your money on something that actually works.

  2. Solar hot water systems are perfectly viable in the UK and can meet half the average household’s hot water needs without too much trouble. Given the rising price of gas, which is likely to account for the other half, solar hot water is a very effective addition to the energy mix. Solar PV is less promising in the UK, and until the price and the energy return on investment improves, is only going to be a small scale domestic resource here.

    But that’s a one line example, not an attempt to outline an energy policy, so don’t get too hung up on that.

  3. Interwoven with his ideas of labor were Schumacher’s ideas about what would later be called appropriate technology. His two basic development theories were Intermediate Size, and Intermediate Technology.To impose Intermediate Size on a national economy Schumacher suggested superimposing on large-area states a cantonal structure of modest size so that vast industrial concentration (with all this entails in imbalance, ineptitude, and diseconomies of scale) becomes not only unnecessary but also impractical and inefficient. (1)Intermediate Technology would be a byproduct of the cantonal structure. Once a development district is ‘appropriately’ reduced, it becomes possible to fulfill a society’s material requirements by means of less expensive and simpler equipment than the costly, computerized, labor-saving machinery necessary for satisfying the massive appetite for the remedial transport and integration commodities without which a very large modern market community cannot exist. Though this means a reduction in productivity, it does not mean a reduction in even the highest humanely attainable standard of living. (1)Putting it differently, the reduced efficiency of intermediate technology provides the same amount of goods, but at a higher cost in labor. However, since higher labor cost and longer working hours means simply that the desired level of production can be achieved only by full rather than partial employment of the available labor force, they represent socially no additional cost at all. They are, in fact, a benefit. It is unemployment, defined by Schumacher as the degrading saving of manpower through the inappropriate use of advanced machinery, which is the prohibitive cost which no society can afford to pay in the long run. Furthermore the unemployment caused by excessive technological progress will inevitably lead to the revolt of the unemployed (1).

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