Sunday, June 28, 2009

Small is Beautiful

Small is Beautiful: Economics As If People Mattered by by E. F. Schumacher is over 25 years old now, but its premise is now more valid than ever. It's a simple, straightforward approach that takes into consideration the way measuring strictly by patterns of consumption create dysfunctional systems that ignore human and natural capital. It has a very Buddhist bent, but that world view encompasses the risk factors ignored by our current system that's beancounter-based solely on amounts of consumed product.

Nouriel Roubini is a professor of economics at the New York University Stern School of Business and the chairman of an economic consulting firm. He affirms this approach after examining the global fiscal structure that has approached collapse because of this fundamentally flawed view and the necessary emergence of a new global economic structure. An excerpt:

Now that the dollar’s position is no longer so secure, we need to shift our priorities. This will entail investing in our crumbling infrastructure, alternative and renewable resources and productive human capital — rather than in unnecessary housing and toxic financial innovation. This will be the only way to slow down the decline of the dollar, and sustain our influence in global affairs.

This business of "going green" is not only an issue of the global survival, but a fundamental issue of "appropriately risked" global economics as well. How an economic system is constructed to best produce return on investment and improve the quality of life for people in their communities is the measure of its success. Here's a definition from The Concise Encyclopedia of Economics, David R. Henderson, ed

"Economic growth occurs whenever people take resources and rearrange them in ways that are more valuable. A useful metaphor for production in an economy comes from the kitchen. To create valuable final products, we mix inexpensive ingredients together according to a recipe. The cooking one can do is limited by the supply of ingredients, and most cooking in the economy produces undesirable side effects. If economic growth could be achieved only by doing more and more of the same kind of cooking, we would eventually run out of raw materials and suffer from unacceptable levels of pollution and nuisance. Human history teaches us, however, that economic growth springs from better recipes, not just from more cooking. New recipes generally produce fewer unpleasant side effects and generate more economic value per unit of raw material."

As you can see from the spinogram above from Miller-McCune, the financial and service industries have become the drivers of the massive growth bubbles and unsustainable business practices that are so globally destructive in the long run. This represents "more cooking", and it shows in the large shifts of those sectors to the top of the US GDP from 1965 to the present. We're at a point where, as Roubini states, there needs to be a different growth model, and more than just a shift in economic sectors. Thomas Friedman talks about “Market to Mother Nature” which takes our economic system back to rational production processes and systems that create profit at the same time they align with human capital and natural systems.

Many voices are now speaking to this issue of environmental and human capital that must be part of a functioning economic system. In addition, California has very particular problems that have to be addressed because of the toll this recession has taken on the state. It's no longer business as usual. A report from the Economic Roundtable, Ebbing Tides in the Golden State, examines in detail the challenges that the State faces in rebuilding its economy. It echoes Roubini and Friedman in its emphasis that human capital and natural resources must be the focus of rebuilding a new and productive economic structure. We need to see true leadership emerge from all across California, and seek collaborative reform of what has become a dysfunctional system. It's a window of opportunity if we do this right.