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Chapter Two - page 1


In the world economy, only a very limited range of activities is commercially feasible in most communities because of the intensity of competition from outside. We must therefore build independent, parallel economies if we are to fill more of our needs for ourselves.

The last chapter attempted to make two important points. One was that a large part of the world's population has lost the means and the ability to provide for itself and has become dependent on a single, highly unstable economic system which has no use for a growing proportion of it.. The second was that for the next few years unless there is a trade war, politicians are unlikely to be willing or able to protect their citizens from being damaged by the world economic system even though it is actually running backwards and making life worse almost everywhere.

If both points are valid, is there anything that people like us can do? Can we achieve a better balance between the world economy on the one hand and millions of local economies on the other, many of which have contracted almost to vanishing point or are rapidly withering away? To put this another way, can communities limit the scope of the industrial system and its individualistic culture without governmental help and by so doing create a protected space within which local, peasant-type economies and collective cultures can be recreated or revived?

Before answering these questions, I need to define two terms. First, by a peasant economy I mean a society in which most families own their means of making their livelihoods, be this a workshop, a fishing boat, a retail business, a professional practice or a farm. In such an economy, families would, of course, be free to join with other families to own the source of their livelihoods collectively. Second, by the industrial economy, I mean the system under which activities are primarily ways of making profits for shareholders rather providing ways of life. In the industrial system, groups of investors typically put up the capital and employ workers to carry their ventures out, paying them wages which are regarded as a cost to be minimised rather than a gain. In the peasant system, those wanting a way of life which will also provide them with a livelihood find or borrow the capital to employ themselves and count their wages as a benefit.

The difference between the industrial and peasant systems is not only that one seeks to minimise the returns to labour and maximise those to capital, while the other wants to minimise the return to borrowed capital and maximise a wide range of benefits including income for the group involved. There is also a difference of scale. An investor-owned, industrial-system venture can grow extremely large through mergers or by ploughing back its profits, the techniques which General Motors - with 251,130 people on its payroll and an income which exceeded the GNP of all but twenty-one countries - used to become the biggest company in the world in terms of employment at the beginning of the 1990s. Peasant projects, by contrast, tend to stay fairly small unless they adopt the industrial approach and employ people who are not shareholders or participate in joint ventures with investor-financed firms. Many of the bigger Irish agricultural co-ops owe their size to exactly these non-co-operative strategies.

If there was ever the political support, a better balance could be achieved between the industrial and peasant systems by enacting laws limiting the size to which investor-financed enterprises were allowed to grow and which split big businesses into hundreds of employee-owned parts. In addition, shops and factories could be barred from expanding beyond a certain size and restricted in the type of technology and the amount of capital per worker they could use. Similarly, to keep more families working the land, farmers could be prevented from increasing their acreages. But these top-down tactics are pipe-dreams in the present climate and we have no alternative but to work from the bottom up. In other words, rather than changing the law, we will have to change attitudes and ideas - and consequently behaviour - if we are to build peasant-system economies strong enough to survive the pressures and instabilities of an industrial-system world. Here are three approaches I think we will have to adopt to achieve a satisfactory co-existence.

We must begin to use local resources to meet community needs rather than the wants of markets far away

At present, all our thinking about the right way to bring prosperity to the places in which we live boils down to identifying goods and services that can be made in or provided from our communities to be sold to people outside. Mainstream economists tell us that with the money we earn from these activities, we will be able to buy the goods and services we ourselves need from wherever in the world they are cheapest and, because each community everywhere will eventually produce and sell only those things which they can provide most effectively, everyone everywhere will be able to have more goods and services and be better off than if they tried to do everything for themselves.

This indirect way of meeting needs worked well when most of the goods and services people needed were still provided from their own areas but now that communities are almost entirely dependent on outside supplies it has become much less satisfactory because of the increased levels of competition and instability in the world economy. For example, if a community organises golfing holidays for wealthy Swedes as my town has done, it may bring extra money into its area for a year or two but, eventually, several dozen other destinations are bound to offer very much the same sort of holiday too, bringing everyone's prices down. This increases the wealth of the Swedes in relation to the communities competing to serve them and explains why, since world trade has become so very important, the gulf between poor nations and rich ones has grown.

After being forced to give price reductions, the communities will be left with a much smaller income for themselves once they have paid outsiders for food, drink, heating oil, electricity, replacements, labour taxes and so on than they expected when they first planned the holidays. This might not be too bad if they were able to shrug their shoulders and go back to the way things were but this is rarely possible: guest houses and hotels which have borrowed to build extra rooms and taken on extra staff now have higher overheads and will find it financially ruinous to revert to their previous levels of turnover. Their dependence on an income flow from the outside world has increased, and, consequently, so has their community's. The conventional economic remedy for the reduced margins is usually to suggest that the community finds another source of high-paying holidaymakers or takes up some other enterprise altogether and makes good profits from that until rivals catch on and, by offering similar products, bring everyone back to square one and force the whole find-a-new-product-or-market cycle to start again.

By offering themselves as holiday destinations in a highly competitive market, the communities have not only become more dependent on outside earnings and seen the wealth of their target customers rise in comparison with their own. They have also increased the risk of economic disruption they run since, should the exchange rate vary, a postal dispute prevent bookings coming in, air traffic controllers strike or a recession develop in the Swedish economy, those involved in the tourist trade could be very hard hit, with knock-on effects on the rest of their communities.

In current conditions, then, selling things outside our immediate areas to earn the money to buy the goods and services we must have to survive cannot be considered the basis for a sustainable, stable local community. What we must do instead is to look at the resources of our areas and see how they can be used to meet our communities' vital needs directly rather than via the conventional, indirect, produce-for-someone-else-and-buy-one's-requirements-in route. It's true we have been taught that the indirect route is more efficient because it takes more resources to grow bananas in Ennis, Essex or Essen than in Ecuador. My response to this is threefold. One is that the much-touted efficiency of the world trade system is a grotesque myth, as I will explain shortly. For the moment, we only need ask ourselves how a system which condemns so many people to spend their lives in involuntary idleness and uses so many scarce resources to do the simplest things can still be regarded as efficient, particularly as we saw in the last chapter that as some countries' output increases, their citizens are actually receiving a smaller amount of economic welfare year by year.

Secondly, even if the indirect system was more efficient, we ought at least to discuss how much inefficiency we would tolerate from the direct route in order to reduce the risk of our lives being blighted and our livelihoods disrupted by instabilities in the external world. Most of us pay premiums for house or car insurance every year, accepting the certainty of a small loss in exchange for avoiding the risk of a big one. As communities we should also be prepared to pay for insurance, in this case against economic disruption, particularly as local economies which boast a wide range of activities are not only more stable but provide much more scope for their members to find niches within which they can fulfil themselves.

Thirdly, bananas are non-essentials and if they were imported as a direct exchange for some non-essential we grew, the fact that we relied on other people to produce them would not matter: either party to the trade would be able to terminate it whenever they wished without seriously harming the other. Our goal should be to minimise our dependence on external trade not to phase it out altogether. Trading outside our communities should become something we can engage in if we choose and then on our own terms, not something which is vital for our survival.

World prices must not determine what we produce

Existing levels of prices or profits cannot be allowed to decide whether we should make or grow something in our communities or not. This is because there is no connection between an item's value to our community and the price our neighbours pay for it in normal times. True, most economists and right-wing politicians believe that market prices should determine what is produced, in what quantity, by what method and where, because it is 'uneconomic' and 'inefficient' to take other factors into consideration. But this is because they believe that the market price of something is equal to its value and because all their thinking is in terms of the industrial system. Efficiency, however, can only be measured in relation to one's objectives and if we have objectives which those running the industrial system are not permitted to share such as satisfying work, stability, sustainability and fairness rather than the maximisation of returns to investors' capital, our success or failure must be measured with respect to our targets rather than theirs.

In terms of progress towards community goals, local production for local use can be much more efficient than production for outside markets. This is because a community is interested in a much wider range of benefits than solely the profit a business makes. It is, for example, interested in the total income - the wages, the profits, the payments for local materials - that the business brings into or keeps in the community's area. Investors, on the other hand, are usually only concerned with the tiny fraction of a business's total income flow which ends in their hands, an outlook which, from a community's point of view, is very much the tail wagging the dog. Moreover, because a community needs its income for long-term tasks like raising children, it wants to be sure that the activity will continue for many years. Investors, on the other hand, tend to have very short time horizons and frequently give up valuable future benefits to get more immediate returns. In a 1994 survey by the Confederation of British Industry, two thirds of the companies which responded required investment projects to pay for themselves in three years or less1. What is efficient for our communities is therefore very different from what is efficient for investors in the wider world.

Unfortunately, the future of the planet as well as of communities is clouded by the 'market price equals value' type of thinking. In 1990 a Nobel prizewinner for economics, Professor William Nordhaus of Yale University, was anxious to calculate how much the United States should be prepared to spend to lower the risks presented by global warming. Because agriculture and forestry, the sectors which would be most affected by any warming, made up only 3% of the United States' national income (which is, course, a measure of its output at market prices) he proceeded to assume that this was their value to its citizens. In other words, he overlooked the fact that all the non-agricultural things which go to make up a modern economy and which would be relatively unaffected by the 2-3 degree rise in average temperature he was assuming - intensive care units of hospitals, underground mining, science laboratories, communications, heavy manufacturing and microelectronics were the examples he gave - would be valueless if people had nothing to eat. This remarkable oversight enabled him to conclude that, as by no means all food and forest production would be lost, the maximum damage likely to be suffered by the US as a result of global warming was of the order of 0.25% of its national income. Consequently, after allowing a generous margin for uncertainties, he argued that it was not worth the US spending more than 2% of its national income each year to reduce greenhouse gas emissions.

Nordhaus's verdict would be amusing if it had not reduced the scale and urgency with which the world's governments have responded to the climate crisis and if fellow-economists were not still citing his paper with approval. By confusing price with value, he failed to recognise that our food, raw materials and energy supplies are worth much more to us than are other products and services on which we might spend the same proportion of our income. Food and transportation make up roughly equal shares of the average American's budget but he or she would give up practically everything to continue eating when faced with death by starvation, but considerably less to secure petrol to keep running a car.

We must not make this mistake. In other words, we must not use world prices to determine which activities are profitable and can therefore be carried on in our communities because, if we do, we might find that the production of items of the greatest value to us, such as food, clothing, light and heat, are ruled out and that increased economic independence is therefore impossible. Indeed, we could well find that the only things which are profitable to do at world price levels are those we are doing already, plus one or two we have only just thought of.

But if a lot of the types of production necessary to make our communities more self-reliant would be loss-making at current, externally-dictated prices, we have a huge problem on our hands because even in a peasant economy, no commercial activity will continue long unless those engaged in it get a reasonable return for their efforts and on the capital they have involved. A generation ago, as we discussed in the last chapter, governments enabled national prices to differ from those on the world market using import duties and quota controls. This widened the range of production which was commercially possible. Now, however, these methods have been outlawed by international agreements and there is no way of preventing world prices from setting local ones in the places in which we live. As a result, unless we can find some way for local producers to make a profit supplying us with a full range of essential goods and services at prices identical with those from outside, our attempts to achieve greater self-reliance are likely to be stillborn.

At first sight our quest for such a way seems doomed to failure, particularly as there are only two basic approaches local producers can use to lower their prices. One is to be so super-efficient that they can match their outside competitors on price whatever the outside labour costs, whatever the technology, whatever the source of raw material, whatever the economies of scale. The second is for us to reduce the prices at which we supply our labour and capital to local businesses by enough to make their prices competitive: in other words, to give them a subsidy. Neither of these strategies seems promising but let us look at both more closely to see if anything can be done.

Page 2 of Chapter 2

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Short Circuit by Richard Douthwaite: links within this site

Contents Foreword Preface Introduction
Chapter 1 Chapter 2 Chapter 3 Chapter 4 Chapter 5 Chapter 6 Chapter 7
Epilogue 2002/3 Updates Links Site Map