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Historical context of new economics


09 / 2008

One of the earliest humanistic voices to challenge classical economics from within was that of Jean Charles Leonard Simonde de Sismondi, who was born in Geneva in 1773. In the history of classical economics, Sismondi is credited with being the father of the business cycle theory and the first economist to attempt a macro theory of under-consumption based on the distribution of income between the owners of capital and workers. Quite simply, he argued that a more equal distribution of benefits would mean a more steady expansion of markets.

Sismondi is one of the first modern economist to denounce the costs of industrial development and to see it as a forced phenomenon which demands the violent displacement of both masses of people and resources. Therefore he deplored economists’ tendency to make wild generalizations while neglecting reality and relying on abstract calculations to the point that economics became ‘an occult science’.

Today, Sismondi is acknowledged as a pioneer of New Economics, or economics-as-if-people mattered. Though Sismondi had no direct disciples, he is believed to have inspired Thomas Carlyle – who became far more famous for attacking the orthodoxy of economics as a ‘dismal science’, ‘pig philosophy’ and so on. Carlyle in turn had an influence on John Ruskin.

John Ruskin (1819-1900) never trained to be an economist and was famous in his time as a brilliant and fiercely prolific art historian, writer and lecturer. It was Ruskin’s interest in cultural history that drew him into a study of the political economy. He stumbled upon this role partly through his efforts to teach art appreciation to the working class. This led him to the realization that the problem was not with the workers but with a system that degraded and stunted their aesthetic sensibilities. So, Ruskin plunged into a passionate attack on John Stuart Mill and his notion of Homo econonomicus.

In Unto This Last, Ruskin illuminated the moral and social content underlying all commercial transactions. He stressed that real wealth is life itself not money nor gold. From this perspective, the worst kind of waste is the waste of time due to the crushing of human creativity through mindlessly oppressive tasks geared to make money instead of being aimed at working for justice, social and aesthetic goals. Ruskin’s solution for the ills of industrial society was to encourage co-operation rather than competition – with strong state intervention to ensure social justice.

Some of Ruskin’s proposals for reform presaged the welfare state of the 20th century, such as public ownership and management of the economy, a universal system of education, free libraries and museums. He even advocated that industries should be run on a co-operative basis through a revival of the old Guild Government.

Ruskin is regarded as a pioneer or fore-father of today’s fair trade and ethical investment activists. His influence can be found in shaping many of the innovative alternatives thinking in the 20th century – including guild socialism, distributionism, social credit, social investment. Schumacher and other environmental thinkers were deeply influenced by Ruskin’s plea to bring ethics back into economics.

Ruskin in turn had a profound influence on Mahatma Gandhi. For Gandhi, economics was meaningful only to the extent that it worked towards the welfare of all. This meant a system of production, distribution and consumption driven by the need to provide the basic necessities for the very last person, in ways that ensured respect for the higher values of life – that is, human dignity, non-violence and creative labor.

The way out lay in Sarvodaya (welfare of all) - Gandhi’s term for social and economic justice. Gandhi’s vision of the path to Sarvodaya was a village-based economy which maximized the strengths of India’s traditional artisanal base and used only that modern machinery which ensured production by the masses rather than mass production. Thus, Gandhi chose the spinning wheel as the symbol not merely of India’s struggle for freedom from imperial rule, but of swaraj, or self rule.

Gandhi’s legacy was carried forward by his disciple Joseph Chelladurai Corneilus Kumarappa, who was both a chartered accountant and an economist trained at Columbia University. Kumarappa devoted himself to finding both a practical and theoretical basis for a different kind of economics. Every being, Kumarappa found, fulfills its necessary role in the cycle of life by performing its own primary function. He articulated these ideas in a book he titled The Economy of Permanence: A quest for a social order based on non-violence.

Of course, Kumarappa acknowledged that the natural world is not entirely made up of complete non-violent cooperation between various units. He identified five kinds of economies in nature: parasitic, predatory, enterprise, gregation and service. In Kumarappa’s frame the economy of service is the highest form of economy in nature. Thus today’s world with its endless striving for economic growth, accompanied by worldwide environmental devastation and social turmoil is an economy of transience – the exact opposite of what is the ideal in Gandhi and Kumarappa’s worldview.

Kumarappa’s work illustrated how the idea of economic man, and most of classical economics, is peculiar to capitalist societies and far from universal. Kumarappa did try to flesh out how the business of allocation would work out in a Sarvodayi economy but this work remained inconclusive and sparse – largely because his energies were primarily focused on empirical work on village industries.

The tide began to turn, slowly, in the West in the 1960s. The publication of Silent Spring by biologist Rachel Carson in 1962 is widely considered the inaugural event of this gradual shift. The book is about the lethal poisoning of the environment by chemicals used in the name of progress. Silent Spring unleashed a public furor which led to a string of environmental regulation in the USA that is today taken for granted.

In 1969 leaders and intellectuals from thirty-nine nations gathered in Rome to consider the future of progress and concluded that the world would soon reach the point where it will exhaust the earth’s resources. The ‘Club of Rome’ and its report, The Limits of Growth, helped define New Economics in the 1970s.

It was in this context that the long tradition of humanistic economics was gifted with perhaps its most celebrated proponent in the early 1970s. The man was E.F. Schumacher and his best known work, Small is Beautiful: Economics as if People Mattered, became a global best-seller.

Through the late 1960s, Schumacher wrote a series of essays which mused over technology, economics and spirituality. Small is Beautiful was largely a compilation of these essays and lectures. Since “people can be themselves only in small comprehensible groups”, Schumacher contended, “we must learn to think in terms of an articulated structure that can cope with a multiplicity of small scale units.”

In the spirit of Mahatma Gandhi, Schumacher insisted that the critical challenges before humanity were now moral, rather than technological or economic. This meant bringing ethics back into the center-stage of the economic discourse. In the early 1970s, economics and spirituality were not commonly mentioned in the same breath. Schumacher was quite out of step with the mainstream discourse when he called for a ‘Buddhist Economics’. But many people across the world could relate to Schumacher’s view that we do not have to choose between ‘modern growth’ and ‘traditional stagnation’. Rather, he wrote: “It is a question of finding the right path of development, the Middle Way between materialist heedlessness and traditionalist immobility, in short, of finding ‘Right Livelihood’.”

This means that: “If human vices such as greed and envy are systematically cultivated, the inevitable result is nothing less than a collapse of intelligence. If whole societies become infected by these vices, they may indeed achieve astonishing things but they become increasingly incapable of solving the most elementary problems of everyday existence.” (Small is Beautiful – 25 Years Later, p.18).

This partly explains why inspite of a wealth of data, knowledge and reflection, humankind is still rapidly losing the race to save the planet. As Paul Hawken, the author of The Ecology of Commerce points out, the self-evident truths of Small is Beautiful still seems painfully opaque to the world a quarter century later. Yet this is not to underplay the fact that there is today more excitement about the ideas of humanist economics, or new economics, than there was two decades ago.

Quite apart from his impact through writing, Schumacher’s interactions with an emerging generation of activist-intellectuals had far reaching consequences. Hazel Henderson found herself drawn to Schumacher because of how much he valued the “common sense of ordinary people and their ability to expand their awareness of comprehensive, eternal truths. This was the essence of his work and the element of it that was most meaningful to me as a citizen activist. He gave me, and millions like me, the courage of our convictions, even when we were facing the mystification of legions of brilliant, quantitative specialists and narrow economic rationalists” (Hazel Henderson, The Politics of the Solar Age: Alternatives to Economics, p. 174).

Henderson went on to become one of the most prolific writers and campaigners for various dimensions of New Economics. She is part of the growing global fraternity of activist intellectuals deeply engaged in both the theoretical and practical challenges of the required transformation.

Among them was a younger contemporary and colleague of Schumacher, named James Robertson. Robertson studied history, philosophy and classics at Oxford. From 1953 to 1965, he worked in government, part of that time in the British Cabinet Office. This work brought him in close touch with the decolonisation movement in Africa and deepened his future thinking in favor of freedom for ‘Big Brother’ power structures.

Robertson became a friend of E. F. Schumacher and closely followed the gradual unfolding of the latter’s work through the 1970s. Shortly after Schumacher’s death in 1977, it was Robertson who provided a text to galvanize the alternative economics movement. The book was called The Sane Alternative.

Like others in this tradition, Robertson is concerned with an ethical, spiritual approach to economics and politics. He is suspicious of single answers, of panaceas and of any promised ‘solutions’ that involve authoritarian control over individuals. The fundamental problem, according to him, is that “the capacity of Nature’s resource pool and the capacity of Nature’s waste sink have been treated as free goods, of no value. » The result is that even as resources dwindle, pollution mounts, and these losses are not accounted for in the measurements of the economy. A new economics therefore begins with a central place for nature and more efficient, sustainable use of its bounty.

Robertson challenges the view that thanks to ever increasing industrial-scientific growth, humankind now stands on the threshold of endless prosperity and plenty. This kind of blindness is characterized as the ‘HE’ view, “a dangerous masculine fantasy - exploitative, elitist and unsympathetic.” Robertson defined the desired change as ‘SHE’ - ‘sane humane and ecological’- a world in which people would live in vibrant communities of inter-linked villages.

According to Robertson, this on-going global shift requires ‘systemic’ change so that the system does not force people into deadening and environmentally damaging work patterns, at enormous economic cost, but sets them free to make it easier to « choose healthier, less selfish, more socially responsible, more ecological, more spiritual, more locally grounded ways of life ».

Some of what Robertson visualized has come to pass - the Internet has facilitated direct links between people, bypassing centralized power structures of broadcast communication. Holistic healing disciplines are proliferating, with more and more people learning to tap their own healing energies. But there are as yet few signs of the most cherished aspect of Robertson’s vision which requires a devolution of power to local communities and a virtual dissolution of centralized power.

In 1989, ten years after Schumacher’s death, when Herman Daly and theologian John Cobb wrote For the Common Good, they began by highlighting certain extreme facts. Between 1950 and 1986, the earth’s population doubled. In the same period, the gross world product and fossil fuel consumption roughly quadrupled. As a consequence of this, there is a hole in the earth’s protective shield of ozone, the CO2-induced greenhouse effect is causing potentially disastrous climate change, and bio-diversity is declining at an alarming rate.

In the late 1980s, many of these were relatively new and controversial issues, often treated more as claims than ‘facts’. Thus Daly and Cobb had to begin with an emphatic declaration that the world had already reached the point where further ‘growth’ along existing patterns of production would increase the ecological costs more rapidly than it would increase economic benefits.

The starting point of Daly and Cobb’s exploration was the long standing lament by environmentalists that economists do not pay sufficient attention to the exhaustion of resources and increasing pollution in industrial societies. The reasons for this, Daly and Cobb wrote, is that economists assume the following: firstly, that the majority of people are more interested in economic goods than in psychological or environmental losses; secondly, that the suffering accompanying industrialization is exaggerated; thirdly, it is the industrializing nations that have grown in wealth; and lastly, that environmentalists underestimate the capacity of capital and ingenuity to create technological breakthroughs.

These asumptions lost ground through the 1990s. Yet various spin on these head-in-the-sand world views are still around - and not merely among professional economists but also leaders of business, bureaucrats and politicians. For The Common Good appeared at a time when the counter arguments seemed scattered and lacking a coherent theoretical base. Daly and Cobb appealed for an “economics for community” which would be fundamentally different from a quasi-science based on the worship of Homo Economicus. An economics for community would give equal priority to production of adequate goods and services - ensuring that ‘work’ was meaningful and personally satisfying.

For The Common Good drew on most of the tradition outlined above as well as the Catholic critique of both capitalism and socialism. For this Daly and Cobb relied on the work of Heinrich Pesch (1854-1926), a Roman Catholic economist whose work both informed and was informed by papal encyclicals. Pesch defined economics as the science governing the provision of material goods for people living as a community. Pesch favored a “solidaristic system” which rejected the notion of society as a mere aggregate of individuals, and envisioned an economic order based on a blossoming of community – where the self-interest of the individual is tempered by a concern for the entire community or collective. Yet, Pesch rejected socialism and insisted on a major role for the market.

Pesch’s work is also valued by Daly and Cobb because he envisioned human community as part of a larger community of other living being and the total web of life on which everything depends – that which Wendell Berry has called the Great Economy. The failure to accord supreme importance to this Great Economy means that « human beings are being led to a dead end ». The motivating force of For the Common Good was the fact that in the late 1980s many well-meaning people could not see the dead-end inherent in contemporary economic structures.

As an academic book, For the Common Good, did well with over 40,000 books in print, but it did not make any impact within economics discipline. In 1996, Daly won the Right Livelihood Award ‘for defining a path of ecological economics that integrates the key elements of ethics, quality of life, environment and community’. Work like Daly’s has given the term ‘new economics’ a different meaning from what it had some fifty years ago.

Key words

economy, economic development, economics, economic solidarity, alternative development, economical system



An Economics for well-being


Further readings:

  • Rachel CARSON, Silent Spring, Mariner Books, Crest, 1962

  • Herman DALY and John COBB Jr., For The Common Good. Redirecting the Economy Toward Community, the Environment, and a Sustainable Future, Beacon Press, 1989.

  • Hazel HENDERSON, Creating Alternative Futures: The End of Economics, Putnam’s and Sons, N.Y., 1978.

  • Hazel HENDERSON, The Politics of the Solar Age: Alternatives to Economics, Knowledge Systems, Indianapolis, Indiana, 1998

  • J.C. KUMARAPPA, Economy of Permanence, Sarva Sewa Sangh Prakashan, 1984.

  • James ROBERTSON, The Sane Alternative: A Choice of Futures, Oxon, 1978.

  • John RUSKIN, Unto This Last, Wiley & Sons, New York, 1988, first published 1864.

  • E.F. SCHUMACHER, Small is Beautiful: Economics as if People Mattered, 25 years later,with commentaries, Introduction by Paul Hawken, Hartley and Marks, 1999.

This sheet is also available in French: Contexte historique des alternatives économiques



Rajni BAKSHI, An Economics For Well-Being, Centre for Education and Documentation, Mumbai & Bangalore, 2007

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