Economic Life/Grace of Innovating

“Economic life develops by grace of innovating; it expands by grace of import-replacement.”
--from "Cities and the Wealth of Nations: Principles of Economic Life" by Jane Jacobs

In October the E. F. Schumacher Society bought a house for staff and interns. It was not a simple transaction, rather a complex and marvelous adventure weaving our work lives together with the story of a small manufacturing company: the innovation of its founding, the history of its employees, its significance in the regional community, the role of a regional equity fund in financing its growth, and the power of the vision of the fund's founder. It was (though we did not know it at first) a story about ingredients for building strong regional economies and the grace of that process.

We are pleased to share the story in the narrative below.

Photos are at:
http://www.smallisbeautiful.org/PAS/photos.html

Best wishes,
Susan Witt
E. F. Schumacher Society

Economic Life/Grace of Innovating

For the past four years the Schumacher Society has rented a small house for staff and interns that we call Guilder House, located a short walk through the orchard from the Schumacher Library and office building. Because housing prices have been so high in the Berkshire region of Massachusetts, it has been essential to provide free and/or affordable housing in order to enable young staff and interns to work with us. With its four bedrooms and two-and-a-half baths, Guilder House has served that purpose.

In June the owner of the house offered to sell it to us, donating one third of its current appraised value as a gift to the Society. The offer was irresistible; nevertheless, repair work was necessary to responsibly care for the building. How would we get it all done?

A week after signing the contract to purchase Guilder House, we had a call from Dan Levinson, the founder and managing partner of Main Street Resources (www.mainstreetresources.com), a private equity firm in Westport, Connecticut, that provides investment capital and resources to companies with great potential and great people. Main Street had recently invested in Protective Armored Systems (www.pasarmored.com), a small manufacturing firm in the Berkshires making bullet-proof glass for multiple applications. Dan told us that one of the autoclaves used to heat and pressurize the glass had exploded. Miraculously, no one was hurt, but a building was rendered useless, and production would be shut down for over a month. Like other good corporate citizens before it, PAS wanted to keep its workers employed during the rebuilding. The company was reaching out to community groups for appropriate volunteer projects. This was a welcome opportunity for us.

For four weeks we watched as a crew of up to twelve per day worked to transform Guilder House--clearing brush and trees to open the site to more light, sealing cement walls against moisture, staining the exterior to protect the wood, replacing a rotting deck, removing moldy carpeting and sanding the newly exposed floors, insulating walls for heat efficiency, tiling, painting, cleaning. What was merely housing is now a warm, secure, lovely home, thanks to the team from Protective Armored Systems (PAS).

Schumacher staff provided coffee, homemade muffins, home-cooked hot lunches served family style on a row of picnic tables, a refrigerator full of soft drinks, a priority list of projects, and plenty of ahs and heart-felt thanks. The PAS crew provided multiple skills, hard work, good will, and stories about what it takes to run a small manufacturing firm. Main Street Resources provided the inspiration, connection, and funding for building materials. Over lunches and coffee breaks we learned a great deal about the history of industrial development in the region.

The Berkshire region was once home to a diversity of local manufacturing firms. Water from the Housatonic River powered wool, paper, and log mills. We grew much of the food we ate and processed much of the wood used in building our homes. Wood stoves provided a significant quantity of heat from October through April. There was a spirit of self-sufficiency coupled with a rich cultural tradition.

However like many developed regions, the Berkshires have since “outsourced” that manufacturing. Remnants of the infrastructure remain, such as abandoned factories clustered along the river, but we are losing the memory of manufacturing skills and its ethos. The Berkshire economy is changing to a service economy.

PAS is unique in the region, manufacturing its signature product for export and providing jobs for technically skilled employees. What are the characteristics that grew this firm, and how can we encourage additional manufacturing appropriate in scale and nature to the region?

PAS is a small company with only forty employees. Its founder, Phil Martino, has deep roots in the Berkshire community. He basically built the business from scratch, inventing the manufacturing process for the bullet-proof glass, designing the equipment, and gaining the confidence of customers. He worked alongside his employees, training them in cutting the glass to specification, grinding the edges smooth, keeping the work space meticulously clean, and packing in such a way that no damage occurred during shipping.

When asked about the philosophy of work behind his success, Phil Martino modestly claims that it is nothing special--essentially that of the Shakers, who believe that God is met in your work, so you perform each task with the love and care appropriate for that meeting. Further, you treat co-workers as you would be treated by them. That simple but profound work ethic permeates the business.

Several of the PAS workers came from the closing paper mills (some of them third generation in the mills) or were laid off when General Electric closed its nearby Pittsfield, Massachusetts, operations. Ranging in age from nineteen to sixty, they have worked as carpenters, as linemen trimming trees, as equipment installers, as stock clerks, as theater-set builders. Most were raised in the Berkshires. Two are recent immigrants from Eastern Europe. One is African-American with a young family. Another is Phil's grandson, learning the business by working alongside the others. The younger ones might have had some training in the trades in public high school. They wish they had had more.

The employees all have friends who are looking for jobs, and they are grateful for the manufacturing job at PAS. It provides a relatively good salary, enough to provide security for a family. They are proud of their role in the business and report that PAS is different from other worksites. Because of the relatively small scale of the firm, they know all the stages of making the glass, not just their one task. That gives them greater ownership and pride in the finished product. They have read letters from American soldiers in Iraq thanking PAS for the bullet-proof glass in their vehicles that protects lives under fire. They have seen the copy of the U. S. Constitution kept safely behind their glass and know that it is a document of enormous significance to the history of this country.

These men trained by Phil work alongside him in the production line, fish with him, see and respect the discipline it took to build the company, and so they do not hesitate to labor hard for him. If GE or the paper mills had been shut down by equipment failure, their employees would be on the dole, not working on a community project supported by PAS.

I asked Phil Martino what he sees as the limitations to creating more manufacturing firms of the scale and quality of PAS.

* Distribution of tax incentives
Regional economic development programs provide tax incentives to lure big corporations to the region but fail to offer similar incentives for smaller home-grown businesses.

* Infrastructure
Building and site selection, while a concern, is not an insurmountable problem. Remnants of a once thriving industrial base along the rivers mean that suitable buildings remain vacant and affordable. It is important, however, to cultivate a citizenry that welcomes appropriately scaled manufacturing in their neighborhoods.

* Transportation
A lack of sufficient freight-train service to the region puts reliance on trucking, thus narrowing choices of locations to easy access from the few highways.

* Skilled workers
There is a base of good workers in the region, but they are not trained, so businesses must take the time for and bear the cost of training on the job. Though more technical education in the public schools would be helpful, better yet would be funds for apprenticeships so that job-skill development can be specific to the manufacturing process.

* Financing
Phil named lack of financing for small and medium sized businesses like his as the biggest hindrance to business start-ups and expansion. Large enterprises have national sources of funding, but not so the regional firms on the scale of PAS. Phil is quick to credit Main Street Resources with providing an answer to the problem of financing.

Dan Levinson earned an MBA from Stanford Graduate School of Business and holds a joint degree (with honors) in applied mathematics and economics from Brown University. But his real skill lies in recognizing the talent of individuals and encouraging those talents. His equity fund, Main Street Resources, is shaped in a particular way to best apply his skills and inclinations. Investing primarily in businesses within a hundred mile drive from his home in Westport, Connecticut, he knows the companies and their management teams personally. He is available on short notice for consulting and trouble-shooting. He is well-informed about his portfolio businesses, without micro-managing them.

Phil Martino personally funded the startup of PAS, putting his home and family at risk. When PAS was ready to grow in an organic way, it needed a financial partner. Main Street understood the scale of the business, made the personal contact, and provided the right amount of financing while still keeping the successful management team in place--a team that knows the product as well as the ins and outs of the manufacturing process, the suppliers, the markets, and the local community.

Main Street's engaged, personal, proven approach to financing has turned clients into new investors. Under Main Street's leadership a group of former owners of small businesses has coalesced into an informal mentoring team to help a new set of entrepreneurs, ensuring the success Main Street’s partner enterprises.

It was Main Street that provided the capital to open a new facility at PAS to house a new autoclave. When the explosion occurred, the leased building next door was already under renovation and the autoclave was on order. Main Street's investment meant that production would resume in one month, not one year. What would the employees do during that time? For PAS, with its deep local roots and in partnership with an equity fund with strong social values and a commitment to the region, the answer was simple: seek a community service opportunity, supporting the workers and the community group at the same time.

By good grace, that group was the E. F. Schumacher Society.

For four weeks staff of the E. F. Schumacher Society and the Protective Armored Systems team ate lunch together on picnic tables stretched out across the lawn of Guilder House. Our co-worker, Kristen, spent the morning cooking, using fresh produce from local farms and my kitchen garden. The red, white, and yellow checkered table cloths and napkins were washed fresh each day. We all experienced a note of subdued festivity.

I spent two hours every day interviewing each member of the team, learning what brought them to their work and asking what they thought was needed to create more manufacturing jobs in the region. Their stories lingered with me over the weekends, when they were not with us, and I began to realize that our stories, told over many lunches, lingered with them.

One Monday morning I went over to Guilder House and found the crew already hard at work. Oronde, meaning the Appointed, whom everyone called "O," was scraping old paint from the side of the house in preparation for a fresh coat. "O," says I, after a pause while watching him work, "You are all pouring so much love into this house." "Susan," says O, "that's because you are all pouring so much love into us."

Grace.

President's Energy Speech

Joseph A. Stanislaw has spent his career concerned about the future of energy production and consumption. The J.A. Stanislaw Group specializes in strategic thinking and investment in energy and technology, advising industry and governments as they set energy policy.

Deeply influenced by the writings of E. F. Schumacher, Mr. Stanislaw has authored several papers on alternative energy technologies and their promise.

He writes of his latest innovative essay: "With the historic election of Barack Obama to President, our nation enjoys new opportunities to confront monumental challenges--especially the convergence of energy, climate change, and security. This is the speech I would like to see President Obama deliver when he takes office in January 2009."

We have excerpted sections of it below. The full essay is at www.smallisbeautiful.org/publications/stanislaw_08.html

Best wishes,
Staff of the E. F. Schumacher Society

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TOGETHER WE WILL EMPOWER AMERICA IN THE 21st CENTURY

My fellow Americans, this is my first address to you as your President. It is also one of the most important speeches I will ever make.

Our nation confronts many challenges. . . . one challenge transcends them all.

It is--at once--our most critical economic, national security, foreign policy, and environmental challenge. It lies at the heart of how we educate our children and operate our government. It is the key to unlocking millions of jobs, and to preserving and developing our local communities. And it is our way out of this economic crisis, the most severe crisis our nation has faced since the Great Depression.

This issue is energy--how we produce it and how we consume it.

The threats we face today that are linked to energy have multiplied. Not only are our economic security and well-being at risk, but so too is our fundamental security. Our reliance on foreign oil threatens our independence. Our exposure to climate change poses an unacceptable risk to our communities, our environment, and our culture.

It is this convergence of economics, climate change, and security that
makes energy the most important issue of our time.

In leading our country into a new energy era, I have on my side one all- powerful weapon--a weapon none of my predecessors ever fully enlisted in their efforts: you, the American people. Each and every American, beginning today, has the power to drive our country to greater energy independence. Each and every American can contribute in a meaningful way to creating the green economy of the 21st century and to combat climate change.

I will be accountable to you. And I expect you to be accountable to me and to each other. This is what democracy means.

We will appeal to American common sense by expediting the era of cutting-edge clean vehicles, energy efficient homes, and smart appliances--all of which will save you money and improve your lives.

We will build on the American ethic of fairness by allowing competing technologies to prove themselves on their true merits -- making our markets reflect and capture the true cost of energy . . .

We will inspire and support America's spirit of innovation and entrepreneurship by investing in research and providing powerful incentives to bring new technologies into the marketplace.

We will lead the way by making energy a force for international unity, not division, and by seriously addressing climate change.

And we will honor America's forward-looking spirit by investing in education, from cradle to grave, so that we change how Americans of all ages view our energy challenges and the related environmental issues.

Nor will we suddenly turn our backs on oil and gas. No matter how fast the progress on alternatives, the world will be primarily reliant on fossil fuels for at least two generations--the bridge to tomorrow's new energy future depends on this. . . . There is no quick fix. But a rising tide of alternative sources of energy--combined with new demand patterns and new demand efficiencies--will mitigate the eventual, gradual drop-off in hydrocarbon production that should begin in the next quarter-century. This will create a bridge to the new, cleaner energy era ahead and will create a wave of new jobs--a new industrial revolution.

Allow me to outline five areas of action, including specific targets, on
which my administration will begin working immediately.

The first, and most vital goal, is education. There is only so much that presidential leadership alone can accomplish. For this great American project to succeed, we must make knowledge of energy part of our national DNA. This can only be done through education.

So tomorrow, I will convene a blue-ribbon commission of high school and college educators, business and labor leaders, economists, and technology experts to look at every aspect of our education, training, and public awareness systems. . . .Their first goal will be to identify the skills our schools must teach so that we develop a world-class workforce that can usher in a new era of energy and environmental progress – these include basic skills needed from electricians, to welders, to plumbers, to more advanced engineering skills.

But education requires not only learning in the classroom, but learning in the real world. So today I am announcing the massive expansion of AmeriCorps. Every graduating high school senior will be encouraged to undertake one year of national service. The top priority will go to projects that will rebuild our communities so that they become energy efficient and environmentally aware.

Our second goal is one that also enlists every single American--energy efficiency.

The greatest proven reserves of fossil fuels that we have are not in Saudi Arabia or the Gulf of Mexico--they are in your cars' gas tanks, in your homes' oil heaters, in the electricity plant down the road. A barrel of oil saved is a barrel found. Everything we do today, we could be doing more efficiently as soon as tomorrow--consuming less energy by using technologies that are already available to us.

By the end of my first term in office, our goal is to put in place energy efficiency programs and initiatives to promote alternative transportation technologies that will eliminate the need for oil imports by 2025.

Our progress towards energy efficiency, however, will only be possible if we continue to develop smart technologies and alternative forms of energy. For this to happen, we need markets that are honest and fair--markets that reflect the true price of energy. This will be my administration's third goal.

Simply put, when you buy a gallon of gas today, or fill your boiler, the price of these fossil fuels does not reflect their true costs to our society. Over the course of my first term, therefore, I will confer with the energy industry about adopting a carbon tax or a carbon trading system that creates a cost for carbon to make the economics of our energy systems reflect the honest cost of fossil fuels. The revenues we raise from such a tax or trading system would be invested in helping to finance the upfront costs of energy efficiency technologies for Americans, as well as in the research we need to develop clean and alternative technologies.

This is my fourth goal: to make America the world leader in every promising clean and alternative energy technology. There is no silver bullet to achieve our energy targets--we need every bullet.

As importantly, my government will renew our country's aging infrastructure, laying the foundations for the green economy of the 21st century. A smart energy grid will be one of our signature projects. Specifically, within two months from today, we will begin work on demonstration projects for a smart grid system in two to three locations in America, so we can prove the worth of these technologies. We will then reward states that allow for the rapid implementation of smart grids and we will develop programs to speed the construction of such grids across the country.

If we are willing to spend $1 trillion to bail out banks, surely we can invest an equal amount to build the basis of our future prosperity. In doing so, government will lead by example. We will use America's might in the market to set the highest standards for energy technology. Those companies that lead the way will be rewarded in the marketplace through the government's purchasing power.

Your government will construct buildings that meet green LEED standards. Your government will retrofit its buildings to the highest "green" standards. Your government will purchase automobiles and electronics that rate in the top 10 percent of energy efficiency. By doing so, we will create economies of scale for these technologies that will bring down prices for all Americans. And your government will hire employees who have received certification in energy efficiency.

I expect that city and state governments, many of which have been visionaries in this field, will follow the federal government's lead. In fact, we will help them do so by offering federal guarantees for municipal bonds raised for this purpose. We also will require any entity drawing on federal funds to meet federal energy standards.

In everything we do, in fact, we will be guided by a profound commitment to our local communities--it is the prism through which we will develop all of our energy policies.

. . . in cooperation with today's top technology companies, we will launch a major web portal to allow local communities nationwide and worldwide to share their best ideas and practices for transforming themselves into green economic leaders.

Government also will use the current crisis in our economy to transform local communities. As we rebuild our financial system, we will ensure that it functions to promote housing and urban transport improvements that are responsive to our energy goals. This includes, among other measures, providing mortgages with lower rates for more energy efficient homes.

And when the smoke clears--and the smoke will literally clear--we will have created millions of new jobs--jobs that pay well and stay put for all those students educated by the "green economy" schools we will have created. Jobs that revitalize local communities. Jobs that make America a global industrial leader once again. Jobs that cannot and will not be exported.

But if there is one thing we have learned during the economic and foreign policy crises of the past decade, it is that we cannot go it alone. America is not an island.

On the energy issues that matter most, we need to reach out and develop deep cooperation with our allies and trading partners. This is my fifth goal.

Our ultimate destination is energy independence. But, the path to that ultimate destination is mutual interdependence. We will achieve this by creating transparency in energy markets, by investing jointly with our allies in new and renewable technologies, by leading negotiations for a successor treaty to the Kyoto protocol, and by creating a G20 for energy security.

To oversee all aspects of this greatest challenge of our generation, I am creating today a National Energy Council, which will be located in the White House.

Their core mission will be to create the vision, the direction, and the conditions to drive us to this new energy future.

We should not expect short-term miracles from this plan. Over the next four years, we must do the hard work of defining and putting in place a 50-year vision for the wholesale transformation of our society to one that has a sensible long-term energy policy – and is also clean and green. If we do this, our energy costs and our foreign dependency will drop dramatically each and every decade. This is the promise I make to you and your children and your grandchildren.

* * * * * * * * * *
Used with permission of Joseph A Stanislaw and
Deloitte Touche Tohmatsu (www.deloitte.com).

Scale Limitations/Shaping a Future Economy

John Fullerton described the current financial collapse in his May 2008 essay "The Relevance of E. F. Schumacher in the 21st Century." It now seems prophetic.

In the same article he warned us not to look to the tweaking of current economic systems to solve our problems, but rather to reach to the teachings of our common wisdom traditions to find new ways of assessing the truth of our situation and to collectively build new economic systems that are just, ecologically responsible, and permanent. In fact he names this rebuilding as the central task of concerned citizens in the first decades of this century.

We have posted his full article at the E. F. Schumacher Society's website (http://www.smallisbeautiful.org/publications/fullerton_08.html) and excerpted sections below for your reading.

Best wishes,
Staff of the E. F. Schumacher Society
140 Jug End Road
Great Barrington, MA 01230
www.smallisbeautiful.org

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Excerpts from:
"The Relevance of E. F. Schumacher in the 21st Century"
By John Fullerton
May, 2008

Our global economic system is broken not because of the credit crisis; it is broken because it is predicated on perpetual, resource driven growth with no recognition of scale limitations.

What we are not hearing, at least in the mainstream media, is a critical reframing of the questions that address root causes. . . . . We are not hearing a debate about the sustainability of a perpetually growing global economic system nested within our finite biosphere. We are not hearing a debate about the wisdom of allowing financial power (and systemic risk) to be increasingly concentrated in the hands of a few financial institutions of increasing complexity and scale. We are not publicly questioning the wisdom of the system we have allowed to evolve in response to capital's quest for ever increasing financial returns. Nor are we debating where to look for creative responses.

However, nothing could be more important at this critical time. What we must grasp is that the financial crisis we are reacting to is but a cyclical side show to the bigger issues we face regarding the sustainability of our economic system. We should see the present financial crisis as a wake up call to this far greater challenge. We should search with an open mind for the wisdom we need to transition our economic system onto a sustainable path, grounded in ecological reality, with a respect for human justice and a deep appreciation for all life.

What is needed is nothing less than a new economic myth, which incorporates the central issue of scale in order to supplant and transcend the "invisible hand" of the free market. We need a "post-modern (post-materialist) economic theory".

At the beginning of the 20th century, scale did not matter. At start of the 21st century, scale redefines our economic challenge.

In my personal quest for this new economic myth, I was stopped dead in my tracks after discovering E.F. Schumacher several years ago. Most who know of Schumacher know him from his seminal work, Small is Beautiful - Economics as if People Mattered (1973). The fortunate ones have also read his final published work, A Guide for the Perplexed, a title that grabbed me and did not disappoint. Most disciples of Schumacher probably encountered his clear thinking during the 70s. Many went on to become leaders in the environmental movement. I was in junior high school when Small is Beautiful was published, and then was busy building a career in global finance during the 80s and 90s on the belief that finance rather than politics would dominate international relations during my lifetime. I got that right, but not in the way I expected. Seeing global finance, what I do, as a root cause in fueling our unsustainable economic system, has shaken many of my prior beliefs on economics.

. . . it is now time that we transcend to an economics built upon wisdom. Schumacher's instruction is clear and compelling. "From an economic view point, the central concept of wisdom is permanence. We must study the economics of permanence." This intention takes us in a profoundly different direction than conventional, Cartesian thinking. "Permanence" suggests valuing durability over efficiency, stability over speed. These are different values from those typically celebrated in the marketplace.

We need to think about what adjustments are necessary to "insure" the permanence of our collective home, which must include a stable civil society. Such thinking must address the very nature of our economic system. Without a sustainable and just economic system, there is no permanence. We need to inject these ideas into the public debate by reframing the cyclical economic concerns that preoccupy the mainstream media. We see little true recognition of this profound challenge among our business, financial and governmental leadership, which remains absorbed with short-term tactical issues.

Following Schumacher's lead, we should look to the great wisdom traditions for direction in this truth. Where better to look than to the ideas and teachings from all cultures that have stood the test of time, rather than restrict ourselves to contemporary economic theories that we know are limited and incomplete.

Schumacher is relevant to our critical 21st century challenges precisely for this reason. His philosophy, his concern about the limits of materialistic scientism, his distinctions between divergent and convergent problems, and his ideas of decentralism, appropriate technology, and human scale to name but a few, are all rooted in the great spiritual and philosophical teachings. Not surprisingly, his ideas, in addition to being humane and just, are aligned with nature and nature's sustainable way, the only truly sustainable system we know. They are, I believe, rooted in truth as best as Schumacher could discern it, and therefore they represent wisdom, the wisdom of permanence.

If you examine Schumacher's personal library, which is carefully stewarded at the
E. F. Schumacher Society in the Berkshires, you will find that most of the texts are not about economics. Instead, they include the great philosophical and spiritual texts from all traditions. Schumacher's gift and genius was to derive economic principles and ideas from these teachings, to have the courage to speak the truth, despite knowing it often flew in the face of conventional economic thinking, and to make the truth accessible with his clear and witty prose. What emerges is certainly not the final word on the economics of permanence. Some of his thinking is outdated, or simply missed the mark. But as a foundation to build upon, it is invaluable. The reason his ideas about economics ring true is because they are built upon these wisdom traditions. The contradictions of modern economics are gone.

Our challenge now is to refine and update this thinking and to chart a practical path of convergence between the reality that exists in our economic system today and the principles we strive to uphold and upon which our long run prosperity undoubtedly depends. . . . The opening decades of 21st century may be our best chance to launch the critical transformation of our economic system to an economics of permanence. We need to get it right, as only our collective consciousness will allow.

Transitioning to a sustainable and just economic system is the ultimate challenge of the 21st century. History no doubt will judge our generation by how well we acknowledge, embrace and take up this challenge.

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John Fullerton is a former Managing Director of JPMorgan where he worked for 18 years in New York, London, and Tokyo, and subsequently was CEO of an energy focused hedge fund. He is now seeking to launch an investment fund focused on investing in high impact sustainability initiatives, and is working on The Purpose of Capital, a book about the role of investment capital in sustainable economics. He is a friend and supporter of the E. F. Schumacher Society in Great Barrington, Massachusetts. John can be reached at john@level3cap.com.