Are corporate executives robbing the (investment) bank?

As part of the New Economy 2.0 series

By David Korten

We think of stock sales as ways for households to invest and for corporations to raise capital. But if you dig into the numbers, something very different is going on.

In 1999, according to corporate-ethics guru Marjorie Kelly in The Divine Right of Capital, the public sale of newly issued corporate common stock netted $106 billion – in other words, less than one percent of the $20.4 trillion in corporate shares traded in that year went to the corporations that issued them.

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Can we design a self-correcting society?

As part of the New Economy 2.0 series

By David Korten

I’m sometimes called an economist because I write and speak about economic issues. The discipline for which I received my academic training, however, is organizational systems design. I view the economy through an institutional design lens.

As a Harvard Business School professor in the early 1970s, I taught the art of structuring human relationships in corporations to maximize profit. Partly, that involves getting the incentives right; it also involves culture, authority, communication flows, and a host of other influences subject to management intervention.

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Great human advances were made when we still valued life.

As part of the New Economy 2.0 series 

By David Korten

In an earlier day our rulers were kings and emperors. Now they are corporate CEOs and hedge fund managers. Wall Street is Empire’s most recent stage. Its reign will mark the end of the tragic drama of a 5,000-year Era of Empire.

Imperial historians would have us believe civilization, history and human progress began with the consolidation of dominator power in the first great empires that emerged some 5,000 years ago. Much is made of their glorious accomplishments and heroic battles.

Rather less is said about the brutalization of the slaves who built the great monuments – the racism, suppression of women, conversion of free farmers into serfs or landless laborers, carnage from the battles, hopes and lives destroyed by wave after wave of invasion, pillage and gratuitous devastation of the vanquished, and lost creative potential.

Nor is there mention that most all the advances that make us truly human came before the Era of Empire, including the domestication of plants and animals, food storage and the arts of dance, pottery, basket making, textile weaving, leather crafting, metallurgy, architecture, town planning, boat building, highway construction and oral literature.

As the institutions of Empire took root, humans turned from a reverence for the generative power of life to a reverence for hierarchy and the power of the sword. The wisdom of the elder and priestess gave way to the arbitrary rule of often ruthless kings. Social pathology became the norm and society’s creative energy focused on perfecting the instruments of war and domination. Priority in the use of available resources went to military, prisons, palaces, temples and patronage.

Great civilizations were built and then swept away in successive waves of violence and destruction. War, trade and debt served as weapons of the few to expropriate the means of livelihood of the many and reduce them to slavery or serfdom. Whole empires were subjected to the delusional hubris and debaucheries of psychopathic rulers.

If much of this sounds familiar, it is because in the face of the democratic challenge, the dominator cultures and institutions of Empire simply morphed into new forms.

The ideals of the American Revolution heralded the possibilities of a new era of equality and popular democratic rule, but it was a more modest beginning than we have been taught to believe. Once the former colonies gained their freedom from British rule and declared themselves the United States of America, their new leaders put aside the pronouncement of the Declaration of Independence that all men are created equal and enjoy a natural right to life, liberty and the pursuit of happiness – and set about securing their own power.

The king was gone, but the Constitution they drafted with a promise to “secure the Blessings of Liberty” for “We the People of the United States,” effectively limited political participation to white male property owners and secured the return of escaped slaves to their designated owners. Colonial expansion followed soon after as the new nation expropriated by armed force all of the Native and Mexican lands between themselves and the distant Pacific Ocean.

Global expansion beyond U.S. territorial borders followed. The United States converted cooperative dictatorships into client states by giving their ruling classes a choice between aligning themselves with U.S. economic and political interests for a share in the booty or being eliminated by assassination, foreign-financed internal rebellion or military invasion. Following World War II, when the classic forms of colonial rule became unacceptable, international debt became a favored instrument for forcing poorer nations to open to foreign corporate ownership and control.

Most of the economic, social and environmental pathologies of our time – including sexism, racism, economic injustice, violence and environmental destruction – originate in the institutions of Empire. The resulting exploitation has reached the limits the social fabric and Earth’s natural systems will endure.

As powerful as Wall Street appears to be, it’s abuse of power has so eroded the economic, social and environmental foundations of its own existence that its fate is sealed. We the People have a choice. We can allow Wall Street to maintain its grip until it brings down the whole of human civilization in irrevocable social and environmental collapse. Or we can take control of our future and replace the Wall Street economy with the values and institutions of a New Economy comprised of locally owned businesses devoted to serving their communities by investing in the use of local resources to produce real goods and services responsive to local needs.

Either way, Wall Street’s days are numbered. Ours need not be.

About David Korten

David Korten (livingeconomiesforum.org) is the author of Agenda for a New Economy, The Great Turning: From Empire to Earth Community and the international best seller When Corporations Rule the World. He is board chair of YES! Magazine, co-chair of the New Economy Working Group and a founding member of Business Alliance for Local Living Economies (BALLE).

About New Economy 2.0 

Visionary economist David Korten introduces a national conversation series, New Economy 2.0, on CSRwire Talkback based on his acclaimed book, Agenda for a New Economy, 2^nd edition. For the next several weeks, Korten will summarize the main points and key lessons of each chapter of his book, leading from a dissection of what went wrong in the “phantom wealth Wall Street economy” to the presentation of a vision of a world of real wealth Main Street economies that support strong middle class societies, honor real market principles and work in partnership with Earth’s biosphere.

New Economy 2.0 envisions an economy in which life is the defining value and power that resides in people and communities. It contrasts with the popular New Economy 1.0 fantasy of a magical high-tech economy liberated from environmental reality and devoted to the growth of phantom wealth financial assets.

This exciting, new series is co-published by CSRwire and YES! Magazine.

The arguments presented here are developed in greater detail in Agenda for a New Economy available from the YES! Magazine Web store.

Talkback Readers: Are capitalism and empire co-dependent? Or can we reconfigure capitalism to respect life? Tell us your thoughts on Talkback!

The calculus of the debt economy equals booms, busts and inequality.

As part of the New Economy 2.0 series 

By David Korten

The unrealistic expectation that money should grow effortlessly in perpetuity is more than an issue of unrealizable expectations. It combines with a Wall Street controlled debt-based money system to create an imperative for the economy to grow profits of bankers, and thereby the richest among us, to keep the financial system, and thereby the economy, from collapsing.

It is odd we experienced a financial collapse in 2008 because of a credit crunch, a shutdown on lending, at a time when the world was already awash in money. BusinessWeek’s July 11, 2005, cover story shouted “Too Much Money” and spoke of a savings glut. Its June 11, 2008, European issue reiterated the theme, “Too Much Money, Inflation Goes Global.”

Most discussion of the financial crisis focuses on the details and misses the big picture. First, much of the money was tied up in the Wall Street casino rather than facilitating productive activity in the real economy and was simply pumping up a phantom wealth bubble. Second, virtually every dollar in the system was borrowed, because in our money system, banks create money by lending it into existence. When this debt is used to inflate financial bubbles and support Ponzi schemes, eventual default is inevitable.

Third, Wall Street and the Federal Reserve are joined in an alliance to keep “wage inflation” below the level of growth in the real cost of living. This assures all benefits of productivity gains go to owners rather than being shared with workers. It also keeps inflation confined to financial bubbles that inflate the phantom wealth financial assets of the rich. Furthermore, it forces the bottom 90 percent of the population – the people who make their living by producing real goods and services – into debt at usurious interest rates to the top 10 percent to cover daily basic daily expenses. Inevitably, amounts owed exceed the borrower’s ability to repay. The lenders then stop lending and foreclose on assets of the desperate borrowers.

When a loan is repaid or goes into default, the debt is cancelled and the money supply shrinks by that amount. Most loans continue to be repaid, but if new loans are not being issued, the demand for real goods and services falls because people don’t have the money to pay for them. As demand falls, businesses lay off workers, who then join those pushed into default.

The problem appears to be a lack of money, even though the total money in circulation is far more than enough to cover real-wealth exchanges in a rational real-wealth economy. The money, however, is locked up in the Wall Street casino economy rather than circulating in the real Main Street economy. Pouring public bailout money into Wall Street serves only to re-inflate the bubble. It does nothing to revive the real economy.

Demand by Wall Street for the eventual repayment with interest of nearly every dollar in circulation means, that to avoid collapse, the economy has to grow to generate demand for new borrowing to put new money into circulation to pay the interest due to bankers on already outstanding loans. This demand for perpetual growth simply keeps bankers’ solvent results in a serious distortion of society’s economic priorities.

Rather than maximizing real well-being, policy makers are compelled to focus on avoiding economic collapse by growing the money economy. A debt-based money system can make sense when the credit funds real investment. When the credit funds current consumption and phantom wealth speculation, the result is ever-increasing debt, inequality, destruction of the natural environment, erosion of the social fabric and ultimate default.

We have for too long put up with a money system designed to grow the financial assets of rich people at the expense of assuring continuing cycles of economic boom and bust, confining billions to lives of desperation and reducing Earth to a toxic waste dump. We can do better.

Growth in GDP creates the illusion we are getting richer, even as we accelerate our material, social and spiritual self-impoverishment as a species. Fortunately for our common future, people everywhere are waking up to the reality and challenging conventional economic wisdom. They are focusing their attention on rebuilding their communities and local economies to improve human security, health and happiness without regard to how this impacts GDP, corporate share prices or other bogus indicators of economic well-being. It is an important beginning.

An obvious next step is to replace GDP and other financial indicators with indicators of the health of our children, families, communities and natural systems as the basis for assessing the economy’s performance. We may then notice that destroying living wealth to create financial wealth is an act of collective suicidal insanity and begin treating money as a useful tool for managing our economic choices rather than the end to be maximized.

About David Korten

David Korten (livingeconomiesforum.org) is the author of Agenda for a New Economy, The Great Turning: From Empire to Earth Community and the international best seller When Corporations Rule the World. He is board chair of YES! Magazine, co-chair of the New Economy Working Group and a founding member of Business Alliance for Local Living Economies (BALLE).

About New Economy 2.0 

Visionary economist David Korten introduces a national conversation series, New Economy 2.0, on CSRwire Talkback based on his acclaimed book, Agenda for a New Economy, 2^nd edition. For the next several weeks, Korten will summarize the main points and key lessons of each chapter of his book, leading from a dissection of what went wrong in the “phantom wealth Wall Street economy” to the presentation of a vision of a world of real wealth Main Street economies that support strong middle class societies, honor real market principles and work in partnership with Earth’s biosphere.

New Economy 2.0 envisions an economy in which life is the defining value and power that resides in people and communities. It contrasts with the popular New Economy 1.0 fantasy of a magical high-tech economy liberated from environmental reality and devoted to the growth of phantom wealth financial assets.

This exciting, new series is co-published by CSRwire and YES! Magazine.

The arguments presented here are developed in greater detail in Agenda for a New Economy available from the YES! Magazine Web store.

Talkback Readers: If the economy depends on debt, and debt spells booms, busts and inequality, what is the remedy? How can we get from here to a more stable economy? Share on Talkback!

Wall Street has created phantom expectations far in excess of the real wealth available to satisfy them.

As part of the New Economy 2.0 series 

By David Korten

It is a curious thing. Unless we stuff it in a mattress, we expect whatever money we don’t immediately spend to grow in perpetuity without effort. We do not expect the same of real wealth. Buildings must be maintained. Machinery must be replaced. Knowledge must be updated. The trust and caring of a community must be continuously renewed. Skills must practiced. Even wild spaces must be protected from predators, particularly human. All of these require a real investment of our time and life energy. Only phantom financial assets, the product of financial bubbles and fancy accounting tricks unrelated to the production of anything of real use, can grow effortlessly and perpetually – producing phantom expectations that in the aggregate can never be fulfilled.

Financial planner Thornton Parker has pointed out phantom wealth expectations are likely to be an issue for baby boomers who built up financial assets during the stock market boom in anticipation of a comfortable retirement. Just as their collective decision to put money into the stock market during their working years helped inflate share prices, so their collective decision to take it out during their retirement deflates those prices, leaving them in potentially desperate straits.

The problem is not confined to retirement accounts. It applies as well to the endowments of foundations, universities and other nonprofits. It applies to the public trust funds of libraries and municipalities, college savings funds, the reserve accounts of insurance companies, personal trust funds and much else.

Wall Street’s phantom-wealth machine has created phantom expectations far in excess of the real wealth available to satisfy them.

Financial figures that get thrown around in relation to the credit crash and financial bailout of 2008 defy both reality and imagination. The financial assets of the richest 1% of Americans before the crash totaled $16.8 trillion, representing what they understood to be their rightful claim against the world’s real wealth. To put that in perspective, the estimated 2007 U.S. gross domestic product was $13.8 trillion and the total federal government expenditures that same year were only $2.7 trillion.

Clearly the $16 trillion worth of financial assets that evaporated globally between mid-September and end of November 2008 as the market value of the world’s publicly traded corporations’ share prices fell by 37 percent was phantom wealth, and that was only in publicly traded stock shares. Much of that phantom wealth has since been restored by a stock market recovery, without a corresponding recovery of jobs that put people to work producing real goods and services.

Welcome to the Alice in Wonderland world of phantom expectations.

It isn’t necessary to know the details of Wall Street’s esoteric inner workings to recognize we are dealing with a system that is delinked from reality and operating with no one at the helm.

Nor does it take special genius to recognize when folks are moving around trillions of dollars in secret transactions to generate billion dollar bonuses for themselves and cannot explain in a credible way where the money is coming from or where it’s going, and cannot make a credible case it is serving a beneficial purpose, they are probably up to no good even though they may truly believe they are “doing God’s work.”

Beyond the more visible economic, social and environmental consequences of Wall Street excess, it has also destroyed the integrity of the money system and created expectations that society has no means to fulfill. No one is even asking how the inevitable loss of unfulfillable expectations might be fairly distributed. A given dollar doesn’t come with a marker that tells us whether it was earned through productive labor or is a product of financial manipulation and accounting tricks.

When the Fed creates money with a wave of an accountant’s magic pen, it is creating phantom financial assets. This can be sound policy if the phantom financial assets put unemployed people to work creating real wealth by producing real goods and services of real value. If the Fed’s pen is used simply to re-inflate financial bubbles or keep Ponzi schemes afloat, it is simply playing accounting games to hide the real problem and delay the inevitable reckoning.

The sooner we realize the real nature of the problem, seek an orderly resolution of the unrealizable phantom wealth claims and give priority to directing money to where it will put people to work creating real wealth to meet real needs, the greater our hope for a viable future.

About David Korten

David Korten (livingeconomiesforum.org) is the author of Agenda for a New Economy, The Great Turning: From Empire to Earth Community and the international best seller When Corporations Rule the World. He is board chair of YES! Magazine, co-chair of the New Economy Working Group and a founding member of Business Alliance for Local Living Economies (BALLE).

About New Economy 2.0 

Visionary economist David Korten introduces a national conversation series, New Economy 2.0, on CSRwire Talkback based on his acclaimed book, Agenda for a New Economy, 2^nd edition. For the next several weeks, Korten will summarize the main points and key lessons of each chapter of his book, leading from a dissection of what went wrong in the “phantom wealth Wall Street economy” to the presentation of a vision of a world of real wealth Main Street economies that support strong middle class societies, honor real market principles and work in partnership with Earth’s biosphere.

New Economy 2.0 envisions an economy in which life is the defining value and power that resides in people and communities. It contrasts with the popular New Economy 1.0 fantasy of a magical high-tech economy liberated from environmental reality and devoted to the growth of phantom wealth financial assets.

This exciting, new series is co-published by CSRwire and YES! Magazine.

The arguments presented here are developed in greater detail in Agenda for a New Economy available from the YES! Magazine Web store.

Talkback Readers: Where should baby boomers put their retirement savings? Share your ideas on Talkback!

“Conservatism” today looks much like the piracy of old.

As part of the New Economy 2.0 series 

By David Korten

Like many Americans, I grew up believing conservative values were about local control and personal responsibility for family, community, nature. It seemed curious to me the political alliance that drove a rollback of Roosevelt-era policies that created the American middle class called itself conservative and dismissed its liberal opponents as un-American. Eventually, however, I discovered the term conservative harkens back to a day when conservatives were monarchists who considered democracy a threat to social order and the seas were ruled by buccaneers and privateers.

Buccaneer is a colorful name for pirates of old who pursued personal fortune with rules of their own making and were in their time an iconic expression of “free market” capitalism. Privateers were pirates to whom a king granted legal immunity and safe harbor in return for a share of the booty. Their charge was to extract physical wealth from foreign lands and peoples by whatever means—including the execution of rulers and slaughter and enslavement of Native inhabitants.

Hernán Cortés claimed the Mexican empire of Montezuma for Spain. Hernando de Soto made his initial mark trading slaves in Central America and later allied with Francisco Pizarro to take control of the Inca empire based in Peru.

Some privateers operated powerful naval forces. In 1671, Sir Henry Morgan (yes, appreciative British kings granted favored privateers titles of nobility in recognition of their service) launched an assault on Panama City with 36 ships and nearly two thousand brigands, defeating a large Spanish force and looting the city as it burned to the ground.

Eventually, the ruling monarchs turned from swashbuckling adventurers and chartered pirates to chartered corporations as their favored instruments of colonial expansion, administration and pillage. The sale of public shares enabled a single firm to amass virtually unlimited financial capital and assured the continuity of the enterprise beyond the death of its founders. Limited liability absolved the owners of personal liability for the firm’s losses or misdeeds.

Corporations chartered by the British Crown established several of the earliest colonial settlements in what later became the United States and populated them with bonded laborers – many involuntarily transported from England – to work their properties. The importation of slaves from Africa followed.

The East India Company (chartered in 1600) was the primary instrument of Britain’s colonization of India, a country the company ruled until 1784, much as if it were a private estate. In the early 1800s, the East India Company established a thriving business exporting tea from China, paying for its purchases with illegal opium.

The Dutch East India Company (chartered in 1602) established its sovereignty over what is now Indonesia and reduced the local people to poverty by displacing them from their lands to grow spices for sale in Europe.

It is no exaggeration to characterize these forebears of contemporary publicly traded limited liability corporations as, in effect, legally sanctioned and protected crime syndicates with private armies and navies backed by a mandate from their home governments to extort tribute, expropriate land and other wealth, monopolize markets, trade slaves, deal drugs and profit from financial scams.

Wall Street hedge fund managers, day traders, currency traders and other unlicensed phantom-wealth speculators are the independent unlicensed buccaneers of our day. Wall Street banks are the commissioned privateers who ply a similar trade with state backing. The economy is their ocean. Publicly traded corporations serve as their favored vessels of plunder, financial leverage is their favored weapon and the state is their servant-guardian.

As with the buccaneers and privateers of days past, Wall Street’s major players find it more profitable to expropriate the wealth of others than to find honest jobs producing goods and services beneficial to their communities. They walk away with their fees, commissions and bonus packages and leave it to others to pick up the costs of federal bailouts, gyrating economic cycles, collapsing environmental systems, broken families, shattered communities and the export of jobs along with the manufacturing, technology and research capacities that go with them.

They seek self-enrichment by plundering wealth they had no part in creating, enjoy substantial legal immunity and acknowledge no duty or accountability other than to themselves. Whether we call it conservative or liberal, theft is theft. Only tyrannies guarantee the liberty of the few to plunder the wealth of the many.

About David Korten

David Korten (livingeconomiesforum.org) is the author of Agenda for a New Economy, The Great Turning: From Empire to Earth Community and the international best seller When Corporations Rule the World. He is board chair of YES! Magazine, co-chair of the New Economy Working Group and a founding member of Business Alliance for Local Living Economies (BALLE).

About New Economy 2.0 

Visionary economist David Korten introduces a national conversation series, New Economy 2.0, on CSRwire Talkback based on his acclaimed book, Agenda for a New Economy, 2^nd edition. For the next several weeks, Korten will summarize the main points and key lessons of each chapter of his book, leading from a dissection of what went wrong in the “phantom wealth Wall Street economy” to the presentation of a vision of a world of real wealth Main Street economies that support strong middle class societies, honor real market principles and work in partnership with Earth’s biosphere.

New Economy 2.0 envisions an economy in which life is the defining value and power that resides in people and communities. It contrasts with the popular New Economy 1.0 fantasy of a magical high-tech economy liberated from environmental reality and devoted to the growth of phantom wealth financial assets.

This exciting, new series is co-published by CSRwire and YES! Magazine.

The arguments presented here are developed in greater detail in Agenda for a New Economy available from the YES! Magazine Web store.

Talkback Readers: Is Wall Street redeemable? Should it – or can it – be made honest? Share your thoughts on Talkback?

As part of the New Economy 2.0 series 

By David Korten

As did most Americans of my generation, I grew up in the post-World War II years believing America was defined by a strong middle class supported by a durable bipartisan political consensus.

In fact, the American middle class was created in the space of a very few years by New Deal legislation that established Social Security and other safety-net programs, implemented a highly progressive taxation of income and estates, supported unions and raised the floor on wages to narrow the wealth and income gap between the upper and lower economic classes.

Perhaps because I was living abroad during most of the 1970s and 80s, even into the 1990s, I believed until the mid-1990s that the middle class is a universal American ideal. It was quite a shock when I eventually came to realize that America is governed by an owning class that considers government intervention to maintain an equitable distribution of wealth anti-American, socialist and a threat to individual liberty and national prosperity.

In the 1970s, an alliance of elite interests began preparing to roll back measures that created the American middle class and launched a full-scale class war during the 1980s under the banner of the Reagan revolution. Wall Street corporate interests provided the money and controlled the real agenda. Religious fundamentalists provided votes in return for lip service to a conservative social agenda on abortion, family planning and gay marriage. Libertarians provided an ideological framework removing constraints to the unlimited concentration of wealth in the name of market freedom. Neo-conservatives provided justification for wars and outsized military expenditures to swell profits of the defense industry and secure corporate access to the world’s resources and markets.

Once in power, the Reagan administration rolled back taxes on the wealthiest Americans, ended robust antitrust enforcement and launched a stunningly successful campaign to make finance the U.S. economy’s dominant and most profitable sector. This process continued seamlessly through subsequent Republican and Democratic administrations.

In 1950, arguably the peak of U.S. global power, manufacturing accounted for 29 percent of the U.S. gross domestic product and financial services for 11 percent. By 2005, manufacturing accounted for only 12 percent of the GDP, and financial services for 20 percent—more than manufacturing, health and wholesale/retail combined. This weakened unions, put downward pressure on wages and increased the power of the owning class.

In 1999, on the recommendation of Wall Street insiders, Congress “modernized” the country’s financial system by repealing Glass-Steagall, a Depression-era law that limited commercial banks to commercial banking activities. In 2004, the established requirement that investment banks maintain a 12-to-1 leverage ratio of debt to equity was repealed, leaving them free to make much greater use of borrowed money.

Between 1980 and 2005, there were some 11,500 bank mergers in the U.S., an average of 442 per year. As the banking system consolidated, its focus shifted from providing financial services for productive activity on Main Street to funding speculation on Wall Street.

Hedge funds, the high rollers that led the speculative frenzy responsible for the 2008 financial collapse, proliferated from a couple hundred in the early 1990s to some 10,000 in mid-2007, by which time they had more than $1.8 trillion in financial assets under management.

Wall Street used its political influence and control of the money supply to ensure its players captured virtually all the benefits of productivity gains in the Main Street economy as interest, dividends, financial service fees and inflated asset prices.

This effort to achieve an upward redistribution of wealth was so successful that from 1980 to 2005, the highest-earning one percent of the U.S. population increased its share of taxable income from nine percent to 19 percent. Most of that gain came from the bottom 90 percent and went to the top 10^th of one percent. In 2007, the top 400 U.S. tax returns reported an average annual income of $345 million compared to an average of $12.7 million for the top 427 returns in 1955, adjusted to 2007 dollars.

As Wall Street exported its modernization plan to the world, the wealth gap widened almost everywhere. In 2005 Forbes magazine counted 691 billionaires in the world. In 2008, only three years later, it counted 1,250 and estimated their combined net worth at $4.4 trillion. According to a United Nations University study, the richest two percent of world’s people now own 51 percent of all the world’s assets. The poorest 50 percent own only one percent.

Efforts to fix Wall Street miss an important point: Wall Street, as we know it, is an instrument of class war that poses a mortal threat to the middle class and democracy. For the sake of our most cherished American ideals, it must be dismantled and replaced.

About David Korten

David Korten (livingeconomiesforum.org) is the author of Agenda for a New Economy, The Great Turning: From Empire to Earth Community and the international best seller When Corporations Rule the World. He is board chair of YES! Magazine, co-chair of the New Economy Working Group and a founding member of Business Alliance for Local Living Economies (BALLE).

About New Economy 2.0 

Visionary economist David Korten introduces a national conversation series, New Economy 2.0, on CSRwire Talkback based on his acclaimed book, Agenda for a New Economy, 2^nd edition. For the next several weeks, Korten will summarize the main points and key lessons of each chapter of his book, leading from a dissection of what went wrong in the “phantom wealth Wall Street economy” to the presentation of a vision of a world of real wealth Main Street economies that support strong middle class societies, honor real market principles and work in partnership with Earth’s biosphere.

New Economy 2.0 envisions an economy in which life is the defining value and power that resides in people and communities. It contrasts with the popular New Economy 1.0 fantasy of a magical high-tech economy liberated from environmental reality and devoted to the growth of phantom wealth financial assets.

This exciting, new series is co-published by CSRwire and YES! Magazine.

The arguments presented here are developed in greater detail in Agenda for a New Economy available from the YES! Magazine Web store.

Talkback Readers: What’s your opinion: can Wall Street be reformed? What could replace it? Share your ideas on Talkback!

As part of the New Economy 2.0 series 

By David Korten

When economic failure is systemic, temporary fixes, even very expensive ones like the Wall Street bailout, are like putting a bandage on a cancer. We need to rethink and redesign the economic system. The failed system we must put behind us was designed by economists. For the New Economy system design we best look to ecologists.

The differing perspectives of the economist and ecologist are exemplified by the authors of two books that appeared in 2008 as the financial crash was playing out: Jeffrey Sachs, Common Wealth, and Gus Speth, The Bridge at the Edge of the World. These books present nearly identical statements of the need to address growing environmental stress and end extreme poverty. Their recommendations, however, are miles apart.

Jeffrey Sachs, once described by the New York Times as “probably the most important economist in the world,” takes the existing growth-centered economic model and institutional system as givens. He prescribes a solution based solely on modest adjustments in public budget allocations. Sachs’ world is defined by flows of money as both end and means. 

He calls for modest new investments in existing technologies to sequester carbon, develop new energy sources, end population growth, make more efficient use of water and other natural resources, and jump-start economic growth in the world’s remaining pockets of persistent poverty.

In a 2007 lecture to the Royal Society in London, Sachs made clear his belief that there is no need to redistribute wealth, ask the rich to reduce their material consumption or redesign our economic institutions:

I do not believe that the solution to this problem is a massive cutback of our consumption levels or our living standards…, and I do not believe … that the essence of the problem is that we face a zero sum that must be redistributed.

Far from calling for a restraint on consumption, Sachs projects global economic expansion from $60 trillion in 2005 to $420 trillion in 2050 and estimates the world’s wealthy nations can eliminate extreme poverty and develop and apply the necessary technologies to address environmental needs with an expenditure of a mere 2.4 percent of the projected midcentury economic output.

Sachs never looks upstream to ask why the current economic system is driving toward social and environmental collapse. Nor does he ask why we need or want a global economy seven times as large as its present size if we can stabilize population and meet needs of the poor with a modest budget reallocation. He says nothing about what forms of consumption might continue to multiply without placing yet more pressure on already overstressed natural systems or how increasing consumption of the world’s most extravagant consumers by seven times might increase their happiness.

Gus Speth, the ecologist who founded the World Resources Institute and for 10 years served as Administrator of the United Nations Development Program, starts by taking an upstream look at systemic causes of environmental and social breakdown and sees a need for thorough cultural and institutional transformation to address foundational questions of values and power.

Speth presents compelling evidence that although there has been a slight decrease in recent decades in environmental damage per dollar growth in GDP, GDP growth always increases environmental damage. He further demonstrates that beyond a modest threshold, more physical consumption does not increase happiness. It seems such possibilities never occurred to “the most important economist in the world.”

Speth calls attention to the importance of social movements grounded in an awakening spiritual consciousness that are creating communities of the future from the bottom up, practicing participatory democracy and demanding changes in the rules of the game.

He recommends replacing financial indicators of economic performance, such as GDP, with nonfinancial indicators of social and environmental health. And he endorses calls to revoke charters of corporations that grossly violate public interest, exclude or expel unwanted corporations, roll back limited liability, eliminate corporate personhood, bar corporations from making political contributions and limit corporate lobbying.

Tinkering at margins of the failed economy guided by the same mindset that got us into our current mess will not get us out. Economists led the way to creating an economy that mimics a cancer. To create an economy that mimics Earth’s biosphere, we best turn for guidance to ecologists.

About David Korten

David Korten (livingeconomiesforum.org) is the author of Agenda for a New Economy, The Great Turning: From Empire to Earth Community and the international best seller When Corporations Rule the World. He is board chair of YES! Magazine, co-chair of the New Economy Working Group and a founding member of Business Alliance for Local Living Economies (BALLE).

About New Economy 2.0 

Visionary economist David Korten introduces a national conversation series, New Economy 2.0, on CSRwire Talkback based on his acclaimed book, Agenda for a New Economy, 2^nd edition. For the next several weeks, Korten will summarize the main points and key lessons of each chapter of his book, leading from a dissection of what went wrong in the “phantom wealth Wall Street economy” to the presentation of a vision of a world of real wealth Main Street economies that support strong middle class societies, honor real market principles and work in partnership with Earth’s biosphere.

New Economy 2.0 envisions an economy in which life is the defining value and power that resides in people and communities. It contrasts with the popular New Economy 1.0 fantasy of a magical high-tech economy liberated from environmental reality and devoted to the growth of phantom wealth financial assets.

This exciting, new series is co-published by CSRwire and YES! Magazine.

The arguments presented here are developed in greater detail in Agenda for a New Economy available from the YES! Magazine Web store.

Talkback Readers: Can we “grow” ourselves out of the environmental and social crises we face? Share your insights on Talkback!

As part of the New Economy 2.0 series 

By David Korten

In America we are taught from birth capitalism is synonymous with markets, democracy and individual liberty. Whatever its flaws, the only alternative is communism, or so we are told.

This sets up a false and dangerously self-limiting choice between two economic models both of which create concentrations of power that stifle liberty and creativity for all but the few at the top.

Communism is dead. As we now look for solutions to our current economic crisis, the relevant distinction is not between capitalism and communism, but rather between Wall Street and Main Street.

The Wall Street economy is centrally planned and managed by big banks and corporations for which money is both means and end. The primary goal is monopoly control of markets, physical resources and technology to maximize profits and bonuses.

Main Street economy is comprised of local businesses and working people who self-organize to provide livelihoods for themselves, their families and communities producing real goods and services in response to community needs. Main Street exemplifies the market economy envisioned by Adam Smith; Wall Street is the antithesis.

Smith believed people have a natural and appropriate concern for the well-being of others and a duty not to do them harm. He also believed government has a responsibility to restrain those who fail in this duty.

Smith and the political economists who followed in his tradition developed an elegant theory of the market’s capacity to self-organize in the community interest based on a number of carefully articulated assumptions, including the following:

• Buyers and sellers must be too small to influence the market price and must honor basic principles of honest dealing.

• Income and ownership must be equitably distributed.

• Complete information must be available to all participants, and there can be no trade secrets.

• Sellers must bear the full cost of the products they sell and incorporate it into the sale price.

• Investment capital must remain within national borders, and trade between countries must be balanced.

• Savings must be invested in the creation of productive capital rather than in speculative trading.

These are characteristics of a real market economy. Wall Street capitalism violates them all.

Capitalism is a term originally coined to refer to an economic and political regime in which ownership and benefits of capital are appropriated by the few to the exclusion of the many who through their labor make capital productive. It describes Wall Street perfectly.

Markets work wonderfully within a framework of clear rules and a caring community. The stronger the relations of mutual trust and caring and the more equitably power is distributed, the more the market becomes self-policing and the less need there is for formal governmental intervention. An economy comprised of powerful corporations governed by a culture of greed and a belief that their only legal duty is to maximize their profits requires a strong and intrusive governmental hand to limit abuse and clean up the messes.

The “free market,” a code word for an unregulated market, is a contradiction. A market without rules facilitates and encourages the unlimited concentration and abuse of corporate power unconstrained by market discipline and democratic accountability.

Market fundamentalists selectively cull bits and pieces of market theory to argue that public interest is best served when economic power is concentrated in unregulated globe-spanning mega-corporations engaged in monopolizing resources and externalizing costs for short-term financial gain. They distort market theory beyond recognition.

Like cancer cells that attempt to hide from the body’s immune system by masking themselves as healthy cells, Wall Street institutions attempt to conceal themselves from society’s immune system by masquerading as agents of a healthy market economy.

The credit collapse penetrated the façade to reveal the inner workings of Wall Street capitalism as a criminal syndicate engaged in counterfeiting, predatory lending, usury, tax evasion, fraud and extortion. It may be legal because Wall Street funds politicians and writes its own rules, but it should be illegal and treated accordingly.

A criminal syndicate is “fixed” by shutting it down through the enforcement of laws that protect public interest. You “fix” a cancer by removing it and rebuilding the healthy tissue. Main Street is the healthy tissue from a healthy real market economy that can be built.

About David Korten

David Korten (livingeconomiesforum.org) is the author of Agenda for a New Economy, The Great Turning: From Empire to Earth Community and the international best seller When Corporations Rule the World. He is board chair of YES! Magazine, co-chair of the New Economy Working Group and a founding member of Business Alliance for Local Living Economies (BALLE).

About New Economy 2.0 

Visionary economist David Korten introduces a national conversation series, New Economy 2.0, on CSRwire Talkback based on his acclaimed book, Agenda for a New Economy, 2^nd edition. For the next several weeks, Korten will summarize the main points and key lessons of each chapter of his book, leading from a dissection of what went wrong in the “phantom wealth Wall Street economy” to the presentation of a vision of a world of real wealth Main Street economies that support strong middle class societies, honor real market principles and work in partnership with Earth’s biosphere.

New Economy 2.0 envisions an economy in which life is the defining value and power that resides in people and communities. It contrasts with the popular New Economy 1.0 fantasy of a magical high-tech economy liberated from environmental reality and devoted to the growth of phantom wealth financial assets.

This exciting, new series is co-published by CSRwire and YES! Magazine.

The arguments presented here are developed in greater detail in Agenda for a New Economy available from the YES! Magazine Web store.

Talkback Readers: Is capitalist economy the antithesis to market economy?

As part of the New Economy 2.0 series 

By David Korten

It appears we are a nation addicted to debt. The current total of U.S. public and private debt is $57 trillion (2009). Of this total, $42.5 trillion is private household/business/financial sector debt and $14.7 trillion is federal/state/local government debt. Of the private debt, $13.5 trillion is household debt, 122.5% of annual disposable income. Of the total U.S. debt, $14 trillion is owed to foreigners. Current U.S. GDP is $14.3 trillion. So is this a problem?

Most of the money in circulation is created as credit when a bank issues a loan. By the nature of this system, no debt means no money. Now that would be a really big problem in an economy that cannot function without money.

More important than the size of the debt is the question of whether it is good debt or bad debt. So what’s the difference?

Let’s start with good debt. The underlying logic of a debt-based money-system rests on the assumption that the money banks create by issuing loans is invested in ways that expand society’s productive capacity and thereby the available pool of real goods and services.

It further assumes the benefits produced are shared equitably among all who contribute. The savers and investors who defer their consumption to build the bank’s capital reserves receive a fair share as interest. The bank employees receive a fair share as salary and benefits. The governments that provide the legal, social and physical infrastructure required to do business receive a fair share as taxes.

The problem facing the United States is most of our outstanding debt is bad debt. It was issued to fund consumption and phantom wealth speculation, and in aggregate cannot be repaid, because it is not backed by real assets.

This didn’t just happen. It is the result of bad public policies and can be corrected only by better policy choices. Let’s take a look at four examples.

Gambling Debt: Borrowing at interest to gamble on asset bubbles and loan pyramids can inflate financial asset statements, but produces nothing of real value and the assets can deflate in a heartbeat, leaving the loans unsecured and unpayable. This is a direct consequence of the financial deregulation that allowed Wall Street players to take control of the money and banking system and reorient it from financing investment in the real-wealth economy to financing speculation in the bubble economy.

Private Consumer Debt: Borrowing at interest to support current consumption beyond one’s income is a dead end. At issue here are policies relating to trade, unions, wages, employment, public services, and taxes that suppress the incomes of working people relative to the cost of living, while inflating the incomes of the investing class. This forces the majority of households to borrow from the investing class to cover basic consumption expenses.

Public Consumer Debt: Much of the current debate about debt centers on public debt. Borrowing by governments to invest in things like education, research, infrastructure and even temporary economic stimulus directed to creating jobs in the real economy builds the nation’s future productive capacity and is logical and sensible. Borrowing to fund war, tax breaks for the rich and current government operations is neither. Tragically, most of our public borrowing has been for the latter.

Foreign Debt: Perhaps the most dangerous of all bad debt is that owed to foreign countries to pay for current consumption beyond what we produce for ourselves domestically. Our foreign debt is largely a result of unsound trade policies that lead to outsourcing jobs in manufacturing, research and technology and increase our dependence on imports of manufactured goods, agricultural products and services. These policies also play a major role in driving down domestic wages and forcing households to borrow against their credit cards and home equity to meet basic consumption needs. They place our children in a position of potentially permanent debt slavery to the children of other nations, a very bad idea indeed.

Arguments focused on the size of the U.S. public debt will get us no place, unless we address the failed economic theories and policies that have mired us in all four of the major varieties of bad debt. To get out of this mess, we need policies that favor productive investment over speculation, living wages and quality public services over consumer debt, public investment in education, research and infrastructure over war and tax breaks for the rich, and domestic production over outsourcing and imports.

About David Korten

David Korten (livingeconomiesforum.org) is the author of Agenda for a New Economy, The Great Turning: From Empire to Earth Community and the international best seller When Corporations Rule the World. He is board chair of YES! Magazine, co-chair of the New Economy Working Group and a founding member of Business Alliance for Local Living Economies (BALLE).

About New Economy 2.0 

Visionary economist David Korten introduces a national conversation series, New Economy 2.0, on CSRwire Talkback based on his acclaimed book, Agenda for a New Economy, 2^nd edition. For the next several weeks, Korten will summarize the main points and key lessons of each chapter of his book, leading from a dissection of what went wrong in the “phantom wealth Wall Street economy” to the presentation of a vision of a world of real wealth Main Street economies that support strong middle class societies, honor real market principles and work in partnership with Earth’s biosphere.

New Economy 2.0 envisions an economy in which life is the defining value and power that resides in people and communities. It contrasts with the popular New Economy 1.0 fantasy of a magical high-tech economy liberated from environmental reality and devoted to the growth of phantom wealth financial assets.

This exciting, new series is co-published by CSRwire and YES! Magazine.

The arguments presented here are developed in greater detail in Agenda for a New Economy available from the YES! Magazine Web store.

Talkback Readers: What policies can turn us from bad debt to good? Share your ideas on Talkback!