A compelling New Economy policy framework is being framed and developed.

As part of the New Economy 2.0 series

By David Korten

I am among those who hoped President Obama, based on his campaign promises, would introduce reforms putting the United States on the path to a New Economy.

Unfortunately, for all the powers of the presidency, any new president, no matter what his intention, quickly learns he is captive to institutional forces that severely limit his ability to set a course for uncharted waters.

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Top seven failings of the old economy and their new economy solutions.

As part of the New Economy 2.0 series

By David Korten

The Old Economy fails us because it concentrates power in unaccountable corporations and financial markets that value money more than life. Here are seven critical sources of Old Economy failure—each paired with its New Economy solution.

1.     Problem: Financial Indicators. The use of financial indicators like gross domestic product (GDP) and the Dow Jones average to assess the performance of the economy gives priority to financial values over life values. This leads to the sacrifice of human, community and natural health to make money for people who already have more than they need.

Solution: Living Indicators. Optimize sustainable human well-being by evaluating economic performance against indicators of human- and natural-systems health. The Bhutan experiment with a happiness index is an excellent start.

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Exploring elements of Wall Street’s moral perversion.

As part of the New Economy 2.0 series

By David Korten

We humans are living out an epic morality play. For millennia humanity’s most celebrated spiritual teachers have taught society works best and we all enjoy our greatest joy and fulfillment when we share, cooperate and are honest in our dealings with one another.

For the past few decades this truth has been aggressively challenged by a faith called market fundamentalism – an immoral and counter-factual economic ideology that has assumed the status of a modern state religion. Its believers worship the God of money. Stock exchanges and global banks are their temples. They proclaim everyone does best when we each seek to maximize our individual financial gain without regard to the consequences for others.

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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!

Out with the old, in with the new.

By David Korten

In his recent State of the Union address, President Obama emphasized the global competition for jobs. He pointed to the example of China and India educating their children “earlier and longer, with greater emphasis on math and science.” He brought both Republicans and Democrats to their feet to applaud his call for America to “out-innovate, out-educate and out-build the rest of the world.”

It was a politically unifying moment—and one that revealed how badly we have lost our way as a nation, not to mention how far our national economic and political institutions are from providing the leadership that we, and the world, now need.

A global competition for survival and dominance has given us a world divided between the profligate and desperate. It leads to the expropriation of ever more of the world’s real wealth to secure the privilege and extravagance of the few. Rededicating ourselves to this destructive path is not likely to produce a different result.

Hope for our common human future depends instead on global cooperation to create a world in which every child can look forward to a prosperous, secure and meaningful life irrespective of nationality, race or religion. This will require replacing economic policies and institutions responsible for Old Economy failure with policies and institutions of a New Economy—one based on positive life-values and a democratic distribution of power.

The following are seven critical sources of Old Economy failure—each paired with its New Economy solution.

1. Living Indicators. The use of financial indicators like gross domestic product (GDP) and the Dow Jones average to assess the performance of the economy gives priority to false values. We currently see just how invalid these financial measures are: GDP grows, but jobs don’t. The Dow Jones climbs, but wages are stagnant and foreclosures continue. Neither is a valid measure of the kind of economic performance we need.

Replace financial indicators like GDP with indicators of human- and natural-systems health as the basis for evaluating economic performance. The Bhutan experiment with a happiness index is an excellent start.

2. A Real Wealth Money System. Wall Street control of the creation and allocation of money concentrates the power to set national priorities in institutions that recognize no interest beyond their own profits. As we become ever more dependent on money to meet our basic daily needs, this control becomes ever more complete—and more destructive of all that we truly value.

Decentralize and democratize the money system so that it redirects the flow of money away from Wall Street speculators to productive Main Street businesses. We once had a system of community banks, mutual savings and loans and credit unions that were locally rooted and served local needs. But that system has been largely dismantled and transformed into too-big-to-fail Wall Street mega-banks that suck wealth out of communities and depend on government subsidies and protections. There is nothing esoteric about the banking system we must create. It looks a great deal like the system we had before the start of banking deregulation in the 1970s.

3. Equitable Distribution. Wall Street political influence has produced trade, fiscal, workplace and social policies that create ever more extreme inequality by suppressing wages and eroding protections, services and safety nets for those who do productive work to increase profits for the owning class. Aren’t we glad politicians restored tax breaks for the very rich so they could continue to inflate their claims against the real wealth of the rest of us?

Implement fiscal, workplace and social policies that distribute income and ownership equitably. Equitable societies are healthier, happier, more democratic and avoid the excesses of extravagance and desperation.

4. Living Enterprises with Living Owners. An ideology of market fundamentalism has embedded a belief in public culture that the sole purpose and responsibility of a business enterprise is to maximize financial returns to its owners. This belief, combined with a system of absentee ownership and instantaneous trading of corporate shares, encourages short-term over long-term thinking and strips corporate decision making of concern for social and environmental consequences. 

Recognize the primary purpose of any enterprise is to serve the needs of a living community. Favor living enterprises with living, locally rooted owners who have a direct stake in the social and environmental consequences of the firm’s management decisions—people who are looking not for maximum financial return, but for a living return that includes a healthy community and natural environment. This means favoring cooperative, worker- and community-owned enterprises and discouraging the speculative public trading of corporate shares.

5. Real Markets/Real Democracy. The institution of the global corporation is designed to facilitate the creation of global-scale, legally-protected concentrations of economic and political power dedicated to extracting social, environmental and governmental subsidies to advance the exclusive and narrow private interests of financial elites beyond public accountability. This violates the principle of shared and distributed power foundational to democracy and a market economy.

Create real rule-based markets and democracy by breaking up concentrations of corporate power, barring corporations from competing with human beings for political power and implementing rules and incentives that support cost internalization.

6. Local Living Economies. Fragmented local economies dependent on global corporations for jobs and basic goods and services leave people and nature captive to the financial interests of distant institutions that have no concern for their well-being or accountability to their interests.

Pursue local economic development programs that build diversified, self-reliant, energy efficient, democratically self-organizing local economies comprised of locally-owned living enterprises devoted to serving local needs.

7. Supportive Global Rules. Global rules put forward by institutions like the WTO that are largely captive to corporate interests circumvent institutions of democracy to support the other six Old Economy dysfunctions.

Restructure global rules and institutions to honor and serve life values and local control.

Leadership in framing and popularizing a vision for a New Economy must come from We the People. We are the one’s we’re waiting for.

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).

Talkback Readers: Give us your thoughts on the 7 steps – or add others you would like to see. Share your vision on Talkback!