CHAPTER 1
LOOKING UPSTREAM
A man was standing beside a stream when he saw a baby struggling in the water. Without a thought he jumped in and saved it. No sooner had he placed it gently on the shore than he saw another and jumped in to save it, then another and another. Totally focused on saving babies, he never thought to look upstream to answer the obvious question: Where were the babies coming from, and how did they get in the water?
ANONYMOUS
Our economic system has failed in every dimension: financial, environmental, and social. Moreover, the current financial collapse provides an incontestable demonstration that it is unable to self-correct.
Bloomberg News estimated in March 2009 that total federal bank bailout commitments and guarantees topped $12.8 trillion, nearly the equivalent of the total U.S. GDP.1 Yet private bank credit still wasn’t flowing into the real economy more than a year later.
The Bush administration’s response to the financial crisis focused on bailing out the Wall Street institutions that bore primary responsibility for creating the crisis; its hope was that if the government picked up enough of those institutions’ losses and toxic assets, the banks might decide to open the tap and get credit flowing again. It did not happen, because Wall Street is not in the business of financing the real economy.
The failure of the credit system is only one manifestation of a failed economic system that is wildly out of balance with, and devastatingly harmful to, both humans and the natural environment.
Wages are falling in the face of volatile food and energy prices. Consumer debt, housing foreclosures, and executive pay are setting historic records. The middle class is shrinking. The unconscionable and growing worldwide gap between rich and poor, with its related alienation, is eroding the social fabric to the point of fueling terrorism, genocide, and other violent criminal activity.
At the same time, excessive consumption is pushing Earth’s ecosystems into collapse. Climate change and the related increase in droughts, floods, and wildfires are serious threats. Scientists are in almost universal agreement that human activity bears substantial responsibility. We face severe water shortages, the erosion of topsoil, the loss of species, and the end of the fossil fuel subsidy. In each instance, a failed economic system that takes no account of the social and environmental costs of monetary profits bears major responsibility.
Spending trillions of dollars in an effort to restore a failed system to normal function is a reckless waste of time and resources and, in the absence of action to replace the failed system, is the greatest misuse of federal government credit in history. The more intelligent course is to acknowledge the failure and to set about redesigning our economic system from the bottom up to align with the realities and opportunities of the twenty-first century.
We face a monumental economic challenge that goes far beyond anything being discussed by the administration, the U.S. Congress, or the corporate press.
Hope that an Obama administration would take serious action to rein in Wall Street in favor of Main Street began to die even before he took office, when he announced his initial picks for the country’s top economic posts. That hope continued to fall, along with President Obama’s poll numbers, as he backed off from pushing essential Wall Street reforms. Even the Obama administration’s $787 billion economic stimulus package did nothing to address the deeper structural causes of our. nancial, social, and environmental crisis.
The failure of the phantom-wealth casino economy is evident in:
1. An economic crisis created by an unstable global financial system that favors speculation in asset bubbles over investment in the production of beneficial goods and services, drives continuing cycles of boom and bust, mires people and governments in debts they cannot pay, and holds national governments hostage to the interests of global financiers concerned only with maximizing their own profits.
2. A social crisis of extreme and growing inequality within and among nations created by a focus on maximizing returns to money — which means to the people who already have the most money. A tiny minority of executives and financiers experience soaring incomes and accumulate grand fortunes at the expense of working people whose wages are largely stagnant or falling relative to the cost of living. The enormous disparities undermine institutional legitimacy, human health, and the social fabric of families and communities and thereby feed violence.
3. An environmental crisis of climate chaos, loss of fertile soil, shortages of clean freshwater, disappearing forests, and collapsing fisheries created by an economic system prone to collapse if excessive forms of consumption do not continuously grow. This crisis is reducing Earth’s capacity to support life and is creating large-scale human displacement and hardship that further fuel social breakdowns.
On the positive side, however, the financial crisis has put to rest the myths that our economic institutions are sound and that markets work best when deregulated. This opens a window of opportunity to initiate a national conversation about what we can and must do to create an economic system that can work for all people for all time. That window will remain open for as long as the nation remains mired in unemployment, housing foreclosures, and unpayable debts — which in the absence of action to implement the New Economy agenda spelled out in part IV, is likely to be a very long time.
REAL WEALTH/LIVING WEALTH
Real wealth has intrinsic value, as contrasted to exchange value. Life, not money, is the measure of real-wealth value. Examples include land, labor, knowledge, and physical infrastructure.
The most important forms of wealth are beyond price and are unavailable for market purchase. These include healthy, happy children, loving families, caring communities, and a beautiful, healthy, natural environment.
Real wealth also includes all the many things of intrinsic artistic, spiritual, or utilitarian value that are essential to maintaining the various forms of living wealth. These may or may not have a market price. They include healthful food, fertile land, pure water, clean air, caring relationships and loving parents, education, health care, fulfilling opportunities for service, and time for meditation and spiritual reflection. For most purposes, real wealth is living wealth, and living wealth is real wealth. Money is neither.
TREAT THE SYSTEM, NOT THE SYMPTOM
As a student in business school, I learned a basic rule of effective problem solving that has shaped much of my professional life. Our professors constantly admonished us to “look at the big picture.” Treat the visible problem — a defective product or an underperforming employee — as the symptom of a deeper system failure. Look upstream to find the source of the problem and correct the system so the problem will not recur. It is perhaps the most important lesson I learned in more than twenty-six years of formal education.
Because of the essential role of caring relationships, the monetization and commodification of real wealth, which generally translates into the monetization and commodification of relationships, tends to diminish their real value. The monetization and commodification of relationships does, however, translate into growth in the gross domestic product and new opportunities for corporate profits. Replacing parental caregivers with paid child care workers is an example.
In contrast to a phantom-wealth economy, money in a real-wealth or living economy is not used as a measure or a storehouse of value but solely as a convenient medium of exchange. A phantom-wealth economy seeks to monetize and commodify relationships to increase dependence on money; a real-wealth economy favors strengthening relationships based on mutual caring to reduce dependence on money.
Many years after I left academia, an observation by a wise Canadian friend and colleague, Tim Brodhead, reminded me of this lesson when he explained why most efforts fail to end poverty. “They stop at treating the symptoms of poverty, such as hunger and poor health, with food programs and clinics, without ever asking the obvious question: Why do a few people enjoy effortless abundance while billions of others who work far harder experience extreme deprivation?” He summed it up with this simple statement: “If you act to correct a problem without a theory about its cause, you inevitably treat only the symptoms.” It is the same lesson my business professors were drumming into my brain many years earlier.
I was trained to apply this lesson within the confines of the business enterprise. Tim’s observation made me realize that I had been applying it in my work as a development professional in Africa, Asia, and Latin America. For years, I had been asking the question: What is the underlying cause of persistent poverty? Eventually, I came to realize that poverty is not the only significant unsolved human problem, and I enlarged the question to ask: Why is our economic system consigning billions of people to degrading poverty, destroying Earth’s ecosystem, and tearing up the social fabric of civilized community? How must that system and the institutions it comprises change if we are to have a world that works for all people and the whole of life?
Pleading with people to do the right thing is not going to get us where we need to go so long as we have a culture that celebrates, and institutions that reward, the destructive behaviors we must now put behind us. It is so much more sensible to direct our attention to making the right thing easy and pleasurable by working together to create a culture that celebrates positive values and to foster institutions that reward positive behavior.
Also called illusory wealth, this is wealth that appears or disappears as if by magic. The term generally denotes money created by accounting entries or the inflation of asset bubbles unrelated to the creation of anything of real value or utility. The high-tech-stock and housing bubbles are examples.
Phantom wealth also includes financial assets created by debt pyramids in which financial institutions engage in complex trading and lending schemes using fictitious or overvalued assets as collateral for loans in order to feed and inflate asset bubbles to create more phantom collateral to support more borrowing to further feed the bubble to justify outsized management fees.
Those engaged in creating phantom wealth collect handsome “performance” fees for their services at each step and walk away with their gains. When the bubble bursts, borrowers default on debts they cannot pay and the debt pyramid collapses, along with the bubble, in a cascade of bankruptcies.
Those who had no part in creating or profiting from the scam are then left to absorb the losses and to sort out the phantom-wealth claims still held by the perpetrators against the marketable real wealth of the larger society. It is all legal, which makes it a perfect crime.
WORSE THAN NO THEORY
What my wise colleague did not mention is that placing too much faith in a “bad” theory or story, one that offers incorrect explanations, may be even worse than acting with no theory at all. A bad theory can lead us to false solutions that amplify the actions that caused the problem in the first place. Indeed, a bad theory or story can lead whole societies to persist in self-destructive behavior to the point of self-extinction.
The cultural historian Jared Diamond tells of the Viking colony on the coast of Greenland that perished of hunger next to waters abundant with fish; it had a cultural theory, or story, that eating fish was not “civilized.”2 On a much larger scale, the human future is now in question and the cause can be traced, in part, to economic theories that serve the narrow interests of a few and result in devastating consequences for all.
As we are perplexed by the behavior of the Vikings who perished because of their unwillingness to give up an obviously foolish theory, so future generations may be perplexed by our foolish embrace of some absurd theories of our own, including the theory that financial speculation and the inflation of financial bubbles create real wealth and make us richer. No need to be concerned that we are trashing Earth’s life support system and destroying the social bonds of family and community, because eventually, or so the theory goes, we will have enough money to heal the environment and end poverty.
This theory led to economic policies that for decades served to create a mirage of phantom wealth that vanished before our eyes as the subprime mortgage crisis unfolded. It also led us to give control of our political and economic systems to institutions devoted to creating phantom wealth for the exclusive private benefit of their most powerful players.
Even with Wall Street’s dramatic demonstration that we were chasing a phantom, most observers have yet to acknowledge that the financial speculation was not creating wealth at all. Rather it was merely increasing the claims of financial speculators on the shrinking pool of everyone else’s real wealth.
A NEW STORY FOR A NEW ECONOMY
A theory, of course, is nothing more than a fancy name for a story that presumes to explain how things work. It is now commonly acknowledged that we humans are on a course of self-destruction. Climate chaos, the end of cheap oil, collapsing fisheries, dead rivers, falling water tables, terrorism, genocidal wars, financial collapse, species extinction, thirty thousand child deaths daily from poverty — and, in the richest country in the world, millions squeezed out of the middle class — are all evidence of the monumental failure of our existing cultural stories and the institutions to which they give rise. We have good reason to fear for our future.
At first, each of the many disasters that confront us appears distinct. In fact, they all have a common origin that our feeble “solutions” fail to address for lack of an adequate theory. Agenda for a New Economy is a big-picture story, or theory, of where we went wrong in the design of our economic institutions and what we can do about it. We do, in fact, have the means to create an economic system that takes life as its defining value and fulfills six criteria of true economic health. Such a system would
1. provide every person with the opportunity for a healthy, dignified, and fulfilling life;
2. restore and maintain the vitality of Earth’s natural systems;
3. nurture the relationships of strong, caring communities;
4. encourage economic cooperation in service to the public interest and democratically determined priorities;
5. allocate resources equitably to socially and environmentally beneficial uses; and
6. root economic power in people- and place-based communities to support the democratic ideal of one-person, one-vote citizen sovereignty.
A BOOK FOR THOSE LOOKING UPSTREAM
Agenda for a New Economy is a book for people who are looking upstream, not to place blame, but to find real solutions that fulfill a shared human dream of a world that works for all in perpetuity. At its core, it is about the cultural stories that shape our collective values and the institutional systems that shape our relationships with one another and with Earth. The relevance is global, but the primary focus is on the United States because U.S. economic values and institutions are somewhat distinctive and have a powerful global influence.
The justified public outrage against the breathtaking excesses of Wall Street creates an opportunity to mobilize political support for a New Economy that shifts our economic priorities from making money for rich people to creating better lives for all and that reallocates our economic resources from destructive, or merely wasteful, uses to beneficial ones.
To create an economic system that works for all, we need a different design grounded in different values and a different understanding of wealth, our human nature, and the sources of human happiness and well-being. The basic design elements of the New Economy we seek are known, as I will elaborate in subsequent chapters.
We face an urgent need for a national and international discourse on economic policy choices that support a bottom-to-top structural transformation of the economy to strengthen community and reallocate resources to where they best serve. I have written Agenda for a New Economy as a contribution to this discourse. I hope you will be encouraged to engage your friends, colleagues, community, and media contacts in discussion about the foundational economic policy choices at hand and will find this book a useful tool.