Introduction to Complementary Economics


Arthur Warmoth, Ph.D.

Sonoma State University

Skaggs Island Foundation

Copyright © 2005





The Epistemology of Economics


Economics is the universal language of the integrated global economy of the postmodern world.


            The purpose of economic systems is the satisfaction of human needs and desires (to maximize human wealth and well being).


            The essence of economics systems is mapping ecologies (social and natural) onto accounting systems.


            The mission of economics as a social science is to explore the structure and dynamics of economic systems so that they can be redesigned to maximize human happiness (human wealth and well being)


In my view, the most central concepts of complementary economics are simple:


· On the financial/monetary institutions/accounting side of the equation, we need to look at what money is, not just at what it does:  Money should be created as a public utility supported by a service charge, not as a commodity funded by interest.


· On the ecology of real wealth side, we need to look at institutional and ecological arrangements for constructing sustainable local economies, with global commerce as the icing on the cake:  We need to look at the economics of assets, not just the economics of trade.


Five Basic Principles of Complementary Economics


1.  Money is an agreement, not a thing.


“Money is an agreement, within a community, to use something as a means of payment.”  (Bernard Lietaer, The Future of Money, 2001, p. 41) 


It should be noted that the “something” needs to be countable, and that “means of payment” is one of the two major functions of money generally recognized by economists: money serves as a medium of exchange. This definition describes the function of money at all times and places


There is a second conventionally recognized function of money: a store of value.


Thus money is actually an agreement by a community to use a unit of account as either or both a medium of exchange and a store of value.  If that unit of account is “something,” then the currency is “backed.”


2.  The purpose of economic institutions is the efficient, sustainable satisfaction of the full range of human needs


The function of economic systems is to enhance human wealth and well-being while managing the interface between human and ecological systems.  Abraham Maslow’s hierarchy of needs (Motivation and Personality, 1954) offers a useful schematic model of the full range of human needs:


·      Physiological needs

·      Safety needs

·      Love & belongingness needs

·      Need for esteem and self-esteem

·      Need for self-actualization


Maslow and others have also postulated a transpersonal or spiritual realm of various higher needs, including truth, beauty, justice, and transcendence.  The conventional economics of commodities and markets deals only with the lower levels of human needs that are addressed by material consumption, making greed the only path to security and self-esteem.  Complementary economics deals also with the economics of higher needs, including the economics of the “commons” which includes both social and natural resources.  Thus complementary economics recognizes that the economic systems needed to satisfy different levels of the hierarchy of need may operate according to different system properties in which the price-auction market may play only a partial or limited role.                     


3.  Accounting systems must be based on a close relationship to the ecology of real wealth in real time.


The tendency of contemporary corporations to create wealth by manipulating legal and accounting systems, rather than by producing real wealth in real time, was labeled “paper entrepreneurialism” by Robert B. Reich (in The Next American Frontier, 1983).  Fueled by the seductive complexifying power of information technology, this trend culminated in the financial scandals of Enron, Arthur Anderson, Global Crossing, K-Mart, Tyco, Merrill Lynch, Adelphia, WorldCom, and AOL-Time Warner.  Those members of the middle class who saw their 401(k)s evaporate in this fiscal trainwreck—and those of us who are concerned about the future of our investments—might well look to alternative investment models such as microlending, stakeholder ownership (Jeff Gates, The Ownership Solution, 1998), and Natural Capitalism (Paul Hawken, Amory & L Hunter Lovins, 1999).


4.  Human resources are relatively more abundant than natural resources in relation to their utility in satisfying human needs; therefore the economics of human labor should be an economics of abundance, not an economics of scarcity.


Chronic social problems such as education, health care, and social services for the working poor primarily require the mobilization of local human resources to solve.  This would “prime the pump” in the current stagnant economy as well as contributing to the sustainability of local economies, making them more recession-resistant.  To do this means investing more in education and less in paramilitary social control.


5.  The economics of price-auction markets, which is suitable for goods and services that can be produced and consumed by individuals, requires a complementary “economics of the commons,” which includes all resources, goods, services, and assets that must be produced and/or consumed (used), at least in part, collectively.


“The commons” includes all social system and ecological system assets essential to, or useful for, human wealth and well-being that cannot be produced and/or distributed to individuals operating in price auction markets.  Today we find that most aspects of the commons, ranging from the integrity of the environment to the social fabric of our communities, are in a state of crisis.  This is because we simply do not know how to think about the economics of these critical systems, including elements of the commons such as politics, health care, education, public safety, retirement security, employment security, energy, transportation, environmental quality, land use, affordable housing, and culture and the arts.


Complementary Economics & Sustainable Economies


"Complementary economics" deals with those areas of economics that are ignored or inadequately understood by conventional economics (and economists), which is essentially the economics of markets, of manufacturing and trade.  Conventional economics pays insufficient attention to the question of the nature of money as such.  Furthermore, it ignores or provides a distorted image of a large arena of economic activity that cannot be traded in markets.  This economic arena is sometimes referred to as public goods and services.  However, there is no widely accepted term to refer to these collectively consumed goods and services, as well as our collectively held assets.  Recently some commentators have begun to refer to this economic arena as "the commons."


The creation of sustainable economies requires creating economic theory that deals with the economics of public goods and assets as fully and robustly as price-auction market economics deals with the economics of private production and trade.  The key elements of complementary economics are:


1.  Complementary currencies (Bernard Lietaer, Thomas H. Greco, Jr.)


2.  Investment in sustainable bioregional and city-regional economies,

2.1. Stakeholder ownership, microinvestment (Jeff Gates, Grameen Bank)

2.2. Ecological Economics, "Natural Capitalism") (Paul Hawken, Amory  and L. Hunter Lovins; Lester Brown)


3.  Economics of the Commons:  A comprehensive systems model of the social and ecological commons that will support the mobilization of regional human and natural resources to solve social problems, and will provide sustainable models for funding social and environmental services by integrating philanthropy, tax reform, and the management of the government services and nonprofit sectors. (Jonathan Rowe)


These three elements offer progressively more complicated stages in a strategy to address our current economic and fiscal crisis by creating recession-resistant regional economies.  From a public policy perspective, the most fundamental conclusion of complementary economics is the need to shift the basis of our public and personal planning for economic security from unsustainable growth based on the control and exploitation of energy and other natural resources to sustainable regional economies based on the optimal utilization of human resources.


            There is nothing wrong with growth as such.  However, sustainable growth is not possible if it is based primarily on the exploitation of natural resources.  Furthermore, it is not possible within the institutional architecture of contemporary global capitalism.  Trickle down effects will never be adequate (particularly in the context of the political trend away from progressive taxation), and the expectation of compound interest creates unsustainable expectations for fiscal performance on the part of corporations and financial services institutions.


            Sustainable regional economies do not preclude the importance of global trade in manufactured goods and natural resources.  Adam Smith's theory of the differential productivity of regions and nations is valid within the domain of trade goods, and all regions are not equally endowed with natural resources.  However, most of our chronically unsolved social problems, including education, health care, social welfare, public safety, and environmental stewardship primarily require the mobilization of human resources at the local and regional level.  The core strategies for mobilizing human resources are education and participatory democratic politics.  The primary focus of complementary economics is on the redesign of economic systems and institutions so that they support sustainable, education-based economic development.


It is important to note that "the commons" should not be equated with what conventional economists often mean by "public goods." The commons is a much larger concept that includes public goods (which is why we need a new vocabulary). The commons includes the ecological commons that makes life possible, the gene pool that underwrites our adaptation as social primates (the behavior that Maslow called "instinctoid, and which is of particular interest to sociobiologists), and the cultural commons, which is all of those useful social arrangements that are managed by tradition.

However, when the commons gets into trouble and therefore requires our conscious attention, it becomes a matter of political economy. That is, it becomes grist for political processes and economic theory. 



Say's Law and the Macroeconomic Tautology

Economic theorists generally recognize two functions of money:

1. A medium of exchange
2. A store of value

However, the second is implicit in the first and third, and the last two are characteristics only of specific monetary systems, including modern national currencies.] Modern monetary, banking, and financial services institutions are designed to serve both functions. This has many advantages, but also some significant disadvantages. The latter will be discussed below. However, before discussing modern money and its alternatives, it is useful to look at an additional corollary of the social psychological character of money: Say's Law. Money is nothing if not logical, and Jean Baptiste Say (1767-1832) recognized the logic inherent in the fact that every expenditure by one individual is another's income. This is more than an empirical observation; it is a logical tautology. It necessarily follows from the conceptual design of a "medium of exchange." This tautology is the starting point for John Maynard Keynes' analysis of the business cycle in The General Theory of Employment, Interest, and Money (1935).

The nub of Keynes' theory of the business cycle is the difficulty that can arise when we attempt to shift money from its primary function as a medium of exchange to its other function as a store of value. We will examine the multitude of ways this translation can get us into trouble below. However, the problem identified by Keynes was the fact that when the aggregate intention to save significantly exceeds the aggregate intention to invest, the liquidity necessary to lubricate the normal transactions of daily business dries up. In order to understand this argument, it is useful to look at the basic economic equation that derives from Say's tautology, which is outlined in Figure 1.


Income = Expense

W + S + T = C + I + G

Wages (income to the factors of production) = Consumption (purchases)
(This part of the equation is Say's Law)

Savings = Investment

Taxes = Government spending

Figure 1. The Macroeconomic Tautology

Adam Smith understood that if money is being used only as a medium of exchange, a price auction market will clear itself based on the balance of supply and demand. In the process, it will send signals to producers about the desirability of adjusting the mix of goods and services being produced by increasing the production of some and decreasing the production of others. Under the conditions of free and open exchange among individuals, where market information is readily available, the market is a very efficient mechanism.

However, when we introduce the use of money (and financial instruments) as a store of value, the simple form of Say's tautology no longer applies. Many of the systemic problems of modern economies can be accounted for by the slipping and sliding that goes on in the transfer of money from the first (exchange) to the second (savings) function. And the situation is further complicated by the ability of governments to manipulate their income and expenditures at the macroeconomic level (by printing money, engaging in deficit spending, etc.). The logic of economic systems design requires that all three elements of the macroeconomic equation be in balance. In the real world, they often are not, and that leads to predictable systems problems that are associated with each of the elements of the basic tautology:


1. The liquidity (currency) problem

2. The savings-investment (asset) problem

3. The "problem of the commons" (public goods)


Adequate solutions to the problems in each of these areas will require more than he application of simple minded economic nostrums. They require rethinking and reinventing deep structural aspects of our economic thinking and economic institutions.  The first and third problems were explored in Part I.  We now turn our attention to the savings-investment problem


The Savings-Investment (Asset) Problem

The foundation of a healthy economy modern economy is adequate savings and sustainable investment. The fundamental logic of capitalism argues for the efficiency of private property as encouraging stewardship and for the social utility of creative, entrepreneurial investment. This logic is not inherently undemocratic. However, there are design flaws in the contemporary mechanisms for implementing the capitalist ideal that render it undemocratic and vulnerable to the cycle of boom and bust. These flaws include the basic weaknesses in the design of our specific interest-based monetary system outlined above. But they also include problems in the financial mechanisms and institutions that implement the savings-investment process.

Keynes' elegant analysis of the problem of the business cycle focuses on the imbalance between the aggregate intention save and the aggregate intention to invest. Keynes understood that for the economy to keep humming along, all three components must be in balance. What happens, however, if the intention to save exceeds the intention to invest--S>I--because of a lack of profitable investment opportunities, a climate of economic insecurity, etc.? Because the expenditures of investors and government are the incomes of workers and households that consume, save, and pay taxes, when savings stop being translated into spending for investment and instead become passive ledger entries, the economy slows down. Workers with limited savings must use them for consumption in order to survive, and when those are gone, the absence of sufficient currency to enable possible transactions keeps those transactions from happening. The level of real savings declines, while those who can afford to hold onto financial assets are able to increase their concentration of control over assets (real estate, stock shares, etc.), even though the cash value of their financial portfolio may decline. If they are holding onto assets, the value of those assets will increase when the economy recovers.

Keynes remedy was to increase government spending in order to take up this slack. Government spending (preferably for public investment) has the effect of borrowing inactive assets at zero interest. If the compensatory government spending is reduced as passive assets become active, there is no need to formally borrow the funds--a point overlooked by many Keynesians. To avoid inflation, government initiated funds need to be recovered through taxation as private spending comes online. However, it is well to remember that although the Roosevelt administration adopted a policy of Keynesian deficit spending, it turned out that only military spending of the scale of World War II was able to overcome the Great Depression.

A key element of Keynesian economics is the principle that when money is shifted from the first function to the second, it must reenter the economy as active investment if economic slowdown (a shortage of liquidity) is to be avoided. In terms of macroeconomic formula, S(avings) = I(nvestment).

Another way of describing this shift of intention on the part of the holder of currency is to say that it is being treated as an asset, rather than as purchasing power. In order to avoid a shrinkage in liquidity in the current market, the cash value of the savings must be translated into a physical asset (e.g. real estate, objets d'art, tools, etc.), with the assumption that the seller, or a cycle of sellers, will use the income for consumption purchases within a reasonable time frame, or into a financial asset (stocks, bonds, or other instrument) designed to put the liquidity to use in an active process of economic investment/development).

The process of converting savings into investments is the source of several major problems that must be solved if capitalism is to become effectively democratic:

1) The problem of access to investment capital

2) The problem of the concentration of the ownership of assets

3) The problem of the need for endless economic growth (or of the inevitability of the boom-bust business cycle).

4) The problem of unproductive investment and excessive speculation ("paper entrepreneurialism," Reich, 1983).

The first three problems result from overlaying the banker's assumption of guaranteed compound interests on top of the logic of private property and creative investment. The last is a function of the fact that the relative complexity of the system encourages the clever to devise clever ways to accumulate wealth -- to exploit the system -- at the expense of other individuals and of the common good.

1. The problem of access to investment capital. The basic concept of investment is simple: Instead of consuming all of today's resources, use some of them to create tools that will lead to greater productivity -- hence to greater wealth -- in the future. However, in order to participate in the financial investment process one must have access to financial capital. Most players in the contemporary global economy do not have such access. To a certain extent, this is part of the general problem of liquidity. Lietaer's analysis of the potential of complementary currencies suggests that they could contribute to the solution of this aspect of the problem. However, complementary currencies are usually designed to serve primarily as a medium of exchange and to be somewhat insulated from the potential ravages of speculative investment. Therefore, additional modifications are needed in the institutional arrangements that translate savings into investment.

Many of today's instruments for converting savings into investment require that the risk be secured not only by the assets to be created but more basically by already existing assets. Others require that the potential return greatly exceed the return on risk-free interest-bearing securities (such as federally insured bank deposits). Both of these requirements tend to exclude a potentially quite profitable arena of small scale investment.

One solution to this problem is the institution of micro-banking originated in 1974 by Muhammed Yunis in Bangladesh. Recognizing that small loans could make a huge difference in the productivity of poor workers, Yunis began making loans as small as $25. In the process he discovered that the poor are actually excellent credit risks, and his bank has become profitable enough to permit him to expand into other ventures. He obtained permission to form his own Grameen Bank, which today serves 2.4 million families. It has a 98% repayment rate, and half of its clients have been able to raise themselves out of poverty. It has contributed substantially to agricultural self-sufficiency, to improving the status of women (who are its principal customers), and to promoting the values of education and smaller families. ("Banking on People", 2001) Less radical versions embodying similar principles, if on a less grass roots scale, include co-ops and government agricultural banks. All of these institutions are designed to realize the potential economic and social return on efficient small scale investment. The effective democratization of capitalism will require creating a much larger population of grass roots capitalists.

2. The problem of the concentration of the ownership of assets. In the eyes of San Francisco investment banker Louis Kelso (Kelso & Adler, 1858), the concentration of ownership is the Achilles' heel of capitalism. Excessive concentration of wealth can lead to social unrest and a pervading sense of social injustice. It can also lead to diminishing markets as a result of diminished purchasing power. This problem is compounded by automation, which has been hyperaccelerated by the information processing revolution. Conventional wisdom argues that jobs lost in one area will sooner or later be replaced by new ones in another. This worked during the era of Henry Ford capitalism, where Ford saw the wisdom of paying his workers enough to be able to buy his cars. It is also works when economic growth is on a scale that permits both the concentration of wealth and the employment of a growing labor force. However, in Kelso's view, this assumption has limits. A capitalism designed to systematically replace workers with machines runs the risk of creating a situation in which fewer workers have the means to purchase the output of the productive plant. This problem is underscored by Lietaer's observation that

The harsh reality is that the post-industrial economy does not need -- and therefore cannot and will not provide --jobs for the six billion people on the planet today, not to speak of the eight billion forecast for 2019. Jobless growth for major corporations worldwide is not a forecast but an established trend. The extent to which the writing is on the wall can be comprehended from the statistic quoted by William Greider: the world's 500 largest corporations have managed to increase their production and sales by 700% over the past 20 years, while at the same time reducing their total workforce. (2001, pp. 11-12)

Lietaer's solution is complementary currencies that permit cycles of economic activity in a social sector operating outside of the market for manufactured (especially high tech) goods. Kelso's solution is to promote worker ownership of the means of production, particularly through the device of the Employee Stock Option (ESOP), and idea that was heavily promoted by Louisiana Senator Russell Long. The ESOP and other recent experiments in the democratization of ownership are reviewed in Jeff Gates book The Ownership Solution (1988). (An earlier work with useful and well-detailed ideas for both the individual and collective democratizing of ownership is Shann Turnbull's Democratising the Wealth of Nations, 1975).

Gates documents the increasing concentration of the ownership of assets.  For example,

Gates also points out that the existing institutional arrangements for financing business investment will inevitably continue this process of concentration: capitalism is not designed to create more capitalists; it is designed to finance more capital for existing capitalists" (Gates, 1998, p. 22; original italics). He further goes on to argue that employable skills are not the only legitimate way to exercise a stake in the economy. The stewardship responsibilities associated with ownership are an equally legitimate claim. As Louis Kelso observed, ownership claims become an increasingly important source of economic stakeholdership as many economic goods, particularly manufactured goods, are increasingly produced primarily by capital intensive technology. (Marx understood this as the congealed labor of previous generations of workers. Henry Ford understood that production needs to create not only products but also customers.) Broadening the base of capital ownership is an effective way to assure economic security for an aging population, as well as providing for a broader spectrum of feedback into critical corporate decision making processes. Continued concentration of ownership is certain, sooner or later, to provoke unpredictable and destabilizing reactions.

In addition to promoting economic security, broadening the ownership base of corporations and creating mechanisms for more effective shareholder participation in critical decision-making process could improve the quality of social and environmental feedback in corporate governance. Shareholder interests go beyond short term financial returns to reflect their interests and family and community members who have long term as well as short term interests. A primary purpose of broadening ownership and fostering active shareholder responsibility for corporate stewardship would be to broaden the horizons of corporate decisions to emphasize social and ecological concerns that extend beyond the next quarter's bottom line. Gates is for a capitalism that moves beyond efficiency defined only by short term profits to more comprehensive models of organizational effectiveness that include the measurement of complex factors more difficult to quantify that economic profits but not impossible to measure and include in more comprehensive models of accountability.

Gates proposes a variety of mechanisms for democratizing asset ownership primarily by broadening the distribution of new wealth, rather than by distributing existing wealth. Employee stock ownership plans (ESOPs) are a well established mechanism, although the problems revealed in the collapse of Enron and other companies with large quantities of employees stock ownership suggest that management integrity and full disclosure of risks are important factors in protecting the interests of employee-owners. However related enterprise ownership (RESOPs), suppliers, customers, and depositors are all potential owner-stakeholders who offer the possibility for productive feedback relationships. The fact that many employees already own stock managed by institutional investors through their pension plans and mutual funds provide another basis for expanding corporate responsibility through the active assertion of ownership claims.

Workers, managers, shareholders, and citizens all have a stake in the increased organizational effectiveness and sustainability that could be realized by the more complex and effective feedback systems that could result from empowering a broader constituency of capitalist owners. Catherine Austin Fitts' Solari (2002) is a particularly well thought our model for community-based regional investment. Her model reflects her astute analysis of the unsustainable character of contemporary conventional capitalism. However, realizing the benefits of democratic ownership will require a significant investment in public education, as well in as creating innovative organizational structures.

The good news and the bad news is that the trend away from defined benefit and toward defined contribution pension plans, along with the probably partial privatization of Social Security, creates a strong incentive for the public to educate itself about these matters. It also creates strong competitive incentives for financial services institutions to use technology to reduce the transaction cost for investment transactions and to lower the cost of information about sound, socially equitable, and ecologically sustainable investment opportunities. These shifts may finally auger the arrival of the "pension fund socialism" predicted by Peter Drucker in 1976.

Another potentially useful approach is democratizing the ownership of natural resources (a principle which is enshrined in the Mexican Constitution, though not very effectively implemented). The 19th century economic philosopher Henry George (1879/1979) proposed that the elimination of poverty and the adequate provision of public services could be accomplished by taxing the value of real estate (exclusive of the improvements thereon, in contrast to the methodology of most current U.S. property taxes). George argues that the value of land resides in its character as a God given natural resource, enhanced by the value of the collective human economic activity that is carried out upon it. For example, the value of the land under San Francisco's Transamerica Pyramid is created by the economic dynamism of the city. The primary rationale for private ownership of real estate is effective stewardship, which is manifest in improvements on the land. However, the value of the land itself is created primarily the value created by individuals acting in concert as a community. Therefore, it is reasonable and proper for the community to appropriate some of this collectively created value for its collective purposes. This was the basis for George's proposal for a "single tax" on land values.

3) The problem of the need for endless economic growth (or of the inevitability of the boom-bust business cycle). Investment and development do not need to buy into the infinite exponential growth curved assumed by the design of conventional currency. The expectations created by the convention of interest require continuous economic growth in order to avoid collapse and widespread bankruptcy, regardless of what else may be going on in the economy. This problem is further complicated by the fact that, as noted above, with debt-based fiat currencies (that is, all conventional national currencies) the money to pay the interest on the money-creating loans is never created. And it is further complicated by the convention of compound interest, which makes the growth requirement exponential. (Every student of ecology knows that where exponential growth occurs, it is a particular phase of the evolutionary cycle that is impossible to sustain indefinitely.)

These impossible to fulfill assumptions of conventional economics and business practice make a "boom and bust" cycle inevitable. Some might argue that this is simply the "creative destruction" inherent in capitalism. However, competitive markets in themselves are sufficient to assure an adequate rate of creative destruction without the destabilizing and asset concentrating effects built into the convention of compound interest.

4) The problem of unproductive investment and excessive speculation. The complexity of modern economies has encouraged the institutionalization of a variety of forms of unproductive speculation and manipulation that permit some -- particularly those well educated in the intricacies of our financial institutions -- to accumulate wealth at the expense of others less fortunate. The Manichean worldview of the radical left would simply label this "exploitation." However, the liberal economist Robert B. Reich (1983) has come up with the kinder, and perhaps even more accurate, label "paper entrepreneurialism." This does not mean that all speculation is unproductive. A certain amount of institutionalized and legitimized gambling in financial markets can contribute flexibility, liquidity, and risk management to the operation of the economic system. However, the contemporary situation appears to have the tail wagging the dog, for example Lietaer's observation (cited above) that currently 98% of foreign exchange transactions are speculative, and only 2% relate to real international trade.

The management culture of paper entrepreneurialism involves innovation in "accounting, tax avoidance, financial management, mergers, acquisitions, and litigation" that "involve the manipulation of rules and numbers that in principle represent real assets and products but that in fact generate profits primarily by the cleverness with which they are employed" (Reich, 1983, pp. 140-141).  Reich sees the development of these strategies as an extension of the culture of scientific management. that approach served the economy well during the era of high volume mass production, but Reich believes that it is obsolete in an era of global competition and flexible-system production. Writing in 1983, Reich's concerns included some of the bureaucratic maneuvers characteristic of middle management's attempts to hold onto the past, efforts which have been largely shaken out of the economy by the downsizing frenzy of the intervening decades. (Such unproductive bureaucracy is also to be found in governments, where it is harder to get rid of; this includes a good deal of the self-serving maneuvering of the declining decades of the PRI.) But it also includes a good deal of the high level wheeling and dealing of top management that is still very much in fashion. The core problem remains the fact that a large amount of current economic activity concentrates wealth rather than creating it. While the economies of the industrialized world are so enormous that we can afford quite a lot of this sort of self-indulgence, there are inherent limits in the wastefulness and instability of such a system, which among other things, is characterized by the acceleration and accentuation of the characteristics of national currencies mentioned above: excessive competition, the need for endless growth, foreshortened time horizons for economic planning, and the concentration of wealth.

At the present time, the primary beneficiaries of the technology that promotes the global integration of trade and finance are large global corporations. However, the long term implications of this technology for the economy may turn out to be very different from their short term impact. The primary function of money is managing comparative information about value, and the primary function of economies is the creation and distribution of real goods and services. Therefore, this information processing and communication technology has profound implications for the future design of economic systems. It has already made possible the rapid worldwide expansion of complementary currency systems. However, its long term potential for increasing the efficiency -- the productivity -- of our financial services institutions has barely begun to be explored. Lietaer quotes Citibank CEO John Reed's view that "banking will become a bit of application software on an intelligent network" (p. 69). Perhaps that is also the fate of most of the accountants, brokers, and analysts that today make up an excessively labor intensive industry that is artificially inflated by the ideology of markets.

In his recent book,The Future of Success, Reich (2001) offers the interesting prediction that the increasing efficiency of markets, particularly labor markets, will put strong downward pressure on the value of marketable goods and services. This lowering of the price of marketables shifts many aspects of health, wealth, and family and community well-being into the collective arena discussed below as "the problem of the commons." It seems reasonable to predict that these downward pressure will also eventually apply to the value of financial goods and services.

The Ecology of Bioregional Investment

If the relationship between savings and investment has been sufficiently established, a key insight is that any unit of account can be used in investment agreements (contracts).  The unit of account used to denominate an investment agreement (contract) is basically a wager that the unit chosen will maintain its value.  In the case of a complementary currency such as the Sonoma County CSD, the wager is essentially that the exchange rate between CSDs and $US will continue to be equal (or will favor CSDs).  Given the current management of the U.S. economy, that appears to me to be a good bet.

There appears to be a growing interest in alternative approaches to investment at the regional and local level.  Catherine Austin Fitts’ (2002) has proposed the “Solari” for organizing community-based investment strategies.  Her model is essentially a social structure that puts philosopher kings in charge of making investment decisions for a community of stakeholders.  A Solari is a regional investment trust, and there are two classes of stockholders: Class A stockholders are knowledgeable about the regional economy and make the investment decisions.  Class B stockholder make the financial investment and enjoy the financial returns.

In making regional, community-based investment decisions it is useful to identify three separate domains of investment, each with separate goals and economic system properties.


1.  Investment for economic security; sectors include:


·      Agriculture

·      Housing

·      Energy

·      Monetary & financial institutions


2.  Investment for economic growth; sectors include:


·      Information technology

·      Information management

·      Biotechnology


3.  Investment for “Quality of Life”


·      The key strategy is mobilizing local/regional human resources in order to maintain and grow the social commons.

·      Eventually, progressive taxation at the local level is essential; however, in the meantime, progressive philanthropy can play a key role. (See attached.)

·      Key sectors include:

o      Education

o      Health care

o      Environmental systems management

§       Land use

§       Natural resources use

§       Transportation infrastructure

o      Culture and the Arts

o      Public Administration



The Limits of Prosperity in Sonoma County


The recent release of the New Economy, Working Solutions (NEWS) report ,“The Limits of Prosperity,” was an important event.  Researchers Dan Acland and Nari Rhee thoroughly documented the “hourglass economy” in the North Bay.  Income growth has occurred at the high wage end of the work force and job growth at the low wage end, with middle class job growth remaining stagnant.  Commentators led off by Congresswoman Lynn Woolsey supported the report’s recommendations, which ranged from accountability for job creation in publicly funded projects through affordable housing to support for the organizing efforts of the low wage work force.


However, some further implications of the study should be noted.  The lack of middle class job growth boxes in the low wage work force, which aspires to upward mobility, at least for their children.  But it also impacts middle class workers who send their children to college believing that this is a ticket to a middle class lifestyle.


Furthermore, increasing the minimum wage is not sufficient in itself to provide affordable housing, education, and health care.  Acland and Rhee argued persuasively that the minimum wage can be raised significantly without threatening competitiveness or endangering job creation.  However, these necessities cannot be adequately provided for the middle class, let alone the low wage work force, entirely by the free market.   Public subsidies are needed for these necessities, and we must find better ways to collect the taxes needed to provide them.  The concept of “progressive taxation” was notably missing from the discussion.  The mixed fate of recent parcel tax proposals suggests that there is some willingness on the part of the public to pay for education and perhaps other essential services.  However, parcel and sales taxes are regressive and unfair.  What is needed is the ability to implement progressive taxation at the local level.


Furthermore, we need to consider where good middle class jobs can logically be created in a globalizing information economy.   We need to identify the most likely growth sectors for the foreseeable future.  Since any job that can be outsourced to a cheaper labor market eventually will be, we need to look critically at our hopes for export-based growth.  Unlike high tech manufacturing, high tech engineering probably still has a future in Sonoma County.  Engineers willing to have their creations manufactured in India still prefer to live here.  But engineering mostly creates additional wealth, not additional jobs.  The most robust export industries are currently wineries and tourism.  These industries mainly produce export income and low wage jobs.  But failure to provide an adequate standard of living for the growing low wage work force has quality of life implications for all of us, including creating public health and safety hazards.  For one thing, lack of opportunity encourages the spread of gang activity.


There are some interesting opportunities at the high end of tourism and hospitality, including eco and cultural tourism, and retirement living.  The Green Summer Music Festival could become a tourist magnet comparable to the Ashland Shakespeare Festival.  Other cultural resources at Sonoma State and elsewhere in the county could also be developed.  Furthermore, retirees who move into the county bringing income from elsewhere have a balance of trade effect similar to that of tourism.


However, a healthy, sustainable regional economy in an area as rich in natural and human resources as the North Bay should depend less on export–driven growth than on the mobilization of local resources to meet local needs.  There are crying needs in the areas of education, health care, ecosystem management, public safety, transportation infrastructure, and public administration.  However, these unmet needs are in the public sector.  It is unrealistic to expect sufficient growth in the commercial economy to be able to meet these needs with current tax policies.  This brings us back to the need for progressive taxation at the local level, as mentioned above.  But it also suggests the need for more creative innovations, such as the regional currency concept currently being developed by the Sebastopol Economic Forum and the Skaggs Island Foundation, as well as a variety of "smart growth” or “sustainable development” options being promoted by various local organizations.



The Four Big Stories In Complementary Economics


There are four big stories in complementary economics, of which complementary currencies are only one.  The stories are:


1.        Complementary currencies and local/micro banking.

2.        Taxation and public spending.

3.        Savings, Investment & Ownership

4.        Ecopsychology


1. Complementary Currencies and Local/Micro Banking.


Complementary currencies are designed primarily to serve the market sector of the economy.  Complementary currencies treat money as a public utility financed by a service charge, rather than as a commodity financed by compound interest.


Complementary currencies deal with the instabilities of the business cycle by providing sufficient liquidity during periods of a shortage of national currency commonly known as recession or depression.  In addition, because they are not based on compound interest, complementary currencies address the excessive competitiveness of the present system and the ecological destructiveness of near term-focused planning. (Bernard Lietaer, The Future of Money, 2001; Thomas H. Greco, Jr., Money, 2001, Lietaer & Brunnhuber, in press.) 


Another recent invention is microbanking, which was pioneered by Muhammad Yunus' Grameen Bank in Bangladesh.  Microbanking provides access to liquidity for persons usually considered too insignificant for conventional banking to deal with.  Since microbanking invests in real wealth-based economic development, it also represents a very grass roots approach to ownership issues (see below).  Credit unions might be an interesting market to approach to implement alternative models of banking.


2. Taxation and Public Spending.


This and the subsequent stories get into the economics of the commons.  The public seems to be forgetting that taxes are actually designed to pay for valuable, often essential, public goods and services.  According to Lietaer and Brunnhuber (2005):


Almost everywhere the proportion of income from capital income (income generated through investments), is increasing, while the proportion from wage income (income generated through work) is declining. Furthermore, the ability and will of governments to tax and redistribute capital income and assets has been weakened, a fact which is linked both to potential capital migration and the internationalization of business groups. As more states worldwide compete for direct investment, the threat of a trans-national group closing down a facility is ever present and feeds a continuous "race-to-the-bottom" among states, with potentially ruinous consequences. (p. 71)


This had led to the chronic underfunding of public services including education, health care, public safety, transportation infrastructure, and environmental protection.  Ultimately, as long as democratic decision-making mechanisms are in place, public policy failures reflect a lack of understanding on the part of the electorate. At the present time, various instances of venality and corruption and the widespread experience of stagnant real income—contrary to the popular expectations of the American Dream—have played into the American populist tradition of distrust of government to further erode public confidence that taxpayers are getting value for their money.  This has tended to elicit a nostalgia for simple fundamentalist solutions in politics, economics, and morality, including the skepticism about any kind of politics that has been part of the American tradition since the time of the Revolution and an over reliance on the charisma of anti-politics political leaders.  However, a deeper analysis would see the problem as the lag time involved in the political process responding to the huge and rapid structural changes in our economic institutions that are being driven by communications and information management technology.


In an information economy, the information commons is probably the most valuable asset of all, and it will be the main basis for quality of life in the future.  Sufficiently available money--which is made possible by complementary currencies--can lessen some of the temptations for venality and corruption.  Information technology and institutional system redesign can greatly reduce the overhead cost of government and offer greater accountability.  The governator is moving somewhat in the right direction, but his thinking is hobbled by his commitment to a business-focused ideology that embraces free market-fundamentalism and the outdated notion that ‘business creates wealth and government spends it.’  David Osborne and Ted Gaebler’s Reinventing Government (1992) offered a good recipe for separating the legislative priority setting and the service delivery functions of government that could lead to the realization of these efficiencies, if only legislatures were inclined to reinvent themselves.


3. Savings, Investment & Ownership


This may actually be the biggest story right now.  Enron, WorldCom, and Arthur Anderson have recently made big headlines by their abuse of stockholder and employee ownership.  But the bigger story is the fact that the shift from defined benefit to defined contribution pension plans (including the proposed ‘privatization’ of social security) is precipitating the crisis predicted by Louis Kelso.  Kelso predicted that as technology increasingly replaces labor in the production of manufactured goods, the concentration of the ownership of productive capital would squeeze out jobs as the basis for claims on the output of productive capital.  (Kelso & Adler, 1958,1961; Kelso & Hetter, 1967)  This ownership crisis represents a Malthusian twist on Marx’s analysis of the surplus:  the owners of the means of production can accumulate surplus to the point where the increasingly unnecessary workers starve. 


Ownership issues can be broadly sorted into two types: 




Issues related to shareholder ownership can be sorted into monetary and financial institution issues and issues of ecological economics.  The former are problems created by the way that contemporary monetary and financial services institutions are designed.  The latter relate to institutional arrangements linking ownership and stewardship to the real wealth ecologies of the social and natural worlds.


Ownership & Financial Institutions.  One of the key insights of macroeconomics is that the intention to save must equal the intention to invest.  If, in the economy as a whole, the intention to save exceeds the intention to invest, the result will be a loss of liquidity in the economy.  J. M. Keynes demonstrated that this is a driving force behind recessions and depressions.  In other words, savings must be turned into investments, and this is a primary function of banks and other financial services institutions.


However, there are problems with the contemporary design of money and associated financial institutions that make our current institutional arrangements unsustainable.  These have been well summarized by Lietaer and Brunnhuber (2005).


Seven characteristics of today's financial system reveal that it is not neutral in terms of sustainability. These characteristics are briefly summarized below. The rest of the chapter provides some of the evidence that supports these claims.


1. Instability of the international financial system itself

The international monetary system itself has become unstable. This instability creates major problems not only for the financial industry itself, but for the entire economy as well. Any investment in the future invariably has a component of speculation, as it requires a prognosis now about an uncertain future. However, monetary and banking crises are adding an entire new layer of uncertainty to investment decisions. The "contagion" effect whereby a crisis in one country can trigger a series of crises in other countries adds to this uncertainty, as entire continents may be affected in a completely unpredictable ways. Furthermore, the dramatic social consequences of such monetary or banking crashes linger much longer than the purely financial ones.


2. Pro-cyclical money creation process

The instability mentioned above is in fact an exacerbation of a much older systemic problem - namely, the process by which the banking system creates money is pro-cyclical. That is, it tends to amplify the fluctuations of the business cycle. Indeed, banks simultaneously tend to either make credit available or restrict it for a given country or group of countries. Specifically, when business is good in a particular market, banks tend to be more generous in terms of credit availability, thereby pushing the "good times" into a potentially inflationary boom period. Conversely, as soon as the business horizon looks less promising, banks logically tend to try to reduce their exposure to the perceived risks and therefore restrict credit availability, potentially pushing a business dip into a full-blown recession. Central banks attempt to counteract such fluctuations by giving counteracting interest rate signals. Nonetheless, the net effect remains clear: collective actions of the banking system tend to exacerbate the business cycle in both boom and bust directions.


3. Short-term orientation

Our present financial system systematically introduces a bias towards very short-term results, thereby discouraging concern about long-term implications.


4. Compulsory growth pressure

Particularly in the case of debt-laden individuals and companies, the present monetary and financial system exerts systematic pressure to achieve economic growth at all costs. For developing countries for instance, this translates into coercion for export-led development. This kind of growth pressure, particularly when it combines with short-term priorities, provides incentives to overexploit resources and disregard sustainable practices.


5. Unrelenting concentration of wealth

Wealth is concentrated in increasingly fewer hands as the disparity between rich and poor increases in all countries throughout the world. This is true both within most countries and between developed and developing countries. It will be shown how our monetary and financial system is one of the key underlying mechanisms of this process.


6. Devaluation of social capital

George Soros, who cannot be suspected of an anti-capitalist bias, concluded that:  "International trade and global financial markets are very good at generating wealth, but they cannot take care of other social needs, such as the preservation of peace, alleviation of poverty, protection of the environment, labor conditions, or human rights - what are generally called 'public goods'."  [On Globalization. (Oxford Public Affairs, 2002) p. 14]  Consequently, as market mechanisms are introduced into ever-greater areas of society, social capital begins to erode. We can observe social capital in the readiness of citizens to help each other spontaneously, to form self-help groups, clubs, trade unions and parties, through membership of religious communities, or through the organization of charitable events. Social capital has proven fiendishly hard to measure quantitatively, but is nevertheless a critical ingredient to create a robustly sustainable society.


7.   Mobility of capital vs. mobility of goods

We know since David Ricardo (1772-1823) that trade is beneficial between two countries whenever there is a comparative cost advantage in the production of the goods or services they exchange. Every economic textbook elaborates on this thesis. Ricardo's arguments in favor of international trade are the main justification for dismantling protectionist measures worldwide and for the globalization efforts of the past decades. However, one of the conditions specified by Ricardo himself is that the comparative advantage theory works only if capital doesn't become mobile as well. If Ricardo is right, we have to choose between freedom of movement of capital or of goods: we can't have both and still derive the benefits of international trade. Because of a lack of empirical studies on the benefits of free capital movement, the jury is still out on this issue. (pp. 48-49)


Ecology of Ownership.  One of the values historically associated with ownership is accountability of effective stewardship of productive assets, including land and capital assets.  Jeff Gates has proposed a useful laundry list of institutional innovations that could promote a broadening of the ownership based of society’s major assets:


Full-ownership policy. Today's full-employment economic policy needs a counterpart ownership policy. We need both widespread employment of our labor resources and widespread ownership of our capital resources.


Ownership impact reporting. Every policy pronouncement should be accompanied by an ownership impact report. We have a right to know when those we elect pass laws that make the rich richer. An international effort should compile and maintain a detailed global ownership registry.


Fiscally foresighted investment practices. Today's $8 trillion-plus in retirement-plan assets must be invested in a way that fosters broad-based ownership. Pensioners need to retire into a fiscal en­vironment characterized by widespread financial self-reliance. Anything less endangers their retirement benefits.


Private wealth from public assets. Government contracting should favor broadly owned companies. The same should hold true for government-granted licenses (broadcasting, etc.) or anywhere private access is granted to public assets, such as commercial ac­cess to minerals, timber, and oil on public lands.


New ownership possibilities. Ongoing commercial relationships (supplier, distributor, customer, contractor, bank depositor, ser­vice provider) should be the priority focus for an array of policies designed to broaden wealth while improving enterprise perfor­mance by "ownerizing" those relationships.


Customer-owned utilities. Investor-owned utilities should become partially owned by their customers, gradually transforming bill payments into customer-owned equity.


Corporate localization. Today's megamergers should be restruc­tured to ensure broad-based ownership, particularly within those communities where corporate operations are located.


Ownership-pattern-attuned tax policy. Fiscal foresight requires a tax policy ensuring that more of the nation's income-produc­ing capital finds its way into the accounts of those now under­capitalized.


Monetary policy. The Federal Reserve's indifference to fast-widening economic disparities is destined to undermine long-term price stability as more people become dependent on the government. Both monetary and fiscal policy must be made more sensitive to ownership patterns.


Antitrust policy. Ownership patterns should be considered a key factor in assessing both the structure and the conduct of monop­olistic firms.


Populist foreign policy. U.S. foreign policy should set as its top priority the worldwide alleviation of poverty. Plutocratic owner­ship patterns, now the global norm, pose a clear danger to global stability, to the environment, and to the continued advance of democracy.


Foreign assistance. Foreign aid, including assistance provided by the World Bank and the International Monetary Fund (IMF), should adopt ownership-pattern-sensitive development tech­niques.


Capital commons user fee. Global capital markets are a com­mons. An international effort should impose a capital commons user fee, directing the proceeds to fund human needs in the de­veloping world. International law should extract a "freeloader's levy" from those who've hidden $8 trillion in the world's tax havens.


Resource productivity policies. All public policies should be de­signed to multiply the productivity of natural resources.


New assets for new owners. Limits should be placed on hydrocar­bon emissions, property rights created in emission permits, and those permits used to capitalize households nationwide, linking energy conservation to income generation.5

Socially responsible investing. As with the antiapartheid screening of investments a decade ago, the investor community should screen for equity and sustainability.

Prosperity corps. A prosperity corps should be established to train Americans for missions abroad that implement best-practice de­velopment programs.

Culture corps. Americans should be sent abroad to share our di­verse cultures with others while showcasing the world's cultures here.

Just say no to values-free free trade. Free trade, yes, but no more values-free free trade. Democracies must oppose injustice and un-sustainability, whether here or abroad. (Gates, 2002, pp. 8-10.)


The recent trends toward defined contribution, rather than defined benefit, pension plans is combining with President Bush’s initiative to privatize Social Security to force the public to consider the possibility that Kelso’s prophecy may be coming to pass.  This situation could lead to the pension fund socialism predicted by Peter Drucker (in The Unseen Revolution, 1976; also see Jeff Gates, The Ownership Solution, 1998.)  Pension fund managers could become more important than legislators as shapers of public policy in the near future.  Investment in ‘miracle’ technologies and investment in sustainable regional technologies (including social systems, natural capital, etc.) are important areas to study.  Co-ops, land trusts, etc. will become increasingly important.  New investment institutions taking advantage of the cheap information processing  (including cheap accounting) made possible by technology are on the horizon.  Philanthropy is in for a radical revisioning.


4. Ecopsychology


The ecopsychology story is actually many stories, or perhaps more accurately a metastory.  Ecopsychology integrates ecosystem issue with the questions of values and ethics than can only be addressed and managed by telling ourselves and one another appropriate stories built around images of sustainability.  (The neo-Jungians call this imaginal psychology, and Susanne Langer called it “presentational symbolic forms.”) This is the realm that humanizes the theoretical idea of “system” by embedding it in concepts like sustainability, stewardship, caretaking, social justice, compassion, Gaia and green.  It shows up in phrases such as life, liberty and the pursuit of happiness; liberté, égalité, fraternité; Mother Earth-Father Sky; and In God We Trust.


This is a domain of a multitude of stories because any story that connects does so because it fits into a historical stream of cultural ideas, images, attitudes, and values.  Thus ecopsychology, with its bioneers, fits into a stream sometimes labeled “the cultural creatives,” which in turn is a branch of the great river of the Judeo-Protestant liberal imagination.  But other cultures have their own stories.  There are instructive debates with the Native American community as to whether those who are willing to share sacred traditions and practices with cultural creatives are traitors, or simply representatives of traditional values of sharing and hospitality


Postindustrial interconnectedness has created a historically unique situation in which spiritual or religious narratives are no longer the cultural underpinnings of cultural organization and ecological adaptation.  In the global society, the discourse that manages humanity’s interface with the natural environment and operationalizes human values is economics.  As I stated at the beginning, economics is about mapping ecologies onto accounting systems.  The rules governing the mapping and the design of the accounting systems are necessarily essentially political.   


Therefore a new understanding of politics, particularly democratic politics, becomes essential.  Politics is no longer, as in the liberal democratic tradition, only debate and agreements about social contracts among individuals.  It also become debate and agreements about the management of ecological systems and the interpretation of human values that occur among cultural communities that speak different languages and operate out of differing historically evolved worldviews.


Thus, as the Buddha knew, the idea of a universal metastory is an illusion.  There is only a perennial dialogue among art, science, and the dreamworld to create narratives and images that construct ecologically adaptive social realities that embody virtue and the good life.





Acland, Dan & Rhee, Nari.  (2005). The Limits of Prosperity.  Santa Rosa, CA: New Economy, Working Solutions (NEWS) .


Drucker, Peter F.  (1996).  The Pension Fund Revolution.  New Brunswick, NJ: Transaction Publishers.  (Originally published as The Unseen Revolution, New York: Harper & Row, 1976.)


Fitts, Catherine Austin. (2002).  Solari & the Rise of the Rule of Law.  Http://


Gates, Jeff. (1998). The Ownership Solution: Toward a Shared Capitalism for the 21st Century.  Reading, MA: Addison-Wesley.


Gates, Jeff. (2002).  Democracy at Risk.  Cambridge, MA:  Perseus.


George, Henry. (1879, 1979). Progress and Poverty. New York: Robert Schalkenbach Foundation.


Greco, Thomas H., Jr.  (2001). Money: Understanding and Creating Alternatives to Legal Tender. White River Junction, VT: Chelsea Green.


Hawken, Paul, Lovins, Amory & Lovins, L. Hunter. (1999).  Natural Capitalism: Creating the Next Industrial Revolution.  Boston, Little, Brown & Co.


Kelso, Louis O. & Adler, Mortimer J. (1958). The Capitalist Manifesto. New York: Random House.


Kelso, Louis O. & Adler, Mortimer J. (1961). The New Capitalists. New York: Random House.


Kelso, Louis O. & Hetter, Patricia. (1967). The Two Factor Theory. New York: Vintage.


Keynes, John Maynard. [1935]. The General Theory of Employment, Interest and Money.  New York: Harcourt, Brace & World.


Langer, Susanne. Philosophy in a New Key.


Lietaer, Bernard. (2001). The Future of Money: Creating New Wealth, Work, and a Wiser World. London: Century.


Lietaer, Bernard & Brunnhuber, Stefan. (2005). Our Future Economy: Money and Sustainability–the Missing Link.  (EU Chapter of The Club of Rome, in press.)


Osborne, David & Gaebler, Ted. (1992).  Reinventing Government.  Reading, MA: Addison-Wesley.


Reich, Robert B. (1983). The Next American Frontier.  New York: New York Times Books.


Reich, Robert B. (2001).  The Future of Success.  New York: Alfred A. Knopf.





Introductory Bibliography on Complementary Economics


A manifesto for complementary economics is contained in:

Wendell Berry. (2003). In the Presence of Fear: Three Essay for a Changed World. Great Barrington, MA: The Orion Society.



David Bollier. (2002). Silent Theft: The Private Plunder of Our Common Wealth (Routledge)


Lester Brown. (2001). Eco-Economy: Building an Economy for the Earth.  New

York: Norton.

Jeff Gates. (1998). The Ownership Solution: Toward a Shared Capitalism for the 21st

Century. Reading, MA: Addison-Wesley.

Jeff Gates. (2001). Democracy at Risk: Rescuing Main Street from Wall Street

Cambridge, MA: Perseus.

Thomas H. Greco, Jr. (2001). Money: Understanding and Creating Alternatives to Legal

 Tender. White River Junction, VT: Chelsea Green Publishing Co.

Paul Hawken, Amory Lovins & L. Hunter Lovins. (1999). Natural Capitalism:

Creating the Next Industrial Revolution. Boston, Little, Brown & Co.

Hazel Henderson. (1999). Beyond Globalization: Shaping a Sustainable Global

Economy. West Hartford, CT: Kumarian Press.

Bernard Lietaer. (2001). The Future of Money: Creating New Wealth, Work, and

a Wiser World. London: Century.

Bernard Lietaer & Arthur Warmoth. (1999). "Designing Bioregional Economies in the Context of Globalization." In Joseph Kruth & Andrew Cohill, Eds. Pathways to Sustainability, published online by Tahoe Center for a

Sustainable Future at <>.

Jonathan Rowe. (2001, Summer). The hidden commons.  Yes! <>


Jonathan Rowe. (2002, Autumn). The promise of the commons.  Earth Island Journal,

pp. 28-30.

Schumacher, E. F. (1973). Small Is Beautiful.  New York: Harper & Row.


Stiglitz, Joseph E. (2002). Globalization and Its Discontents.  New York: W. W.