OOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOO

OOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOO


SUSTAINABLE COMMUNITY ECONOMICS:
BASIC THEORY

by Arthur Warmoth, Ph.D.

Copyright © 2001, 2002, 2003, 2005 by Arthur Warmoth, Ph.D. & Skaggs Island Foundation
Last updated 6/2/06

Contents

I. Globalization as the Driving Force in Contemporary Economies
II. What is Money
III. Say's Law and the Macroeconomic Tautology
IV. The Liquidity (Currency) Problem
V. The Savings-Investment (Asset) Problem

V.1.The problem of access to investment capital.
V.2. The problem of the concentration of the ownership of assets.
V.3.) The problem of the need for endless economic growth
V.4) The problem of unproductive investment and excessive speculation.

VI. The "Problem of the Commons" (Public Goods)
VII. The Ecological Commons
VIII. The Structure of the Global Economy and the Role of Regional Economics

[Figures 2, 3 and 4 are from 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 the Tahoe Center for a Sustainable Future at <http://ceres.ca.gov/tcsf/pathways/chapter2.html>. Part VIII is reprinted from that article.]

Economic institutions and conventions are the glue that holds the postmodern world together. The economic system has become the basis of human adaptation to the environment. Globalization is promoted by communications and information processing technology because it creates the global village of shared images foreseen by Marshall McLuhan. But even more significantly at the practical level, globalization is promoted by the linking and acceleration of the economic transactions of trade and finance made possible by this technological revolution. For that reason, a basic understanding of economic institutions is a necessity for ordinary citizens, as well as for those who wish to promote positive community and social development.

Unfortunately, the conventional wisdom of capitalism, as portrayed in the media as well as in most college economic courses, is one-sided. Conventional economics is essentially the economics of markets, of manufacturing and trade. It focuses on the strengths of capitalist institutions--the market, free trade, supply and demand, and their enormous capacity to promote invention and growth--and ignores those aspects of wealth and well-being that these institutions do not manage so effectively--the common good, the environment, the quality of social life. These latter forms of wealth are as real and as important to the quality of life as material possessions. The imbalance in capitalist society's ability to manage public and private wealth led to the Marxist and socialist critiques of capitalism in the nineteenth century, as well as to the development of the modern welfare state as a way to ameliorate and control the dissatisfaction that this inevitable imbalance creates. In the postwar period, the liberal economist John Kenneth Galbraith updated the analysis of this imbalance in The Affluent Society (Boston: Houghton Mifflin, 1958). Unfortunately, we still do not as a society know how to find the proper balance.

This imbalance is a major challenge to those of us who would promote the development of healthy communities. Fortunately, the technology that is promoting capitalist global economic integration also offers resources for disentangling community and bioregional development from the webs of global finance, which unfortunately involve a large component of potentially destabilizing speculation, as well as a healthy capacity to promote technological innovation. Information technology provides local communities with the capability to track and manage information about local human and natural resource at a level of precision and reliability that was previously accessible only to large corporations with the capacity to employ squadrons of data processing accountants, bureaucrats, and middle managers. A community can measure the state of its wealth and well-being quite accurately, whereas in the past such measurements were limited to the very rough approximations of macro-economics. However, knowing what to do with that information requires a basic understanding of the structure and dynamics of economic systems. This web site is intended to provide this basic information.
[Return to top of page.]

I. Globalization as the Driving Force in Contemporary Economies

The dominant force in contemporary social evolution is globalization. Preeminently, this means the global integration of the economic system, but it also includes global communication networks and increased geographical and social mobility. At the most general level, the processes of globalization are being driven by the imperatives of electronic communications and information processing technology. Throughout history, every major new technology has carried with it a set of imperatives for social transformation. Societies have responded both by taking advantage of the opportunities offered by technology and by engaging in complex struggles to 'humanize' the society that is created by these technological imperatives. In the modern era, democracy has been the principle social tool for humanizing the dislocations of the industrial revolution. The core imperative of the communications/information revolution is the capitalization of all of the aspects of information processing and information management that can be capitalized. Global information networks--especially networks processing financial information--are one major aspect of this.

A second major driving force grows out of the history of the industrial revolution, as we become increasingly aware of its ecologically destructive side effects. The information/ communications revolution is intensifying our our awareness of ecological problems, but it also offers us increasingly sophisticated tools to micromanage ecological systems at the bioregional level.

Within this larger framework, there are several more specific dynamics that have significant implications for personal and organizational planning:

•The processes of globalization, particularly the global integration of information about the processes of manufacturing, trade, and finance, combined with the imperatives of ecological limits and increasing demands for democracy and social justice, create a situation in which there are substantial downward pressures on the consumption level of advanced industrialized societies.

•Whether this will lead to a declining standard of living is dependent on our ability to design new social institutions that can deliver a higher quality of life with lower levels of consumption of energy and natural resources. The alternative is the extension of the colonial model of garrisoned ghettos of the very rich and masses of the very poor.

•Automation will continue to be a major force shaping the nature of work, especially in the global manufacturing, trade, and financial services sectors. This means that while these sectors will continue to be sources of new wealth, they may much less important as sources of new employment. The trend toward automation will continue to promote the bifurcation of the work force in these sectors into highly paid top management and low paid production workers, with the virtual elimination of information processing middle management ("downsizing").

•A critical area of necessary social invention is the redesign on the our monetary and economic institutions. The design of conventional national currencies promote inequality and ecological deterioration. [See Section II, What Is Money, and Section IV, The Liquidity (Currency) Problem, below .].

•The adoption of complementary currencies, primarily on a bioregional scale, would encourage full employment and provide the basis for alternative mechanisms for meeting a variety of social needs. It would create an economic basis for local and regional institutions to develop adaptations to reducing consumption levels while improving the quality of life.

•Our political culture guarantees that market mechanisms, which can be very efficient, will be tried in every area where they can work and in many where they cannot. Two areas where alternative models need to be consciously created are:

1) Serving the public good ("the commons"). Goods such as clean air and water, public safety, and education are consumed by society collectively, not primarily by individual consumers. Conventional political mechanisms are distrusted because of their tendency to inefficiency and corruption. It is necessary to invent to forms of democratic decision-making that are more trustworthy and cost-effective (and which can include market incentives where these can work). [See Section VI, The "Problem of the Commons" (Public Goods), below.]

2) Saving and investment. Our current institutions for managing savings and investment give too large a role to speculation and what Robert B. Reich called "paper entrepreneurialism," and too small a role to real, ecologically sound, and socially responsible investment activity. The socially responsible investment and micro-banking movements address this issue. The investment process would also be made more ecologically sound by the adoption of Lietaer's Global Reference Currency (GRC). [See Section V, The Savings-Investment (Asset)) Problem, below.]

•Because of our inability to think clearly about these problems, there are several specific problems that appear chronically insoluble. They are insoluble when approached with the current conventional economic wisdom. In these areas, effective political advocacy based on new economic paradigms is necessary:

1) Education. We need educational institutions that address both the need to learn how to manage an increasingly sophisticated capitalized knowledge and information base and the need to support the development of sustainable, self-sufficient, and self-determining communities and families.

2) Health care. We need to figure out how to "get managed care right." Health care needs to be managed, but it is a complex industry involving both 'high touch' human interactions and sophisticated 'high tech' interventions. It needs to be managed in terms of collectively defined social goals, rather than in terms of profits. There is also a need for subsidized access for the working poor, as the labor market will never support wages that are adequate for this group to be able to afford the full average cost of health care. It also requires subsidized major medical care for the middle class, as normal health insurance can cover the average cost of routine care, but the costs of catastrophic illnesses for the middle classes need to be subsidized by some form of progressive taxation.

3) Affordable housing. The working poor need subsidized housing and the middle class needs affordable housing. The housing market needs to be modified by design interventions that preserve affordability and integrate the planning for housing into a comprehensive system for the sustainable management of all of the ecological systems of a bioregion.

4) The working poor and public safety. We are beginning to understand the inadequacy of welfare as the basic safety net for poor women and children, and to find ways to replace welfare with the dignity of work. We need to begin to understand that meaningful work is also a socially cost-effective alternative to crime and violence for men. However, expanding the opportunities for the working poor requires extensive systemic rethinking of the economic, and even cultural, dynamics of low wage work. A healthy low-wage working class will require extensive public support in the areas of education (including family education services), housing and health care, since a competitive labor market labor market will never generate wages high enough to permit the working poor to purchase these essential public goods.

•The rapid pace of technological development will continue to promote a rapid pace of organizational and economic change. This creates an environment demanding continuing resocialization and adaptation to change (which Berger & Luckmann, 1966, call "secondary socialization"). In this environment, an understanding of education as a continuous process of reacculturation (Bruffee, 1993) is becoming increasingly relevant.

•Persons growing up in this rapidly evolving environment will continue to experience contradictory processes of acculturation originating with family, the local community, the mass media, the educational system, and peer culture.

•Intercultural communication and geographic mobility will continue to intensify the polycultural character of regional societies and of global civilization. In this context, the "melting pot" model of education which has served the United States as a society of immigrants is obsolete and needs to be replaced with new institutional forms that recognize the importance of cultural (or ethnic) community and identity in supporting families in the process of "primary socialization," which is the original initiation into the social construction of the self and social reality that takes place in the first few years of life and in the bosom of the family (Berger & Luckmann, 1966).
[Return to top of page.]

II. What is Money

Conventional economics begins with trade. Trade--the consequences of the efficiencies of the division of labor--was the focus of Adam Smith's The Wealth of Nations (1976/1776-78). His account of the virtues of the free market (or the "price auction market," Thurow, 1983) was at the heart of his theory, and it remains the starting point for conventional contemporary economic theory. (In the trendy case of so-called "neo-classical" economics--called "neo-liberal" in Latin America--it also appear to be the ending point.) However, the real starting point for economics should be an examination of the nature of money itself.

Bernard Lietaer's ground-breaking study of The Future of Money (2001) answers this question in considerable depth. [John Kenneth Galbraith's 1975 study of the history of money, Money: Whence It Came and Where It Went, is also useful.] Lietaer arrives at a simple definition:

Money is an agreement, within a community, to use something as a means of payment. (Lietaer, 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. (The second conventionally recognized function, money as a store of value, will be discussed below.) This definition describes the function of money at all times and places. It also highlights the fact that its value comes not from the fact that it is a thing, but rather the fact that it is an agreement to use some thing as a measure of value. This is true even in the case of gold or other precious metals, which seem to lend themselves to serving as the basis for such agreements because of their unique thingish density and immutability. Thus the foundation of economics lies in the social psychology of agreements, not in the science or technology of the material world. The invention of money was the discovery of the usefulness of applying quantitative logic to the matrix of human ecology. Furthermore, this application of quantitative logic can take many specific forms. Although all modern national currencies follow the same general design, historically there have been many different monetary systems with very different design characteristics. These different designs have different predictable consequences (both empirically and logically) that need to be more widely understood.

All contemporary national currencies are bank debt-created fiat money (Lietaer, 2001, pp. 32ff). This means that they new money comes into existence by creating new bank accounts based on loans or bank debt, issued on the authority of the government (which is responsible for controlling the quantity in circulation, primarily with the twin objectives of providing adequate liquidity for a healthy, growing economy and avoiding an inflation-provoking oversupply). Although governments do print bills and mint coins, most of the money supply actually exists in the form of bank accounts and other financial instruments. The primary way in which modern governments create money is to authorize banks to create new accounts, based on interest bearing loans. Banks are required to maintain a certain quantity of capital reserves to partially cover their depositor's accounts, but that amount only protects a part of the deposits, which is why it is called fractional reserve banking (and why federal deposit insurance became necessary).

The obvious problem with this system is the need to manage the money supply in order to avoid inflation, a task which is assigned in the United States to the Federal Reserve Bank. Too much money in circulation leads to inflated prices, with their obvious disruptive effects; too little means recession. However, there are additional less obvious problems inherent in the design of this system based on interest-bearing loans (Lietaer, 2001, pp. 50-52). 1) Because the money required to repay the interest on the bank loans is never created, conventional money is necessarily scarce (participants in the economy must compete for both profits and credit); therefore the system promotes competition over cooperation. 2) Furthermore, the unfunded interest requirement promotes the concentration of wealth and the inevitability of a certain amount of bankruptcies. 3) Guaranteed compound interest also creates an impossible expectation or assumption of endless (infinite) economic growth. 4) Because interest has the effect of discounting future real economic returns, the system favors short term time horizons over the long term planning horizons required for environmental sustainability (pp. 242-248). 5) Because the system is primarily under the control of national governments, it encourages national consciousness and discourages global identity.

The system evolved primarily in pre-Victorian England. It evolved, rather than being systematically designed, but its characteristics seem ideally suited to promote capitalism and the industrial revolution. However, there is a serious question, as Lietaer suggests, as to whether the current system can adequately serve a post-industrial globalizing world. While virtually all contemporary money is designed according to one systems model, this is far from an inevitable state of affairs. There are a number of possible alternative, or complementary, forms of monetary system design, some of which are actually succeeding in the real world, that can solve these problems.
[Return to top of page.]

III. Say's Law and the Macroeconomic Tautology

As mentioned above, economic theorists generally recognize two functions of money:

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

[Lietaer (2001, pp. 332-333) identifies five different functions:

1. Medium of Exchange
2. Standard of Measure
3. Store of Value
4. Instrument of Speculation
5. A Tool of empire

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.
[Return to top of page.]

IV. The Liquidity (Currency) Problem

The problem of liquidity is the need to provide adequate liquidity for the smooth operation on markets without generating inflation or recession. Too much currency in circulation creates inflation, as excess currency leads the market to bid up prices. Too little creates recession, as a shortage of currency means that many potential transactions cannot be consummated.

The design of conventional currency makes the alteration of boom and bust (although not necessarily inflation) inevitable. The positive phase of the cycle occurs when economic optimism leads to the expansion of credit, and therefore of the money supply, as investors pursue opportunities which, in the nature of the system, cannot all be realized. Contraction occurs when optimism passes and the accumulated debt is called in, leading to a contraction of liquidity and the concentration of assets. Bill Clinton's boom was the combined result of good policy -- primarily getting interest rates down -- and good fortune -- primarily the fashionable enthusiasm for high technology investments, of which the dot.com industry concept was the most overblown. The ensuing downturn was eventually inevitable.

However, there are other factors besides the business cycle that can lead to regions or even entire countries finding themselves with acute or chronic shortages of liquidity. Acute liquidity shortages can be associated with the volatility of international currency speculation. Lietaer points out that currently 98% of foreign exchange transactions are speculative, and only 2% relate to real international trade. Recent casualties of this system were Mexico in 1995 and several Asian countries in 1988. (2001, p. 314-6) Chronic shortages can result from mismanagement of the economy, as occurred in Mexico under the last decades of the PRI administration, or simply from being geographically disadvantaged in the global competition for liquidity. The latter is the situation in the underdeveloped world and in various insulated areas of the U.S. economy such as Appalachia and the inner cities. Lietaer predicts that this situation will become more general as large corporations increase their ability to increase production and sales while contracting their work force:

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 to the liquidity problem is to create new monetary systems. Since these systems would be designed supplement, not to replace, conventional currencies, Lietaer advocates for the general term "complementary currencies." This is not a new idea. Local currencies, or scrip, were important during the Great Depression on the thirties. Switzerland has enjoyed the benefits of the WIR system, which serves individuals and small businesses, since 1934. Figure 2 shows the economic cycle of conventional currencies, which requires that funds be siphoned off to support community based transactions. Figure 3 shows the mutually supportive cycles of conventional and community-based complementary currencies. Lietaer also proposes a Global Reference Currency system (the "Terra," Ch. 8) which would promote sustainable long term development and free international trade from the risks associated with the current foreign exchange casino system. (See also the Alternative Currency section in the References.)


 



Over 2500 community currency systems are currently in operation world wide, particularly in Europe, but also in Japan, Australia, the United State and Canada. Lietaer (2001, Chs. 5 & 6) offers extensive examples of systems that are successful in both enabling work and building community, as well as a comparison of the design features of various systems (p. 232). Figure 4 shows the growth of complementary currency systems since 1984.


 

Figure 4. Growth of Complementary Currencies Since 1984


[Return to top of page.]

 

V. 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 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, 1958), 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,

He 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.
[Return to top of page.]

VI. The Problem of "the Commons" (Public Goods)

The third problem involves a concept for which we do not even have a good label: the problem of our collective wealth and well-being. Economists speak of "public goods" (which includes public services), but we really need a concept that includes public assets and nongovernmental public productivity as well. Mexico has the useful concept of the "social sector" that embraces many of these concerns. However, there is no widely accepted term to refer to these collectively consumed goods and services, and collectively held assets. Recently some commentators have begun to refer to this economic arena as "the commons" (Rowe, 2002), a term that was first popularized by Garrett Hardin's article "The Tragedy of the Commons" (1968). Hardin was particularly interested interested in the tendency of individuals to want to enjoy the benefits of commonly held resources without paying the costs. Recent commentators have stressed the necessity of a well kept commons.

There are two basic problems involved in an adequate understanding of the economics of the commons. One is to develop an adequate conceptual grasp of the full scope of collective economic activity. The second is to design just methods for assessing and distributing their costs.

The scope of the commons can be defined as all activities and ecological processes that are essential or useful for human wealth and well-being that cannot be produced by and/or distributed to individuals (including legal individuals, i.e. corporations) operating in price auction markets. This includes government services such as public safety, education, transportation infrastructure, public health, and environmental protection. Some important areas, such as education and health care, have a market-oriented component. Individuals are willing to pay something for education, health care, and clean drinking water, but not necessarily for the quantities of those services that would optimize our collective well-being. Many public services are provided by nonprofit organizations funded by both government and philanthropy. Historically, philanthropic support has been the main source of support for the arts and other forms of collective cultural activity, including major private universities. The importance of funding adequate protection for the environment became a major issue in the last quarter of the 20th century as public recognition of the toxic side effects of the industrial revolution become unavoidable.

Economists have developed the useful concept of "externalities" to describe costs not included in the supply and demand pricing of the free market. The debate continues as to the most efficient method of including these costs in the cycle of economic activity: regulation vs. taxation/public subsidy vs. direct assessment of the actual costs. The one point that cannot be avoided is that all of these goods and services represent real contributions to human wealth and well-being, that is they involve real productivity. The cliché that the private sector produces wealth and the public sector consumes it is simply not true!

The economics of the commons are fundamentally different from the economics of markets. Unfortunately, the economics of the commons does not include an elegant self-regulating mechanism comparable to the "invisible hand" of price auction markets that serves the economics of commerce so well. Our relationship to the commons is characterized by mechanisms that operate according to rhythms and orders of conceptual complexity that are different from those governing markets. The economic activity of the commons is created and managed mainly in three ways:

"Custom" is the mainstay of the management of the commons in traditional societies. Social arrangements in traditional societies have evolved slowly over countless generations. They include what José Ortega y Gasset (1957) calls "usages": the repertoire of practices that includes ritual and ceremony, as well as more mundane practices, and the repertoire of knowledge that is embodied in imaginal and narrative consciousness. They include complex provisions for the maintenance of the commons because human evolution is essentially a collective activity. The basic adaptive unit of evolution is the gene pool, not the individual. Tribal traditions, including respect for the earth and all of the values and practices we admire in Native American and other tribal cultures have evolved a complex social commons because this fabric of social relationships is the basis of successful adaptation to the natural environment, the natural commons.

The development of agriculture made the larger scale social organizations of cities and feudal societies possible. As scale of organization increased, the rule of law and evolution of strategic policy began to supplement tradition as the basis for social organization. Whereas traditional arrangements generally evolve on the basic of incremental innovations that are generally the result of conscious reflection, law and strategic policy are the result of conscious thought on a much more elaborate scale. These innovations are dependent on the level of ecological sophistication achieved by a given society. They generally take the requirements of ecological systems into account, but there have been major miscalculations, such as deforestation and over grazing.

In modern industrial society, the management of the commons falls both to government and to voluntary associations (often organized as nonprofit organizations).

Governments and legal frameworks are created by political processes that were originally legitimized by the divine rights of feudal aristocracies. However, since the 18th century, political legitimacy has increasingly required some degree of democratic accountability to the citizens who make up a society. Along with the evolution of political democracy, groups of individuals have developed a diverse repertoire of voluntary self-organizing systems to manage common interests.

In the long view of history, the commons has primarily been managed by the largely unconscious (or more accurately, embodied in iconic and narrative consciousness) hand of incrementally evolving tradition. Since the Renaissance, it has become increasingly the province of the conscious hand of politics, which is ideally guided, though often misguided, by reason. These political processes are widely recognized as vulnerable to whim and corruption. The founding fathers of the United States believed that they had succeeded in creating a new form of democratic political process that provided historically unparalleled accountability to the people. It embodied an innovative system of checks and balances that they believed would limit the negative impact of unbridled self-interest and provide a level of reflective deliberation that would generally permit wisdom and the long view of the public interest to prevail.

While this system has served us reasonably well for the past two centuries, the last half century has seen the ascendance of economic power and the acceleration of rates of social change powered by the information technology revolution. This increasing domination of politics by economic power has led an increasing bias in the direction of short term economic interests in our approach to issues related to the commons. It has led to an ideological emphasis on the reliance on markets as the solution to all economic and political problems. This in turn has tended to obfuscate our efforts to respond politically to the negative ecological side effects of industrial production and to directly address pressing issues of social equity and cultural pluralism.

Today, we find 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. We need an economics of the commons is because the globalization of market economics has led to the monetization of all aspects of human existence. Since accountants are everywhere-and hopefully are now being required to act with more integrity-we need to develop methods for tracking our wealth and well-being held in common, as well as the wealth that held by individuals (and those individuals created by legal fiction called "corporations"). Fortunately, information technology also gives us the historically unprecedented ability to examine and interpret the fine structure of the commons in ways that could conceivably enhance our ability to make informed political decisions

Corporations are legal persons composed of many created by governments. These legal persons are expected to contribute to the well-being of society by producing goods and services with ever greater volume and efficiency. While the principal focus of corporations tends to be productivity for price auction markets, it should be borne in mind that the creation of corporations is legitimized as public policy because increasing productive capacity is recognized as a public good or social benefit. The fact that corporations are franchised to serve the common good suggests that they should be held accountable for their effectiveness in this regard. Our respect for the invisible hand of the market should not prevent us from holding corporations producing for the market's responsible for their intended and unintended negative impacts on the social and natural environment.

There are two domains of the commons: the natural commons and the social commons. The natural commons includes air, water, earth, sunlight-all natural resources. It also includes all ecological and genetic processes, the basis of all life on earth. It includes all of the processes summarized in the Gaia metaphor. (It is discussed in greater detail below in Section VII.)

The social commons includes our cultural heritage. Jonathan Rowe's (2001) view of the commons includes our "languages and cultures, the stores of human knowledge, the informal support systems of community, the peace and quiet that we crave." The social commons also includes our instinctive relationship with nature and our impulse for creative expression. In fact, our cultural commons is the entire repertoire of human institutions and tools that human societies have evolved over time to solve (more or less) the problem of adaptation and survival. This commons includes artifacts and tools, of which markets are an example, that are used by individuals to meet the challenges of their individual lives. But the availability of the tools is a function of the evolution of a collective social order. The social commons thus depends on adequate stewardship of the natural environment to survive. The social commons is the socially organized interface between individuals and nature.

It is worth noting that the social commons has continuously evolved over the course of human history. A distinctive feature of this evolution is the increasing role that economic ideas and institutions, interacting with the achievements of science and technology, have come to play in managing this human-environment interface. Prior to the Renaissance and the Enlightenment, the relationship between humans and nature was managed almost entirely by tradition. Organized trade on a scale that required sophisticated planning and accounting were a minuscule portion of total economic activity. Wars periodically shifted the field of entitlements from one group to another, but the day to day business of living was conducted according to time honored methods and endowed with meaning by worldviews handed down from antiquity. It was only in the 16th and 17th centuries that humans (in this case, mostly men) began to think they could do better using reason. As the 18th century saw the beginning of the Industrial Revolution, the conscious design of economic institutions and the (ideally) rational decision-making process of democratic politics evolved hand in hand. Factional differences among various religious interpretations of history combined with the obvious successes of reason and science discredited the relevance of traditional theological interpretations of the social commons. By the time Darwin discovered the theory of evolution in the late nineteenth century, most social evolution was being driven by economic and political institutions that were clearly the products of human intelligence.

In the modern world, the social commons includes public services such as public safety, education, transportation infrastructure, public health and health care access, and environmental protection. And it includes the framework of rules for the economic game, as well as collective arrangements for economic security, including insurance and provisions for retirement security through investments and Social Security.

It is our collective provision for retirement security that has recently been devastated by the criminal conspiracies of high flying capitalist speculators such as President Bush's friend Ken Lay of Enron and their felonious accountants such as Arthur Anderson. Indeed, it is somewhat amazing that there is not more middle class outrage at the devastating assault on these institutions that we trusted to care for our collective economic well being in our declining years. However, there are well thought out alternatives, such as Jeff Gates' (1998, 2001) proposals for saving capitalism by democratizing ownership. (See also the section on "Democratizing Asset Ownership" below.)

Once we come to grips with the actual size of the commons -- the magnitude of collective economic activity -- which is huge, we are faced with the problem of how to finance and manage it. John Kenneth Galbraith in The Affluent Society (1958) pointed out that American society is awash in consumer goods and starved for public goods. The situation has changed little in the ensuing nearly half century. One of the first barriers to be overcome is the populist attitude expressed by the maxim that "that government governs best which governs least." That attitude was appropriate for the 18th century, where the principle precedent was aristocratic hierarchy, one of whose main functions was to appropriate surplus productivity to its own wastefully luxurious lifestyle, and where most of life's necessities were produced in local communities. It continues to be reinforced by the popular perception that political power often corrupts in wasteful ways. However, the complexities of modern society make it impossible to avoid taking a good hard look at the economics of the commons.

The first step is to ask the right policy basic policy question. The question is not "How do we minimize the size of government," but rather "How do we find the right balance between public and private spending?" What is the right amount or proportion of collective economic activity? In other words, what allocation of society's resources will optimize the fulfillment of the broad spectrum of human needs across the broad spectrum of the population. Societies make choices about this balance, and some societies -- particularly in Northern Europe -- make very different choices than the ones made in North America. Indeed, the choices made in Canada involve a much larger investment in the common welfare that do the choices made in either the United State or Mexico. It would serve the evolving political conversation of the NAFTA zone to study the consequences of these different choices in some detail.

A second important question is how to make the provision of public goods and services more efficient. There is no question that one of the major virtues of the free market is its economic efficiency. There is no comparable feedback mechanism for the commons. Part of the solution probably lies in providing adequate professional and ethical education for public servants. Another approach, advocated by David Osborne and Ted Gaebler in Reinventing Government (1992) is to promote competition in the provision of public services, while the legislative function is to determine the desirable quantity and quality of the services to be provided. The neo-liberal privatization movement appropriately understands the value of competition in increasing the efficiency and productivity of services. However, it misses the fact that the allocation of resources to public purposes is necessarily a collective, that is a political, decision. A clear separation of the political function of resource allocation from the managerial function of the production of goods and services could lead to greater efficiency in the fulfillment of both functions.

A third major policy area is the appropriate balance between compulsory (taxation) and voluntary (charitable or philanthropic) spending in support of the commons. Philanthropy has the important advantages of allowing for the direct expression of priorities and encouraging a personal sense of responsibility for and participation in civic life. For the very wealthy, it provides the rewards associated with noblesse oblige, and perhaps to some extent counterbalances the regressive structure of taxes such as those on sales and social security. However, for reasons well understood by Garret Hardin, voluntary individual spending on our collective store of wealth and well-being will never be sufficient. What is needed is a comprehensive, sophisticated model of financing the commons that includes a mix of philanthropy, user fees, and progressive taxation on both income and assets.

What can I do? Some immediately available personal strategies for investing in the commons include:

The economic commons is a socially constructed system; it is a system that has been designed. Unfortunately, most of that design has been accomplished by historical trial and error, and the current version embodies some egregious errors. However, that which has been designed can be redesigned. It is not to late for democracy to take back the commons.
[Return to top of page.]

VII. The Ecological Commons

The natural commons includes air, water, sunlight, soil&emdash;all natural resources. It also includes all ecological and genetic processes and systems which are the basis of all life on earth. In fact, it includes everything that is summarized in the metaphor "Gaia." The emergence of the environmental movement initiated by the publication of Rachel Carson's The Silent Spring in 1962 has focused public attention on the fact that many of the activities fostered by conventional capitalism systematically and on a global scale threaten the stability of ecological systems. Global warming is only the most recent of a series of critical ecological problems associated with the pollution and depletion of air, water, and soil. Economists call the economic consequences of these crises "externalities" because they are not accounted for by the conventional mechanisms of the price auction market.

Public awareness and environmental legislation has succeeded in ameliorating many of these effects (Easterbrook, 1995), for example acid rain in the Northeast and smog in the Los Angeles Basin. However, Lester Brown, founder of the Worldwatch Institute and currently president of the Earth Policy Institute, argues that more systematic and comprehensive restructuring of our economy will be needed to deal with impending ecological crises that will have devastating social and economic consequences. (Some observers have suggested that the crisis is no longer "impending" in Africa.) In his book Eco-Economy (2001), Brown documents and alarming litany of symptoms resulting from a growing population confronting symptoms of climate change and biospheric resource depletion. The former includes rising average temperatures, melting ice caps, rising sea levels, stronger storms, and growing water scarcity. The latter include the depletion of soil and natural energy sources, but even more alarmingly, the depletion of biological resources such as forests and fisheries, and the genetic resources of biodiversity.

At the same time, both Brown and the authors of Natural Capitalism (Paul Hawken, Amory Lovins & L. Hunter Lovins, 1999) see this crisis as a historically unprecedented opportunity for productive investment. Al that is needed is to restructure the rules of the economic game to account for the costs currently treated as externalities so that these opportunities become clearly profitable to potential investors. In many cases, Hawken et al. suggest that there are many opportunities that are clearly profitable under current rules of the game. These include investing in energy efficiency and conservation, and energy efficient automobiles and architecture. All of these authors see the creativity of the business sector as the engine driving the economic revolution required to achieve a sustainable economy. Hawken et al. refer to "The Next Industrial Revolution," while Brown sees "History's Greatest Investment Opportunity." But they also agree that public education and public policy have an important role to play.

Natural Capitalism is a richly documented encyclopedia of technological innovations that have been the basis of profitable, ecologically sustainable investments or could be in the near term future. The authors identify four strategies that underlie most of the innovations they identify:

  1. Radical resource productivity
  2. Biomimicry
  3. Resource and flow economy
  4. Investing in natural capital (Hawken, Lovins & Lovins, 1999, pp. 10-11)

Eco-Economy contains an updated review of a similar menu of options. However, actualizing these technological possibilities will require a willingness on the part of engineers and consumers to imagine possibilities that go beyond the conventional wisdom. And it will require entrepreneurs who are not only willing to imagine new possibilities but who are also willing to look for profits that are associated with the creation of real wealth, rather than the inflated profits that have been associated with the recent boom based on speculation and paper entrepreneurialism.

Public policy can play an important role in encouraging such entrepreneurialism by creating tax structure that approximate the true costs of natural resource use and of waste and pollution.

Tax shifting involves changing the composition of taxes, but not the level. It means reducing income taxes and offsetting them with taxes on environmentally destructive activities such as Carbon emissions, the generation of toxic waste, The use of virgin raw materials, the use of nonrefillable beverage containers, mercury emissions, the generation of garbage, the use of pesticides, and the use of throwaway products. This is by no means a comprehensive list, but it does include the most important activities that should be discouraged by taxing. There is wide agreement among environmental scientists on the kinds of activities that need to be taxed more. The question now is how to generate public support for the wholesale tax shifting that is needed. (Brown, 2001, p. 236.)

Social justice could be promoted by shifting the burden of regressive taxes such as payroll and sales taxes.

The possibility that taxes based on the economic use value of our common stock of natural capital could be sufficient to fund the part of the social commons managed by government raises echoes of Henry George's nineteenth century vision of funding government services by taxing the economic value of land (the "single tax"). George argued that since the use value of land is created largely by the collective human activity that takes place on it, a certain portion of that value should be returned to the community for common purposes.
[Return to top of page.]

VIII. The Structure of the Global Economy and the Role of Regional Economics

Reprinted from 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 <http://ceres.ca.gov/tcsf/pathways/chapter2.html>.

The function of economic systems is to enhance human wealth and well-being while managing the interface between human and ecological systems. Although globalization has mainly been about the global integration of financial transactions and of manufacturing and trade, a complex modern economy that satisfies the full range of human needs requires many different sectors, only some of which depend primarily on manufactured goods. Furthermore, many economic activities involve forms of economic benefits called "public goods" which are enjoyed by societies collectively. While the production and distribution of individually consumed goods and services can be managed by markets, public goods require public policy, or other forms of decision-making in the public interest such as philanthropy.

There are many essential sectors in a modern economy, and some of them are best organized on the regional level. Table 1 outlines the major sectors in a complex modern economy and categorizes them according to whether they lend themselves to global or regional economics, as well as whether they fall in the market or public sector.

The Global Trade Economy

The Metropolitan Bioregional Economy

Market Sectors

Commodity Agriculture (wheat, rice, soybeans, beef, coffee, bananas, etc.)

Electronics

Vehicles

High Tech Health Care, Pharmaceuticals

Hardware

Mass Produced Clothing, Cloth Goods

Hydrocarbon-Based Energy

Financial Services

Short term R&D

Organic & Specialty Agriculture

Local Commerce (locally produced goods and services)

Construction (Housing, etc.)

Education (basic, life management, citizenship)

Basic & Holistic Health Care & Education

Hand Crafts

Arts

Sports

Child Care

Elder Care

Home & Yard Care

Public Goods
(The "Commons")

Global Ecology

Fair Trade Policies

National Defense

Long Range R&D

Catastrophic Reinsurance (health, disasters, etc.)

Coordination of Health, Education, Welfare (Information and infrastructure investments)

Major (Corporate, Foundations, etc.) Philanthropy

Sustainable Land Use

Employment Security

Education (basic, life management, citizenship)

Urban Environment & Social Welfare Services

Conservation & Recreation

Local Philanthropy

Table 1. BASIC ECONOMIC SECTORS

 

The economic sectors that are most actively involved in international trade differ in important ways from the regional sectors. The latter are equally essential to the overall health of a regional economy, but they are necessarily based on local production for local consumption using local resources. This regional economy takes care of our basic needs for shelter, physical nourishment, and basic services such as education and routine health care. These economic activities are often concerned with intangible values such as sustainability and nourishment, rather than the economically more aggressive (and conventional) values of competition, production, and accumulation. This economy tends to be dependent on values of public spirited cooperation, mutual support (reciprocal giving, which in more primitive societies has been described as the "gift economy"), and concern for community well-being.

In addition to being based on the use of local resources for local production and consumption, regional economic activities often involve low to moderate technological sophistication (what has sometimes been called "appropriate technology"). And they tend to be labor intensive, so that the supply can easily be increased by mobilizing underemployed labor in the local labor market. They produce goods and services that can be made more abundant by mobilizing underutilized local productive capacity. Investing in education is the principal strategy for mobilizing underutilized human resources.

There is no question that the global trade economy makes substantial contributions to the sense of wealth and well-being in the daily life of the average citizen. It is this contribution that has permitted democracies to tolerate the systemic diseconomies also generated by the trade economy (principally in the forms of pollution, economic instability, and cultural disintegration). But it is also true that modern information management technology gives us the ability to manage social and ecological systems with greater sophistication and effectiveness. Combining this technical sophistication with a clear understanding of the regional economy as a system can empower local democratic institutions to alleviate many of the toxic side effects of the trade economy.

Manufacturing and trade, and the financial systems that support these activities, still offer the greatest potential for economic growth and asset accumulation. They are the areas that are most easily integrated on a global scale by information technology, and they are the central focus of conventional economic theory. Classical and neoclassical economics, which is still the core of the economics that is taught to future businesspersons and politicians, is mainly about the economics of manufacturing and trade. When Adam Smith set down the foundations of this economic world view in the eighteenth century, he wanted to understand manufacturing and trade because these areas were demonstrating a stunning capacity for innovation and growth. The basic ideas of our conventional economic wisdom--markets, supply and demand, competition, productivity, growth, GNP--still primarily describe the economics of trade.

However, a complex regional economics would offer organizing principles for understanding both the emerging global economy and the countervailing regional and local economies that must be strengthened if the values of democracy, ecological sustainability, and social justice are to prevail. This analysis is further complicated by the fact that both the global and regional economies require economic activity in the public sector (the "commons") as well as in the private sector. It is also complicated by the fact that we are increasingly recognizing that economic systems must promote human wealth and well-being in the context of ecological adaptation and sustainability.
[Return to top of page.]


References

Banking on People. (2001, April 24). The News Hour with Jim Lehrer (PBS).

Peter L. Berger & Thomas Luckmann. (1966). The Social Construction of Reality. Garden City, NY: Doubleday

Kenneth A. Bruffee. (1993). Collaborative Learning. Baltimore: Johns Hopkins University.

Rachel Carson. (1962). The Silent Spring. Boston: Houghton Mifflin.

Peter Drucker. (1976). The Unseen Revolution. New York: Harper & Row.

Gregg Easterbrook. (1995). A Moment on Earth: The Coming Age of Environmental Optimism. New York: Viking.

Fitts, Catherine Austin. (2002). "Solari and the Rise of the Rule of Law." <http://courtskinner.com/solari/Rise.htm>.

John Kenneth Galbraith. (1958). The Affluent Society. Boston: Houghton Mifflin.

John Kenneth Galbraith. (1975). Money: Whence It Came, Where It Went. Boston: Houghton Mifflin.

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.

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

Garrett Hardin. (1968). The Tragedy of the Commons. Science, 162: 1243-48.

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

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

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 <http://ceres.ca.gov/tcsf/pathways/chapter2.html>.

Bernard Lietaer. (2001). The Future of Money: Creating New Wealth, Work, and a Wiser World. London: Century. See <http://www.transaction.net/money/book/> and <http://www.futuremoney.de>. To order this book or related titles on the theme "The Complexity Sciences & Gaia" go to http://www.janhauser.com/complexity.html and click on the title.

Abraham H. Maslow. (1954) Motivation and Personality. New York: Harper & Bros.

José Ortega y Gasset. (1957). Man and People. New York: W. W. Norton.

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

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

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

Jonathan Rowe. (2001, Summer). The hidden commons. Yes! <http://www.futurenet.org/18Commons/rowe.htm>

Jonathan. Rowe (2002, Autumn). The promise of the commons. Earth Island Journal, pp. 28-30.

Adam Smith. (1976). The Wealth of Nations. Chicago: University of Chicago Press (originally published 1776-78).

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

Lester C.Thurow. (1983). Dangerous Currents. New York: Random House.

 [Return to top of page.]


{
Return to "Sustainable Community Economics" Home Page}

For more information, contact Art Warmoth <Artwarmoth@aol.com>