*DRAFT* A Living World Economy Needs a Living World Economics

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by David Korten

Type: Article [title]
Published May, 2013

***MAY 27, 2013, DRAFT FOR REVIEW AND COMMENT***

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On November 2, 2011, seventy Harvard students walked out of their introductory economic class to protest what they perceived to be a narrow, ideologically based perspective that “fails to equip its students with a broad and critical understanding of economics…[and] contributes to the increasing economic inequality in America.” The professor whose course sparked this rebellion was Greg Mankiw, chair of the Council of Economic Advisers under George W. Bush, advisor to Mitt Romney’s 2012 presidential campaign, and author of Principles of Economics, the most widely used introductory economics text.

In a recent public forum at Union Theological Seminary organized by the Institute for New Economic Thinking, no less than Nobel Laureate Economist Joseph Stiglitz echoed the concerns of the students in his observation that economics as currently taught and practiced is less a science than a faith based religion. In spring of 2013, with support of the New Economics Institute, university students across the United States and Canada organized conferences that question everything from university investments in fossil fuels to the relevance of the university curricula—particularly economics—to the realities of the 21st century world into which they will graduate.
The challenge reflects a growing public recognition that continuing economic instability, extreme and growing inequality, collapsing environmental systems, and political gridlocked fueled by corporate money are all evidence of devastating economic failure for which economists have no credible explanation, let alone a credible solution.
This evident incapacity of the priests of money and markets is leading thoughtful observers, including some professional economists, to take a critical look at the economic theories and methods taught in most universities. They are arriving at a disturbing conclusion. Economics as currently taught and practiced is a faith-based ideology without scientific or moral foundation grounded in mathematical abstractions of questionable relevance to the real world economy. Far from offering valid guidance in addressing the defining economic, social, environmental, and governance issues of our time, the theories and methods favored by most economists are a source of obfuscation and misdirection.
 

Living World vs. Financial World Economies

 
Let’s start with a sober look at a critical source of the systemic failure of the global economy that is playing out unabated in most every nation of the world. The failure is driven in large measure by the conflict between two parallel but interconnected economies grounded in very different values and worldviews. Sometimes described as a conflict between Wall Street and Main Street economies, it is perhaps more accurate to describe it as a conflict between a real living world economy and a virtual financial world economy.
 
The Living World Economy
 
In a healthy living world economy, people and nature join in common cause to make a living for all through productive work and exchange. In this economy, life, in all its many forms, is the defining value. Making a living for all is the defining purpose. The limits of Earth’s generative systems and our human ability to organize and apply available human knowledge, skills, labor, and creativity are the primary constraints.
Our human participation in a living world economy would be well served by a living world economics that honors life as sacred and guides the alignment of human cultures and institutions with the generative systems of the living Earth Community that is the source of our birth and nurture. A living world economics would remind us that we humans are living beings, life exists only in community, and an ethic of cooperation and sharing is essential to healthy community function—much as great religious prophets have taught for millennia and the leading edge of science now confirms. This economics would also remind us that money is only a unit of account useful in facilitating beneficial exchange beyond one’s family and close friends and any central bank can easily create it with a computer key stroke.
Lacking a true living world economics, we are prone to forget these basic truths and embrace the beguiling promises of the financial world economy.
 
The Financial World Economy
 
In the financial world economy, money is the defining value and making money is the defining business purpose. Financial economy proponents embrace a belief system in which money is the measure of wealth, money and free markets are sacred, a lack of money is the primary constraint to universal human prosperity, and power properly resides with institutions devoted to maximizing private financial return to private financial assets.
The financial world economy is pretty much a pure abstraction with many of the characteristics of a virtual reality computer game minus the colorful images. The game’s primary players are mathematicians, accountants, lawyers, computer programmers, and traders who collaborate and compete in complex schemes to game the living world economy’s accounting system to reward themselves with financial credits without the burden of producing anything of real value. By the gamers’ belief system the unrestrained pursuit of financial greed is moral duty to society. All evidence to the contrary, these gamers share as an article of faith a belief that the invisible hand of the sacred market will magically turn the player’s disregard for the well-being of others into growing prosperity for all.
Beyond its threat to public morality, the virtual financial world computer game would be little more than a curiosity but for the fact that its players control the creation and allocation of money, the accounting tokens by which we in the living world allocate the real resources on which all life depends. By controlling the accounting system, they control access to our means of living. They use this extraordinary—and largely invisible—power to reward themselves with real world financial credits for successfully inflating financial bubbles, manipulating markets through fraud and deceit, arbitraging small price differentials between markets, and monopolizing real world resources to extract unearned monopoly profits.
 
As the high functioning living world economy organizes to create real value, the financial world economy organizes to expropriate real value.
Whether from naïve innocence or malicious intent, economists aid and abet the deception by equating growth in GDP and financial assets with wealth creation. When asked to explain what Wall Street financial games contribute to real wealth creation, many economists respond with vague arguments about market liquidity, economic efficiency, and 401k retirement plans.
 
When presented with evidence that these financial games are driving social and environmental breakdown, most economists respond with calls for more deregulation and tax breaks for the rich to accelerate the growth of GDP. By the tenants of their faith, as GDP grows, markets will respond to end poverty, provide technological fixes for environmental problems, and bring eternal peace and prosperity for all. Unfortunately, however, no matter how fast GDP grows, it never seems enough to end poverty, heal the environment, or achieve peace. So why don’t mainstream economists seem to notice such obvious gaps between theory and reality? True scientists seek to expose and learn from such gaps. True believers seek to deny them.
 

Economics: Science or Faith Based Ideology?

 
A true science begins and ends with systematic observation of real world phenomena to formulate, test, and adapt its theories to fit observed reality. Interdisciplinary science historian Robert Nadeau points out that economics derived its theories not from observations of real economies, but rather from a mathematic model adapted from physics. In this adaptation, economists assumed that an individual economic actor is equivalent to a physical particle and that economic utility is equivalent to energy. They ignored the obvious differences between an inanimate sub-atomic particle and a living human decision maker and the awkward fact that the concept of utility is too vague to be accurately measured or tested.
 
Economists have largely ignored these deficiencies and concentrated instead on the ever more complex elaboration of the basic model. Nor do they express concern that the adapted model on which this elaboration is based has long since been abandoned by physicists as overly simplistic and untestable.
Neva Goodwin, co-director of the Global Development and Environment Institute at Tufts University, points out that economists are often explicit that their concern is more with the internal consistency of their mathematical models than with real world validity. This may explain why most economists have a limited understanding of money, markets, institutions, power, living systems, human behavior, and history and why their media commentaries rarely go beyond shallow recitations of economic statistics interpreted through an uncritical ideological lens.
 
Academic disciplines, including true sciences grounded in real world observation and testing, tend to develop internal cultures and institutional interests that lead to rewarding those who affirm the discipline’s established worldview or paradigm rather than those who challenge it. Economists have taken this myopia to an extreme, perhaps because the stakes go beyond questioning a particular worldview. They include the risk of undermining the status of economics as a science.
The lack of self-critical intellectual curiosity also helps explain why mainstream economists seem not to notice that the primary business of Wall Street gamers is manipulating the economy’s accounting system to expropriate wealth without contributing anything to its creation.
Indeed, most economists seem highly prone to align with and provide intellectual cover for Wall Street interests. Perhaps this is because the gamers not only share the economists’ uncritical acceptance of money as the measure of wealth and the free market as the sole legitimate arbiter of resource allocation choices, they as well offer economists lucrative employment, consulting contracts, and research grants—and prestigious media exposure. Thus favored by Wall Street interests, the discipline of economics has become increasingly narrow, intolerant of contrary opinions, and committed to ideological purity. Without embarrassment, it now serves as a highly effective propaganda arm of the Wall Street takeover.
 
Economists also played a critical role in preparing the way for this takeover through their successful effort to make GDP growth the defining measure of development
progress and prosperity.
 

GDP Growth and the Power of Money

 
As previously noted, money is a unit of account invented by humans to manage reciprocity in market-based exchanges between strangers. Properly used, it is an important and beneficial human invention essential to prosperity, organization, and innovation in complex and densely populated societies.
 
In healthy human societies, monetary exchange complements, without supplanting, the nonmarket exchanges of daily life that build the foundation of mutual trust and social cohesion essential to human happiness and well-being. If, however, money becomes a substitute for caring relationships and a financial oligarchy is allowed to gain monopoly control over its creation and allocation—as is currently the case—the near certain outcome is extreme wealth concentration, moral decline, and social breakdown.
 
The award-winning documentary “Ancient Futures” beautifully portrays life in traditional Ladakh, a long isolated Himalayan community in India, in which people led happy and productive lives with minimal dependence on monetized exchange. Because such communities had little or no need for money, bankers had no power over them. Because GDP takes no account of non-monetized exchange, the GDP in such societies was near zero.
 
A substantial portion of GDP growth represents little more than a monetization of relationships previously based on mutual trust and caring. In traditional subsistence economies, people obtained their food from their own land and processed it by their own hand. They cared for their own children, produced their own clothing and shelter from local materials, and shared their labor and skill—all with little or no need for money.
 
The early stages of what we call “development” consists largely of monetizing people’s relationships to one another and to the land and other resources from which they fashion their subsistence livelihoods. The process most commonly begins with converting men from unpaid subsistence producers on their own land to paid landless agricultural labor working the fields of others. The conversion of women from home makers who process food, produce clothing, and provide care for their own children into paid workers processing food, producing clothing, and providing childcare for others eventually follows. As economies thus “develop,” power shifts from living people and communities to bankers and global financial systems that take their cut on every transaction.
 
When economists cite growth in the number of people who now earn more than $2 a day as proof that development is lifting people out of poverty, they to not celebrate improvements in the quality of life, so much as an erosion of the bonds of mutual caring and cooperation and a corresponding growth in the power of banker’s. 
 

Living Beings on a Living Earth

 
For some 200,000 years modern humans lived as part of nature. Beginning with the era of imperial domination some 5,000 years ago, human societies began to embrace the idea that humans are separate from and superior to nature and we turned from relating to Earth as symbiotes (contributing cooperator organisms) to relating as pathogens (disease causing organisms harmful to their host).
 
Discoveries at the leading edge of science tell a powerful cautionary tale. The physical state of early Earth when the first living organism began to appear made it inhospitable to anything resembling human life. It took the trillions upon trillions of organisms of Earth’s emerging, evolving biosphere 3.5 billion years to filter excess carbon and toxins from Earth’s air, waters, and soils and sequester them deep underground to create the conditions required on Earth’s surface to support human life.
 
Now, in a fit of collective insanity, we have created an economy that celebrates and rewards the accelerating extraction and release of those sequestered carbons and toxins back into Earth’s atmosphere, waters, and soils in a self-destructive effort to dominate, suppress, and control the natural processes that birthed and nurture us.
Rather than expose the insanity, mainstream economists assure us that it is all to the good, because this behavior grows GDP and the financial assets of wealthy job creators and thus creates the wealth required to provide a better life for all.
 
Marginal adjustments to the decision models of a failed faith-based economic ideology may slow the damage. To set a positive course requires a reality-based economics that honors the generative systems of a living Earth as the source of all true value and regards the preservation of the natural vitality of these systems as a practical and moral duty to creation and ourselves.
 

A Real World Economics for a Living World Economy

 
Creating a real world economics for a living world economy starts where any true science must begin: with disciplined observation of the living world. Critical questions include:
 
  • How do Earth’s generative systems self-organize and what are the most robust measurable indicators of their healthful function?
  • What are the most robust and measurable indicators of positive and negative human impact on these systems?
  • What are the essential determinants of human health and happiness?
  • What are the most promising opportunities to enhance human health and happiness while simultaneously bringing ourselves into balance with the generative capacity of Earth’s natural systems?
 
The findings of real world scientists working at the frontiers of natural and biological sciences and the experience of citizens who are pioneering the development of local economies and local built infrastructure based on living system principles, suggest that a real world economics will:
 
  • Look to resilient, self-organizing, self-reliant, place-based communities as the primary units of organization.
  • Favor enterprises that are transparent, democratically accountable, local, cooperatively owned, and dedicated to contributing to community health and well-being.
  • Assess the well-being of the society and the performance of the economy against a dashboard of indicators of the well-being of its individuals, households, communities, and natural systems.
  • Support policies and institutional structures that optimize the sustained health and capacity of living Earth’s generative systems; and allocate the human share of their available surplus in a manner that assures every person access to the means and opportunity to achieve a healthy, productive, and meaningful life as a contributing community member.
  • Treat money as a transparent system of accounts with clear rules that serves best when the power to create and allocate money resides with cooperatively owned local financial institutions that issue credit in response to local needs and opportunities for productive investments that generate widely shared benefits.
  • Give high priority to restoring the caring relationships of healthy family and community life as a primary goal of economic policy and celebrate the consequent decline in GDP as evidence of progress toward rebuilding community and increasing efficiency in the use of real resources.
 
Many communities and even some nations, are intuitively applying these principles as they work to recover from and move beyond the devastation wrought by the financial world gamers and complicit economists. Popular practice in these efforts currently leads the development of the formalized body of supporting theory and method required to take these early experiments to scale. Colleges and universities have so far given little attention to learning from or contributing to the development of supporting theory and method. Perhaps student demands on the academy to rethink and restructure may help change this.
 
* * * * * * *
The monumental failure of our dominant economic institutions brings a corresponding decline in the credibility of economists who daily demonstrate their inability to explain or to resolve the failure.
 
The Harvard students who walked out of their economics course had good reason to rebel—as do the students who are raising related challenges in universities and colleges across the United States and Canada. Economics as taught in most universities and colleges is an intellectually and morally bankrupt enterprise that puts the human future at grave risk.
 
Rethinking and restructuring the narrow siloed and often outmoded disciplinary structures of our universities is long overdue. It is imperative that they devote serious resources to advancing intellectual initiatives committed to building new bodies of theory and method relevant to the realities, imperatives and opportunities of a 21st century world. A critical look at economics departments devoted to teaching and perpetuating as science a failed, deeply destructive, and highly elitist ideology is a good place to start.
 
It will take decades to develop a full- fledged science-based living-world economics and to train a new cadre of living world economists. Fortunately, the millions of people who are already engaged in building life-serving living-world economies and communities from the bottom up are creating the necessary foundation of real world experience and understanding.
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Dr. David Korten is the author of Agenda for a New Economy: From Phantom Wealth to Real Wealth, The Great Turning: From Empire to Earth Community, The Post-Corporate World: Life after Capitalism, and the international best seller When Corporations Rule the World. He is co-founder and board chair of YES! Magazine, co-chair of the New Economy Working Group, founder and president of the Living Economies Forum, an associate fellow of the Institute for Policy Studies, and a member of the Club of Rome. He earned MBA and PhD degrees from the Stanford University Graduate School of Business and served on the faculty of the Harvard Business School. He blogs for YES! Magazine. See also his 2011 presentation “Taking Ecological Economic Seriously” to the U.S. Society for Ecological Economics.