A Bad Theory

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As part of the New Economy 2.0 series 

 

By David Korten

Many years ago a wise Canadian colleague, Tim Brodhead, explained to me why most efforts to end poverty fail. “They stop at treating the symptoms of poverty, such as hunger and poor health, with food programs and clinics.” They never ask the obvious question: “Why do a few people enjoy effortless abundance, while billions of others who work far harder experience extreme deprivation?”

I realized it was the same lesson my business school professors had drummed into my head in my student days. “The visible problem – a defective product or an underperforming employee – is a symptom of system failure. Look upstream to find and fix the problem at its source. Step back and look at the big picture.”

Tim summed up his observation with a profound lesson, “If you act to correct a problem without a theory about its cause, you inevitably treat only the symptoms.”

I soon found myself asking a yet larger question: “Why does our economic system consign billions of people to degrading poverty, destroy Earth’s ecosystem and tear apart the social fabric of civilized community?”

It turns out the consequences of acting on a bad theory based on a false premise can be even worse than acting without a theory. Indeed, it can lead to collective self-extinction.

Cultural historian Jared Diamond tells of the Viking colony on the coast of Greenland that perished of hunger next to waters abundant with fish; it had a cultural theory that eating fish is not “civilized.”

As we are perplexed by the foolishness of the Viking colony, future generations may be perplexed by our equally foolish devotion to an economic theory that using borrowed money to speculate on financial bubbles will eventually result in prosperity for all. No need for concern that in the process we are trashing Earth’s life support system and destroying the social bonds of family and community. Eventually, or so the theory goes, we will have enough money to heal the environment and end poverty.

As I looked ever further up-stream I was startled to find the source of our foolish behavior is an illusion: the belief that money – a mere number created with a simple accounting entry that has no reality outside the human mind – is wealth—indeed the standard against which all other forms of wealth are properly measured.

Because money represents a claim on so many things essential to our survival and well being, it is easy to confuse it with the things for which it may be exchanged. From there we easily slip into evaluating economic performance by the rate at which it is growing phantom wealth financial assets. Focused on returns to money, we embrace GDP growth, essentially a measure of the rate at which human relationships are being monetized and commodified and real assets are being converted to financial assets, as our primary measure of progress.

Once the belief that money is wealth is implanted firmly in the mind, it is easy to accept the idea that money is a storehouse of value rather than simply a storehouse of expectations, and that “making money” is the equivalent of “creating wealth.”

This misdirection ultimately explains why we tolerate an economy that cycles violently between boom-and-bust; decimates the middle class; forces families to choose between paying the rent, putting food on the table and caring for their children; and wantonly destroys the relationships of community and Earth’s biosphere.

It explains why we have allowed Wall Street to assume control of our most powerful economic, political and media institutions to make financial speculation, accounting fraud and the inflation of financial bubbles our national economic priorities. It explains why we allow the perpetrators of this fraud to reward themselves with obscene bonuses for creating phantom financial assets that inflate their claims to the real wealth created by others – an act that in a slightly different context would be considered counterfeiting, a form of theft.

The Wall Street edifice sits on a foundation of a false theory grounded in grand illusion. Spending trillions of dollars to renovate the edifice is a fool’s errand. Our best hope for a viable future is to build a New Economy grounded in reality-based theories and devoted to the sustainable production and exchange of real goods and services to meet the real needs of our children, families, communities and natural environmental systems.

About David Korten

David Korten (livingeconomiesforum.org) is the author of Agenda for a New Economy, The Great Turning: From Empire to Earth Community and the international best seller When Corporations Rule the World. He is board chair of YES! Magazine, co-chair of the New Economy Working Group and a founding member of Business Alliance for Local Living Economies (BALLE).

About New Economy 2.0 

Visionary economist David Korten introduces a national conversation series, New Economy 2.0, on CSRwire Talkback based on his acclaimed book, Agenda for a New Economy, 2nd edition. For the next several weeks, Korten will summarize the main points and key lessons of each chapter of his book, leading from a dissection of what went wrong in the “phantom wealth Wall Street economy” to the presentation of a vision of a world of real wealth Main Street economies that support strong middle class societies, honor real market principles and work in partnership with Earth’s biosphere.

New Economy 2.0 envisions an economy in which life is the defining value and power that resides in people and communities. It contrasts with the popular New Economy 1.0 fantasy of a magical high-tech economy liberated from environmental reality and devoted to the growth of phantom wealth financial assets.

This exciting, new series is co-published by CSRwire and YES! Magazine.

The arguments presented here are developed in greater detail in Agenda for a New Economy available from the YES! Magazine Web store.

Talkback Readers: What thoughts do you have on SRI and participating in financial markets? Can the bubble mentality be avoided? How? Share your thoughts on Talkback!