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Table
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Resource
Guide
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What
is this madness? The economy is booming. The stock market is
setting new records. The US is
again heralded as the world's most competitive economy.
We are assured that we are richer than ever
before and getting richer by the day.
 Yet we are also told
there is no longer enough money to
provide an adequate education for our children, health
care and safety nets for the poor, protection for the
environment, parks, a living wage for working people, public
funding for the arts and public radio, or adequate pensions
for the elderly. According to the official wisdom,
even though richer, we can no longer afford what
we once took for granted. How is this possible? What's
gone wrong?
A quick hint. The
problem most definitely is not a lack of
money. The world is awash in it. The world's 450 billionaires
alone have combined financial assets greater than the
combined annual incomes of half of humanity.
The problem is this:
a predatory global financial system, driven by the
single imperative of making ever more money for those who
already have lots of it, is rapidly depleting the real capital the
human, social, natural, and even physical capital on which our
well-being depends.
The truly troubling
part is that so many of us have
become willing accomplices to what is best described as a war of
money against life. It starts, in part, from our failure to recognize
that money is not wealth. Wealth is something that has real
value in meeting our needs and fulfilling our wants. Modern money is
only a number on a piece of paper or an electronic trace in a computer
that by social convention gives its holder a claim on real
wealth. In our confusion we concentrate on the money to the
neglect of those things that actually sustain a good life.
It is striking how
difficult our very language makes it to
express the critical difference between money and real wealth. Picture
yourself alone on a desert island with nothing to sustain yourself
but a large trunk filled with bundles of hundred dollar bills. The
point becomes immediately clear.
During a visit to
Malaysia some years ago I met the minister
responsible for forestry. In explaining Malaysia's forestry
policy he observed that the country would be better off
once its forests were cleared away and the money from the sale was
stashed in banks earning
interest. The financial returns would be greater. The
image flashed through my mind of a barren and lifeless world
populated only by banks with
their computers faithfully and endlessly compounding the
interest on the profits from timber sales.
The importance of
the difference between money and wealth is not limited
to people who find themselves stranded on desert islands. It is basic
to understanding why the more money we have as a nation the less we
can afford. It is as well a key to understanding the underlying
pathology of the global economic system.
Money pathology
Think of a modern
money economy as comprised of two related subsystems.
One creates wealth. It consists of factories, homes, farms, stores,
transportation and communications facilities, the natural
productive systems of the
planet, and people going to work in factories, hospitals, schools,
stores, restaurants, publishing
houses, and elsewhere to produce the goods
and services that sustain us. The other creates and distributes money
as a convenient mechanism for allocating wealth. In a healthy economy
the money system serves as dutiful servant of wealth creation, allocating
real capital to productive investment and rewarding those who
do productive work in relation to their contribution.
In a healthy
economy, money is not the dominant value, nor
is it the sole or even dominant medium of exchange. Indeed, one
of the most important indicators of economic health is the
presence of an active economy
of affection and reciprocity in which people do a
great many useful things for one another with no expectation of
financial gain. Such voluntary sharing creates and maintains
the fabric of trust and mutual caring of which the social capital
of any healthy family, community, or society is comprised.
Pathology enters the
economic system when money, once convenient
as a means of facilitating commerce, comes to define the life purpose
of individuals and society. The human, social,
and natural capital on which the well-being of any society
depends becomes subject to sacrifice on the altar of money making.
Those who already have money prosper at the expense of those
who don't. It is a social pathology called finance capitalism.
When financial
assets and transactions grow faster than
growth in the output of real wealth, it is a strong indication
that the global economy is
getting sick. A study by McKinsey and Company found that from 1980
to 1992 financial assets in the
developed countries of the OECD grew twice as fast as
their underlying economies and bullishly predicted that future
financial growth would be three
times real output growth. [William Greider, One World, Ready
or Not; New York: Simon and Schuster, 1997, page 232.] Indeed,
as the Malaysian minister
noted, in the global economy money is growing a great deal faster
than the trees.
Furthermore, the
biggest profits are going to those who deal in pure
finance. For 1996, the shareholders of the seven largest US money
center banks reaped an average
total return of 44 percent. Mutual funds specializing in
finance averaged a 26.5 percent return, besting all other industry
categories by a wide margin.
Funds specializing in much-touted technology stocks came in
a poor second at 21 percent.
The growing
dominance of money is also revealed in the increasing monetization
of human relationships. Not long ago, even in the most supposedly advanced
countries, half of the adult population worked without pay to maintain
home and community. These are among the most fundamental and important
of functions in a healthy economy. Now, it typically takes two adults
holding two to three paid jobs between them to support a
household. Child and home care
is either left undone or hired out. Community service becomes the
work of public employees to the extent there is public money to
pay them. As the social capital
of caring relations is depleted, family and community life fall
into disarray.
Pyramids, bubbles and the
global casino
Albania recently
suffered a national crisis brought on by the collapse
of fraudulent pyramid schemes. Westerners wise in the ways of the
market were bemused by the
naiveté of the Albanians who fell
for "investment" schemes promising returns as high as 25
percent a month with no real
business activity behind them. During the course of the nationwide
speculative frenzy, farmers sold their flocks and urban dwellers
their apartments to share in
the promised bonanza of effortless wealth. The inevitable collapse
sparked widespread riots, arson, and looting when the Albanian
government failed to make up
the losses.
Those inclined to
laugh at the innocence of the Albanians should first
consider their own response to proposals that social security
contributions be invested in a
stock market that even Federal Reserve Chairman Alan Greenspan
says is substantially over
valued. The speculative financial bubble,
which involves bidding up the price of an asset far beyond its
underlying value, is little
more than a sophisticated variant of the classic pyramid scam.
Investing in a
bubble is a form of gambling and it isn't entirely naive. Who
cares if there is nothing behind it? The bubble is the action. The
trick is to place big bets and
get out before it bursts. It is a
game of nerves. The action gets especially exciting when banks are
willing to accept the inflated
assets as collateral and lend new money into existence to stake further
play, which pushes prices ever higher. This process of borrowing
into bubbles with newly created
money is key to making financial wealth increase faster than
real wealth. Furthermore, when a leveraged bubble bursts and banks
are left with substantial
portfolios of uncollectible loans, governments are almost forced
to step in with a bailout to stop a banking collapse as the US government
did in the case of the Great Depression and the more recent
Savings and Loan crisis. This
amounts to another money transfer, this time from taxpayers to
those with money.
Betting on financial
bubbles is only one of the lucrative games that attract
players to the global finance casino. There are as
well opportunities to speculate on short-term price movements, buy
and sell simultaneously in different markets to
profit from minute price differences, and bet on derivatives
contracts. While economists have become exceedingly facile in rationalizing
how such activities actually benefit society, in truth they are
more accurately described as
forms of legal theft by which a clever few expropriate
rights to the real wealth of society while contributing more to its
depletion than to its creation.
Consuming capital to make
money
William Greider, in
his newly released book One World Ready or Not, observes
that corporations get caught in the trap of having to compete for investment
funds against the often more lucrative financial games of the
world of pure finance. With the rare exception of companies with a
hot product or distinctive
market niche, in an unregulated global economy most corporations
have little choice but to use their economic and political power
to externalize ever growing
portions of their costs onto the community. The dynamics of
a competitive global economy favor the cost externalization
process because they pit
workers and communities against one another in a deadly race to
the bottom. By competing for
the jobs corporations offer, workers and communities
are compelled to deplete real wealth to make corporations more profitable.
Responding to the
pressures of financial markets, corporations:
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Deplete
social capital by moving production to places
where they can pay less than a living wage or use the threat
of moving jobs to break up
labor unions and bargain down wages. Gains from productive
activity are thus shifted from working people to money
people. Furthermore, the stress of attempting to maintain self
and family on insecure jobs paying less than a family
wage results in family breakdown and violence, depleting the social
capital of society.
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Deplete
human capital by hiring young women in places like the
Mexican maquiladoras under conditions that lead to
their physical burnout
after three or four years. Once eyesight problems, allergies,
kidney problems, and repetitive stress injuries deplete their
efficiency, they are replaced by a fresh supply of younger women.
Such practices destroy lives and deplete society's human capital.
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Deplete
the Earth's natural capital through strip
mining forests, fisheries, and mineral deposits, dumping
wastes, and aggressively marketing toxic chemicals.
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Deplete
institutional capitalby fighting environmental and
other regulations essential to the long-term health and viability
of society. Corporations further demand direct public subsidies,
subsidized infrastructure, and relief from their fair share of
taxes. This shifts a greater share of the tax burden onto
working people and
undermines the credibility and performance of government in
its essential functions, thus eroding the legitimacy of
democratic government.
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Deplete
business capital. Corporate managers are forced into
a short-term view even in regard to their own operations. They
cut investment in research
and training essential to their own future
prospects. As they downsize, the sharp employee quickly learns
to use the job only to build a resume to attract a higher bidder.
These actions erode the corporation's own human, intellectual,
social, and physical capital.
Intent
on making ever more money for those who already have
money even at the cost of depleting the natural, human, institutional,
and social capital on which the very survival of society depends
the money system becomes
like a cancer that consumes its host and ultimately destroys itself.
The CEO of a
publicly traded corporation who fails to
maximize profits because of a moral aversion to engaging in
such predatory practices is almost certain to be eliminated by
the system, even if he they are almost all men runs
an otherwise profitable operation. Where the shareholders don't
step in, a corporate raider most surely will.
The
money system becomes
like a cancer that consumes
its host and ultimately
destroys itself
Pacific Lumber
Company for years pioneered the development of
sustainable logging practices on its substantial holdings of
ancient redwood timber stands
in California. It also provided generous benefits to
its employees, fully funded its pension fund, and maintained a
no-layoffs policy during
downturns in the timber market. This made it a good
citizen. It also made it a prime takeover target. Corporate raider
Charles Hurwitz gained control
in a hostile takeover. He immediately doubled the cutting
rate of the company's holding of thousand-year-old trees, reaming a
mile-and-a-half corridor into the middle of the forest that he jeeringly
named "Our wildlife-biologist study trail." He then
drained $55 million from the company's $93 million pension fund
and invested the remaining $38
million in annuities of the Executive Life Insurance Company
which had financed the junk bonds used to make the purchase and
subsequently failed.
The remaining
redwoods are now the subject of a last-ditch effort by
environmentalists to save them from clearcutting.
Professional buy-out
artists are drawn like bees to honey by
a socially responsible firm that internalizes its environmental
costs, pays union wages,
invests in worker training, fully funds its pension fund, and
pays its full share of taxes. In a system that puts short-term
profits first, these are
inefficiencies to be eliminated.
Over the last
several years, the biggest corporations have performed
as the financial markets have demanded increasing their
profits by an average of 20 percent a year. In 1996, the 30 US corporations
whose stock prices comprise the Dow Jones Industrial Average returned
to their shareholders an average of 28.2 percent for the year, a
substantial increase from the five-year average of 18.3 percent.
Each such increase further
lifts the floor under investor expectations and increases
the pressure on top managers to maintain such returns in the
future by any means.
The global
corporation is arguably the most powerful instrument
for concentrating power and wealth ever devised. Indeed,
of the 100 largest economies in the world, 51 are corporations. The
economy of Mitsubishi is larger than that of Indonesia, the
world's fourth most populous country and a land of enormous
natural wealth.
Because
we have so little experience
in designing money systems to
create
societies that benefit people
and nature,
we will need to be creative
Healing
the money system
To heal society we
must heal the money system. This will involve
a two-fold process of reducing money's importance in our lives
and restoring its appropriate role in service to the creation and protection
of real wealth.
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It
will be necessary to de-myth money. I earned MBA and
PhD degrees from one of the world's leading graduate schools
of business, but I was never taught the difference between
making money and creating
wealth, nor how to distinguish between productive and
predatory investments. Such lessons should be a basic part of
education for business or responsible citizenship.
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We
need to reweave the social fabric. In a society
in which relationships are defined by love, generosity, and
community, the importance of money in mediating personal
exchange and allocating
resources is likely to decline markedly. This will require
reducing monetary dependence and restoring non-monetary
exchanges through a process
that selectively delinks individuals, families, and communities
from dependence on the predatory institutions of a
global economy, downscaling consumption to reduce dependence
on paid work, increasing
reliance on local products to meet basic needs, and strengthening
the engagement of all persons in the productive life of family
and community.
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The
truly monumental task will be to redesign the money
system to make money the servant of the creation and
protection of real wealth.
Among other things, corrective measures will need to: 1) make speculation
unprofitable; 2) limit the growth of financial bubbles; 3)
increase incentives for cooperation among people and
communities; 4) reward
productive work and investment; 5) create a just distribution of
claims to real wealth; 6) provide incentives for patient and locally
rooted investment in real assets; and 7) strengthen the social
fabric of family and community.
A
common currency exclusive to the members of one city or
geographic region is one means of moving towards these goals.
Another is to introduce zero-
or negative-interest money. We should also consider
whether it makes sense for private banks, rather than government or
communities, to create money, and seriously consider substantial taxes
on short-term speculative gains.
The purpose of such
measures is not to promote global growth
and competition, but rather to create healthy and prosperous societies
that provide economic security and just rewards for productive contribution
to their members, have a strong and caring social fabric,
and live in balance with their natural environment. Because
we have so little experience in designing money systems to create
societies that benefit people and nature, we will need to be creative;
there are no tested guidelines.
Many of the best
minds of our time are engaged in finding ways
to use the finance system to claim ever more of the world's real
wealth for those who already control much of it. But there are also
those who are concerned with how we might redesign money to serve a
society that works for all people and preserves the natural environment.
The articles that follow contain some of their thinking and experimentation.
David Korten has an MBA and PhD from Stanford University's
Graduate School of Business, has served on the faculty at the
Harvard Graduate School of Business, and has spent many years in
Asia on assignment from the Ford Foundation and the US Agency for
International Development. He is the author of When
Corporations Rule the World (Berrett-Koehler and Kumarian
Press, 1995), president of the People-Centered Development Forum,
and chair of the board of Positive Futures Network, publisher of YES!
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