Photo by Knight725.

The successful function of mature democracies, caring communities, and living economies requires caring, mature, and responsible citizens who care not only for their own well-being, but as well for that of their neighbor. Given the experience of human history, many will ask with good reason whether this might be contrary to human nature.

We humans are complex beings with many possibilities. Empire has demonstrated our capacity for extremes of individualistic greed, hubris, deceit, ruthless competition, and material excess. Yet most people daily demonstrate our human capacity for caring, sharing, peacemaking, and service.

The former are the possibilities of our lower nature; the latter, the possibilities of our higher nature. Contrary to what morally challenged market fundamentalists would have us believe, both are within our means. What in fact makes us distinctively human is our capacity to choose which of our many possibilities will define us as individuals and societies.

We humans have a complex three-part brain. At the base is our “reptilian” brain.

It coordinates basic functions, such as breathing, hunting and eating, reproducing, protecting territory, and engaging the fight-or-flight response. These functions are essential to survival and they are part of our nature. The are not, however, characteristic of our human nature, but rather of our reptilian nature—defined by the most primitive and least-evolved part of our brain.

Layered on top of the reptilian brain is the limbic or “mammalian” brain, the center of the emotional intelligence that gives mammals their distinctive capacity to experience emotion, read the emotional state of other mammals, bond socially, care for their children, and form cooperative communities.

The third and, in adult humans, largest layer is the neocortical brain, the center of our capacity for cognitive reasoning, symbolic thought, awareness, and highly developed self-aware volition. The neocortical brain is the source of our capacity for choice, including our capacity for moral choice, and our capacity to decide whether to create an economy that celebrates and rewards our reptilian nature or our distinctively human nature.

Most of the development of the limbic and neocortical brains essential to actualizing the capacities that make us most distinctively human occurs after birth and depends on lifelong learning acquired through our interactions with family, community, and nature. Developmental psychologists describe the healthy pathway to a fully formed human consciousness as a progression from the self-centered, undifferentiated magical consciousness of the newborn to the fully mature, inclusive, and multidimensional spiritual consciousness of the wise elder.

Scientists who use advanced imaging technology to study brain function confirm that the mature human brain is wired for caring, cooperation, and service. Their studies reveal that merely thinking about another person experiencing harm triggers the same reaction in a mentally healthy adult brain as that of a mother who sees distress on her baby’s face.

Conversely, engaging in an act of cooperation and generosity triggers the brain’s pleasure center to release the same hormone that’s released when we eat chocolate or engage in good sex. In addition to producing a sense of bliss, this hormone benefits our health by boosting our immune system, reducing our heart rate, and preparing us to approach and soothe.

Want the Good Life? Your Neighbors Need It, Too: An interview with epidemiologist Richard Wilkinson, whose research shows that what the healthiest and happiest societies have in common is not that they have more, but that what they have is more equitably shared.

Positive emotions like compassion produce similar benefits. Negative emotions, by contrast, suppress our immune system, increase our heart rate, and shift us into reptilian mode prepared to fight or flee.

It is entirely logical that we humans have an instinctual desire to cooperate and protect the group. We are helpless as infants and even as adults are individually weak. As a group, however, we are the strongest of Earth’s living creatures. This in turn creates a moral obligation to use this power responsibly for the good of the whole. These findings are further confirmed by the pleasure that most of us experience being a member of an effective team or extending an uncompensated helping hand to another being.

Behaviors driven by our lower, more narcissistic, orders of consciousness are perfectly normal for young children, but they become sociopathic in adults and are easily manipulated by advertisers, propagandists, and political demagogues. Tragically, persons who have been thwarted on the path to maturity are those most likely to engage in the ruthless competition for positions of unaccountable power—and to abuse that power when they succeed.

Just as we have chosen to create economies that reward and celebrate the sociopathic greed and ruthless competition of our reptilian nature, we can and must now create economies that nurture and reward the caring, sharing, peacemaking, and service of our distinctively human nature.

[Next: The World of Our Dreams]

David Korten (livingeconomiesforum.org) is the author of Agenda for a New Economy, TheGreat Turning: From Empire to Earth Community, and the international best seller When Corporations Rule the World. He is board chair of YES! Magazine and co-chair of the New Economy Working Group. This Agenda for a New Economy blog series is co-sponsored byCSRwire.com and YesMagazine.org based on excerpts from Agenda for a New Economy, 2nd edition.

The ideas presented here are developed in greater detail in Agenda for a New Economy available from theYES! Magazine web store — where there are 3 WAYS TO GET THE BOOK and a 22% discount!

Interested?

•   Agenda for a New Economy available from the YES! Magazine web store.

More by David Korten:

Photo by Goldemberg Fonseca de Almeida.

We humans are living out an epic morality play. For millennia humanity’s most celebrated spiritual teachers have taught that society works best and we all enjoy our greatest joy and fulfillment when we share, cooperate, and are honest in our dealings with one another.

But for the past few decades, this truth has been aggressively challenged by a faith called market fundamentalism—an immoral and counter-factual economic ideology that has assumed the status of a modern state religion. Its believers worship the God of money. Stock exchanges and global banks are their temples. They proclaim that everyone does best when we each seek to maximize our individual financial gain without regard to the consequences for others.

In the eyes of a market fundamentalist, to sacrifice profit for some presumed social or environmental good is immoral. The result is a public culture that proclaims greed is a virtue and sharing is a sin.

Having established control of the institutions of the economy, media, education, government, and even religion, market fundamentalists initiated a global social experiment to test their theory. The results are now in.

The prophets of the older faith traditions were right. Our common future depends on rediscovering their truth and redefining our public culture and governing institutions accordingly.

The following are some of the more visible elements of Wall Street’s global campaign of moral perversion.

• It uses control of media outlets, advertising, and politicians to shape and spread a global culture of individualistic greed, material self-indulgence, ruthless competition, and moral irresponsibility.
• Through the pursuit and celebration of financial gain at any cost, it provides role models for immoral behavior.
• It undermines democracy and the legitimacy of government by buying politicians to do its bidding.
• It uses student loan programs to get the best and brightest youth mired in debts they can repay only by selling themselves to jobs that serve Wall Street interests.
• It buys up and monopolizes control of the world’s land and water resources in anticipation of extracting monopoly profits by charging what the market will bear as scarcity increases.
• It uses its financial power and creative accounting skills to manipulate markets and obscure market signals, as when helping governments hide their debt or helping corporate CEOs hide their insider bets against the future of their own companies.
• It buys the deeply discounted debt obligations of hapless underwater homeowners and countries on the open market and then demands full value payment from governments or philanthropists who step in to lend a helping hand to the afflicted.
• It puts in place global rules requiring that if a government introduces regulations that prevent a foreign corporation from harming or killing people with its toxic products or discharges, the country’s government must compensate the corporation for the profits it estimates it will lose.

By capitalism’s perverse moral logic, if a person sells toxic assets by knowingly misrepresenting them as sound, the fault lies not with the misrepresentation of the seller, but rather with the lack of due diligence on the part of the overly trusting borrower. When the assets prove worthless and threaten both the solvency of both the seller and the borrower, the logic says the party responsible for the misrepresentation has a moral obligation to demand redress from the government, “Buy my toxic assets at face value and make me whole so that I return to my trade in toxic assets, or I will be forced to stop lending and crash the economy.”

7 Steps for Action
Toward a New Economy
Rather than turning again to increased global competition to mend our failing economy, we must instead steer our focus toward cooperation and equality.

Step back to take in the big picture, and it turns out Wall Street market fundamentalists have proclaimed the seven deadly sins of pride, greed, envy, anger, lust, gluttony, and sloth to be virtues. In turn they have proclaimed the seven life-serving virtues of humility, sharing, love, compassion, self-control, moderation, and passion to be sins against the market.

There is a widespread sense that with Wall Street’s apparent recovery, the window of opportunity for serious structural change has passed. Such a judgment, however, is premature. Far from closing, the window of opportunity for serious change continues to widen as public awareness of Wall Street corruption grows and true and appropriate moral outrage builds.

Most psychologically healthy adults recognize in their heart of hearts the moral perversion of the old economy, but may fear to speak up because so many experts—including even some religious leaders—continuously assure us in so many words that greed is good, even that God wants us to be financially rich and financial wealth is a mark of God’s favor.

If all who share a mature moral consciousness find the courage to speak the simple truth that greed is driving us to collective self-destruction and cooperation is essential to our common salvation, we can put the perversion behind us and secure the future of our children.

[Next: Our Human Nature]

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 and co-chair of the New Economy Working Group. This Agenda for a New Economy blog series is co-sponsored by CSRwire.com and YesMagazine.org based on excerpts from Agenda for a New Economy, 2nd edition.

The ideas presented here are developed in greater detail in Agenda for a New Economy available from the YES! Magazine web store — where there are 3 WAYS TO GET THE BOOK and a 22% discount!

Interested?

•   Agenda for a New Economy available from the YES! Magazine web store.

More by David Korten:

• Fix the Economy, Not Wall Street
  Would-be Wall Street regulators aren't asking the right question: How do we create a financial services sector that directs money where it is actually needed?
• Clueless Economists, Smart Ecologists
  David Korten: To successfully address climate change and extreme poverty, the ecology paradigm must replace the traditional economics mindset.
• David Korten: My Defection Story
  How I came to challenge the legitimacy of the institutions I once served.
  

The George Washington statue outside the New York Stock Exchange.

Photo by Mikael Tjemsland.

In an earlier day, our rulers were kings and emperors. Now they are corporate CEOs and hedge fund managers. Wall Street is Empire’s most recent stage. Its reign will mark the end of the tragic drama of a 5,000 year Era of Empire.

Imperial historians would have us believe that civilization, history, and human progress began with the consolidation of dominator power in the first great empires that emerged some 5,000 years ago. Much is made of their glorious accomplishments and heroic battles.

Rather less is said about the brutalization of the slaves who built the great monuments, the racism, the suppression of women, the conversion of free farmers into serfs or landless laborers, the carnage of the battles, the hopes and lives destroyed by wave after wave of invasion, the pillage and gratuitous devastation of the vanquished, and the lost creative potential.

Nor is there mention that most all the advances that make us truly human came before the Era of Empire—including the domestication of plants and animals, food storage, and the arts of dance, pottery, basket making, textile weaving, leather crafting, metallurgy, architecture, town planning, boat building, highway construction, and oral literature.

On the Origins of Corporations
How the buccaneers and privateers of days past came to be the Wall Street profiteers of the present.

As the institutions of Empire took root, humans turned from a reverence for the generative power of life to a reverence for hierarchy and the power of the sword. The wisdom of the elder and the priestess gave way to the arbitrary rule of often ruthless kings. Social pathology became the norm and society’s creative energy focused on perfecting the instruments of war and domination. Priority in the use of available resources went to military, prisons, palaces, temples, and patronage.

Great civilizations were built and then swept away in successive waves of violence and destruction. War, trade, and debt served as weapons of the few to expropriate the means of livelihood of the many and reduce them to slavery or serfdom. Whole empires were subjected to the delusional hubris and debaucheries of psychopathic rulers.

If much of this sounds familiar, it is because in the face of the democratic challenge, the dominator cultures and institutions of Empire simply morphed into new forms.

The ideals of the American Revolution heralded the possibilities of a new era of equality and popular democratic rule, but it was a more modest beginning than we have been taught to believe. Once the former colonies gained their freedom from British rule and declared themselves the United States of America, their new leaders put aside the pronouncement of the Declaration of Independence that all men are created equal and enjoy a natural right to life, liberty, and the pursuit of happiness—and set about securing their own power. 

The king was gone, but the Constitution they drafted with a promise to “secure the Blessings of Liberty” for “We the People of the United States” effectively limited political participation to white male property owners and secured the return of escaped slaves to their designated owners. Colonial expansion followed soon after as the new nation expropriated by armed force all of the Native and Mexican lands between themselves and the distant Pacific Ocean.

Global expansion beyond U.S. territorial borders followed. The United States converted cooperative dictatorships into client states by giving their ruling classes a choice between aligning themselves with U.S. economic and political interests for a share in the booty or being eliminated by assassination, foreign-financed internal rebellion, or military invasion. Following World War II, when the classic forms of colonial rule became unacceptable, international debt became a favored instrument for forcing poorer nations to open to foreign corporate ownership and control. 

We're Number One!
America is number one in quite a few areas—but they're not all accomplishments to be proud of.

Most of the economic, social, and environmental pathologies of our time—including sexism, racism, economic injustice, violence, and environmental destruction—originate in the institutions of Empire. The resulting exploitation has reached the limits that the social fabric and Earth’s natural systems will endure.

As powerful as Wall Street appears to be, its abuse of power has so eroded the economic, social, and environmental foundations of its own existence that its fate is sealed. We the People have a choice. We can allow Wall Street to maintain its grip until it brings down the whole of human civilization in irrevocable social and environmental collapse. Or we can take control of our future and replace the Wall Street economy with the values and institutions of a New Economy comprised of locally owned businesses devoted to serving their communities by investing in the use of local resources to produce real goods and services responsive to local needs.

Either way, Wall Street’s days are numbered. Ours need not be.

[Next: Greed is Not a Virtue]

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 and co-chair of the New Economy Working Group. This Agenda for a New Economy blog series is co-sponsored by CSRwire.com and YesMagazine.org based on excerpts from Agenda for a New Economy, 2nd edition.

The ideas presented here are developed in greater detail in Agenda for a New Economy available from the YES! Magazine web store — where there are 3 WAYS TO GET THE BOOK and a 22% discount!

Interested?

•   Agenda for a New Economy available from the YES! Magazine web store.

More by David Korten:

• Fix the Economy, Not Wall Street
  Would-be Wall Street regulators aren't asking the right question: How do we create a financial services sector that directs money where it is actually needed?
• A System Designed to Crash
  David Korten on why a money system dependent on constant growth can't last.
• War Against the Middle Class
  

  David Korten: Why is the middle class shrinking?

Photo by Nick Ares.

The unrealistic expectation that money should grow effortlessly in perpetuity [see my last blog] is more than an issue of unrealizable expectations. It combines with a Wall Street controlled debt-based money system to create an imperative for the economy to grow the profits of bankers, and thereby the richest among us, to keep the financial system, and thereby the economy, from collapsing.

It is odd that we experienced a financial collapse in 2008 because of a credit crunch, a shutdown on lending, at a time when the world was already awash in money. BusinessWeek’s July 11, 2005, cover story shouted “Too Much Money” and spoke of a savings glut. Its June 11, 2008, European issue reiterated the theme: “Too Much Money, Inflation Goes Global.”

Most discussion of the financial crisis focuses on the details and misses the big picture. First, much of the money was tied up in the Wall Street casino rather than facilitating productive activity in the real economy and was simply pumping up a phantom wealth bubble. Second, virtually every dollar in the system was borrowed, because in our money system, banks create money by lending it into existence. When this debt is used to inflate financial bubbles and support Ponzi schemes, eventual default is inevitable. 

Third, Wall Street and the Federal Reserve are joined in an alliance to keep “wage inflation” below the level of growth in the real cost of living. This assures that the benefits of productivity gains all go to owners rather than being shared with workers. It also keeps inflation confined to financial bubbles that inflate the phantom wealth financial assets of the rich.

Furthermore, it forces the bottom 90 percent of the population—the people who make their living by producing real goods and services—into debt at usurious interest rates to the top 10 percent to cover daily basic daily expenses. Inevitably, the amounts owed exceed the borrower’s ability to repay. The lenders then stop lending and foreclose on the assets of the desperate borrowers.

When a loan is repaid or goes into default, the debt is canceled and the money supply shrinks by that amount. Most loans continue to be repaid, but if new loans are not being issued, the demand for real goods and services falls because people don’t have the money to pay for them. As demand falls, businesses lay off workers, who then join those pushed into default.

The problem appears to be a lack of money, even though the total money in circulation is far more than enough to cover real-wealth exchanges in a rational real-wealth economy. The money, however, is locked up in the Wall Street casino economy rather than circulating in the real Main Street economy. Pouring public bailout money into Wall Street serves only to reflate the bubble. It does nothing to revive the real economy.

The demand by Wall Street for the eventual repayment with interest of nearly every dollar in circulation means that to avoid collapse, the economy has to grow to generate demand for new borrowing to put new money into circulation to pay the interest due to bankers on already outstanding loans. This demand for perpetual growth simply to keep the bankers solvent results in a serious distortion of society’s economic priorities.

Rather than maximizing real well-being, policy makers are compelled to focus on avoiding economic collapse by growing the money economy. A debt-based money system can make sense when the credit funds real investment. When the credit funds current consumption and phantom wealth speculation, the result is ever-increasing debt, inequality, destruction of the natural environment, erosion of the social fabric, and ultimate default.

7 Steps for Action Toward a New Economy

For too long, we have put up with a money system designed to grow the financial assets of rich people at the expense of assuring continuing cycles of economic boom and bust, confining billions to lives of desperation, and reducing Earth to a toxic waste dump. We can do better.

Growth in GDP creates the illusion that we are getting richer, even as we accelerate our material, social, and spiritual self-impoverishment as a species. Fortunately for our common future, people everywhere are waking up to the reality and challenging conventional economic wisdom. They are focusing their attention on rebuilding their communities and local economies to improve human security, health, and happiness without regard to how this impacts GDP, corporate share prices or other bogus indicators of economic well-being. It is an important beginning.

An obvious next step is to replace GDP and other financial indicators with indicators of the health of our children, families, communities, and natural systems as the basis for assessing the economy’s performance. We may then notice that destroying living wealth to create financial wealth is an act of collective suicidal insanity and begin treating money as a useful tool for managing our economic choices rather than as the end to be maximized.

[Next: The End of Empire]

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 and co-chair of the New Economy Working Group. This Agenda for a New Economy blog series is co-sponsored by CSRwire.com and YesMagazine.org based on excerpts from Agenda for a New Economy, 2nd edition.

The ideas presented here are developed in greater detail in Agenda for a New Economy available from the YES! Magazine web store — where there are 3 WAYS TO GET THE BOOK and a 22% discount!

Interested?

•   Agenda for a New Economy available from the YES! Magazine web store.

More by David Korten:

• Phantom Wealth and False Expectations
  It's time we stop expecting money to grow on Wall Street—and start putting people to work creating real wealth to meet real needs.
• Clueless Economists, Smart Ecologists
  To successfully address climate change and extreme poverty, the ecology paradigm must replace the traditional economics mindset.
  
• War Against the Middle Class
  Why is the middle class shrinking?

David Korten: These days, we seem to expect whatever money we don’t immediately spend to grow in perpetuity without effort.

Photo by Keith Ramsey.

It is a curious thing. Unless we stuff it in a mattress, we expect whatever money we don’t immediately spend to grow in perpetuity without effort. We do not expect the same of real wealth. Buildings must be maintained. Machinery must be replaced. Knowledge must be updated. The trust and caring of a community must be continuously renewed. Skills must be practiced. Even wild spaces must be protected from predators, particularly human ones. All of these require a real investment of our time and life energy.

Only phantom financial assets, the product of financial bubbles and fancy accounting tricks unrelated to the production of anything of real use, can grow effortlessly and perpetually—producing phantom expectations that, in the aggregate, can never be fulfilled.

Financial planner Thornton Parker has pointed out phantom wealth expectations are likely to be an issue for baby boomers who built up financial assets during the stock market boom in anticipation of a comfortable retirement. Just as their collective decision to put money into the stock market during their working years helped inflate share prices, so their collective decision to take it out during their retirement deflates those prices, leaving them in potentially desperate straits.

The problem is not confined to retirement accounts. It applies as well to the endowments of foundations, universities and other nonprofits. It applies to the public trust funds of libraries and municipalities, college savings funds, the reserve accounts of insurance companies, personal trust funds and much else.

Wall Street’s phantom-wealth machine has created phantom expectations far in excess of the real wealth available to satisfy them.

Financial figures that get thrown around in relation to the credit crash and financial bailout of 2008 defy both reality and imagination. The financial assets of the richest one percent of Americans before the crash totaled $16.8 trillion, representing what they understood to be their rightful claim against the world’s real wealth. To put that in perspective, the estimated 2007 U.S. gross domestic product was $13.8 trillion and the total federal government expenditures that same year were only $2.7 trillion.

System Failure? Look Upstream
Why it's important to address our economic problems at their Wall Street roots.

Clearly the $16 trillion worth of financial assets that evaporated globally between mid-September and end of November 2008 as the market value of the world’s publicly traded corporations’ share prices fell by 37 percent was phantom wealth—and that was only in publicly traded stock shares. Much of that phantom wealth has since been restored by a stock market recovery, without a corresponding recovery of jobs that put people to work producing real goods and services.

Welcome to the Alice in Wonderland world of phantom expectations.

It isn’t necessary to know the details of Wall Street’s esoteric inner workings to recognize we are dealing with a system that is delinked from reality and operating with no one at the helm.

Nor does it take special genius to recognize when folks are moving around trillions of dollars in secret transactions to generate billion dollar bonuses for themselves and cannot explain in a credible way where the money is coming from or where it’s going, and cannot make a credible case it is serving a beneficial purpose, they are probably up to no good.

Beyond the more visible economic, social, and environmental consequences of Wall Street excess, it has also destroyed the integrity of the money system and created expectations that society has no means to fulfill. No one is even asking how the inevitable loss of unfulfillable expectations might be fairly distributed. A given dollar doesn’t come with a marker that tells us whether it was earned through productive labor or is a product of financial manipulation and accounting tricks.

When the Fed creates money with a wave of an accountant’s magic pen, it is creating phantom financial assets. This can be sound policy if the phantom financial assets put unemployed people to work creating real wealth by producing real goods and services of real value. If the Fed’s pen is used simply to re-inflate financial bubbles or keep Ponzi schemes afloat, it is simply playing accounting games to hide the real problem and delay the inevitable reckoning.

The sooner we realize the real nature of the problem, seek an orderly resolution of the unrealizable phantom wealth claims and give priority to directing money to where it will put people to work creating real wealth to meet real needs, the greater our hope for a viable future.

[Next: A System Designed to Crash]

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 and co-chair of the New Economy Working Group. This Agenda for a New Economy blog series is co-sponsored by CSRwire.com and YesMagazine.org based on excerpts from Agenda for a New Economy, 2nd edition.

The ideas presented here are developed in greater detail in Agenda for a New Economy available from the YES! Magazine web store — where there are 3 WAYS TO GET THE BOOK and a 22% discount!

Interested?

•   Agenda for a New Economy available from the YES! Magazine web store.

More by David Korten:

• War Against the Middle Class
  Why is the middle class shrinking?
  
• Jobs, Not Handouts
  Wall Street's plunge shows what's wrong with phantom wealth. Why support that system when we could be creating jobs in the real economy?
• The Illusion of Money
  Real wealth or phantom assets? David Korten explores the difference between the kind of wealth that makes life better and the phantom wealth created by financial speculation.

The Fleet of the East India Co., Homeward Bound from China, Under the Command of Sir Nanthaniel Dance by William Daniell, 1804. The East India Company was chartered in 1600 to aid in Britain's colonization of India, and in the early 1800s the company exported tea from China using illegal opium to pay for its purchases.

Painting by William Daniell, 1804.

Like many Americans, I grew up believing that conservative values were about local control and personal responsibility for family, community, and nature. It seemed curious to me that the political alliance that drove a rollback of the Roosevelt-era policies that created the American middle class called itself conservative and dismissed its liberal opponents as un-American.

Eventually, however, I discovered that the term conservative harkens back to a day when conservatives were monarchists who considered democracy a threat to social order and the seas were ruled by buccaneers and privateers. That was a clarifying moment.

Buccaneer is a colorful name for the pirates of old who pursued personal fortune with rules of their own making. They were, in their time, an iconic expression of “free market” capitalism.

Privateers were buccaneers to whom a king granted legal immunity and safe harbor in return for a share of the booty. Their charge was to extract physical wealth from foreign lands and peoples by whatever means—including the execution of rulers and the slaughter and enslavement of native inhabitants.

Hernán Cortés claimed the Mexican empire of Montezuma for Spain. Hernando de Soto made his initial mark trading slaves in Central America and later allied with Francisco Pizarro to take control of the Inca empire based in Peru. 

Some privateers operated powerful naval forces. In 1671, Sir Henry Morgan (yes, appreciative British kings granted favored privateers with titles of nobility in recognition of their service) launched an assault on Panama City with thirty-six ships and nearly two thousand brigands, defeating a large Spanish force and looting the city as it burned to the ground.

Eventually, the ruling monarchs turned from swashbuckling adventurers and chartered pirates to chartered corporations as their favored instruments of colonial expansion, administration, and pillage. The sale of public shares enabled a single firm to amass virtually unlimited financial capital and assured the continuity of the enterprise beyond the death of its founders. Limited liability absolved the owners of personal liability for the firm’s losses or misdeeds.

Corporations chartered by the British Crown established several of the earliest colonial settlements in what later became the United States and populated them with bonded laborers—many involuntarily transported from England—to work their properties. The importation of slaves from Africa followed.

The East India Company (chartered in 1600) was the primary instrument of Britain’s colonization of India, a country the company ruled until 1784 much as if it were a private estate. In the early 1800s, the East India Company established a thriving business exporting tea from China, paying for its purchases with illegal opium.

The Dutch East India Company (chartered in 1602) established its sovereignty over what is now Indonesia and reduced the local people to poverty by displacing them from their lands to grow spices for sale in Europe.

Bankers, Bookies, and Gamblers
What is the proper role and social function of a bank? The answer starts with getting the question right.

It is no exaggeration to characterize these forerunners of contemporary publicly traded limited liability corporations as, in effect, legally sanctioned and protected crime syndicates with private armies and navies backed by a mandate from their home governments to extort tribute, expropriate land and other wealth, monopolize markets, trade slaves, deal drugs, and profit from financial scams.

Wall Street hedge fund managers, day traders, currency traders, and other unlicensed phantom-wealth speculators are the independent, unlicensed buccaneers of our day. Wall Street banks are modern day commissioned privateers who ply a similar trade with state backing and safe harbor. The economy is their ocean. Publicly traded corporations serve as their favored vessels of plunder, financial leverage is their favored weapon, and the state is their servant-guardian.

As with the buccaneers and privateers of days past, Wall Street’s major players find it more profitable to expropriate the wealth of others than to find honest jobs producing goods and services beneficial to their communities. They walk away with their fees, commissions, and bonus packages and leave it to others to pick up the costs of federal bailouts, gyrating economic cycles, collapsing environmental systems, broken families, shattered communities, and the export of jobs along with the manufacturing, technology, and research capacities that go with them.

They seek self-enrichment by plundering wealth they had no part in creating, enjoy substantial legal immunity, and acknowledge no duty or accountability other than to themselves. Legal or not, taking the property of another through deception, fraud, and expropriation is theft. Only tyrannies guarantee the liberty of the few to plunder the wealth of the many.

[Next: Phantom Wealth and False Expectations]

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 and co-chair of the New Economy Working Group. This Agenda for a New Economy blog series is co-sponsored by CSRwire.com and YesMagazine.org based on excerpts from Agenda for a New Economy, 2nd edition.

The ideas presented here are developed in greater detail in Agenda for a New Economy available from the YES! Magazine web store — where there are 3 WAYS TO GET THE BOOK and a 22% discount!

Interested?

•   Agenda for a New Economy available from the YES! Magazine web store.

More by David Korten:

• 10 Common Sense Principles for a New Economy
  It’s time we the people declare our independence from the money-favoring Wall Street economy.
  
• Jobs, Not Handouts
  Wall Street's plunge shows what's wrong with phantom wealth. Why support that system when we could be creating jobs in the real economy?
  
• The Illusion of Money
  Real wealth or phantom assets? David Korten explores the difference between the kind of wealth that makes life better and the phantom wealth created by financial speculation.

A pro-union protester in Madison, Wisconsin on February 18, 2011. David Korten points out that America's once strong middle class came out of New Deal legislation, including strong support of labor unions.

 

Photo by Rob Chandanais.

As did most Americans of my generation, I grew up in the post-World War II years believing that America was defined by a strong middle class supported by a durable bipartisan political consensus.

In fact, the American middle class was created in the space of just a few years by New Deal legislation that established Social Security and other safety-net programs, implemented a highly progressive taxation of income and estates, supported unions, and raised the floor on wages to narrow the wealth and income gap between the upper and lower economic classes.

Perhaps because I was living abroad during most of the 1970s and 80s, even into the 1990s, I believed until the mid-1990s that the middle class is a universal American ideal. It was quite a shock when I eventually came to realize that America is governed by an owning class that considers government intervention to maintain an equitable distribution of wealth anti-American, socialist, and a threat to individual liberty and national prosperity.

In the 1970s, an alliance of elite interests began preparing to roll back the measures that created the American middle class and launched a full-scale class war during the 1980s under the banner of the Reagan revolution. Corporate interests provided the money and controlled the real agenda. Religious fundamentalists provided votes in return for lip service to a conservative social agenda opposing abortion, family planning, and gay marriage. Libertarians provided an ideological framework removing constraints to the unlimited concentration of wealth in the name of market freedom. Neo-conservatives provided justification for wars and outsized military expenditures to swell the profits of the defense industry and secure corporate access to the world’s resources and markets. 

Once in power, the Reagan administration rolled back taxes on the wealthiest Americans, ended robust antitrust enforcement, and launched a stunningly successful campaign to make finance the U.S. economy’s dominant and most profitable sector. This process continued seamlessly through subsequent Republican and Democratic administrations.

In 1950, arguably the peak of U.S. global power, manufacturing accounted for 29 percent of the U.S. gross domestic product and financial services for 11 percent. By 2005, manufacturing accounted for only 12 percent of the GDP, and financial services for 20 percent—more than manufacturing, health, and wholesale/retail combined. This weakened unions, put downward pressure on wages, and increased the power of the owning class.

Bigger than Unions, Bigger than Wisconsin
How Americans of all stripes are uniting in opposition to Wisconsin's anti-union bill—and cultivating a movement that reaches far beyond the state border.

In 1999, on the recommendation of Wall Street insiders, Congress “modernized” the country’s financial system by repealing Glass-Steagall, a Depression-era law that limited commercial banks to commercial banking activities. In 2004, the established requirement that investment banks maintain a 12-to-1 leverage ratio of debt to equity was repealed, leaving them free to make much greater use of borrowed money.

Between 1980 and 2005, there were some 11,500 bank mergers in the United States, an average of 442 per year. As the banking system consolidated, its focus shifted from providing financial services for productive activity on Main Street, to funding speculation on Wall Street.

Hedge funds, the high rollers that led the speculative frenzy responsible for the 2008 financial collapse, proliferated from a few hundred in the early 1990s to some ten thousand in mid-2007, by which time they had more than $1.8 trillion in financial assets under management.

Wall Street used its political influence and control of the money supply to ensure that its players captured virtually all the benefits of productivity gains in the Main Street economy as interest, dividends, financial service fees, and inflated asset prices.

This effort to achieve an upward redistribution of wealth was so successful that from 1980 to 2005, the highest-earning 1 percent of the U.S. population increased its share of taxable income from 9 percent to 19 percent. Most of that gain came from the bottom 90 percent and went to the top tenth of 1 percent. In 2007, the top 400 U.S. tax returns reported an average annual income of $345 million—compared to an average of $12.7 million for the top 427 returns in 1955, adjusted to 2007 dollars.

As Wall Street exported its modernization plan to the world, the wealth gap widened almost everywhere. In 2005 Forbes magazine counted 691 billionaires in the world. In 2008, only three years later, it counted 1,250 and estimated their combined net worth at $4.4 trillion. According to a United Nations University study, the richest 2 percent of world’s people now own 51 percent of all the world’s assets. The poorest 50 percent own only 1 percent.

Efforts to fix Wall Street miss an important point. Wall Street, as we know it, is an instrument of class war that poses a mortal threat to the middle class and democracy. For the sake of our most cherished American ideals, it must be dismantled and replaced.

[Next On the Origin of Corporations]

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 and co-chair of the New Economy Working Group. This Agenda for a New Economy blog series is co-sponsored by CSRwire.com and YesMagazine.org based on excerpts from Agenda for a New Economy, 2nd edition.

The ideas presented here are developed in greater detail in Agenda for a New Economy available from the YES! Magazine web store — where there are 3 WAYS TO GET THE BOOK and a 22% discount!

Interested?

•   Agenda for a New Economy available from the YES! Magazine web store.

More by David Korten:

• 10 Common Sense Principles for a New Economy
  It’s time we the people declare our independence from the money-favoring Wall Street economy.
  
• System Failure? Look Upstream
  Why it's important to address our economic problems at their Wall Street roots.
• The Illusion of Money
  Real wealth or phantom assets? David Korten explores the difference between the kind of wealth that makes life better and the phantom wealth created by financial speculation.
  

David Korten says our world's environmental and economic crises won't be solved by merely tweaking traditional practices. Rather, we must redesign our economic system with an ecological perspective.

Photo by joiseyshowaa.

When economic failure is systemic, temporary fixes, even very expensive ones like the Wall Street bailout, are like putting a bandage on a cancer. We need to rethink and redesign the economic system. Unfortunately, such issues are generally left to economists, when we need the perspective of the ecologist.

The differing perspectives of the economist and the ecologist are starkly revealed by the authors of two books that appeared in 2008 as the financial crash was playing out: Jeffrey Sachs, Common Wealth, and Gus Speth, The Bridge at the Edge of the World. These books present nearly identical statements of the need to address growing environmental stress and end extreme poverty. Their recommendations, however, are miles apart.

Jeffrey Sachs, once described by the New York Times as “probably the most important economist in the world,” accepts the existing growth-centered economic model and institutional system as givens and prescribes a solution based on modest adjustments in public budget allocations. For Sachs, money is both end and means.

He calls for modest new investments in existing technologies to sequester carbon, develop new energy sources, end population growth, make more efficient use of water and other natural resources, and jump-start economic growth in the world’s remaining pockets of persistent poverty.

In a 2007 lecture to the Royal Society in London, Sachs made clear his belief that there is no need to redistribute wealth, ask the rich to reduce their material consumption, or otherwise reorganize the economy: “I do not believe that the solution to this problem is a massive cutback of our consumption levels or our living standards … and I do not believe … that the essence of the problem is that we face a zero sum that must be redistributed.”

Far from calling for a restraint on consumption, Sachs projects global economic expansion from $60 trillion in 2005 to $420 trillion in 2050 and estimates that the world’s wealthy nations can eliminate extreme poverty and develop and apply the necessary technologies to address environmental needs with an expenditure of a mere 2.4 percent of the projected midcentury economic output.

Sachs never asks why, if we can stabilize population and meet the needs of the poor with a modest expenditure, we should need or even want a global economy seven times as large as its present size. He says nothing about what forms of consumption might continue to multiply without placing yet more pressure on already overstressed natural systems or how increasing the consumption of the already big consumers by seven times might increase their happiness. It appears that such questions never occur to “the most important economist in the world.” 

Gus Speth, the ecologist who founded the World Resources Institute and for ten years served as Administrator of the United Nations Development Program, directs attention to the upstream system causes of environmental and social breakdown. He prescribes a thoroughgoing cultural and institutional transformation. His recommendations reach far beyond budget tweaks to address values and power.

Speth presents compelling evidence that although there has been a slight decrease in recent decades in environmental damage per dollar growth in GDP, GDP growth always increases environmental damage. He further demonstrates that beyond a modest threshold, more physical consumption does not increase happiness.

"Localization is the Economics of Happiness"
We know what makes us happy—but too often our economic decisions stand in the way. Interview with Helena Norberg-Hodge.

Speth calls attention to the importance of social movements grounded in an awakening spiritual consciousness that are creating communities of the future from the bottom up, practicing participatory democracy, and demanding changes in the rules of the game.

He recommends replacing financial indicators of economic performance, such as GDP, with non-financial indicators of social and environmental health. And he endorses calls to revoke the charters of corporations that grossly violate the public interest, exclude or expel unwanted corporations, roll back limited liability, eliminate corporate personhood, bar corporations from making political contributions, and limit corporate lobbying.

Tinkering at the margins of the failed economy guided by the same mindset that got us into our current mess will not get us out of it. The time has come for a profound rethinking and restructuring grounded in the living systems perspective of the ecologist.

[Next: War Against the Middle Class]

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 and co-chair of the New Economy Working Group. This Agenda for a New Economy blog series is co-sponsored by CSRwire.com and YesMagazine.org based on excerpts from Agenda for a New Economy, 2nd edition.

The ideas presented here are developed in greater detail in Agenda for a New Economy available from the YES! Magazine web store — where there are 3 WAYS TO GET THE BOOK and a 22% discount!

Interested?

•   Agenda for a New Economy available from the YES! Magazine web store.

More by David Korten:

• System Failure? Look Upstream
  Why it's important to address our economic problems at their Wall Street roots.
• A Real-Market Alternative
  As we look for solutions to our current economic crisis, the relevant distinction is no longer between capitalism and communism, but rather between Wall Street and Main Street. 
• The Illusion of Money
  Real wealth or phantom assets? David Korten explores the difference between the kind of wealth that makes life better and the phantom wealth created by financial speculation.
  

A remnant of the Berlin Wall, once a symbol of the divide between communism and capitalism. David Korten says the relevant distinction in our economy is no longer between communism and capitalism but Wall Street and Main Street.

Photo by Beek100.

In America we are taught from birth that capitalism is synonymous with markets, democracy, and individual liberty. Whatever its flaws, the only alternative is communism, or so we are told.

This sets up a false and dangerously self-limiting choice between two economic models both of which create concentrations of power that stifle liberty and creativity for all but the few at the top.

Communism is dead. As we now look for solutions to our current economic crisis, the relevant distinction is not between capitalism and communism, but rather between Wall Street and Main Street.

The Wall Street economy is centrally planned and managed by big banks and corporations for which money is both means and end. The primary goal is monopoly control of markets, physical resources, and technology to maximize profits and bonuses.

Main Street economy is comprised of local businesses and working people who self-organize to provide livelihoods for themselves, their families, and their communities producing real goods and services in response to community needs. Main Street exemplifies the market economy envisioned by Adam Smith; Wall Street is the antithesis. 

Smith believed that people have a natural and appropriate concern for the well-being of others and a duty not to do them harm. He also believed that government has a responsibility to restrain those who fail in this duty.

Smith and the political economists who followed in his tradition developed an elegant theory of the market’s capacity to self-organize in the community interest based on a number of carefully articulated assumptions, including the following:

• Buyers and sellers must be too small to influence the market price and must honor basic principles of honest dealing.
  
• Income and ownership must be equitably distributed.
• Complete information must be available to all participants, and there can be no trade secrets.
• Sellers must bear the full cost of the products they sell and incorporate it into the sale price.
• Investment capital must remain within national borders, and trade between countries must be balanced.
• Savings must be invested in the creation of productive capital rather than in speculative trading.
  

These are the characteristics of a real market economy. Wall Street capitalism violates them all.
Capitalism is a term originally coined to refer to an economic and political regime in which the ownership and benefits of capital are appropriated by the few to the exclusion of the many who through their labor make capital productive. It describes Wall Street perfectly.

Markets work wonderfully within a framework of clear rules and a caring community. The stronger the relations of mutual trust and caring and the more equitably power is distributed, the more the market becomes self-policing and the less need there is for formal governmental intervention. An economy comprised of powerful corporations governed by a culture of greed and a belief that their only legal duty is to maximize their profits requires a strong and intrusive governmental hand to limit the abuse and clean up the messes.

The “free market,” a code word for an unregulated market, is a contradiction. A market without rules facilitates and encourages the unlimited concentration and abuse of corporate power unconstrained by market discipline and democratic accountability.

System Failure? Look Upstream
Why it's important to address our economic problems at their Wall Street roots.

Market fundamentalists selectively cull bits and pieces of market theory to argue that the public interest is best served when economic power is concentrated in unregulated globe-spanning mega-corporations engaged in monopolizing resources and externalizing costs for short-term financial gain. They distort market theory beyond recognition.

Like cancer cells that attempt to hide from the body’s immune system by masking themselves as healthy cells, Wall Street institutions attempt to conceal themselves from society’s immune system by masquerading as agents of a healthy market economy.

The credit collapse penetrated the facade to reveal the inner workings of Wall Street capitalism as a criminal syndicate engaged in counterfeiting, predatory lending, usury, tax evasion, fraud, and extortion. It may be legal because Wall Street buys the politicians and writes its own rules, but it should be illegal and treated accordingly.

A criminal syndicate is “fixed” by shutting it down through the enforcement of laws that protect the public interest. You “fix” a cancer by removing it and rebuilding the healthy tissue. Main Street is the healthy tissue from a healthy real market economy can be built.

[Next: Clueless Economists, Smart Ecologists]

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 and co-chair of the New Economy Working Group. This Agenda for a New Economy blog series is co-sponsored by CSRwire.com and YesMagazine.org based on excerpts from Agenda for a New Economy, 2nd edition.

The ideas presented here are developed in greater detail in Agenda for a New Economy available from the YES! Magazine web store — where there are 3 WAYS TO GET THE BOOK and a 22% discount!

Interested?

•   Agenda for a New Economy available from the YES! Magazine web store.

More by David Korten:

• Unraveling the Microcredit Mystery
  Unraveling the confusion behind microcredit: how some models help alleviate poverty, while others exploit the poor to make the rich richer.
  
• The Illusion of Money
  Real wealth or phantom assets? David Korten explores the difference between the kind of wealth that makes life better and the phantom wealth created by financial speculation.
• Good Debt, Bad Debt
  David Korten explains the logic behind a debt-based money system—and why it isn't working in the United States.
  

Debt isn't necessarily a bad thing—but it needs to be backed by real assets to work properly.

Photo by Andres Rueda.

It appears that we are a nation addicted to debt. In 2009, U.S. public and private debt totaled $57 trillion. Of this total, $42.5 trillion is private household/business/financial sector debt and $14.7 trillion is federal/state/local government debt. Of the private debt, $13.5 trillion is household debt, accounting for 122.5 percent of annual disposable income. Of the total U.S. debt, $14 trillion is owed to foreigners. Current U.S. GDP is $14.3 trillion.

So is this a problem?

Most of the money in circulation is created as credit when a bank issues a loan. By the nature of this system, no debt means no money. Now that would be a really big problem in an economy that cannot function without money.

More important than the size of the debt is the question of whether it is good debt or bad debt. So what’s the difference?

Let’s start with good debt. The underlying logic of a debt-based money system rests on the assumption that the money banks create by issuing loans is invested in ways that expand society’s productive capacity and thereby the available pool of real goods and services.

It further assumes that the benefits produced are shared equitably among all who contribute. The savers and investors who defer their consumption to build the bank’s capital reserves receive a fair share as interest. The bank employees receive a fair share as salary and benefits. The governments that provide the legal, social, and physical infrastructure required to do business receive a fair share as taxes.

The problem facing the United States is that most of our outstanding debt is bad debt. It was issued to fund consumption and phantom wealth speculation and in aggregate cannot be repaid, because it is not backed by real assets.

This didn’t just happen. It is the result of bad public policies and can be corrected only by better policy choices. Let’s take a look at four examples.

1. Gambling Debt: Borrowing at interest to gamble on asset bubbles and loan pyramids can inflate financial asset statements, but produces nothing of real value and the assets can deflate in a heartbeat, leaving the loans unsecured and unpayable. This is a direct consequence of the financial deregulation that allowed Wall Street players to take control of the money and banking system and reorient it from financing investment in the real-wealth economy to financing speculation in the bubble economy.
   
2. Private Consumer Debt: Borrowing at interest to support current consumption beyond one’s income is a dead end. At issue here are policies relating to trade, unions, wages, employment, public services, and taxes that suppress the incomes of working people relative to the cost of living—while inflating the incomes of the investing class. This forces the majority of households to borrow from the investing class to cover basic consumption expenses.
   
3. Public Consumer Debt: Much of the current debate about debt centers on public debt. Borrowing by governments to invest in things like education, research, infrastructure, and even temporary economic stimulus directed to creating jobs in the real economy builds the nation’s future productive capacity and is logical and sensible. Borrowing to fund war, tax breaks for the rich, and current government operations is neither. Tragically, most of our public borrowing has been for the latter.
   
   Arguments focused on the size of the U.S. public debt will get us no place, unless we address the failed economic theories and policies that have mired us in all four of the major varieties of bad debt.
4. Foreign Debt: Perhaps the most dangerous of all bad debt is that owed to foreign countries to pay for current consumption beyond what we produce for ourselves domestically. Our foreign debt is largely a result of unsound trade policies that lead to outsourcing jobs in manufacturing, research, and technology and increase our dependence on imports of manufactured goods, agricultural products, and services. These policies also play a major role in driving down domestic wages and forcing households to borrow against their credit cards and home equity to meet basic consumption needs. They place our children in a position of potentially permanent debt slavery to the children of other nations—a very bad idea indeed.
   

Arguments focused on the size of the U.S. public debt will get us no place, unless we address the failed economic theories and policies that have mired us in all four of the major varieties of bad debt. To get out of this mess, we need policies that favor productive investment over speculation, living wages and quality public services over consumer debt, public investment in education, research and infrastructure over war and tax breaks for the rich, and domestic production over outsourcing and imports.

[Next: A Real Market Alternative]

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 and co-chair of the New Economy Working Group. This Agenda for a New Economy blog series is co-sponsored by CSRwire.com and YesMagazine.org based on excerpts from Agenda for a New Economy, 2nd edition.

The ideas presented here are developed in greater detail in Agenda for a New Economy available from the YES! Magazine web store — where there are 3 WAYS TO GET THE BOOK and a 22% discount!

Interested?

•   Agenda for a New Economy available from the YES! Magazine web store.

More by David Korten:

• Money From Nothing?
  Many economists and financiers believe it's possible. But what looks like magic is really illusion.
  
• System Failure? Look Upstream
  Why it's important to address our economic problems at their Wall Street roots.
  
• 10 Common Sense Principles for a New Economy
  It’s time we the people declare our independence from the money-favoring Wall Street economy.

Photo by Mister V.

The ancient alchemist and modern Wall Street capitalist have much in common. The latter has achieved the modern equivalent of the alchemist's dream of turning cheap metals into gold. He creates money out of absolutely nothing and wholly free from exertion or the inconvenience of producing anything of real value.

Making money with no effort can be an addictive experience. I recall my excitement back in the mid-1960s, when Fran, my wife, and I first made a modest investment in a mutual fund and watched our savings grow magically by hundreds and then thousands of dollars with no effort whatsoever on our part. We got a case of Wall Street fever on what, by current standards, was a tiny scale.

Of course, most of what we call magic is illusion. When the credit collapse pulled back the curtain to expose Wall Street’s secret inner workings, we learned the extent to which Wall Street is a world of deception, misrepresentation, and insider dealing on a breathtaking scale. It was such an ugly picture that Wall Street’s seriously corrupted institutions stopped lending even to each other for the simple reason that no one trusted the other guy’s financial statements.

Much of what Wall Street celebrates as financial innovation involves borrowing to inflate the value of financial assets to create collateral to support more borrowing to further inflate the assets to create more collateral… Whether you call it a loan pyramid or a Ponzi scheme, it is a form of theft.

A responsible Federal Reserve would have raised interest rates to dampen asset bubbles like the tech-stock bubble of the 1990s and housing bubble of the 2000s. Instead, captive to Wall Street interests, it pursued cheap money policies to encourage and facilitate ever more borrowing by speculators to keep the bubbles growing.

Academics who never learned the difference between real wealth and phantom financial wealth published scholarly articles celebrating the discovery of the secret of effortless wealth creation. Back in 1997, I came across an article in Foreign Policy by John Edmunds, then a finance professor at Babson College and the Arthur D. Little School of Management, titled “Securities: The New Wealth Machine” [pdf]. This is a defining quote:

Historically, manufacturing, exporting and direct investment produced prosperity through income creation. Wealth was created when a portion of income was diverted from consumption into investment in buildings, machinery and technological change. Societies accumulated wealth slowly over generations. Now many societies, and indeed the entire world, have learned how to create wealth directly. The new approach requires that a state find ways to increase the market value of its stock of productive assets. [Emphasis in the original.] … An economic policy that aims to achieve growth by wealth creation therefore does not attempt to increase the production of goods and services, except as a secondary objective.

The thesis was so absurd that on first reading I thought it must surely be some sort of joke or parody intended to expose the irrationality of the exuberance surrounding the inflation of financial bubbles. In his 2008 book, Bad Money, the journalist and former Republican Party political strategist Kevin Phillips notes the Edmunds article was widely discussed on Wall Street and implies that it may have inspired the securitization of housing mortgages.

System Failure? Look Upstream
Why it's important to address our economic problems at their Wall Street roots.

Contrary to the Edmunds “logic,” an asset bubble—real estate or otherwise—does not create wealth. A rise in the market price of a house from $200,000 to $400,000 does not make it more functional or comfortable. The real consequence of a real estate bubble is to increase the financial power of those who own property relative to those who do not. Wall Street encouraged homeowners to monetize their market gains with mortgages they lacked the means to repay except by further borrowing. It then converted these toxic mortgages into worthless toxic securities and sold them to the unwary, including the pension funds that many of those who borrowed against their inflated home values counted on for their retirement.

Why do we tolerate Wall Street’s reckless excess and abuse of power? In part, it is because so many people of influence have bought into the Edmunds fallacy. If you have difficulty understanding "economist speak," it may be because you are in touch with reality.

[Next: Good Debt, Bad Debt]

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 and co-chair of the New Economy Working Group. This Agenda for a New Economy blog series is co-sponsored by CSRwire.com and YesMagazine.org based on excerpts from Agenda for a New Economy, 2nd edition.

The ideas presented here are developed in greater detail in Agenda for a New Economy available from the YES! Magazine web store — where there are 3 WAYS TO GET THE BOOK and a 22% discount!

Interested?

•   Agenda for a New Economy available from the YES! Magazine web store.

More by David Korten:

• The Illusion of Money
  Real wealth or phantom assets? David Korten explores the difference between the kind of wealth that makes life better and the phantom wealth created by financial speculation.
  
• Bankers, Bookies, and Gamblers
  What is the proper role and social function of a bank? The answer starts with getting the question right.
• 10 Common Sense Principles for a New Economy
  It’s time we the people declare our independence from the money-favoring Wall Street economy.
  

It's easy to fix the symptoms of a problem, but finding a real solution involves looking upstream to figure out what's causing the problem in the first place.

Photo by Stu Mayhew.

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 that 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 that 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.

Time for a New Theory of Money
Ellen Brown: When we recognize that money is simply credit, we can unleash it as a powerful tool for our communities.

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. [Next: Money from Nothing?]

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 and co-chair of the New Economy Working Group. This Agenda for a New Economy blog series is co-sponsored by CSRwire.com and YesMagazine.org based on excerpts from Agenda for a New Economy, 2nd edition.

The ideas presented here are developed in greater detail in Agenda for a New Economy available from the YES! Magazine web store — where there are 3 WAYS TO GET THE BOOK and a 22% discount!

Interested?

•   Agenda for a New Economy available from the YES! Magazine web store.

• The Illusion of Money
  Real wealth or phantom assets? David Korten explores the difference between the kind of wealth that makes life better and the phantom wealth created by financial speculation.
• 7 Ways to Transform Banking
  Each of us can help build a resilient financial system that will serve real people in real communities.
  

People often fail to recognize the difference between phantom financial assets and real, living wealth.

Photo by Mike Bitzenhofer

In business school, we were taught to assess investment options to maximize financial return. I don’t recall that the professor ever mentioned that this meant maximizing returns to people who have money—to make rich people richer. Or that money is a system of power and that the more our lives depend on money, the greater our subservience to those who control the creation and allocation of money.

Nor do I recall asking my professors, “What is money?” “Why do we assume that maximizing financial return maximizes the creation of real value?” “How does the conversion of natural living wealth to financial wealth create real value?” “What about the many fortunes built through financial speculation, fraud, government subsidies, the sale of harmful products, and the abuse of monopoly power?” I may have had some doubts, but kept them to myself for fear of being dismissed as hopelessly stupid.

Perhaps those who taught us economics, finance, and accounting did not themselves recognize the difference between real living wealth and phantom financial wealth.

Real wealth has intrinsic value. Examples include fertile land, healthful food, knowledge, productive labor, pure water and clean air, labor, and physical infrastructure. The most important forms of real wealth are beyond price and are unavailable for market purchase. These include healthy, happy children, loving families, caring communities, a beautiful, healthy, natural environment.

Real wealth also includes all the many things of intrinsic artistic, spiritual, or utilitarian value essential to maintaining the various forms of living wealth. These may or may not have a market price. They include healthful food, fertile land, pure water, clean air, caring relationships and loving parents, education, health care, fulfilling opportunities for service, and time for meditation and spiritual reflection.

Money, a number on a piece of paper or created with an accounting enter, has no intrinsic value. Wall Street generates it in astonishing quantities through accounting tricks, financial bubbles, and debt pyramids. It appears from nowhere and can disappear in an instant, as a phantom in the night. 

Those engaged in creating phantom wealth collect handsome “performance” fees for their services and walk away with their gains. When the bubble bursts, borrowers default on debts they cannot pay and the bubbles and debt pyramid collapse in a cascade of bankruptcies.

What is Real Wealth?
John Robbins: We've been measuring happiness in all the wrong ways. How can we find true quality of life?

It is easy to confuse phantom financial assets with the real wealth for which they can be exchanged. Indeed, the illusions of phantom wealth are so convincing that most Wall Street players believe they are creating real wealth.

The market, of course, makes no distinction between the dollars acquired through means that enrich society, those created by means that impoverish society, and those simply created out of thin air. Money is money, and the more you have, the more the market eagerly responds to your every whim. It is still only a number with no existence outside the human mind.

Those who benefit from the creation of phantom wealth may never realize that their gain is unfairly diluting everyone else’s claim to the available stock of real wealth. They may also fail to realize that Wall Street and its international counterparts have generated total phantom-wealth claims far in excess of the value of all the world’s real wealth, thus creating expectations of future security and comforts that can never be fulfilled.

The deceptions are built right into our language. We refer to speculation as “investment” and to phantom financial wealth as “capital.” Indeed, when we hear the terms wealth, capital, assets, or resources we have no way to know whether the reference is to a real asset or only to a phantom financial asset. Our language gives us no way to make this essential distinction. It is no wonder we get confused and fail to recognize that Wall Street produces nothing of real value.

[Next: System Failure? Look Upstream]

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 and co-chair of the New Economy Working Group. This Agenda for a New Economy blog series is co-sponsored by CSRwire.com and YesMagazine.org based on excerpts from Agenda for a New Economy, 2nd edition.

The ideas presented here are developed in greater detail in Agenda for a New Economy available from the YES! Magazine web store — where there are 3 WAYS TO GET THE BOOK and a 22% discount!

Interested?

•   Agenda for a New Economy available from the YES! Magazine web store.

• Putting the Science of Happiness into Practice
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• Building Community: An Economic Approach
  David Korten and David Brancaccio discuss what economic transformation has to do with building stronger, happier communities.

David Korten's roots in small town America taught him the value of community.

Photo by Steve Minor

Many people are intrigued by the story of my defection from my establishment roots to becoming a rebel voice challenging the legitimacy of the institutions I once served. It is the story of a lifelong journey filled with an uncommonly rich and varied collection of experiences. Here are some highlights:

I grew up in a conservative small town where I learned to value family, community, and nature. I was raised to believe in the special character of America as a middle-class democracy, free from the extremes of wealth and poverty that supposedly characterized the world’s less advanced nations. In my childhood, my dad, a local retail merchant, taught me that if your primary business purpose is not to serve your customers and community, then you have no business being in business.

My Stanford Business School education taught me to look for the big picture. My doctoral dissertation research on cultural change in Ethiopia and its impact on modern organizations taught me the power of culture in shaping collective behavior.

From my experience as an Air Force captain on the faculty of the Special Air Warfare School and as a military aide in the Office of the Secretary of Defense during the Vietnam War, I learned how the world’s most powerful military was thwarted by the self-organizing networks of an ill-equipped peasant army motivated by a vision of independence and self-rule. That experience helped me later recognize the potential of a committed citizenry to likewise thwart the seemingly invincible power of Wall Street and gave me insights into how that resistance might self-organize.

While academic director of the Central American Institute for Business Administration in Managua, Nicaragua, I witnessed the extreme gap between the super-rich and the super-poor.
While a professor on the organization faculty at the Harvard Business School, I learned how the structures of large-scale institutional systems shape behavior and how system structures can be designed to support intended outcomes.

During fifteen years in Asia with the Ford Foundation and the U.S. Agency for International Development, I experienced the positive power and potential of local community self-organization and the importance of the local control and management of essential natural resources and participated in many experiences in large-scale organizational change. These were the years of my awakening to the terrible truth that development models centered on economic growth almost inevitably make a few people fabulously wealthy at an enormous social and environmental cost to the substantial majority.

In 1992, Fran (my wife) and I returned to the United States and settled in New York City near Union Square between Madison Avenue and Wall Street and engaged the inquiry into the nature of the publicly traded limited liability, private-benefit corporation as an inherently destructive anti-market business form that produced When Corporations Rule the World.

As a founding member of the International Forum on Globalization, I learned about the power of a new story propagated through global citizen networks to thwart the agenda of the world’s most powerful corporations and reshape the course of history.

As the co-founder and board chair of YES! Magazine, I have come to realize that every act of resistance against what we don’t want must be paired with a positive vision of what we do want.

The Missing Vision
David Korten begins a blog series outlining his Agenda for a New Economy

Writing The Post-Corporate World: Life After Capitalism drew me into in the study of the incredible reality of life’s capacity for creative, cooperative self-organization and the implications for the design of economies that mimic healthy living systems.

The Great Turning: From Empire to Earth Community drew me into an examination of contemporary impact of five thousand years of organizing human societies as hierarchies of domination governed by institutions that nurture and reward moral, emotional, and behavioral dysfunction.

My experience as a founding board member of the Business Alliance for Local Living Economies has immersed me in the experience of communities all across the United States and Canada that are taking control of their economic future by rebuilding their local economies.

These are a few of the experiences and lessons that inform and find expression in Agenda for a New Economy and the blogs I will be sharing here in the next few months.

[Next The Illusion of Money]

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 and co-chair of the New Economy Working Group. This Agenda for a New Economy blog series is co-sponsored by CSRwire.com and YesMagazine.org based on excerpts from Agenda for a New Economy, 2nd edition.

The ideas presented here are developed in greater detail in Agenda for a New Economy available from the YES! Magazine web store – where there are 3 WAYS TO GET THE BOOK and a 22% discount!

Interested?

•   Agenda for a New Economy available from the YES! Magazine web store.

• Building Community: An Economic Approach
  David Korten and David Brancaccio discuss what economic transformation has to do with building stronger, happier communities.

• Lighting the Way to a New Economy
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Photo by Hernan Seoane

Few and fortunate are those whose lives have not been directly touched by the 2008 Wall Street meltdown and its consequences. People want to understand what went wrong and how we can set it right. Yet the public commentary continues to center primarily on finger-pointing. Who knew what when? Which regulators were asleep at the switch, and why?

Most calls for action seek only to limit the excesses and deceptions of greedy bankers and complicit regulators. We have yet to engage in a much-needed national conversation that addresses essential, yet unasked, questions. For example:

• Do Wall Street institutions do anything so vital for the national interest as to justify opening the national purse strings and showering them with trillions of dollars in order to save them from the consequences of their own excess?
• Is it possible that the whole Wall Street edifice is built on an illusion that has no substance yet carries deadly economic, social, and environmental consequences for the larger society?
• Might there be other ways to provide necessary and beneficial financial services with greater effectiveness and at less cost?
  

Ultimately, it comes down to a question of the values we believe the economy should serve. Should it give priority to money, or to life? To the fortunes of the few, or the well-being of all?

The existing Wall Street-led economy is highly effective and efficient at converting real living wealth to phantom financial wealth to make rich people richer. It is a path to collective suicide.

Our future and that of our children depend on replacing the values and institutions of the Wall Street economy with the culture and institutions of a New Economy designed to provide an adequate and satisfying livelihood for all people in balanced relationship to Earth’s biosphere.

I believe that an honest public examination of these questions will lead to a unifying national political consensus that Wall Street institutions produce nothing of value to the society and fulfill no need not better served in other ways. They can and should be replaced with institutions that act like mature, caring adults and serve real needs in ways appropriate to the realities of the twenty-first century.

We cannot, however, simply let the Wall Street financial institutions collapse, as would have happened in 2008 without the federal bailout. Wall Street controls the creation and flow of the money that facilitates the economic transactions on which we depend for meeting most all our material needs. If its institutions suddenly shut down with no alternative in place, we would be left only the money in our pockets and instantly reduced to barter for most essentials of daily life, including food and water.

The process of shutting down Wall Street properly proceeds in parallel with action to put in place the institutions of a New Economy, including a new system for creating and allocating national currencies in ways more responsive to society’s needs.

Building Community: An Economic Approach: David Korten: What economic transformation has to do with building stronger, happier communities.

Leadership for institutional transformation rarely comes from within the institutions of Empire, which bring special privilege to the few and hardship to the many. It invariably comes from authentic grassroots movements that self-organize from outside the establishment to challenge the status quo and create alternative institutions that ultimately displace those that no longer serve.

Efforts to form a social movement to confront the Wall Street-Washington axis are handicapped, however, by the absence of a broadly shared vision of an economic system structured to achieve and maintain financial stability, ecological balance, prosperity for all, and full democratic participation.

As I will elaborate in a future blog, the true alternative to the Wall Street capitalism that is imposing an intolerable burden on society is not totalitarian Soviet-style socialism. It is a system of locally rooted, self-reliant market economies that honor true market principles, operate by clear rules maintained and enforced by truly democratic governments, and mimic the structure and dynamics of Earth’s biosphere.

[Next: My Defection Story]

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 and co-chair of the New Economy Working Group. This Agenda for a New Economy blog series is co-sponsored by CSRwire.com and YesMagazine.org based on excerpts from Agenda for a New Economy, 2nd edition.

The ideas presented here are developed in greater detail in Agenda for a New Economy available from the YES! Magazine web store – where there are 3 WAYS TO GET THE BOOK and a 22% discount!

Interested?

•   Agenda for a New Economy available from the YES! Magazine web store.

• Building Community: An Economic Approach
  David Korten and David Brancaccio discuss what economic transformation has to do with building stronger, happier communities.

• 10 Common Sense Principles for a New Economy
  It’s time we the people declare our independence from the money-favoring Wall Street economy.