The publicly traded limited liability corporation is most accurately described as a pool of money with special legal rights and protections. Even the CEO and directors can be dismissed without notice or recourse. In theory, it is the shareholders whom management serves; however, because most shares are held in trust by various institutional investors, the real shareholders are generally invisible even to the corporate officers.
In effect, management is hired by money to nurture money’s growth and reproduction in disregard of all other considerations. The result is a global capitalist economy destructive of both life and the human soul.
THE MARKET ALTERNATIVE
Defenders of capitalist excess insist that capitalism is synonymous with markets and private ownership. If not entirely false, this claim is at best seriously misleading, and it obscures our ability to see an obvious nonrepressive alternative.
The theory of the market economy traces back to the eighteenth-century Scottish economist Adam Smith and the publication in 1776 of his Inquiry into the Nature and Causes of the Wealth of Nations. Considered by many to be the most influential economics book ever written, Smith’s seminal text articulates the powerful and wonderfully democratic ideal of a self-organizing economy that creates an equitable and socially optimal allocation of society’s productive resources through the interaction of small buyers and sellers making decisions based on their individual needs, interests, and abilities.
Market theory, as articulated by Smith and those who subsequently elaborated on his ideas, developed into an elegant and coherent intellectual construction grounded in carefully articulated assumptions regarding the conditions under which such self-organizing processes would indeed lead to socially optimal outcomes. Market fundamentalists, whose views are shaped more by ideology than by fact-based science, generally ignore the essential conditions of efficient market allocation. For example:
• Buyers and sellers must be too small to influence the market price.
• Income and ownership must be distributed equitably with no extremes of wealth or poverty.
• 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.
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ADAM SMITH’S VISION
Adam Smith envisioned a world of local-market economies populated by small entrepreneurs, artisans, and family farmers with strong community roots, engaged in producing and exchanging goods and services to meet the needs of themselves and their neighbors. This was a vision of the Main Street economy of Smith’s time.
Contrary to popular misconception, Adam Smith was not the father of capitalism. He would have taken offense at the title, because the values of capitalism as we know it were not his values. He had a substantial antipathy toward corporate monopolies and those who use their wealth and power in ways that harm others. He believed that people have a natural and appropriate concern for the well-being of others and a duty not to do others harm. He also believed that government has a responsibility to restrain those who fail in that duty.
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Although not a perfect match, a vital community-centered Main Street aligns with these principles surprisingly well. Wall Street does not. Wall Street abhors real markets and builds its business model around the systematic violation of these market principles.
Wall Street does, however, conform to the original definition of capitalism, which historians have traced to the mid-1800s, long after Adam Smith’s death. In its early use it referred 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.1 This is a near-perfect characterization of Wall Street.
CAPITALISM CLOAKED IN MARKET RHETORIC
Capitalism’s claim to the mantle of the market has no more substance than the claim of the rogue in the tale of “The Emperor’s New Clothes,” who declared that he had cloaked the ruler in a fine gown. In selectively culling bits and pieces of market theory to argue that the public interest is best served by giving globe-spanning megacorporations a license to maximize their profits without public restraint, capitalism has distorted market theory beyond recognition to legitimize an ideology without logical or empirical foundation in the service of a narrow class interest.
Table 3.1 provides an overview of some of the major differences between the Wall Street capitalist economy we have and the kind of Main Street market economy we need to encourage.
Table 3.1 Wall Street Capitalism versus Main Street Markets
Like cancer cells that attempt to hide from the body’s immune system by masking themselves as healthy cells, capitalism’s agents attempt to conceal themselves from society’s immune system by masquerading as agents of a healthy market economy. Capitalism has become so skilled in this deception that we now find our economic and political leaders committed to policies that serve the pathology at the expense of the healthy body. To restore health we must recognize the diseased cells for what they are and either surgically remove them or deprive them of access to the body’s nutrients.
Under a socialist system, government consolidates power unto itself. Under a capitalist model, government falls captive to corporate interests and facilitates the consolidation of corporate power. In a true market system, democratically accountable governments provide an appropriate framework of rules within which people, communities, entrepreneurs, and responsible investors self-organize in predominantly local markets to meet their economic needs in socially and environmentally responsible ways.
RULES MAKE THE DIFFERENCE
Capitalism — rule by big money — is what happens to a market economy that lacks appropriate rules. Economic power becomes increasingly concentrated and delinked from public accountability. The power holders rewrite the rules to secure for themselves the financial gains of their decisions while passing the costs to others. Focused on generating financial gains for the rich and powerful in disregard of real-world consequences, the economic system neglects the production of real wealth in favor of producing phantom wealth. A lack of market rules is the cause. The implementation of market rules is the antidote.
Free market ideologues will shout that government is restricting individual liberty. But liberty can be abused, particularly when combined with a massive concentration of unaccountable financial power. As Adam Smith himself acknowledged in The Theory of Moral Sentiments, an essential responsibility of government is to step in when required to constrain those who abuse their liberty in ways that harm others.
Proper market rules preclude speculation, the acquisition of monopoly power, and the destruction of real wealth to create phantom wealth. They support an economy that functions more like a healthy ecosystem than a cancer. They create a powerful bias in favor of Main Street and real wealth.
A true market economy absolutely needs government, not to direct every aspect of the economy but to set the framework of rules that provide a context within which the daily decision making of people and businesses balances individual and community interests. If market fundamentalists complain that such interference inhibits financial “innovation,” so be it. That is the intention. Most Wall Street financial innovations are nothing more than complex variations on the basic Ponzi scheme and should be illegal.
In the Wall Street economy, money is both means and end, and the primary product is phantom wealth — money disconnected from the production or possession of anything of real value. The Main Street economy is largely engaged in creating real wealth from real resources to meet real needs. Wall Street is very good at making rich people richer, but it has no concern for the health of people, community, or nature
except as sources of short-term profit.
The difference between the Wall Street and Main Street economies is the difference between a capitalist economy and a true market economy. The former monopolizes resources under the central control of global corporations to maximize the profits of the already rich. The latter facilitates radically decentralized economic self-organization to optimize the use of local resources to meet local needs.
Capitalism is what happens to a market economy in the absence of clear market rules fairly and uniformly enforced by democratically accountable governments. If government doesn’t make and enforce the rules necessary to maintain fair and efficient market allocation, the market’s most powerful corporate players make their own rules to suit their financial advantage, and society pays the price.
Draw back the curtain, as the credit collapse has done, to reveal the inner workings of Wall Street capitalism, and it begins to look less like a legitimate business enterprise and more like a criminal syndicate engaged in counterfeiting, predatory lending, usury, tax evasion, fraud, and extortion. It may be legal, because Wall Street writes its own rules, but it should be illegal and treated accordingly. The nearest equivalent in nature is a cancer that drains the body’s energy but produces nothing useful in return.
You “fix” a criminal syndicate 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 on which to rebuild the tissues of a healthy economy, but supporting its full development will require more than tinkering at the margins.
CHAPTER 4
MORE THAN TINKERING AT THE MARGINS
We are told routinely that the first priority must be a strong economy. Yet, we know now that we should seek first a strong society, strong nature, and a strong democracy. Today’s economy offers little help in these regards. We must move beyond it. We need to reinvent the economy, not merely restore it.
JAMES GUSTAVE SPETH, FORMER ADMINISTRATOR, UNITED NATIONS DEVELOPMENT PROGRAMME
When economic failure is systemic, temporary fixes, even very expensive ones like the Wall Street bail-out, are like putting a bandage on a cancer. They may create a temporary sense of confidence, but the effect is solely cosmetic.
Unfortunately, even influential pundits who recognize the seriousness of the environmental and social dimensions of the current economic crisis generally limit their recommendations to a tune-up of the existing system. It is rare indeed to hear establishment voices call for a redesign of our economic institutions.
Jeffrey Sachs and James Gustave Speth are both influential establishment authors who in recent books present nearly identical statements of the need for action to reverse environmental damage and eliminate poverty. Their recommendations, however, are worlds apart. Sachs focuses on the symptoms and prescribes a bandage. Speth takes a holistic approach, looks upstream for the cause, and prescribes a cultural and institutional transformation.1
I contrast the perspectives of Sachs and Speth on three defining economic issues in Table 4.1. The differences are instructive, because we must learn to distinguish those who would lull us into believing we can get by with adjustments at the margins, à la Sachs, the neoclassical economist, from those who offer serious solutions based on a deep system redesign, à la Speth, the systems ecologist.
SACHS: PAINLESS FINE-TUNING
Jeffrey Sachs, an economist by training and perspective, is known for his work as an economic adviser to national governments and an array of public institutions. The New York Times once described him as “probably the most important economist in the world.”2
Sachs opens Common Wealth: Economics for a Crowded Planet(2008) with a powerful and unequivocal statement that raises expectations of a bold break from those he refers to as “free-market ideologues”:
The challenges of sustainable development — protecting the environment, stabilizing the world’s population, narrowing the gaps between rich and poor, and ending extreme poverty — will take center stage. Global cooperation will have to come to the fore. The very idea of competing nation-states that scramble for markets, power, and resources will become passé.…The pressures of scarce energy resources, growing environmental stresses, a rising global population, legal and illegal mass migration, shifting economic power, and vast inequalities of income are too great to be left to naked market forces and untrammeled geopolitical competition among nations.3
Table 4.1 Tinkering versus Transforming
That declaration would have served equally well as an opening statement for Speth, who agrees that government must play an essential role, and that nations must cooperate, in any effort to effect meaningful solutions. From there, however, we might wonder whether they live in different worlds.
The Tech Fix
Sachs assures us that we can end environmental stress and poverty with modest 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, cut back 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. I think the solution is smarter living. I do believe that technology is absolutely critical, and I do not believe…that the essence of the problem is that we face a zero sum that must be redistributed. I’m going to argue that there’s a way for us to use the knowledge that we have, the technology that we have, to make broad progress in material conditions, to not require or ask the rich to take sharp cuts of living standards, but rather to live with smarter technologies that are sustainable, and thereby to find a way for the rest of the world, which yearns for it, and deserves it as far as I’m concerned, to raise their own material conditions as well. The costs are much less than people think.4
Far from calling for a restraint on consumption, Sachs projects global economic expansion from $60 trillion in 2005 to $420 trillion in 2050. Relying on what he calls a “back-of-the-envelope calculation,” he 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. Problem painlessly solved, at least in Sachs’s mind.
Growth as Usual
Sachs gives no indication of 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. Like most other economists, and indeed the general public, Sachs simply assumes that economic growth is both good and necessary. It apparently never occurs to him to question this assumption, which Speth demonstrates to be false.
Furthermore, because Sachs maintains that the poorest of the poor can be put on the path to economic growth with no more than a very modest redistribution, he seems to assume that consumption will continue to increase across the board. He says nothing about what forms of consumption can continue to multiply without placing yet more pressure on already overstressed natural systems. Unless the already affluent are driving even bigger cars, living in bigger houses, eating higher on the food chain, traveling farther with more frequency, and buying more electronic gear, what exactly will they be consuming more of? From what materials will it be fabricated? What energy sources will be used? In what way will this increased consumption improve their quality of life? Sachs fails to consider such questions.
Nor does Sachs mention the realities of political power and resource control — for example, the reality that in most instances, poor countries are poor not because they receive too little foreign aid but because we of the rich nations have used our military and economic power to expropriate their res
ources to consume beyond our own means. It is troubling, although not surprising, that Sachs’s reassuring words get an attentive hearing among establishment power holders.
SPETH: REDIRECTION AND REDESIGN
James Gustave Speth, who has degrees in law and economics, has had a distinguished career as the founder and former head of the World Resources Institute, the administrator of the United Nations Development Programme, and dean of the Yale University School of Forestry. Speth writes from the perspective of a systems ecologist.
The End of Growth and Capitalism
In stark contrast to Sachs, Speth concludes in The Bridge at the Edge of the World: Capitalism, the Environment, and Crossing from Crisis to Sustainability (2008) that “the planet cannot sustain capitalism as we know it.” He recommends that “the operating system of capitalism” be redesigned to support the development of local economies populated with firms that feature worker and community ownership and that corporations be chartered only to serve the public interest.
Rather than settle for a simplistic back-of-the-envelope projection, Speth takes a hard look at the research on GDP growth and environmental damage. He notes that despite a slight decline in the amount of environmental damage per increment of growth, growth in GDP always increases environmental damage. The relationship is inherent in the simple fact that GDP is mostly a measure of growth in consumption, which is the driving cause of environmental decline. Speth is clear that even though choosing “green” products may be a positive step, not buying at all beats buying green almost every time:
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