Economics abstracted too far from nature’s realities
Yes, greed has been a problem and the subprime mortgages and other derivatives magnifying paper value until it should be called the rubber value of inflating bubbles – they’ve been a problem too. Yes, the Commodity Futures Modernization Act enthusiastically supported by Clinton in his last days as President and voted into law by Wall Street-funded Congress Members destroyed the stability of the banking system given to us during the Roosevelt Administration more than 70 years ago. Yes, the revolving door policies that allow ex-Congress Members to become lobbyists and CEOs of banking firms to become the guardians of the US Treasury and the New York Federal Reserve have proved to be a disaster, and yes, the appointment to guardianship of the economic henhouse by Obama of the same foxes who gave us the Financial Crisis in the first place under Clinton and Bush was a terrible decision. All these issues are in the spotlight, stage center of the Occupy Wall Street movement or at least certainly behind the big single unifying issue. And that’s the issue of taxing the rich, which until this summer was among the most cherished taboos in the United States. It is another thing needing attention long ago. So one hopes the dam’s broken, the conversation is flowing through and real problems can be confronted with real solutions.
Of course the first issue if the rich and privileged are to be taxed anything close to seriously, on the assumption that there is a common good to be served with their (or is it our?) money, is what should that money be spent on? The rich are right to suggest they know best how to spend the money that accrues to them if there is no clear notion of what actually would produce a better world. There are traditional means to make spending decisions, presumably mainly through law and government since the government is elected by the people, in more or less functional democracies anyway, and is the chief institution charged with serving the common good. In a more indirect way the benefit of all can be served by the products of businesses that are actually healthy – plenty are not – and by service and education organizations like the Red Cross and NGO’s like Ecocity Builders whose charters are dependent on proving that their works are for the betterment of society and/or nature. And another consideration, probably the most consequential of all spending decisions, is deciding what specifically we might build, which means exactly what kind of cities, towns, villages and all the technologies attached to that built environment that provide transport, energy, food, water and products to the people, all the people. And not to forget, the other animals and plants, healthy climate, and even dependable ocean currents, which are also threatened by global warming… all this hangs in the balance of knowing what to build.
Therefore, given the push from environmental emergencies, dwindling resources relative to growing numbers and appetite of humans and the relatively sudden realization that something is profoundly wrong with economics, right now may be the best time for clarifying what needs to be built for the long-term health of civilization. Readers of this newsletter and my books will be familiar with my long list of ecocity architectural features and ideas about layout of cities that would make it possible for them to run on a small fraction of the land they now cover, bringing agriculture and nature back in close to where we live, and have them demand a very small fraction of the energy required by our conventional car dominated cities today. My past readers will recall how ecocity design and planning can produce a graceful life on foot, bicycle and transit while saving local and global environment and climate and requiring energy enough for our need if not our greed, to paraphrase Gandhi. You’ve heard my argument for the solution of many solutions that the ecologically informed city represents. So here I will leave that at that and make a few preliminary suggestions from my recent readings and writings going into my next book and relevant to the current debate ignited by the Occupy Wall Street movement.
Verbal money and agreements of exchange
First, exchanges that turn into market places go way back to verbal money, that is, basic money is no more than agreements regarding value held in memory and applied to real services and physical things (whether scrounged up and collected – resources – or fashioned into something of utility or beauty – products and art). When exchange gets more complex, a medium of exchange is needed as a reminder of who holds what value, those obligations if only half of an exchange is done right now and the other half waits for later, as when something is loaned or contracts are signed for later delivery of things or services. Money is, as economists have always said, something of three attributes: a medium of exchange, a holder of value and a means of quantification of that value. It can be words held in memory, on paper, in coins, checks, bank obligations, mortgages, stocks, contracts for services or resources or products to be delivered, etc., though generally people think of money as something that is relatively liquid meaning able to facilitate exchange of real value in a short period of time if desired, as well as holding value over longer periods of time. So holding a house mortgage, even with all or lots of equity accrued, and all the value it represents, that may take a few years to sell, isn’t what most would call money, stretching out the functions of money over a long time. But it is still something that can be exchanged that retains value (though reduced from wear or increased if the market comparables go up) according to agreements kept, or at least intended to be kept, and whose value can be quantified. Contracts hold the value of an agreement and one party is likely to owe some deliverable on a contract and thus some contracts can be sold to third parties, as in the case of a subprime mortgage, for the stream of payments the contract is supposed to guarantee. Such “derivatives” can be sold on down the line to others for the income stream and even bundled together and resold in various contracts that, if signed by all parties to the contract, carry the force of law. Unless… Unless the government or prevailing authority see something going wrong with the whole system and then prevents (makes illegal) certain kinds of contracts from being written. I mention the subprime mortgages here because most people know they got way out of hand as brokers encouraged people with risky credit to sign on to them so they, the brokers and real estate agents could get higher fees, as home owners got stars in their eyes fancying themselves serious risk taking investors able to “flip” houses and reap great profits, as brokers and other agents or larger investors took big fees or inflated agreed upon value and sold bundles to yet later investors… until the bubble burst and people at the bottom couldn’t pay and lost their houses, mortgages and the value collapsed all the way up the line, with only a few of the “too big to fails” getting bailed out. That’s one of the things governments are in place to regulate so speculators don’t wreck so many people the “common good” is seriously damaged.
On the other hand, build the right cities and provide the right road and rail infrastructure, police, courts and defense, add a little useful education, aid to farmers and industry and government is not just preventing damage from economics run wild but actually investing in building what might be a healthy society, in other words, creating a healthy economy both in what it regulates and what it facilitates.
Meantime, who has how much of all that value and whether they deserve it and whether it in fact really does help or hinders society and nature is the real subject at the basis of a good economy. Study economics and some interesting characters turn up such as Marcel Mauss, French sociologist who in exploring exchanges of many early economic systems, such as those of the Western Pacific Islanders and the North West Coast Native Americans showed that early economies and those of many contemporary “First Peoples” were gift economies in which things weren’t traded and sold and bought so much as given and received. Values were strongly implicit and obligation to give something back at a later date was accepted as just part of the economics of distribution so that people would end up with a variety of more items of varying types and uses over larger landscapes than any small group could produce by itself in its locality. The obligation to give back to the earlier giver was not so much an onus as an opportunity to refresh a relationship, perhaps show off by giving something of somewhat higher value, perhaps meet the love of your life and explore a whole new world. These gift economy’s seemed to thrive only when cultures had a relatively short “artifact list,” that is small number of overall products available and generally, for each kind of item, not that many. When the number of different products became yet far more varied and their number of each type much greater, that’s when their specialness declined markedly and a pressure began to arise for physical money, not the money of remember who gave what to whom. Even if you wanted to remember accurately and managed to compensate for the fact that we all tend to remember things at least somewhat to our advantage, raising the value of our gift to others or what others owe us, money became needed as a mnemonic device too. That way, with money be it beads, sacks of grain or coins, the record of number, the measure of quantity may be remembered accurately.
At about that time in history the village was getting more complex and something I studied called the preindustrial city was beginning to shape up and determine many new things about economics, including the appearance of physical market places, coinage and religious and power structures in families and small groups becoming more stratified, authoritarian and specialized. For example the hereditary patriarchs, in the Western tradition of Greece and Rome, turned into hereditary village and tribe leaders amplifying their economic and belief system power over others much as the bankers, government and large corporations have consolidated power over thousands of times more money, products, services, people and their thoughts today.
It’s all too much to get into here except in a few particulars and one of those is Jane Jacob’s idea that cities, not nations states, turn out to be, unnoticed by almost all economists, the real engines of innovation, productivity and prosperity. But not just any city. Because basic creativity is pretty rare and can be interpreted and applied in many ways once accomplished, it doesn’t pop up too very often and thus the kind of city that is economically healthy is one she (and others) call “import replacing cities.” That is, they make for themselves the kind of products they earlier imported. They become semi-self-sufficient and their people have more choices as to what to use themselves, in their particular city, and also what they can trade with others. And this isn’t enough either. The healthy, productive, prosperous cities have to also have a healthy relationship with their hinterlands, their resource base, which to our ecocity way of thinking would these days be likely called the city’s bioregion. Or if your city is in a cluster of cities in a bioregion, you are part of a metropolitan area that we are more recently calling in Ecocity Builders an ecological metropolis or “ecotropolis” within a bioregion. The innovations (and locally adapted copies of innovations that were originated somewhere else) that are applied as products and services that can make the bioregion more productive to the people in the ecocity or ecotropolis can also, with a little more wisdom, make the biology of the bioregion more healthy too. These innovations can also be harnessed to utilize (eventually) only renewable energy and recycle so thoroughly that no poisons build up and resources like metals are not lost to rust or frittered away as small objects lost to human uses forever.
Voila! A sustainable economy! Almost anyway. One more concept is needed, implicit in Jane Jacob’s thinking and explicit in mine: the city has to be a compact, well organized living entity usefully comparable to any normal complex living organism. Architect philosopher Paolo Soleri proposed this idea way back in the early 1960s. The healthy city’s compact form and design, which could also be compared, if more crudely, to a machine, works largely because all the parts are close together. In the compact city the workers, managers, customers, resources, tools and facilities for distributing products and services, information and fresh ideas are all arranged close together. They provide by design what I call “access by proximity.” Close proximity of all parts provides easy access, saving time in transport, energy, material and it also provides for happenstance meetings with real potential for serendipitous creativity, as well as adding greatly to the efficiency of arranging intentional meetings, work parties, economic exchanges and so on.
Now we are beginning to describe what needs to be built at the base of our human economy that fits its natural economy, than is even analogous in many ways to everyday (if miraculous) living organisms. Of course it’s not quite that pat because all systems are corruptible and the short term benefit of “me” generally trumps the long term benefits of “us all.” But if we get that the city, and in particular the city of highly diverse production and careful relationship to its bioregion (and its ecotropolis if it doesn’t stand alone in its bioregion), is key, we now have a much better idea of where to spend the money our taxing the rich might provide for us all.
But two more things can be said while we are on this taxing subject. The rich can tax themselves for good works too, as they do now and are encouraged to do in some measure, through the partially tax-deductible non-profit donation cycle. If society agrees with the wealthy, the owners, the high paid managers and the investors, that what they have in mind to support supports the common good really is good, they can make the decision what to build with their money themselves by where to give it – not basically unlike the gift economies of old. In addition if they decide to work to make products, say solar hot water systems, that provide a much better energy solution, than say gas burning water heaters, they can make personal choices to invest in such products and services – and eventually make more money in the process providing society and environment with a healthy product and yet one more tax stream. No problem. God bless good capitalism.
In addition it should be pointed out, as I do in my manuscript and in my recent lectures, that there are three extremely large reservoirs of money that could be tapped for the common good in many ways. They are not just in the hands of the very wealthy but also in the military industrial complex and in the vastly wasteful transportation/sprawl/paving/massive energy infrastructure that is today’s dominant city and town-the waste-by-design there can be avoided and the money to build it turned instead toward building the ecocity civilization. I won’t elaborate here those two immense sources as large or larger than the reservoir of wealth in the hands of the very rich, the military and bad infrastructure capital reserves you might call them, but I will say that, realizing this, we could grasp that society is empowered with so much wealth we could well imagine turning around global heating, and learning to live on our income of solar energy and reserves of minerals and soils while preserving practically all species. With all our wealth presently considered unavailable just by the agreement that it is, when in fact it is immense and awaits only good decision making, maybe our great problems could be surmounted as rapidly as in one or two generations. Yes we will obviously see some further damage to our planet and its people, plants and animals, but we haven’t even tried to devise an economics that knows what to build. But if we did, after a few decades we could well turn around virtually all our problems and make butterflies of all our greedy little mass consuming caterpillars.
So what, specifically in terms of economic policy, should we propose?
Back off from military spending – but don’t just leave a vacuum there. At the same time invest for peace and security. Invest much of that money in getting to understand and actually democratically work with other countries for mutual benefit. That is kindred to the espoused purpose of trade that has in many cases been subverted by violence, threat of and actual war for exploitation and extreme one-sided benefit. This is not just a moral position but a practical economics strategy for prosperity.
Build the ecologically healthy city by not taxing and spending on highways, by not writing zoning ordinances to perpetuate sprawling massively energy-demanding automobile infrastructure and instead invest in ecocity design, planning and construction, from basic layout and “massing” of high diversity facilities and functions down to making better streetcars and bicycles and creating open waterways and productive food gardens where asphalt presently spreads.
Then there’s the tax the rich approach as well as the lean on the military and build the ecocity approach. “We are the 99%” and “Tax the 1%” makes for good slogans but they are bizarrely off target, insufficient in terms of the potential money we need to raise in order to rescue the world and they, those two conjoined slogans, pander to the notion that the solution is in the other guy’s court – and not only that but very, very few of the other guys. True, the top 1% do have an unjustly and wildly disproportionately large share, bespeaking stratospheric greed. But to really do the trick, all but the most desperate, the youngest and those damaged by disability and, let’s face it, just plain getting old, need to pay reasonable taxes. (In theory and often in fact, the old have already paid.) Think more like the bottom 60% continue paying something like present taxes and the top 40% see substantially higher taxes, the top 20% very high taxes, the top 10% up into the 90% category and the top 1%, 95%. In other words, make graduated income tax really work, no loopholes. If you are disgusted and horrified by what some of the Financial Crisis victims have called the pigs of Wall Street, the criminally highly compensated CEOs and the gluttonous investors racking up tens of millions a year, a serious graduated income tax would disempower their greed and only those who were in it for the fun of the game and the love of complex math and big numbers – and a sizeable but not egregious amount of money – would spend that kind of effort in playing such games. They will still be amazingly rich. If they want to invest in building a better world on their own we have to collectively decide through democratic government how we can all agree to the general pattern of building a healthy future and design the economics accordingly so they can participate in that kind of sophisticated gift economics via agreed upon good works. Let them be our new if somewhat more modest Andrew Carnegies, and admire them for their genuine contribution.
(I was shocked to learn that Hank Paulson, once CEO of Goldman Sachs and a US Treasury Secretary, was worth between $600 million and $700 million and said to myself what is a person with demonstrated greed at such high levels doing entrusted with the US Treasury? Talk about empowering class warfare! Wouldn’t that be a conflict of interest about as large as one could conger and not just because of representing a gigantic finance company and being in a position to help it and other kindred institutions but because of wealth at level that just had to represent values weak on compassion and wildly off balance toward materialism? I was shocked a second time to learn that he had given away $100 million already to conservation organizations, is regarded among his peers with some condescension as a “nature lover,” believes, unlike most of his associates at the extreme top of wealth and power, that climate change is real, dangerous and needs immediate attention and that he has pledged to give the rest of his money away to yet more nature conservation causes before and at his death. Conclusion: encourage those with a great deal of wealth to use it well – and be careful to learn a lot about people before passing harsh judgment. There may be positive surprises lurking there.)
Again, what to build – that could be called the ecocity civilization – is key, and it is severely neglected, to this point barely in the economics conversation at all. We could fine tune the non-profit rules and better define through the kind of incentives structures that are very common already a means for the very wealthy to support a sustainable world. To do that though we have to actually address the issue in those terms, head on.
When it comes to what people more generally think of as economic policy here is a list of some of the things that would help greatly: reinstating Glass Steagall and other regulations that cut the dangerous behavior of investors who inflate paper (rubber) value to dangerous levels. Increase greatly the amount of cash banks need to have on hand to prevent bank failures, runs and crashes, that is, increase greatly the small fraction of reserves (“fractional reserves”) needed to cover sudden withdraws. Some derivatives leading into the Financial Crisis of 2008 were backed by less than one dollar for every forty various financial institutions had obligations to pay out on demand. Didn’t help one bit! Loans are fine, but on reasonable basically conservative terms. Move toward balanced budgets; don’t live deep in the red; save more, borrow less. Switching to community coops and small banks from large and invest locally? Good ideas. Clarify which are socially beneficial infrastructure projects such as ecocity building, and, in the Keynesian mold, allow governments to go into debt selling bonds or printing money in limited measure to build such physical projects while putting money in the hands of the workforce. Their employment will lead to greater prosperity later.
There are many healthy other steps like these that could guide the economy and society and the development of a whole civilization in its physical make up and functioning that are out of style or not in the conversation or considered not to be part of current orthodox economic theory. But, like manipulating the interest rates for making money more or less available to encourage investing or slow down inflation, such moves as suggested in the above paragraph should be the just normal everyday craftsmanship of economics.
Local currencies to help solve our economic problems? Well this leads into a really important idea. First to say that such currencies are a way to avoid or minimize being manipulated by distant powerful and self-serving interests or a way to avoid being victimized by the vicissitudes of fate when bank runs and panics might occur, to insulate somewhat a locality from national or international downturns. And this may be useful in some degree. However I have heard many times expressed with forthright glee that, by the way, we can avoid taxes on anything we purchase with these off-the-record local currencies. They are supposed to be taxed, but who really notices? The larger truth is that if your money is circulated locally the benefits are much the same whether the money is minted locally, or in the form of electronic credits stored in everyone’s computers who are in the system or in “the cloud,” or printed in smallish quantity by a city state like Singapore or in massive quantity like the US Dollar or the Euro. Reinvesting locally and producing and buying locally is a very good idea for close-in prosperity, fit’s Jane Jacob’s “city is the engine of prosperity” model and provides some independence from larger national or international forces because people then have the financial resources close to home, simple as that.
Capitalism, socialism or sociatalism?
The important idea that I believe the local currency debate leads into is not just the issue of scale, proximity and independence from outside exploitation and calamity but avoidance of dealing with the larger always difficult issues of the argument between capitalism and socialism. The important idea is that all scales are important, and in this, the battle between capitalism and socialism has to be resolved amicably instead of in the extreme violence game we’ve been playing for a long time now. If you know the literature you know economists wax doctrinaire and smug in their school’s superiority over the other. Most of them have one silver bullet idea instead of seeing the field as similar to a living ecosystem, in the ecological, bioregional, planetary biosphere sense. They freeze into a game of extremes or into dualisms.
For example there was, going all the way back to 18th century capitalist theory, a debate between supply side and demand side theoreticians. If the people made more money in their large numbers they would spend more, stimulating the economy and it would grow and prosper. They’d “demand” (be able to buy and actually buy things and services) and the economy would respond by activating itself and producing, and round and round: demand side leading to prosperity. On the other side, if the clever and industrious owners and industrialists invest and build their products become available and their initiative creates jobs. The products in their efficiencies of scale fall in price so the people in their large numbers can buy lots of them, and round and round goes the growing economy.
Why the argument? It looks like a cycle, but people seem to like getting stuck in competitive games and in theory in spades. This can get serious where capitalists and socialists lock in on their dogmas.
In the 1950s through 1980s the exaggerated polarity game between capitalists and socialists (exacerbated by the polarity between democratic and totalitarian politics) was not just a little immoderate. We were risking all life on the planet in the game, in the nuclear brinksmanship of the battle between those two points of view and organizational structures. If setting up a local currency separate from the larger system’s currency is a way of sidestepping the responsibility for fixing larger scale government policy, to connect that idea with the issue we are discussing now, if it is a way of avoiding and not facing the issue of sharing or not sharing on the larger scale, of tax and spend for what purposes and to whose benefit, of higher or lower degrees of socialism and capitalism, not so good. In theory both local and national currencies could co-exist, and even transnational currencies like the Euro and perhaps even a world currency could be established. But deal with the big ones we must and even more importantly face the capitalism/socialism battle in a way to make peace.
In this discussion it is educational to notice that both US capitalism and Soviet socialism ruthlessly exploited resources as if they’d never run out and the biosphere as if it were incidental to human life, expendable in “our” march, whether capitalist or socialist, to dominance of the planet. Until rather recently, nature was an after thought if a thought at all.
Getting to basics, the capitalist notion rest largely on the idea that markets find their own reasonable prices, just right to compensate the maker of a product or deliverer of a service for costs going into his or her side of the exchange, plus a reasonable profit, and just right for the buyer to be able to afford. The market thus sets it prices and in this way regulates at least that much. But that doesn’t mean it necessarily self-regulates in other ways. In fact as early as in the writings of Adam Smith himself, while giving credit to the powers of the market, he emphasized that it tends to over concentrate capital and deliver ever more capital and power to those who already have it. Without regulation from outside the business world and for the benefit of the common good, markets can – and do – create profound problems, including desperate would-be workers, super-wealthy elites, war and degradation of such natural resources as the forests being cut down for warships and to expand grazing land and timber for lucrative sheep raising and construction common in his day.
The positive power of the market amazed Adam Smith was and he used the eternally famous phrase that the market was guided as if by an “invisible hand.” Herman Daly and John Cobb in their book “For the Common Good – redirecting the economy toward community, the environment, and a sustainable future” point out that in similar manner languages emerge. In both cases something about the needs of the functions in the system, given a collective of people in fairly larger numbers, and a system of exchange – economic exchanges in the case of markets and meanings expressed verbally in words that indicate the actions and conditions of living people in the case of language – appear to organize themselves pretty much of themselves. That is no one actually decides to design and create a language and similarly no one can really design a market and the attempts to do a thorough job of it, as attempted by economists in the Soviet Union, appear to have failed rather miserably.
So the market is very powerful and not insubstantially mysterious. Good! But it needs regulation. As said, Adam Smith himself agreed, in fact lead off with that idea. My contribution to that thinking is the automobile analogy. It embarrasses me somewhat since I see cars as the agent of destruction of healthy city form and in its success in that enterprise the successful largest cause of climate change and rapid destruction of petroleum chemicals on the planet. But the analogy is apt so I’ll use it. An unregulated market is like a car with an engine but no breaks. I could elaborate but I think you get the idea. US President Franklin Roosevelt and his economic advisors crafted a descent economics that retained a capitalist engine with competition and concentration of decision-making and accumulated wealth enough to be massively productive but it also provided the breaks of serious regulation. Those breaks were pulled off the “automobile” (something that moves on its own power) under the snake-eyed smiling charm of Ronald Reagan, the perversely untruthful Ayn Rand (you had to read “The Fountainhead”) and her dead-pan totally self-assured disciple Alan Greenspan and all the other deregulation promoters from Phil Gramm and Bill Clinton to Larry Summers and Ben Bernanke. Thanks to them the 2008 Financial Crisis and the still simmering “Great Downturn” or whatever historians will eventually call it.
The other big issue is ownership and how much taxes, bringing us back to the focus of the Occupy Wall Street movement. But doesn’t it really come down to this?: On the typical capitalist’s side there is the notion that the industrialist, the farmer, the banker and the professional supporting business of infinite variety produce products that the people want and won’t buy if the price is too high. They are the creative force and they should be free to spend and reinvest as they see fit. The socialists say the capitalists are fanatical people who are focused on one thing – more – and who pull all the tricks, amassing enough money that they can hire all the tax attorneys and lobbyists to maximize income and assure a policy game board that favors ever more money in their control. Ultimately, in the unfettered market, they create monopolies, underpay employees, overcharge customers and destroy competition, despite what they say about the virtues of competition. Their simplistic formula, say the socialists, is “the bigger the scale of operation and the larger the profits the better.” Therefore they need the firm control of government, and while we are at it, how about extensive control of government all the way up to and including the Dictatorship of the Proletariat?
But at the root of the debate is this: do we share or hoard, for the common good or the benefit of the private individual and his family and class? Or both? I’d say we need a new perspective that says both. Time see the whole system and instead of emphasizing the differences, blowing them up and out of proportion and fighting over them we need to see that all ecological systems, even economics, are very diverse and reasonable relationships can shake down within them.
And at this point I must sign off with a hint of a direction and rather than fleshing it out here in anarticle already a bit long for a newsletter, the suggestion that, in these days of occupying our cities with thoughts about economics, we think about what that might mean in terms of how we might both share our wealth to build a better world and how we might use our private wealth for that same goal as well.
Richard Register is Founder and President of Ecocity Builders. He can be reached at email@example.com