Proposal for a project to articulate a New Economy vision for Europe -- David Korten
Submitted by GJacobs on Fri, 10/29/2010 - 16:28
Dear Orio, Bernard, Ivo, and Matko
I read David Korten’s presentation to the Club of Rome EU with great interest and find a remarkable convergence of views. Korten’s ideas and prescriptions are bold, far-sighted, and idealistic. They are rightly based on human-values rather than impersonal mechanisms. His paper provides a good opportunity for us to identify some of the issues we would like to explore under our NET (New Economic Theory) project. I note that Korten too belongs to a working group on new economics with which we may want to interact at a later stage. Before jumping to answers, our first objective should be to clearly formulate the questions to be answered by NET. I note below some of the questions raised by his paper which I believe should be examined in our project.
1. Call for a New Vision: Korten calls for a new economic vision that transcends neo-liberal free market economics and social welfare state economy. He states that the purpose of economy is to “ build and support prosperous democratic communities that meet the needs of all people in sustainable balance with nature, we need economic institutions designed to optimize well-being rather than growth.” This is very similar to the view made in our NET paper Human-Centered Economics. It raises the most fundamental question which should be right starting point for evolving a new approach. What is or should be the purpose of an economic system and the theory that governs it?
2. Money: His paper raises fundamental questions regarding the nature of money, how it is created and what constitutes real wealth. He asserts “ From the standpoint of society, money is properly treated as a means, not an end. Rather than directing money to financial speculators and scam artists devoted to creating phantom wealth for personal gain, we must create proper official money systems designed to effectively link underutilized resources to unmet needs to improve the health of our children, families, communities, and the natural environment.”
a. He implies that an essential deviation has occurred by which the means or instrument (money, economic activity and financial transactions) has become an end in itself. This is not only true of money. It can happen with technology, education, government and any other human institution or activity. If money is a means and not an end, what purpose was it intended to serve? What purpose is it serving now? What has changed, how and why?
b. He says money systems should be designed to “ to effectively linkunderutilized resources to unmet needs to improve the health of our children, families, communities, and the natural environment.” Is this the true role of money? How far is money playing that role? Where and how does it fail? Is the problem fundamental to the type of money we have today or is it a distortion that can be rectified by modifying the system?
c. He says that financial innovation (read ‘speculation’) is a form of theft and that financial markets are channeling money to financial speculators. What is the true purpose of financial markets? What purpose are they serving? What is the role of speculation and how does it impact on the original purpose of financial markets?
d. He condemns bank-debt money without ever going to the roots of what money really is. This is an important issue for our investigation. It requires an historical perspective on how and why money systems developed. Can we make a valid distinction between phantom money and real money? Is the problem really that there are different kinds of money or that there are differences ways in which money is utilized?
e. He calls for development of local currencies because they can compensate for some of the gross deficiencies of the current monetary system. Theoretically we need to ask, what is the role of centralization and geographic spread in the efficacy of money systems? What makes complementary systems effective? Should we regard decentralized local money systems as a complementary means to overcome the shortcomings of national systems or as a replacement? What are those shortcomings? How have they evolved historically? What does theory tell us about the value of a wider money system like the Euro or even a single world currency ?
3. Wealth: Korten denounces ‘phantom wealth’, contrasting it with ‘real wealth’ in the form of land, labor, knowledge and food. His insistence on incorporating ecological factors in our measurement of economic activity and real wealth creation is important. Yet, he omits the role of social organization/institutions as a form of wealth. He asks the right question and rightly emphasizes the real shortcomings of current concepts, but I think he fails to provide a sound and sufficient theoretical basis for an alternative. Orio has stressed the need for a fresh conception of wealth. What is the real truth behind the concept of wealth? Can we trace it to its fundamental origins? What is the difference between the money produced by land or production or trade and phantom wealth? Where does the deviation occur that results in phantom wealth? Is the problem with the way money is generated or the way it is utilized?
4. Social Organization: Korten rightly recognizes that a change in economic theory requires an alteration in the design and values of the institutions and organizational systems by which society carries out its activities. Some of his specific observations and recommendations in this regard are very interesting, e.g. need for of alternative measures of economic activity (as Orio calls for); need for redistribution of the benefits of production between capital and people; the in-build tax bias against employment; measures to eliminate speculation. His bottom up approach to building a new economic reality emphasizes an important fact – that all social innovation begins with pioneering efforts of entrepreneurial individuals at the local level. Even today SMEs are the major source of new jobs. Surely the over emphasis on policies favorable to MNCs needs to be rectified, but does that mean a version to local level economics? What is the best solution is most likely to find the proper balance between local initiative, national and global enterprises?
Thank you Orio for sharing this interesting paper.
We hosted Korten’s paper on the NET website and will host any comments in a single thread so we can easily track them.
Best regards
Garry
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Comments
Proposal for a project to articulate a New Economy vision for Eu
by BLietaer - 01/06/2011 - 07:48
I had the pleasure of being present at David's brilliant presentation in Brussels of which this paper is a summary . I agree with everything that was said by David then; and with all the comments in this forum. If I may, I would like to add my grain of salt to this conversation only on two specific points.
1. Why is it that money is what I call "a blind spot" in society in general and in academics involved in economics in particular? I have an unpublished paper on that topic which I am happy to send to any of you separately by email attachment, given that this forum doesn't give me a way to attach a paper. If any of you are interested I am happy to send you the full text, just ask for it by email. Meanwhile, here is a thumb nail reason of 4 layers to this blind spot:
a. all patriarchal societies have had a tendency to impose a single currency with positive interest rates;
b. in the ideological warfare between communism and capitalism, what is different has been studied over and over, but what is common is ignored. And one key thing that is common is money creation through bank-debt - the main systemic difference being that in the Soviet system the banks were owned by the government and in capitalism by the private sector
c. Central banks were created to keep and enforce the institutional status quo in the monetary domain, and they interpret that as keeping the monopoly of a single currency created by bank-debt.
d. Academic taboo: questioning the money system is guaranteeing, for example, that you will never get a Nobel in economics, given that that particular "Nobel prize" is created and paid for by the central bank of Sweden. That is also where the power argument of David is valid.
2. Although I agree with David that (given recent events) it would probably be better to have governments create money, he doesn't seem to agree with Garry and me that this is best done by encouraging some diversity in money creation.That may be the reason why he doesn't want to talk about "complementary currencies" in this context. One implication of this, is that he trusts the government to always do a better job than the private sector. My argument is that this is unlikely in the long run. That is why I am proposing to have an "ecology of monetary units". That would include bank-debt money, government issued money, business-to-business money, and regional and local money. Such a diversity would be less efficient, but provide the resilience that is currently lacking. When such a diversity is in place, and banks blow themselves up (as they did in 2008), the other systems could kick in and society could afford to let the banks sink. Similarly, when governments abuse their money creation power, people would similarly be able to switch to other systems. This diversity also solves a structural problem of a monopoly currency which David doesn't address; independently of whoever and however it is being managed. The theoretical backing for such a view has been published in http://www.lietaer.com/2010/05/is-our-monetary-structure-a-systemic-cause-for-financial-instability-evidence-and-remedies-from-nature-april-2010/
I hope this helps...
Single vs. Multiple Currencies
by dkorten - 01/06/2011 - 16:15
My thanks to Bernard for his kind comments on my presentation to the EU Chapter of the Club of Rome. I am deeply indebted to Bernard as his writing made a major contribution to my recognition that we take the money system as a given at our peril.
He does discern correctly that we differ on the issue of a single vs. multiple currencies, which he and I have discussed on numerous occasions, and which I did not address in the referenced presentation.
The money system is a major subject in itself, and this is not the place for a complete exposition, but here is my primary take.
Much of the economic dysfunction we are experiencing originates in a money system controlled by Wall Street banks and their global counterparts to create money to put in play in speculative and predatory financial games that contribute little or nothing to the productive economy. That system needs to be redesigned and restructured to direct credit through transparent and accountable processes to fund real wealth investment, in contrast to phantom wealth speculation.
In my view that is likely to be a system of locally owned community banks. We used to have such a system in the United States before the wave of deregulation that began in the 1970s and it worked rather well. I have a more extended reflection on the design of official money systems on my website. http://livingeconomiesforum.org/money-rules
I have no complaints with advocates of local community currencies, but community currencies rarely gain consequential traction and I do not see them as a solution to the corruption of the official money system. On the negative side, they can be a distraction from the need to restructure the official money system to make it transparent, accountable, and locally rooted.
As I understand Bernard's proposal, it takes the complementary currency idea to something of an extreme by encouraging virtually any individual or organization that cares to do so to issue their own currency. If I have misunderstood his proposal and misrepresent it here, I trust he will correct me.
As a theoretical construct the idea of a virtually unlimited variety of competing currency units may have merit. As a practical matter it would be a nightmare. Bernard mentions possible inefficiency, but does not elaborate.
Imagine trying to manage a business if your customers expect you to accept any one of a dozen, or potentially even hundreds or thousands of different currencies, many of which are issued by people or groups you have never heard of. Before the financial meltdown, there might well have been Lehman Brothers dollars and Bear Sterns dollars circulating alongside Goldman Sachs dollars, Harry's Bar and Grill dollars, Emmie's Beauty Saloon dollars. How would one evaluate their worth? Do we have to evaluate each one ourselves? Or might we rely on rating agencies like Moody's or Standard and Poor's and assume that their currency ratings are more accurate than their ratings of derivatives? What sort of cash register would accommodate this monetary equivalent of the Tower of Babel? How would we deal with the accounting?
I don't generally talk about complementary currencies unless asked, because I don't consider them a solution to the dysfunctions of our existing official money systems.
We do need a larger conversation about money system design options, but my preference is to keep the conversation focused on single currency systems. Bernard and I have had this conversation before, without any sign of resolution. Perhaps we will simply have to agree to disagree.
Monetary diversity
by GJacobs - 01/06/2011 - 15:05
I fully endorse Bernard's arguments supporting the strategy of diversification of money systems through complementary currencies. This is not in any way inconsistent with David's emphasis on directing bank money creation toward the real economy through bank regulation. Banks are designed to do some things well and efficiently. Let them do it. But they have proven ineffective in harnessing social resources and social opportunities as well as some complementary systems. The Austrian Central Bank put an abrupt end to Woergl's remarkable initiative in the 1930s. Central Banks today appear somewhat more tolerant, but establishing a legal right for such initiatives would provide valuable support for monetary diversity.
The Money System
by dkorten - 01/04/2011 - 20:25
My thanks to Orio and Garry for this conversation. I'm particularly struck by Orio's observations on the transition from non-monetized the monetized relationships. I agree that breaking that down to distinguish between when this is beneficial and when harmful would be a very interesting and useful exercise. Simply creating greater public awareness of this process would be an enormous contribution to awakening public understanding of and engagement with questions relating to the role of money in society.
I wholly agree with Garry's elaboration on my arguments and find it very clarifying. I had not quite framed the distinction between money as a thing and money as a system of organization quite so clearly. It is a very helpful addition to the frame.
As to Garry's question regarding why we humans subordinate ourselves to the institutions we create, I believe part of the answer is that we are creatures of culture as the shared frameworks of understanding that allow us to function in organized groups. http://livingeconomiesforum.org/cultural-consciousness
Culture is essential to collective function, but it also can become a perceptual prison--a kind of trance state. Moving forward as a species depends on our individual and collective awakening from the trance to be able to step back and see culture as a human construct and thereby a subject of judgment and conscious choice. I believe that awakening is happening, but the process needs to be accelerated.
Our public culture conditions us to think of and deal with money as a thing rather than as a system of organization. Most economic analysis treats money as a thing and few economists have the necessary intellectual tools to think about money as an organizing system in any frame other than that of market fundamentalism. Yet most of society looks to economists to frame our understanding of money. It is a serious failing of the discipline.
Given the centrality of money to modern society, one would think that a philosophical study of the human relationship to money would be a major intellectual discipline in its own right, but I'm not aware that such a discipline exists---even as a sub-discipline of economics. Explaining why that would be the case is quite a puzzle in its own right.
David Korten
Money as Organization and Culture
by GJacobs - 01/06/2011 - 14:56
David’s emphasis on both the organizational and cultural aspects of money is a valuable insight. As an organization, money facilitates commercial interaction and exchange the way language facilitates all types of communication and internet forges linkages between people, institutions, and activities. Without these instruments, human interactions, relationship and culture would be severely limited. David’s comment also brings out the fact that underlying this organizational mechanism is a cultural foundation constituted by ideas, beliefs, values and attitudes. Money is a symbol and symbols are cultural. Without understanding that cultural basis, which Bernard examines in his writings, we cannot penetrate to the essence of what money is. It is culture that determines whether we regard money as a means to an end or an end itself, as an instrument designed to promote human welfare or something with its own independent existence and rights, to which human values can be made subservient. Is there a right of the individual to speculate that takes precedence over the right of every citizen to economic security? The answer is obviously cultural.
If money is culture and culture is based on values, then what is the human value of currency? Natarajan has argued that the long term historical trend toward inflation is largely the result of changes in the human value of currency as people gain rights, self-respect and demand more for their labor. Changes in human values (the value of the human being) result in changes in money values. A change in culture with regard to money – meaning a new understanding of what money is and the values on which the present system is based -- may be the single most important step needed to change the system.
David’s proposal for a “philosophical study of the human relationship to money” would generate precious insights into this complex symbolic cultural organization. The negative attributes of money as a source of power for domination and exploitation have been explored, much more than their positive attributes, which form the basis for the emergence of modern society and of which the negative is a perversion. It would be fascinating to explore the relationship between money, social organization and cultural values such as trust, faith, sharing, cooperation and solidarity, which constitute the positive foundation for civilization and social evolution. Then we might identify the specific point of deviation at which a positive social institution lends itself to be hijacked for domination and exploitation. That happens with all forms of social power, but with money the world still lacks the kind of clarity we now have with regard to the self-proclaimed divine right of kings and the privileges of aristocracy, social organizations which served a purpose at one time but which modern democratic civilization has outgrown. These issues are not merely of intellectual interest. They can have profound practical import.
The Money System
by dkorten - 12/31/2010 - 21:55
My thanks to Garry Jacobs for this thoughtful commentary on my presentation to the European Chapter of the Club of Rome. I am delighted to be part of this conversation and look forward to future collaboration.
I do want to correct one misinterpretation. Jacobs attributes to me a call to develop complementary local currencies. My actual statement in the presentation is:
"Decentralize and localize the official money system and operate it as a public
utility comprised primarily of locally rooted non-profit or publicly owned
community banks and credit unions providing basic financial services and funding
productive local investment. Continuously recycle interest in the community."
My focus is on official national currencies. In a modern society in which meeting nearly every need depends on money, the system by which the official national currency is created and allocated defines the flow of power. If we are to resolve the dysfunction of the terminally destructive economic system we have, the money system must be restructured to redirect the flow of money from financial speculation, which serves only to increase inequality, to productive investment that improves the well-being of all. This argument and its structural implications are further developed in the discussion of the money system on my website:
http://livingeconomiesforum.org/money-rules
David Korten
Re: The Money System
by GJacobs - 01/03/2011 - 23:06
I am thankful to David Korten for elaborating his thoughts on money and clarifying his position on complementary currencies. In reading more about his ideas on money on his website, I was struck by several themes. First, he clearly perceives that money is not a thing in itself. It is only a social mechanism, a device, a social organization, designed to help us effectively utilize available social resources to meet human needs. This point ties in closely with Orio’s wider perspective on the movable boundaries between the monetarized and non-monetarized sectors. Both are founded on the realization that money systems must be evaluated on their organizational effectiveness in harnessing available resources to meet human needs, just as we evaluate an internet service provider, cell phone company, courier service, or educational system. The difference, of course, is that money is far more complex than any of these unidimensional social systems. It acts as a bridge for translating one type of social potential or activity into another. The closest analogy would be the role the language plays in all varieties of human communication or the role played by Internet today. Looking at money as an organization rather than a thing clears much of the fog and confusion that Korten seeks to dissipate. It would be worthwhile tracing the entire process by which money as an organization has evolved from its ancient origins and the contribution it has made at each stage to enhancing social productivity. That might help us better understand precisely the point at which the organization got out of hand.
Second, Korten emphasizes the power aspect of money. Money power is, of course, well known, but this points to a deeper perception. Money power is the capacity to exercise influence through money. Social power is the capacity to accomplish work in society, whether that work is fulfilling individual needs, educating the masses, defending the nation from threats, protecting the environment, or organizing productivity at a higher level to raise living standards. In modern society, Money has become one of the principal forms or instruments of social power. Government, technology, market, information, education are also sources and instruments of social power. Money too is an instrument for generating social power, but here also its role is unique and remarkable. Money is embued with enormous creative potential. Korten recognizes that the power of money per se is not the problem, but rather how that power is generated and how it is utilized. This suggests that the problem is one of regulation. As civilization advances, it develops innumerable sources of power. Up to a certain stage that development is unfettered and spontaneous, but a time comes when the potential misuses of that power necessitate social regulation. Today society regulates education, the practice of medicine, marketing of drugs, monopolistic industries, quality of food, transportation, communication, licensing of professionals in all fields, construction, environmental side-effects of technology, safety of baby cribs, etc. Few today advocate the divine right of kings to arbitrarily exercise political power without oversight and control. Yet, as Korten points out, people do not apply similar standards to the use and abuse of monetary power. It is as if society has been as fully brainwashed by the doctrine of the free market as Soviet children were about the virtues of communism, in spite of all the evidence to the contrary. Understanding money as a social organization developed by society to generate power for the common good, rather than as a thing which some people own by right of possession and should be free to use as they wish, may be a helpful means of dispelling the illusion.
That leads to Korten’s third important insight – his focus on speculation. According to him, it is not money and banking that are the problem, but the divorce of finance from its underlying economic foundations. It would be useful to trace the history of the growth of finance and banking as an adjunct and aspect of economic activity to identify the point of departure at which finance began to separate and assert its right to independent existence. Korten’s contrast between the functioning of small community banks and huge international banks makes sense. Local banks draw on local resources and tend to serve local needs. Banking conglomerates looking only to maximize profit, shareholder return and executive pay find it far more lucrative to lend and invest in the speculative financial activity of hedge funds and the like. It happened in 1907 and 1929 and repeated in 2008. His approach appeals because it identifies the disease without condemning the patient and points to a practical remedy which can be applied.
Korten’s views naturally raise the question, why? Why has the evolution of one of the most sophisticated and creative of social organizations gone awry? Viewed in that light, money seems to be no exception. We see the same thing with the unfettered growth and application of technology, which threatens to destroy the environment. Governance is another institution absolutely essential to the survival and development of society. Yet at all points we see the tendency for it to exercise power for the benefit of a few at the expense of the many. Law which is intended to promote justice often impedes it by its insistence on due process or technicalities. Underlying all these phenomenon is a common element – human beings who are the creators of money, markets, government and technology seem to have an inherent tendency to submit and subordinate themselves to the institutions they have fashioned. The moment that happens, the creation becomes a problem. The means becomes an end in itself, the creator becomes a victim to his creation. If this is true, it means our first task is to remind society that money, markets and finance are institutions created by man and adhere to man-made laws, not universal laws of an impersonal physical nature. We made them what they are and we can change them to make them serve us better.
Re: The Money System
by OGiarini - 01/03/2011 - 23:00
I like this issue by David Korten : politically it sounds "federalist". In fact then it would be interesting to examine as an example the role in Switzerland of all the "Cantonal banks" ( most "cantons" have a bank ), plus those of the cooperative banks ( even by the Migros - a distribution chain ) . And then go into the details of the international money flows.......quite an articulate issue...... I would also better study when economic transactions and activities pass the frontier from a non monetized situation into a monetized one: and which of these changes produce added and which deducted value. An finally all the intricate way to develop the debt economies to the point to create money flows on in existent values ( much the case for many derivatives, etc.) : a fantastic opportunity for those who cheat..... At the end we are talking about politics : and I am a kind of swiss and european federalist......
Best wishes, Orio
Dear Orio, dear all, Thanks
by ISlaus - 10/29/2010 - 16:32
Dear Orio, dear all,
Thanks for forwarding a very interesting talk/paper by David Korten.
It fits with what we are doing and that is great. I share most of his analysis and I emphasize two:
i) the system is inappropriate and has to be changed and
ii) if A. Smith and other great economists would see the mess the world is now in, would correctly say that their theory was very different, that it has been "developed" in a wrong way. Therefore, it is very important to reread them carefully (as Orio has been pointing quite forcefully).
Of course, I fully support his main thesis that it is the people who are the true wealth and that the economic system has to be designed in such a way as to benefit everybody, albeit allowing for creative differences. His main suggestions are summarized in his last 12 points and there I have most questions, comments and criticisms. He quotes Rothschild, but then falls into a trap of depending on regulations and laws to eliminate speculation, to introduce taxes etc. His #3. has some similarities with a Yugoslav experiment in self-management, which failed. Of course, though there are several good theoretical discussion on that, eg. late Prof. Horvat, still it is not fully understood.
cordially
ivo