Future of Finance

  • Broken Trust

    January 27th, 2017 by ewalsh

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    At this year’s World Economic Forum gathering in Davos, Switzerland, PR firm Edelman shared its comprehensive annual Trust Barometer, confirming what we all know: global trust in institutions and leaders is at an all-time low.  Fully two-thirds of countries are now considered “distrusters” (under 50% trust in the mainstream institutions of business, government, media and NGOs to do what is right), compared to about half a year ago.  This is a stunning collapse in trust, even from last year’s low base.

    Trust in leadership is equally low. Only 37 percent of the general population believe CEOs are credible, even worse for government officials – 29 percent credible.  A paltry 15 percent believe the system is working.  Ironically, it was Chinese Premier Xi, in his first address at Davos, who stood in defense of globalization (quoting Abraham Lincoln, it should be said), arguing that the system is sound, but it is (Western democratic) governance that has failed.  Note China ranked second on the trust index, second only to India.

    Talk about a humbling moment (if that’s possible) at the annual gathering of the global economic and political elite.

    There was lots of talk this year at Davos about “inclusive capitalism” (Jack Ma actually puts substance behind the slogan in his must-watch interview — a great example of Alibaba’s seemingly regenerative business model in service to its network partners rather than extracting from them, and a sharp contrast to Amazon’s model, as Ma explains).  But the “inclusive capitalism” talk included little honest analysis of the root cause of this stunning collapse in trust, why it is so dangerous (the rise in extreme forms of authoritarian populism rooted in emotion more than evidence and its unpredictable path), and what if anything can be done about it at this late date.  Nobel Economist Joseph Stiglitz wrote a prescient piece on this topic in 2013, and called for strong regulation and bold regulators to enforce the laws.  Clearly, we have failed.  And without a culture that not only values trust but demands it, I am not optimistic about better regulation and stricter enforcement.

    The decline in trust pervades all four institutions studied in the Edelman survey. Unfortunately, Edelman did not single out finance and report on it separately from business.  Surely few would doubt that the finance sector (Wall Street mega banks, in particular) would rank at the bottom of the trust barometer within the business category.  In fact, research confirms that bankers are more likely to cheat than the rest of us. (As a former banker, this is upsetting to me!)

    Nothing defines banking’s breach of public trust better than the 2008 financial collapse.  Being told to move on, It is easy to forget how much of the world’s current social and economic woes can be traced to the financial bubble and subsequent 2008 systemic collapse, either directly or indirectly.

    Recall that the financial collapse destroyed $19 trillion of economic value in the U.S. alone, permanently destroying the economic security of millions of families across America.  An estimated 34 million jobs were destroyed globally in the process.

    The rise of today’s dangerous brand of authoritarian populism—manifesting first in Brexit and now Trump—is directly connected to Wall Street’s breach of trust.  It’s not just because of “globalization” or “technology” taking our jobs as if it were all inevitable.  We cannot forget that compounding and exacerbating these legitimate and complex challenges, and more (climate change-induced drought driving immigration, linked to the Syrian carnage comes to mind) was the willful act of dropping a bomb into an already vulnerable society.  The Goldman Sachs/John Paulson Abacus trade was the Hiroshima of modern financial history.

    The mortgage fiasco was a massive, reckless act of violence, perpetrated upon global society by an industry failing in its critical purpose while instead proving itself willing to do just about anything to make grotesque profits through fraud and egregious deceit.  The efficient market narrative of bringing home ownership to the masses was all a cynical cover.  And the industry’s ongoing fraudulent activities post the crisis, from the LIBOR scandal to FX price rigging, to wrongful foreclosure with robo-signers to Wells Fargo’s opening millions of fake accounts out of its “community banking” division of all places (where the do-gooders are supposed to work), sealed the fate of the industry as devoid of trust for some time to come, unfair as that may be for the many honest bankers out there.

    Blaming populism on bankers’ unparalleled breach of trust is a strong claim.  But think about it:

    Less speculative finance, less speculative real estate lending.  Less boom created from unsustainable misallocation of human, physical, and financial capital to speculative real estate. Less wasted carbon in the atmosphere and less farmland destroyed, exacerbating the drought-driven migrations.  Less unearned wealth for bankers and less resulting inequality, and less power for the sector to rig the rules, buy off and brainwash the politicians and even regulators, resulting in asymmetric risks only the opportunist bankers truly understood.  (Trump once referred to the bankers—now his advisors—as “killers” on the campaign trail, and he’s had to cross them more than once, so he knows).   Less demand on the public sector to socialize the losses to “save the system” and therefore less public debt and no need for the misguided austerity driving society further into despair.  That means more resources available to address the consequences of globalization and automation, and greater acceleration of investment into the transition to renewable energy and into rebuilding our aging yet vital infrastructure.  More assets channeled into education, perhaps even into the revival of civics classes!  We know how this narrative continues.  We know it does not end with the election of a fraud to the most powerful office in the land.

    Donald Trump, whose ethics seem guided by the probability of winning lawsuits, is about as unlikely a remedy for broken societal trust as one can imagine, as his hopeful supporters are sadly about to learn.  Coal is not coming back, sorry.  So the consequences of lost trust will only amplify in dangerous and unpredictable ways that now stunningly include the Orwellian introduction of “alternative facts” into the Trump Administration’s everyday narrative.

    The so-called “activist investor” Carl Icahn is Trump’s fellow bully buddy and now Special Advisor on Regulatory Reform.  He has defended the need for Dodd-Frank banking reform in the past and held the banks responsible for the financial crisis in public statements.  That is a testament to his common sense and refreshing objectivity as a Wall Street insider.  Time will tell whether a man who has spent half a century as an opportunist (bully) stock speculator can come to see that an ideology that conflates speculation with investment and means (finance and the stock market) with ends (a healthy economy) can guide us to a more enlightened and still desperately needed financial system reform and begin the long process of rebuilding trust in Wall Street, and in the process within society.

    Not holding my breath.

  • City States Rising!

    December 29th, 2016 by ewalsh

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    Globalism’s associated and accelerating complexity of interconnected crises from migration to terrorism, from pandemics to climate change, define the new context of our 21st-century reality.  Unmanaged technological change and an outdated economic ideology compound the already unfair burden these crises impose on global citizens.  One need only consider the 18 percent approval rating of the United States Congress, the recent U.S. election, the EU/Euro fiasco, Syria, Israel, Egypt, Turkey (and more) to question whether the Nation State, a 400-year-old response to a different challenge in a different context, is up to the task.

    Ideological rather than pragmatic, a political abstraction that has no grounding in the concrete reality of where and how we live and how life-supporting ecosystems function, the Nation State, together with its political party structure, is not well equipped for today’s most important globally interdependent challenges that cannot be solved through inter-State rivalries where self-interest and might rule the day.

    The “City State” predates the Nation State; it endures.  Rome is older than Italy, Alexandria is older than Egypt.  Cities are expanding as we know.  They are already home to more than half the world’s population, and 80% in the developed economies.  They are home to 85% of the global economy (and associated greenhouse gas emissions) and much of the evolution of our culture.  Like it or not, we have become an increasingly urban species.  Visionaries like Jonathan Rose are showing the way to regenerative cities with his timely publication of A Well-Tempered City.  At the same time, rural culture, small towns, and life-sustaining rural landscapes, historically understood as essential extensions of the City State, have never been more vital, as I will discuss below.

    Cities are also where many of the world’s great challenges must be met. The migration crisis and terrorism are urban affairs.  Since most cities are on coastlines or rivers, climate change will increasingly dominate the agenda of cities.  And cities will be the target of a nuclear attack if dangerous men go unrestrained.  Wise and competent city governance is a matter of life and death, not political theater among self-important globalist and nationalist bureaucrats.

    In response to the governance failures of the global system of Nation States, political theorist Benjamin Barber wrote an important book in 2013 called, If Mayors Ruled the World: Dysfunctional Nations, Rising Cities.  The Global Parliament of Mayors (GPM), which he inspired, held its inaugural meeting in The Hague, two months before rural America elected Donald Trump against the wishes of a strong democratic majority of citizens living in America’s cities.

    Interesting.

    Mayors must be pragmatists first.  Ineptitude, ignorance, and ideology give way to the concreteness of real problems of real people living in real communities. New York Mayor Fiorello La Guardia once famously said, “There is no Democratic or Republican way of fixing a sewer.”  So too for dealing with rising sea levels or, God forbid, a nuclear attack.

    When our centralized governing bodies fail to uphold their responsibilities, a power vacuum ensues, creating an opening for dangerous “strongman” responses, as we are now witnessing in the U.S and abroad.  Our present moment is particularly dangerous, with the simultaneous failure of other critical and powerful institutions – banking and the media in particular – to uphold their civil responsibilities and serve the health of the whole rather than their narrow self-interests.

    Banking’s consequential leadership failures are now a matter for the history books.  But the media’s complex leadership failures are still unfolding, perhaps best epitomized by CBS CEO Leslie Moonves’ shamefully cynical comment at a Morgan Stanley analyst conference earlier this year:

    “It may not be good for America, but it’s damn good for CBS,” he said of the election circus.  “Sorry. It’s a terrible thing to say. But, bring it on, Donald. Keep going.”

    Well, the young crowd at Morgan Stanley chuckled, “Donald kept going,” and we have elected a man to the highest office in the land who numerous respected psychologists believe has a (dangerous to the world) incurable mental illness known as “Narcissistic Personality Disorder.”

    Not so funny, is it, Mr. Moonves?  Enjoy your good quarterly profits.  Just as the reckless behavior of Wall Street was not funny, its ongoing consequences leading directly to the rise in authoritarian movements across the globe are not funny.

    A core principle of sustainable systems is that a system must adapt to its changing context or it will collapse. The current context of accelerating, unpredictable (by definition) complexity and too powerful, dysfunctional critical institutions – Nation States, banking and finance, and the media, together providing much of the essential fabric of our modern democratic and free society – creates the pressure for real change and the very real prospect of possible collapse.

    Our response most certainly lies in the concept of subsidiarity, one of four tenets of Catholic social doctrine, balancing power away from the center and closer to where the inclusive and democratic will of the people is still expressed: the modern City State.  Rise up Mayors!  And, rise up regional banks and community newspapers!

    Looked at through a regenerative systems lens, this is a return to the natural “fractal” ordering of things, demanding an emergent network of City States to counterbalance the corrupted power at the center. Indeed, such a response is already underway with the numerous networks of city-based initiatives such as the prescient GMP, the C-40 focused on climate change, UN-Habitatthe Strong Cities Network, and numerous “Smart Cities” initiatives.

    Rural communities, too, have a vital role to play.  In addition to preserving the ageless wisdom embedded in the diversity of rural cultures and communities, they have the critical responsibility to steward our essential landscapes – our forests, our soils, our watersheds, all under threat from our short-sighted, extractive, industrial economy.  Critically, the regenerative management of forestry and agriculture, with the potential to massively increase natural carbon sequestration, now holds perhaps the missing critical dimension of our ability to respond in time to climate change.  Therefore, City States have a self-interest in valuing and supporting the culture of land stewardship, the very foundation of human civilization and still very much alive in rural communities.  No soil, no water, no life.

    We are passing from the 500-year-old Modern Era in which great progress including the Nation State emerged in response to pressures from a different context.  We are entering the “Integral Era,” in response to new pressures and a new context.  Power is shifting from corrupted institutions of an extractive and overly powerful center to a regenerative and more distributed network of interconnected City States.

    Happy New Era!

  • Sail On, Sail On, Sailor

    September 16th, 2016 by ewalsh

     

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    Image Courtesy of BlueOrigin.com

     

     

     

     

     

     

     

     

     

    The following blog post originally appeared on EcoWatch.com.

    “Our vision is millions of people living and working in space, and New Glenn is a very important step,” said Jeff Bezos, unveiling this week his space travel company Blue Origin’s giant rocket named after Astronaut John Glenn.

    Of course there is also billionaire entrepreneur extraordinaire Elon Musk’s SpaceX, Richard Branson’s Virgin Galactic, and Paul Allen’s Vulcan Aerospace. Dream big, that’s the spirit! The final frontier with limitless possibilities. Our boys and their toys. Great fun!

    Most of us sail at a lower orbit of course. Our games, our striving and exploration, our fun, takes place a little closer to earth. My soul is nourished near and on the sea, so boats are my toys of choice. In my middle age, I have largely traded the competitive sailboat racing of my youth for a desire to “mess around” in relatively small, wooden boats in particular – sail and power – luxuriating in their handcrafted and poetic aesthetic.

    As I’ve documented previously, large, ocean-going yachts are a whole different kettle of fish, and pose a particularly grotesque challenge to any sense of a responsible carbon footprint, even if money is no object. My “boat toy” desires are far more humble. Until a couple weeks ago, my “yachting” consisted of a high performance paddle board with a bamboo deck – sustainable right? In my future, I see a pretty day sailor, handcrafted in Maine out of local wood (I sold my prior sailboat since the kids preoccupied my free time), and a small motorboat to explore harbors (we call this “toodling around”) and to make occasional short journeys around the southern New England coast where I live.

    This summer, I visited the talented craftsman Doug Hylan and his partner Ellery Brown of Hylan & Associates in Brooklin, Maine to continue a conversation we’ve had on and off for over a year about building a small “green” powerboat. Same logic as a car or a house – energy, materials, etc. The challenge of making motorboats fuel-efficient is that it takes much more energy to push a boat through the water than to roll a car down a road. And a boat requires an exponential increment of power to push it faster than what’s called “hull speed” – in other words to make it rise up and plane.

    So the design challenge was to find the right shape (long, narrow, and light), but stable enough for offshore conditions (wide and heavy is better) and with a highly efficient engine that would go “just fast enough”. Doug has done some cutting edge work in this arena, with some updated versions of classic designs and power system innovations. But even with Doug’s design ingenuity, latest technology, and lightweight building techniques, he hasn’t yet come up with a way to overcome those pesky laws of physics. Water is heavy and hydrostatic pressure is a bear.

    As we were talking over the concept we had in mind, I sensed a distinct lack of enthusiasm for my vision of the first truly “green” picnic boat, locally crafted, that had the potential to redefine pleasure boating away from the unsustainable fiberglass that ends up on a junk heap, and overwhelm Doug with new orders in the process. That’s when he turned to me and said, “You know John, if you want to enjoy green, responsible boating, just slow down.”

    Doug’s truth pierced Maine’s stark summer beauty as we looked across the cove, silently absorbing the implications that ran far beyond boats. All the latest advances in design and technology couldn’t come close to simply riding down the steeply sloped and physics determined energy curves he had showed me (slow down, use exponentially less energy).

    I gave up on a new, high tech wooden boat and bought a classic bass boat that has been for sale all summer, built out of wood in 1969, and totally restored in 2009. For a fraction of what a new boat would cost I might add. Reuse, recycle!

    And I’ll be the guy going slow, at least most of the time. At hull speed (about 10 miles per hour), I’ll burn less than a gallon of diesel per hour, a quarter of that when just calmly exploring a shoreline with friends in good conversation, going slow, enjoying the quiet. That’s when the experience feeds the soul, and relationships deepen, so it’s not all sacrifice. Going “fast” when we “need to get somewhere” (about 22 miles per hour is tops in this case), I’ll burn 8 gallons per hour with a guilty conscious.

    In contrast, a yacht like I wrote about before will burn between 20 and 40 gallons per hour going 10 miles per hour. And a fast offshore fishing boat designed to get out to the shelf for the big fish and back in a day, burns 150 gallons per hour at the high speed necessary to be home for dinner – in other words, a 500 gallon a day toy.

    My boat toy fetish makes me complicit, as does the rest of my lifestyle. But it’s mostly the flying I do. As many have pointed out, we sustainability workers sure do fly around a lot. Flying kills a carbon budget fast. Physics again. No doubt we Americans have a big adjustment to make with our living. Much less flying and offshore fishing. More fly fishing. And more sailing, sailor. Not so bad.

    Which brings us back to space travel. There certainly are real societal benefits from space exploration, and some interesting space opportunities only these super-human entrepreneurs could ever dream up. But a little research suggests a frightening energy curve – based on those same pesky laws of physics – that we must confront (hopefully with Doug Hylan’s wisdom hovering about).

    Aside from the money issue, the amount of fuel for a one day (probably hour or less) zero gravity tourist experience in space you wonder? Well, according to my calculations based on one seemingly reliable source, it’s 64,000 gallons of diesel equivalent.

    Some fun. Sail on, Sail on, sailor.

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  • Brexit: Ignorance Calls Out Ignorance

    July 12th, 2016 by ewalsh

    “It ain’t what you don’t know that gets you in trouble. It’s what you know for sure that just ain’t so.” – Mark Twain

    Image Courtesy of www.newmoney.gr

    Image Courtesy of www.newmoney.gr

     

     

     

     

     

     

     

    Former U.K. Prime Minister Tony Blair discussed the momentous June 23 Brexit Referendum on a still “Too Big to Fail” bank conference call last week. Revealing how he really felt near the end of the interview, he proclaimed, “Knowing what you’re talking about became a disqualifier during the Referendum.”

    Blair typifies the neo-liberal elite who as Twain observed “know for sure” what they are talking about, despite overwhelming evidence to the contrary. One would think the Brexit debacle (not to mention the Trump debacle, the rise of Sanders, and the race tensions spinning out of control in the U.S., all rooted in a deeply flawed and divisive economic system that works too well for a few, and not well at all for too many) might cause these leaders to seriously ask themselves whether what they “know for sure just ain’t so.” And we wonder why today’s “elites” attract such disdain.

    No doubt, the Leave vote was supported by many who had little understanding or interest in the European Union (E.U.); this has been well-documented. No doubt we also find its roots in the rise of xenophobic, anti-European opportunists who spearheaded the Leave campaign, only to shamefully disappear from the public stage when they surprised themselves and got their way.

    The potential damage caused by Leave vote is a consequence of the far greater and more destructive ignorance on the part of the elites, including Blair himself. This elite ignorance arises from a blind faith in a dangerously-flawed neo-liberal economic ideology and the E.U.’s misguided, core architecture: monetary union without fiscal union. A basic understanding of biology tells you that organisms move toward food and safety when their life is under threat. Take away the adjustment mechanism of national currencies; squeeze people until they cannot live under a misguided austerity ideology; combine this with a commitment to free labor mobility – and you have designed a guaranteed refugee crisis with all the social turmoil that comes with it. So yes, Mr. Blair, as you said, “these people” as you called them – presumably you were referring to the ignorant little people who voted to Leave – “really do want these problems solved.”

    In that same interview, Blair also put his finger on a root cause when he said, “The basic concept of Europe is about how to exercise power in a multi-polar world. Small countries need to band together to exercise collective power.” This fear-based philosophy is understandable in our highly competitive and too often violent world. But, building this fear-driven competitive narrative into the architecture of our political economy guarantees we will never transcend it. The logical extension of fear-based division and extreme competitiveness is violence in all its forms, from the violence that we have seen play out, too often, over much of modern Wall Street, to the violence we see in our divided communities, to the violence of war.

    This competitive narrative is at the heart of neoliberalism with its belief in: uncontrolled globalism; the financialization of unrestrained “free markets;” and “free trade” defined around mega-corporate interests which locks the world into a race-to-the-bottom around health, labor, and environmental safeguards.

    So how will Great Britain fare outside of the E.U., assuming the Brexit vote will not get a do-over? The pundits and economists are all alarmed about the loss of growth. They “know for sure” that less growth means a poorer Britain, but they appear to be ignorant of the uneconomic growth now emanating out of the City of London. Could it be that Brexit’s ignorant, xenophobia-fueled vote will have the ironic effect of breaking apart the entrenched, systemic ignorance of neoliberal elites, and lead to a healthier and wiser Great Britain?

    Let’s imagine what a better Britain might look like. First, the financial sector might be cut down to size as it splinters into more manageable units across Europe. The consequence of London as a world financial center (do we really need one?) is a national economy way out of balance, dependent on a too powerful, extractive export industry that corrupts politicians with influence (even if subconsciously); drives extreme inequality; and separates London’s elite from the rest of the U.K. as Brexit demonstrated. A smaller financial sector in London, more aligned with the genuine needs of the real economy (rather than playing to its own speculative wants) is a good thing – unless you happen to own expensive real estate in London. We see similar consequences in corrupt, extractive export dependent economies in Africa. There it is diamonds and oil rather than finance, and the corruption may be more brazen, but the consequences for society follow a similar pattern.

    Second, the U.K. had the foresight not to sign up for the fatally-flawed common currency. The British Pound has depreciated nicely making the country immediately more attractive as a trading partner or investment region to the rest of the world. If it could now shake the destructive austerity ideology imported from the E.U. (i.e., Germany), it would have the opportunity

    to take advantage of historically cheap borrowing-costs to invest in its health, education, and critical infrastructure beginning with a smart, clean, energy systems, the foundation for a thriving economy in the 21st century. To do this, some tax shifting (and collecting) will be necessary over the long run. For starters, by imposing a financial transaction tax, the new Britain could send a positive signal across the Channel by finally joining the rest of Europe in nudging finance away from excessive speculation. This new revenue stream will actually enhance the resilience of capital markets and, with it, the health and stability of the real economy (notwithstanding the ignorant neoliberal cries to the contrary).

    Think of it as the “Brexit wake-up call.” It was certainly not an intelligent way to remake the European Project on the fly, leaving great risks in its wake. But there remains the potential for a flourishing Great Britain of the future, a gleaming light in the diverse, culturally-rich mosaic that will always define Europe. All this, if it can only transcend its elites’ flawed economic-thinking.

  • What’s the Matter with America? The Breakdown of Love, Strength & Intelligence

    June 21st, 2016 by ewalsh

    The following guest blog post is by Dr. Sally Goerner, Capital Institute’s Science Advisor.

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    Why have millions of American voters selected Donald Trump, a narcissistic, neo-fascist salesman whose policies run from irrational to dangerous? There are, of course, many facets to this conundrum. Here, I explore its deeper psychological underpinnings in hopes that our leaders might better understand its causes and cures. In particular, I’m going to use the Triune Brain[1] understanding of human nature to explain why this neo-fascist upsurge is a classic consequence of the breakdown of the bonds of love, strength, and intelligence that hold a society together and why rebuilding these bonds is critical to our survival.

    Brain research suggests the behavior patterns of love, strength and intelligence are hardwired into the human brain because they support three critical social functions: community, power, and learning, respectively. Love supports community, allowing diverse individuals to work together for common-cause, be it a family, a business, or a nation. Strength is central to authority, the social power used to coordinate communities and maintain order and defense in large groups. Intelligence enhances learning of course, but thinking is swayed by the two lower brains because they get information first, and pass it along with distinct emotional hues.

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    While all three brain functions operate in most every individual, one or the other of them often dominates in particular individuals and groups – a situation that can be seen in today’s Right-Left divide. The Right emphasizes strength: rugged individualism, self-reliance, and traditional order. The Left emphasizes caring: partnership, community, and openness to non-traditional alternatives.

    While such emphases help unify groups, love, strength, and intelligence actually only work well when they work together for the good of the whole. For example, intelligence without love is evil, and love without strength of character is impotent. Most importantly, in healthy societies, power and authority are positions of responsibility, which are only honorable and functional when they serve community.

    The catch is that the golden three only work when they are connected, but the bonds holding them together tend to fray as social groups grow larger and power becomes more concentrated. So, where leaders in small, well-knit societies (e.g., Native Americans or early Scottish clans) tend to honor their responsibilities to serve community, the bigger a society becomes the more elites grow apart from their people, and the less feedback mechanisms such as shame, religion, and even law serve to check abuse.

    As distance and unaccountability grow, community leaders become unresponsive “elites,” and power is increasingly turned toward elite self-service, with less and less regard to harm done to society as a whole. Soon the striving for superiority and winning, which are natural ambitions of strength, becomes the pathological pursuit of power. Today’s pathological power systems include: bankers who crash economies with predatory loans and toxic financial instruments; tobacco companies that hide the evidence that their product is killing people; a military-industrial complex that promotes endless war for corporate gain; and a whole raft of corporations that poison people and planet – all to make more money for elites.

    So, where public servants like President Eisenhower once warned us of a corrupt military-industrial complex, today’s isolated and uncaring elites are blithely destroying civilization by killing the planet, eviscerating economies, and corrupting political systems. Think water systems in Flint, Michigan. Like the proverbial frog in boiling water, much of the public has been slow to see the problem because they: 1) trust authority; 2) are hyped up on fear and xenophobia; and 3) are constantly told the current system is natural, necessary, and/or best. Concerned reformers raise red flags, but the mainstream public has been taught to see reformers as dangerous radicals and crazy conspiracy theorists – and the behavior of some extremists confirm these fears.

    Elite dysfunction eventually becomes so blatant that bonds of trust and belief disintegrate. As trust crumbles, the society Balkanizes into smaller, polarized, power groups, each defending some cherished cause from conservative community to environmental preservation. As faith in establishment systems dissolves, a power vacuum opens, and regressive and progressive leaders like Trump and Sanders spring up to answer the public’s call for change. Certain individuals and groups gravitate toward neo-fascists like Trump because:

    • Fear and frustration drive them towards strength, regardless of intelligence, and Trump exudes “in-your-face” muscle; and
    • Establishment elites have so corrupted politics, economics, and the media that few people trust them and trustworthy information is hard to find.

    Today’s power systems have become so sociopathic that our survival is now in question. How do we reverse this suicidal trend? There are no pat answers, but understanding how the brain works suggests one thing we need to do is reintegrate love, strength, and intelligence in service to the health of the whole community.

    The first step in this reintegration is to re-empower the public. This is where grassroots reform movements come in; they create a countervailing community force that pathological power must reckon with. At the same time, contrary to Occupy-Wall-Street assumptions, countervailing movements need leadership, power, and authority as much as they need grassroots reformers.

    Bernie Sanders shows how strong leadership can mobilize a deeply concerned public toward much needed political change funded from the bottom up, but the Koch brothers and Donald Trump show that the devil is in the leadership details. Many people were also afraid to elect Sanders because one guy is not enough. We actually need legions of responsible power-players to develop strong, intelligent, community-serving systems capable of both halting socio-economic destruction, and mobilizing resources to build a truly healthy civilization for all. We need to cultivate such leaders from the bottom up with empowering education. We also need to encourage existing leaders to reclaim their traditional role in service to civilization. We need to organize these power-mobilizers with consciousness-raising and community-building for leaders such as that emerging around socially-responsible business.

    Restoring our shattered communities also requires we restore civil discourse by building a conservative-progressive alliance around the values that bind us together – justice, fairness, integrity, community commitment, intelligence, and honorable strength. Societal learning requires both diversity of opinion and the ability to come to agreements about how to proceed for the health of the whole. Our ability to come together has been curtailed by oligarchs spending billions to divide us, but polls show unity is still lurking within, with huge majorities of Americans agreeing on many of the core problems and cures, particularly those relating to abusive power. For example, both sides agree on the need for effective constraints on abusive power including:

    • Anti-corruption constraints in government: e.g., get the money out of politics; require conflict of interest recusal in all sectors of government and judiciary; eliminate revolving doors between public and private service.
    • Legal constraints on private power, e.g., expand and enforce antitrust laws, especially in media and politics; make violating health, safety, and fraud laws too expensive to continue.

    I believe reintegration will also require a clear vision of a positive future, one that reconnects power, community, and learning in pursuit of well-being for all. We must learn to build strong individuals, strong bonds, and freely flowing intelligence by investing in our human and social capital as well as our material and financial systems. We must find a way to build a vibrant civilization with ample opportunities for everyone to live full and meaningful lives, safe from the depredations of uncaring power.

    This is what I see as regenerative civilization. It is not as impossible as one might think.

    [1] Maclean, Paul D. (1969). The Triune Brain. New York: Plenum.

  • To Break ‘Em Up, or Not to Break ‘Em Up, That Is the (Wrong) Question

    May 23rd, 2016 by ewalsh
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    Image Courtesy of Flickr (DonkeyHotey)

     

     

     

     

     

     

     

    Over the coming months, I will be finalizing a white paper whose working title is “Fixing Finance: System Design in Service of the Regenerative Economy.” I will be drawing on the eight principles of Regenerative Economics[1] to explore an aspirational framework for the redesign of global finance. This is the first in a series of articles, previewing ideas from the paper. I will be grateful for all constructive input from our readers.

     

    Bernie says the banks are too powerful so we need to break them up and reinstitute Glass-Steagall, the depression era legislation that separates high-risk investment banking from staid commercial banking. Hillary says we need to strengthen Dodd-Frank, the comprehensive banking reform passed in the wake of the 2008 financial crisis, and extend financial reform to the shadow-banking sector, which includes hedge funds and private equity. Trump just sent chocolates to Wall Street (self-funding is so “Primaries”) by announcing he would largely “dismantle Dodd-Frank.”

    All three have a point.

    Bernie’s right. The big banks remain too powerful and are more concentrated than before the crisis (although they are individually much less risky). Hillary is justified in saying that Dodd-Frank needs more work if it is to do the job it was designed to do. (Trouble is Dodd-Frank, at 2,300 pages—plus an incomprehensible 22,000 pages of regulatory content written by the numerous agencies charged with implementing the rules—is impossibly cumbersome already, and hard, if not impossible, to enforce. Glass-Steagall was an elegant 37 pages by comparison.) And we agree with what Trump might be suggesting – but who really knows what that is- that Dodd-Frank has created numerous unintended consequences beyond the cumulative brain damage of reading and understanding the legislation. Importantly, Dodd-Frank has harmed the sound community banks doing the kind of banking we need, and together with new capital and liquidity rules, discourages big banks from doing the long-term project-finance lending needed to finance the transition to alternative energy systems. But none of the remaining presidential candidates appear to be even contemplating the financial reform we truly need in service of a Regenerative Economy.

    Comprehensive financial reform must not only rein in Wall Street recklessness and predatory behavior, essentially what Dodd-Frank was designed to do, but it must also promote the kind of finance we need. It is a design challenge, not just a police action. And like any intelligent and practical redesign, it must be driven by a clear purpose—it must be a means to a particular end—and, it must reflect the current particular context (from banking culture to climate change) rather than abstract, ideological beliefs.

    Let us begin with the current context. Given space limitations here, I will simply assert seemingly self-evident facts.

    Wall Street (broadly defined) is too powerful and undermines trust throughout society. It has too much influence on a political system whose job it is to legislate for its prudent and pro-social behavior. Repeatedly, powerful actors’ reckless and fraudulent behavior is rarely, if ever, held to account. And, what is most cruel and unfair, the catastrophic costs of this behavior get socialized across innocent and vulnerable citizens and, more generally, the public sector. While a majority of those working in finance are honest, the business as it is conducted today seems to enable and even elevate sociopathic behavior. Wall Street, with a long history of at times anti-social behavior, is simply not a trusted institution. And trust is the foundation of a functional financial system and society at large.

    Second, while private sector banking is run as a profit-maximizing enterprise, it is not “just” a business, like selling software or soap. Banking, and in particular the function of credit (money) creation and allocation, has a distinct public purpose—to serve and support the real economy. Even in free-enterprise-dominated economies like we have in the U.S., this reality is reflected in the unique regulatory framework, central banking architecture as lender of last resort, and federal government backstop programs such as deposit insurance that make finance distinct from other private sector industries.

    Third, the financial system is currently designed to finance what is most profitable to investors in the short-term, not what is needed in the real economy over the medium- and long-term. Misguided incentives and pervasive conflicts of interest further distort what gets financed. In other words, the “invisible hand” needs an upgrade, reflecting the urgent priorities of mitigating inequality and financing the energy transition off fossil fuels, and more generally, the desired end finance is designed to achieve. Finance, a subsystem of the broader economy, is not the end itself. A proper design must sort out means from ends.

    Finally, the financial system is a complex system. Our growing understanding of complexity teaches us that we cannot fully manage it, but we can influence how it unfolds. But this requires a plan and a decision-making framework, not merely a set of ideological belief systems that favor, on the one hand, free markets or, on the other, heavy-handed government intervention to limit risk and fraudulent behavior.

    To imagine the financial system we want, we first need a clear idea of what end we are trying to achieve and then we must design a system to achieve that end. This design approach is quite different than the rules and regulation approach that describes much (but not all) of the modern financial regulatory framework.   To effect this redesign, we must first challenge the assumption that underlies how advocates of both more and less government regulation view finance: that its purpose is to promote efficiency and thereby economic growth. The left and right may differ on the appeal of unfettered financial markets, and on how the spoils that arise from economic growth should be divvied up. But both sides agree that sustained economic growth is the “be all and end all” of a high-functioning financial system.

    Regenerative Economics on the other hand, defines economic health and therefore the purpose of finance in a more nuanced way. To quote urban economist and systems thinker Jane Jacobs, “It’s not how big you grow, it’s how you grow big” that matters.

    To answer this critical “how to grow” question, we must take a fresh approach rooted in hard science, which is also remarkably aligned with common sense and our many humanistic wisdom traditions.   The science is called energy flow network science, an integrated understanding drawn from modern physics, thermodynamics, biology, ecology, and complexity science.[2]

    While it is new to many, this science represents our latest understanding of how the universe actually works. Our premise is simple and logical, built on the assertion that human economies are in fact clear examples of these same energy flow networks. (Einstein taught us that everything is energy.) We must therefore look to real-world living systems that have sustained themselves for long periods of time to discern the proven patterns and design principles of how to grow a sustainable economy, rather than be guided by demonstrably flawed and ideologically driven beliefs and theories, and models based on simplifying but wrong assumptions. Modern Portfolio Theory, Shareholder Value, Value-at-Risk, Efficient Market Hypothesis all come to mind.

    Since finance properly understood is embedded in, and in service of, the economic system, the same science can help us design a framework for a financial system, and along with it, a banking system that supports the right kind of economic growth. And because it has nothing to do with the ideologies of the left or the right, it has the potential to transcend the tired political fight pitting free market champions against government interventionists.

    I will talk more about what integral science can teach us about financial and banking system redesign in the next edition of this new series on Regenerative Finance.

    [1] http://capitalinstitute.org/regenerative-capitalism

    [2] http://capitalinstitute.org/wp-content/uploads/2014/08/000-Goerner-Regenerative-Development-Sept-15-2015.pdf

  • Trump, Sanders, and the Collapse of the American Oligarchy

    April 26th, 2016 by ewalsh

     

    The following guest blog post is by Dr. Sally Goerner, Capital Institute’s Science Advisor.

    “The collapse of urban cultures is an event much more frequent than most observers realize. Often, collapse is well underway before societal elites become aware of it, leading to scenes of leaders responding retroactively and ineffectively as their society collapses around them.”

    – Sander Vander Leeuw, Archaeologist, 1997

    cartoon-of-the-decade

    The media has made a cottage industry out of analyzing the relationship between America’s crumbling infrastructure, outsourced jobs, stagnant wages, and evaporating middle class and the rise of anti-establishment presidential candidates Donald Trump and Bernie Sanders. Commentators are also tripping all over one another to expound daily on the ineffectual response of America’s political elite – characterized by either bewilderment or a dismissal of these anti-establishment candidates as minor hiccups in the otherwise smooth sailing of status-quo power arrangements. But the pundits are all missing the point: the Trump-Sanders phenomenon signals an American oligarchy on the brink of a civilization-threatening collapse.

    The tragedy is that, despite what you hear on TV or read in the paper or online, this collapse was completely predictable. Scientifically speaking, oligarchies always collapse because they are designed to extract wealth from the lower levels of society, concentrate it at the top, and block adaptation by concentrating oligarchic power as well. Though it may take some time, extraction eventually eviscerates the productive levels of society, and the system becomes increasingly brittle. Internal pressures and the sense of betrayal grow as desperation and despair multiply everywhere except at the top, but effective reform seems impossible because the system seems thoroughly rigged. In the final stages, a raft of upstart leaders emerge, some honest and some fascistic, all seeking to channel pent-up frustration towards their chosen ends. If we are lucky, the public will mobilize behind honest leaders and effective reforms. If we are unlucky, either the establishment will continue to “respond ineffectively” until our economy collapses, or a fascist will take over and create conditions too horrific to contemplate.

    Sound familiar? America has witnessed a similar cycle of oligarchic corruption[1] starting in the 1760s, 1850s, 1920s, and 2000s:

    • Economic Royalists infiltrate critical institutions and rig political and economic systems to favor elites. 1760s: Royal governors run roughshod over colonial farmers; The East India Company, whose investors were primarily wealthy aristocrats, is given monopoly trading rights in the colonies. (The Tea Act was basically a corporate tax break for it.) 2000s: Vice President Dick Cheney’s company Halliburton is given no-bid contracts to handle military services in Iraq; American taxpayers bail out failed banks; Billionaire Warren Buffet pays a lower tax rate than his secretary; America’s medical system is dominated by profit-maximizing, health-minimizing insurance companies.
    • Rigged systems erode the health of the larger society, and signs of crisis proliferate. Developed by British archaeologist Sir Colin Renfrew in 1979[2], the following “Signs of Failing Times” have played out across time in 26 distinct societies ranging from the collapse of the Roman Empire to the collapse of the Soviet Union:
      1. Elite power and well-being increase and is manifested in displays of wealth;
      2. Elites become heavily focused on maintaining a monopoly on power inside the society; Laws become more advantageous to elites, and penalties for the larger public become more Draconian;
      3. The middle class evaporates;
      4. The “misery index” mushrooms, witnessed by increasing rates of homicide, suicide, illness, homelessness, and drug/alcohol abuse;
      5. Ecological disasters increase as short-term focus pushes ravenous exploitation of resources;
      6. There’s a resurgence of conservatism and fundamentalist religion as once golden theories are brought back to counter decay, but these are usually in a corrupted form that accelerates decline.
    • The crisis reaches a breaking point, and seemingly small events trigger popular frustration into a transformative change. If the society enacts effective reforms, it enters a new stage of development. If it fails to enact reforms, crisis leads to regression and possibly collapse. 1776: Lexington and Concord’s “shot heard round the world”; the Declaration of Independence; America becomes unified nation aimed at liberty and justice for all. 1933: Under huge public pressure, FDR turns from a standard New York politician to a champion of social and economic reform; government work-programs revitalize the nation’s infrastructure, and reforms such as the Glass-Steagall Act reduce bankers’ ability to abuse the system; Post-FDR America witnesses the longest surge of cross-scale prosperity and the largest increase in the middle class in history.
    • Over time, transformed societies forget why they implemented reforms; Economic Royalists creep back and the cycle starts a new. 1980-2000s: Reagan removes the Fairness Doctrine and stops enforcing antitrust laws; Economic elites argue we need to modernize finance by getting rid of Glass-Steagall; Tax rates on the wealthy plummet while infrastructure crumbles; The Supreme Court supports Citizens United and guts the Voting Rights Act; Gerrymandering increases.

    We have forgotten the lessons of the 1760s, 1850s, and 1920s. We have let Economic Royalists hijack our democracy, and turn our economy into their money machine. Now the middle class is evaporating, infrastructure is crumbling, and pressure is reaching a breaking point. Anti-establishment candidates are on the rise, and no one knows how things will turn out.

    What then shall we do? The first step is to remember that our times also hold a positive possibility – a transformation akin to those which followed 1776, 1865, and 1945. Honest reformers from education and agriculture to energy and finance are already reinventing their fields. Regenerative, resilient “New Economy” experiments are bubbling up everywhere. Thanks to the Internet, communication is faster and more effective than at any other time in history – so word is getting out.

    The second step is to remember that the vast majority of people participating in today’s economic system are not corrupt, they just believe today’s dominant belief system is some combination of good, right, necessary, or inevitable. In today’s case, most of our political-economic elites – both Republican and Democrat, right and left – genuinely believe that today’s neo-liberal economic frame is the path to prosperity, a kind of “win-win” strategy of competitive markets that, in the end, will benefit both elite and global interests as a whole.

    So, for the most part, we are not dealing with evil people, but what sociologists call a “social construction of reality.” Over time, human beings construct their everyday systems and practices around a set of widely held beliefs. They do this by creating a matrix of rewards and punishments that keeps everyone in line with the society’s dominant beliefs, for example, incentives to compete, and rewards for maximizing profit. Unfortunately, this matrix holds even as people begin to realize that the system is not working. What we’re now facing is a combination of: 1) people who still believe; and 2) people who doubt, but: a) would have to sacrifice their livelihood to act on it; or, b) are willing to leave the system but don’t necessarily know what comes next.

    Today’s big challenge is twofold. First, we need to find a way to unite today’s many disjointed reform efforts into the coherent and effective reinvention we so desperately need. This unity will require solid science, compelling story, and positive dream. Secondly, since hierarchies are absolutely necessary for groups beyond a certain size, this time we must figure out how to create healthy hierarchical systems that effectively support the health and prosperity of the entire social, economic, and environmental system including everyone within. In short, our goal must be to figure out how to end oligarchy forever, not just create a new version of it. This is a topic I will take up in my next blog.

    The last step is to keep our eyes on the prize. As Peter Drucker explained in 1995[3]:

    “Every few hundred years in Western history there occurs a sharp transformation. Within a few short decades, society ─ its worldview, its basic values, its social and political structures, its key institutions ─ rearranges itself…Fifty years later, there is a new world, and people born then cannot even imagine the world in which their grandparents lived…We are currently living through such a time.”

    Ours is not a simple task, but we can take hope from the fact that our ancestors succeeded under much harsher conditions.

    [1] This cycle has occurred every 80 to 90 years throughout American and much of world history. It is detailed in books such as Strauss and Howe’s The Fourth Turning, and Thom Hartmann’s The Crash of 2016. See Strauss, W. & Howe, N., (1996). The Fourth Turning: What the cycles of history tell us about America’s next rendevouz with destiny.

    [2] Renfrew, Colin. 1979. Systems collapse as social transformation: Catastrophe and anastrophe in early state societies. In Renfrew C. and Cooke, K.L. (eds.), Transformations: Mathematical approaches to culture change. New York: Academic Press, 481-506.

    [3] Cited in Drucker, Peter. 2009. Managing in a Time of Great Change.

  • Capital Institute Goes to Buffalo

    April 26th, 2016 by ewalsh
    IMG_3021

    (L to R) Ryan McPherson, John Fullerton & Amit Goyal visiting the 28-acre SolarCity facility

    I had the privilege of spending a full day in Buffalo last week before delivering a lecture on Regenerative Capitalism, at the invitation of Amit Goyal, Director of the State University of New York at Buffalo’s RENEW Institute. Regenerative thinking and action is what defines an emergent Buffalo. It is taking place across scales, and it is working at the edges of the private sector, the public sector, the non-profit sector, and the research university.

    RENEW is an impressive “university-wide, interdisciplinary research institute that focuses on complex environmental issues, as well as the social and economic issues with which they are connected.” The seven participating schools include the College of Arts and Sciences, the School of Management, the School Architecture and Planning, the School of Engineering and Applied Sciences, the Law School, the School of Public Health, and the School of Medicine. RENEW’s own vision calls for a regenerative economy, and even a one-day visit to Buffalo left me feeling the regeneration happening in real time. It was yet another example, together with our now 35 “Field Guide” stories, which gives me confidence that regenerative economies are indeed an emergent phenomenon happening everywhere on the ground, often in distressed cities and communities where the pressure for change is the greatest. This is as expected, in accordance with our understanding from the science of physics and how natural systems change in response to pressure.

    I experienced three distinct manifestations of regeneration during my Buffalo visit.

    The RENEW Institute, with an impressive $25 million budget, is certainly a shining example of higher education commitment to interdisciplinary (integrated) thinking and work, the future of higher education in this integral age. Amit likes to say they are looking for “T people” as opposed to “I people” to join the institute. An “I person” is the traditional academic expert, with deep knowledge within his or her field. A “T person” on the other hand, must demonstrate deep knowledge within a discipline, but also be a lateral thinker who can integrate ideas and discover new potential and solutions by working across silos. This is no easy feat as anyone familiar with the academy can attest. Listening to Amit during my visit, and to the Provost during the introduction to my lecture, I got the sense that the University is bound and determined to work at what we like to call the “edges” – the boundaries where different systems (or in this case disciplines) meet – leveraging its considerable domain expertise while at the same time forging relationships of exchange where the real regenerative potential lies.

    The second manifestation of regeneration happening on the ground is the People United for Sustainable Housing (PUSH) Buffalo initiative, under the leadership of the energetic Aaron Bartley.  Bartley is a Harvard Law grad who returned to his hometown to contribute to its regeneration after decades of decay from what was once one of America’s leading and wealthiest cities when it served as a vital trade hub.  Ten years young, PUSH and its partners have transformed neighborhoods one building at a time – inspiring work.  Walking block by block with Aaron and sharing brief greetings with local residents, the regeneration was palpable.

    Finally, there is the Buffalo Billion, a signature economic development project of Governor Cuomo, who has committed to invest $1 billion into the Buffalo economy. A central premise of regenerative economics is what we call “robust circulation.” This includes ample reinvestment in the economic system to ensure its vitality. Too often wealth is extracted from regions and reinvested elsewhere. Faced with decline often caused by external shocks, modern austerity ideology in the name of balanced budgets (see Europe post financial crisis) only furthers economic decline by starving a community of the vital reinvestment all healthy systems demand. After decades of disinvestment and decline, it is vitally important that the public sector engage in Buffalo’s regeneration in order for it to succeed. The city is very fortunate to have been selected by Governor Cuomo as the target for such large-scale investment.

    I was given a tour of the massive solar manufacturing facility being built for SolarCity. At an astonishing 28 acres under one roof, it will be one of the world’s largest and most sophisticated solar manufacturing facilities when it is complete. While the solar plant is but one aspect of the Buffalo Billion, it represents the majority of the funds being invested in an innovative public-private partnership under which the State will actually own the plant.

    Our regenerative framework favors a more diversified, risk-mitigating investment strategy, and greater focus on vital, enabling infrastructure and education than on individual enterprises. That said, if successful, the new solar facility will no doubt create a regional hub for innovation and employment, and generate tax revenue that will support the infrastructure improvements the city so sorely needs. The regenerative potential of a project of this scale, coupled with all the other positive things happening in town is truly impressive.

    Not to mention that Buffalo is nicely situated with respect to water and climate for the future.  We will be back this summer for the New Economy Coalition’s CommonBound (July 8-10).  Watch this space!

     

  • Why Extreme Inequality Causes Economic Collapse

    February 15th, 2016 by designburd

     

    This week’s guest blogger is Dr. Sally Goerner, Capital Institute’s Science Advisor.

    John Fullerton’s white paper, Regenerative Capitalism, lists eight principles critical to systemic economic health. The Capital Institute’s research group, RARE[1], uses recent scientific advances – specifically, the physics of flow[2]– to create a logical and measurable explanation of how these principles work to make or break vitality in the human networks of which economies are built. Here we explain why too much inequality is more than a moral problem. In fact, it drives economic systems towards collapse by sucking the life-blood out of real economies worldwide.

    According to a recent study by Oxfam International, in 2010 the top 388 richest people owned as much wealth as the poorest half of the world’s population– a whopping 3.6 billion people. By 2014, this number was down to 85 people. Oxfam claims that, if this trend continues, by the end of 2016 the top 1% will own more wealth than everyone else in the world combined. At the same time, according to Oxfam, the extremely wealthy are also extremely efficient in dodging taxes, now hiding an estimated $7.6 trillion in offshore tax-havens.[3]

    Why should we care about such gross economic inequality?[4] After all, isn’t it natural? The science of flow says: yes, some degree of inequality is natural, but extreme inequality violates two core principlimage 1es of systemic health: circulation and balance.

    Circulation represents the lifeblood of all flow-systems, be they economies, ecosystems, or living organisms. In living organisms, poor circulation of blood causes necrosis that can kill. In the biosphere, poor circulation of carbon, oxygen, nitrogen, etc. strangles life and would cause every living system, from bacteria to the biosphere, to collapse. Similarly, poor circulation of money, goods, resources, and services leads to economic necrosis – the dying off of large swaths of economic tissue that ultimately undermines the health of the economy as a whole.

    In flow systems, balance is not simply a nice way to be, but a set of complementary factors – such as big and little; efficiency and resilience; flexibility and constraint – whose optimal balance is critical to maintaining circulation across scales. For example, the familiar branching structure seen in lungs, trees, circulatory systems, river deltas, and banking systems (Fig. 1) connects a geometrically constant ratio of a few large, a few more medium-sized, and a great many small entities. This arrangement, which mathematicians call a fractal, is extremely common because it’s particular balance of small, medium, and large helps optimize circulation across different levels of the whole. Just as too many large animals and too few small ones creates an unstable ecosystem, so financial systems with too many big banks and too few small ones tend towards poor circulation, poor health, and high instability.

    In his documentary film, Inequality for All , Robert Reich uses virtuous cycles to clarify how robust circulation of money serves systemic health. In virtuous cycles, each step of money movement makes things better. For example, when wages go up, workers have more money to buy things, which should increase demand, expand the economy, stimulate hiring, and boost tax revenues. In theory, government will then spend more money on education which will increase worker skills, productivity and hopefully wages. This stimulates even more circulation, which starts the virtuous cycle over again. In flow terms, all of this represents robust constructive flow, the kind that develops human and network capital and enhances well-being for all.

    Of course, economies also sometimes exhibit vicious cycles, in which weaker circulation makes everything go downhill – i.e., falling wages, consumption, demand, hiring, tax revenues, government spending, etc. These are destructive flows, ones that erode system health.

    image 2

    Both vicious and virtuous cycles have occurred in various economies at various times and under various economic theories and policy pressures. But, for the last 30 years, the global economy in general and the American economy in particular has witnessed a strange combination pattern in which prosperity is booming for CEOs and Wall Street speculators, while the rest of the economy – particularly workers, the middle class, and small businesses – have undergone a particularly vicious cycle. Productivity has grown massively, but wages have stagnated. Consumption has remained reasonably high because, in an effort to maintain their standard of living, working people have: 1) added hours, becoming two-income families, often with two and even three jobs per person; and 2) increased household debt. Inequality has skyrocketed because effective tax rates on the 1% have dropped (notwithstanding a partial reversal under Obama), while their income and profits have risen steeply.

    We should care about this kind of inequality because history shows that too much concentration of wealth at the top, and too much stagnation everywhere else indicate an economy nearing collapse. For example, as Reich shows (Figure 1a & b), both the crashes of 1928 and 2007 followed on the heels of peaks in which the top 1% owned 25% of the country’s total wealth.

    image 3

    Fig. 3a Income Share of U.S. Top 1% (Reich, 2013) & 3b Reich notes that the two peaks look like suspension bridge, with highs followed by precipitous drops. (Original Source: Piketty & Saez, 2003)

    What accounts for this strange mix of increasing concentration at the top and increasing malaise everywhere else? Putting aside the parallels to 1929 for a moment, most common explanations for today’s situation include: the rise of technology which makes many jobs obsolete; and globalization which puts incredible pressures on companies to lower wages and outsource jobs to compete against low-wage workers around the world.

    But, while technology and globalization are clearly creating transformative pressures, neither of these factors completely explains our current situation. Yes, technology makes many jobs obsolete, but it also creates many new jobs. Yet, where the German, South Korean and Norwegian governments invest in educating their workforce to fill those new jobs, the American government has been cutting back on education for decades. A similar thought holds for globalization. Yes, high-volume industrialism – that is, head-to-head competition over price of mass-produced, uniform goods – leads to a race to the bottom; that’s been known for a long time. But in The Work of Nations (2010), Robert Reich also points out that the companies that are flourishing through globalization and technology are ones pursuing what he calls high-value capitalism, the high-quality customization of goods and services that can’t be duplicated by mass-produced uniformity at cheap places around the world.

    So, while the impacts of globalization and technology are profound, the real explanation for inequality lies primarily with an economic belief that, intentionally or not, serves to concentrate wealth at the top by extracting it from everywhere else. This belief system is called variously neoliberalism, Reaganomics, the Chicago School, and trickle-down economics. It is easily recognized by its signature ideas: deregulation; privatization; cut taxes on the rich; roll back environmental protections; eliminate unions; and impose austerity on the public. The idea was that liberating market forces would cause a rising tide that lifted all boats, but the only boat that actually rose was that of the .01%. Meanwhile, instability has grown.

    The impact this belief system has had on the American economy and its capacities can be seen in American education. Trickle-down theories are all about cutting taxes on the wealthy, which means less money for public education, more young people burdened with huge college debt, and fewer American workers who can fill the new high-tech jobs.

    To be fair, this process is not just about greed. Most of the people who participate in this economic debacle do not realize its danger because they believed what they were told by the saints and sages of economics, and many are rewarded for following its principles. So, what really causes the kind of inequality that drives economies toward collapse? The basic answer from the science of flow is: economic necrosis. But, let me flesh out the story.

    Institutional economists talk about two main types of economic strategies: extractive and solution-seeking. (Hopefully, these names are self-explanatory.) Most economies contain both. But, if the extractive forces become too powerful, they begin to use their power to rig the rules of the economic game to favor themselves. This creates what scientists call a positive feedback loop, one in which “the more you have, the more you get.” Seen in many kinds of systems, this loop creates a powerful pull that sucks resources to the top, and drains it away from the rest of the system causing necrosis. For example, chemical runoff into the Gulf of Mexico accelerates algae growth. This creates an escalating, “the more you have, the more you get” process, in which massive algae growth sucks up all the oxygen in the surrounding area, killing all of the nearby sea life (fish, shrimp, etc.) and creating a large “dead zone.”

    Screen Shot 2016-02-14 at 9.43.56 PM

     

     

     

     

     

    Neoliberal economics set up a parallel situation by allowing the wealthy to use their money to extract ever more money from the overall economy. The uber-wealthy grow wealthier by:

    • Paying for policy favors – big corporate bailouts and subsidies; lobbying; etc.
    • Removing constraints on dangerous behavior – removing environmental protections; not prosecuting financial fraud offenders; ending Glass-Steagall, etc.
    • Increasing the public’s vulnerability – increasing monopolistic power by diminishing antitrust regulations; limiting the public’s ability to sue big corporations; limiting Medicare’s ability to negotiate for lower pharmaceutical rates; limiting bankruptcy for student loans, etc.
    • Increasing their own intake – rising CEO salaries and escalating Wall Street gambling; and limiting their own outflows – externalizing costs, cutting worker wages and lowering their own taxes.

    All of these processes help the already rich concentrate more, and circulate less. In flow terms, therefore, gross inequality indicates a system that has: 1) too much concentration and too little circulation; and 2) an imbalance of wealth and power that is likely to create ever more extraction, concentration, unaccountability, and abuse. This process accelerates until the underlying human network becomes exhausted and/or the ongoing necrosis reaches a point of collapse. When this point is reached, the society will have three choices: learn, regress, or collapse.

    What then shall we do? Obviously, we need to improve our “solution seeking” behavior in realms from business and finance to politics and media. Much of this is already taking place. From socially-responsible business and alternative forms of ownership, to democratic reform groups, alternative media, and the new economy movement – reforms are arising on all sides.

    But, the solutions we need are also often blocked by the forces we are trying to overcome, and impeded by the massive merry-go-round momentum of “business as usual.” Today’s reforms also lack power because they are taking place piecemeal, in a million separate spots with very little cross-group unity.

    How do we overcome these obstacles? The science of flow offers not so much a specific strategy, as an empowering change of perspective. In essence, it provides a more effective way to think about the processes we see every day.

    The dynamics explained above are very well known; they are basic physics, just like the law of gravity. Applying them to today’s economic debates can be extremely helpful because the latter have devolved into ideological debates devoid of any scientific foundation.

    We believe Regenerative Economics can provide a unifying framework capable of galvanizing a wide array of reform groups by clarifying the picture of what makes societies healthy. But, this framework will only serve if it is backed by accurate theory and effective measures and practice. This soundness is part of what Capital Institute and RARE are trying to develop.

    [1] RARE = Research Alliance for Regenerative Economics

    [2] The “physics of flow” refers to the study of flow-networks, meaning any system whose existence arises from and depends on the circulation of critical resources and/or information throughout the entirety of their being. Living organisms depend on the circulation of nutrients and oxygen. Ecosystems depend on the circulation of carbon, oxygen, water, etc. Economic systems depend on the circulation of money, information and resources. The physics of flow uses universal principles and patterns of flow to clarify what makes economies healthy over long periods of time. While “living systems” are flow networks, the advantage of using the broader-case principles is that there is no question about whether the results are merely a metaphoric extrapolation from ecosystems.

    [3] https://www.oxfam.org/sites/www.oxfam.org/files/file_attachments/ib-wealth-having-all-wanting-more-190115-en.pdf; https://www.oxfam.org/en/pressroom/pressreleases/2015-01-19/richest-1-will-own-more-all-rest-2016

    [4] 2013 Documentary film, http://inequalityforall.com

  • What Bundy and His Merry Militia Can Learn From TransCanada

    January 11th, 2016 by ewalsh
    Screen Shot 2016-01-11 at 11.57.10 AM

    Image Courtesy of Fortune.com

    Ammon Bundy and his assault-rifle-packing militia took over the Malheur National Refuge in eastern Oregon to kick off the New Year. Their gripe appears to be the Federal Government’s pesky grazing regulations interfering with their “right” to earn a profit off government land.[1] Gonna’ be a showdown at the last chance corral I guess. Now I imagine Bundy and the boys don’t take a liken’ to Wall Street bankers any more than they do to the Feds.
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    But in this instance, the bankers could help Bundy a lot, and maybe save his life. TransCanada, sponsor of the now dead Keystone XL Pipeline and like Bundy no doubt, also dependent on preferred contractual access to public lands, shows the way. President Obama lobbed a final nail in the coffin by vetoing the pipeline and more recently by formally rejecting the project. But the deed was already done by the Saudis who killed it by unleashing a torrent of oil supply on the market, collapsing oil prices, and ending the economic viability of Canada’s grotesque Tar Sands and the need for the pipeline in the first place. In fact TransCanada had already withdrawn the plan from consideration. However, that didn’t stop TransCanada from now suing the United States of America for $15 billion in damages over Obama’s decision that the XL Pipeline was not in the interest of the United States, including our “security, safety, and environment.” “TransCanada has been unjustly deprived of the value of its multibillion-dollar investment by the U.S. administration’s action,” the company said in a statement after Obama formally rejected the planned pipeline prior to the Paris Climate meeting, timed to bolster what he hopes will be his legacy as a leader on climate. The XL Pipeline decision was effected through a time-honored democratic process enshrined in the U.S. Constitution. Some agree with the decision, some don’t. But that’s not the point. The question is, on

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    what basis can a foreign company sue the U.S. government over a policy decision, putting American taxpayers at risk for $15 billion in this case? The answer: by invoking the North American Free Trade Agreement and its Investor-State Dispute Settlement (ISDS) clause. This clause, as I previously explained here and here, about the contentious Trans-Pacific Partnership (TPP) trade agreement now awaiting approval by Congress, amounts to a veritable “trading away of our sovereignty.” The TransCanada suit proves the point, and it’s not the first such suit challenging a nation’s sovereignty. TPP will open up this insanity to 13 countries and economic activity representing 40% of world GDP. My advice to Bundy and his buddies holed up in Eastern Oregon facing a cold winter? Buy a ranch in Canada. Hire Goldman Sachs or JPMorgan to advise on a “tax inversion” in which using a legal slight of hand the Canadian ranch buys the Bundy ranch but Bundy remains in control of the combined operations (see the recent Pfizer inversion for details). Then sue the United States Government for $15 billion under the ISDS mechanism of NAFTA claiming the BLM grazing regulations interfere with their right to make a profit on their investment. This gets the issue away from the annoying U.S. government and into the hands of a three-person extrajudicial tribunal to determine the outcome of the case. Sweet. In the meantime, stand down, holster your guns, and thus, stay alive to fight another day. You can always ammo up later if the tribunal lets you down. Oh, and if Bundy doesn’t have the cash to buy the Canadian ranch, no problem. There are a number of tougher than Bundy (no guns required) hedge funds that will be all too happy to lend money into a lawsuit and then corrupt the judicial process by bribing the lawmakers (sorry exercising their rights to free speech under Citizens United) to make a buck. For details, see the current battle in Puerto Rico where these hedge funds are using their campaign contribution derived power to influence legislators over the decision to refuse Puerto Rico access to the normal and civilized protections afforded other borrowers including Donald Trump – but not our children if they take out a student loan – under the bankruptcy code. No doubt these hedge funds will have some crafty ideas for how to swing a simple three-person tribunal. For a mere twenty percent of the profits plus expenses, it’s a deal! Insanity is the new normal in America.


      [1] The Bureau of Land Management (“BLM”) policies have issues worthy of debate, but turning land over to folks like Bundy to manage without restrictions is not the solution.

  • BoE Central Banker Addresses Stranded Assets

    September 30th, 2015 by designburd
    Screen Shot 2015-10-01 at 9.42.09 AM

                                             Video courtesy of Bloomberg.com

    We were very encouraged to hear Bank of England Governor Mark Carney address the financial market stabilization risk of “stranded assets,” the risk that if we are to avoid 2 degree warming, we will need to leave up to 80 percent of proved oil, gas, and coal reserves in the ground, echoing the important message that has been promoted tirelessly by our friends at the Carbon Tracker initiative. (Read Carney’s full speech here)

    Capital Institute’s 2011 post, “Our $20 Trillion Big Choice” addressed this issue not just as a financial market stabilization issue. Approximately three quarters of these fossil reserves are owned and controlled by national oil companies.  Exxon and BP are relative bit players in this game. The REAL risk and challenge is perhaps the largest geopolitical one ever to face the modern world.  Rapid drops in solar costs, and other technical revolutions could render much of these fossil fuels obsolete, resolving the problem, although with profound ramifications for fossil- fuel-dependent economies and their societies, with spillover affects throughout the world.  More likely, a comprehensive and highly complex international policy regime will be required far beyond what is currently even contemplated with voluntary “pledges” by nation states negotiating from the perspective of their national interests.

    Great progress this week.  The hard work lies ahead.

  • Trump and Amazon: Are We Losing With All Our “Winning?”

    August 20th, 2015 by ewalsh

     

    Images courtesy of The Trump Organization and Amazon.

     

    Like many of you, I have been trying to make sense of candidate Trump. But dismissing him as “not serious,” or merely describing the “what” in colorful language (megalomaniac, narcissist), fails to explain the “why.”

    Why such an unseemly candidate is so popular right now is baffling to me as it is to many. If it’s just “anger at Washington,” or, as the Wall Street Journal suggested, “attitude,” logic would favor a Cruz or maybe a Christie. But Trump?

    In a recent column Maureen Dowd quotes Trump as saying: “I am a man of great achievement. I win, Maureen, I always win…It’s what I do. I beat people. I win.”

    When interpreted through the “money equals success” cultural narrative lens that has overtaken our nation of late, his “I’m a winner” self-assessment makes some sense, even if the delivery makes one cringe. His talents include a remarkable ability to manipulate us and gain our attention, aided and abetted by an obliging, ratings obsessed (“money equals success”) media . A political organization to support a serious Trump run can be organized with money; we dismiss him at our peril.

    So we must ask: Why Trump? Why now?

    The chilling New York Times cover article on the hypercompetitive, win- at-all-cost culture at Amazon provides one clue. Whether the Times critique is entirely fair or not, it requires that we reflect on the humanistic dark side of the Amazon culture (as represented) of “winning” (at all cost); the reality of the technology industry with its ruthless commitment to creative destruction; the advantages in modern technology business models of extreme scale driving the land grab mentality; Amazon’s commitment to objective, metrics-driven decision making; and an extreme and unquestioned commitment to “excellence” at great sacrifice to the many human values most people hold dear. And noticeably missing was any reference to the importance of relationships and trust, remarkably similar to the erosion of our Wall Street culture. (Bezos, entrepreneurial vision aside, came out of the quant intensive part of Wall Street).

    With this unquestioned commitment, Amazonians believe they can “invent the future,” and be “successful,” in our money-equals-success culture that predates the arrival of Trump on the scene. It is worth noting that the stock market value of Amazon has recently surpassed Walmart’s, and Bezos is worth an estimated $50 billion. Stunning for a company that has barely if ever earned a profit on its core business. Trump is a chump by comparison (sorry). Hard to argue with “success,” right?

    But let’s instead explore the heart of the matter. What does “winning” really mean, and can the Trump phenomenon (and perhaps even Amazon, despite its clear “success” on many levels) be better understood – ironic as this may seem – as warning signs, mere symptoms of the cultural decline we intuit in our bones but struggle to understand much less articulate?

    My colleague shared a recent TED talk in which Margaret Heffernan explains how an MIT study had identified three characteristics of high achieving groups: empathy, no stars but everyone contributing, and more women. On the other hand, groups that are dominated by super stars – AKA “winners” – tend to break down and fail. The study concluded that social capital is the key to building resilient teams, and it takes trust and time to build them. Extreme pay for performance, up or out culling, and the rivalry these practices engender (a central critique in the Amazon expose and descriptive of Wall Street culture as well) breaks down social capital and is catastrophic to long-term resiliency/survivability. This has all been supported by research. (Note: Wall Street, with all its “stars,” did suffer catastrophic failure, but for a government bailout).

    These conclusions are remarkably aligned with the research of preeminent Harvard evolutionary biologist E.O.Wilson. In reading his latest book, The Meaning of Human Existence, I was fascinated to learn that in the insect world (Wilson is considered the world’s leading expert on ants), there is a very clear conclusion to draw from contrasting super star (competitive) societies and social (cooperative) societies. “The twenty thousand or so known species of social insects (ants, termites, social bees, and wasps combined) make up only two percent of the approximately one million known species of insects, but three-fourths (emphasis added) of the insect biomass.” In other words, social (cooperative, empathetic, inclusive) societies win big time. They always win. That’s what they do.

    The conclusion from the MIT study on human teams, and the more evolutionary outcome that we can deduce from studying insects is that “winners” – like Trump and perhaps even Amazon – win within their groups, BUT, their groups lose to more social/cooperative groups over time. Since modern civilization is so dominated by the institutions of big business and short-term driven finance, their shift to extreme competition at the expense of social/cooperative behavior has profound ramifications for modern society, and indeed our ability to thrive well into the future.

    Of course excellence matters and needs to be in service of the team, not the star, as all great coaches teach. But could the almost deification of our culture of stars and “winning” be the source of our collective feeling of losing that Trump himself is exploiting?

    The crescendo of complex, interconnected social, political, economic, financial, and ecological crises now upon us may be the direct result of our hyper-competitive, “winners and losers” driven narrative. And Donald Trump’s appearance on center stage, now even with the possibility of placing his finger on the proverbial button, is our cultural canary in the coal mine. Tweet tweet!