A few days ago, my friend and colleague, Elliot Hoffman and I had lunch to talk about our businesses and the economic transformation taking place right now.
Elliot and I have been doing stuff together for quite a while. A couple of years ago, we decided to write something of an economic manifesto called, Toward a New Capitalism. One night during the time we were working on this, I sat bolt upright in bed in the middle of the night and said out loud, much to the consternation of my wife, “True Market Economy.'” I don’t know what I had been dreaming and that phrase had never occurred to me before, but it got me right up out of bed to begin weaving the idea through our paper.
Elliot liked the idea of a True Market Economy so much that he named the company he is building now, True Market Solutions. True Market Solutions forms circles of small and mid-size companies to help them increase their profits by fully embracing sustainable business practices.
Three Forms of Capital in a True Market Economy
I reworked many of the points Elliot and I made in our paper and included them in the Philosophy of Capitalism section of Planetary Philosophy.
“There are at least three forms of capital essential to the creation of genuine prosperity. In addition to economic capital (financial and manufactured), there are two other forms — natural (environmental) and social. Any business-person knows that, over the long run, a successful business needs to invest wisely to generate more income than expenses and to grow its capital. If a business lives off its capital, it will eventually go bankrupt. (For genuine prosperity) it is essential to build all three forms of capital. In fact, a True Market Economy can be defined as an economy that uses market forces to build all three forms of capital.“
In the middle of our conversation at lunch, Elliot asked, “So how do we accomplish the transformation to a True Market Economy around the world? What are the comprehensive strategies for doing this?”
I replied that I thought the answer was pretty straightforward conceptually. A global True Market Economy will be made up of businesses and real estate developments that are profitable and also build economic, social, and natural capital along with government agencies and non-governmental organizations (NGOs) that encourage that way of doing business. The way to build a True Market Economy is by furthering this type of business.
Some people say that our global economic problem is our obsession with growth and that we need to get to a steady state economy, by dramatically reducing our consumption of stuff. That formulation is correct in an economy in which economic capital is produced at the expense of natural and social capital. However, growth is fine if it truly produces all three forms of capital. For example, the large scale growth of solar and wind technologies is good and important.
Let’s start by reviewing what’s been formulated about a True Market Economy in the Philosophy of Capitalism section of Planetary Philosophy.
The economy operates within design limits inherent in the natural environment. If the economy disrupts the natural environment it disrupts itself, at great financial cost to society and to individual businesses. Most recently, witness the devastation of Super Storm Sandy. Under the deceptively named “free market” economy, which bears little resemblance to the type of market envisioned by Adam Smith, enormous resources have been lost that were once, in fact, provided for free by intact ecosystems.
Conversely, a True Market Economy recognizes its dependence on the natural environment for fresh air, clean water, climate stability, renewable energy, and a thriving eco-system. In a True Market Economy, businesses derive value from the eco-system without disrupting it. As the True Market Economy emerges it will utilize true cost pricing and true cost accounting to value major interactions with the natural world.
A prosperous economy depends on a stable society with a skilled and creative workforce. The economy threatens its own foundations if it disrupts society by allowing an extreme gap to emerge between the very wealthy few and the rest of the population or by inadequately supporting society’s ability to ensure public safety, an effective educational system, a well trained workforce, and quality affordable health care.
On the other hand, a prosperous economy contributes to a stable society by creating the jobs, the opportunity for productive work, and the income that people need to live satisfying lives. A True Market Economy recognizes the profound contribution of social capital to a prosperous economy and builds social capital by reducing the wealth gap, paying its fair share of taxes, and making many other investments in social health and welfare.
Sustained economic prosperity requires that both the private sector and the public sector operate according to sound financial principles, using current income to contribute to the accumulation of long term economic capital – both financial capital and manufactured capital. As we saw in the Great Recession, it is very hard for a capital-starved economy to make the investments necessary to reduce unemployment and return the economy to an appropriate level of economic activity.
Economic capital is most effectively built and the economy works best when economic transactions are transparent and guided by appropriate policies. Sound regulations provide the guard-rails that keep the economy on track. If those who criticized sub-prime lending and exotic real estate derivatives had been listened to, the economy would have saved trillions of dollars and the Great Recession would not have happened.
Large scale government budget and balance of payments deficits are not sustainable and put the countries that incur them in jeopardy to foreign lenders. At the same time, if the state of a country’s physical infrastructure is in serious decline, then its economic capital is in decline. Massive subsidies to major corporations and industries, hidden inside the tax codes, distort the economy and contribute to the deep distrust of the government, policy makers, and business leaders. The allocation of our economic capital should be fully transparent to have an economy and a society that function well.
In a True Market Economy, the government (the public corporation) lives within its means, except during significant economic downturns, and partners with private businesses so that both private and public sectors operate in an economically responsible fashion, while maintaining a sound financial system and reliable physical infrastructure. Investments of public funds for the benefit of current and future generations should be made regularly and wisely.
True Market Metrics
A True Market Economy needs True Market Metrics – transparent, accurate, timely economic information reporting systems that include a national profit and loss statement and balance sheet to measure the health of our economy, society, and environment and the degree to which the economy is building all three forms of capital.
To be continued.