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.
How to define, design, create and implement a “True Market Economy” is one of the great challenges and opportunities of our era. Most people understand – at the intuitive AND intellectual level – that the so-called “free market economy” is not working for most of the world’s people, for other life forms nor for the earth itself. The “free market economy”has evolved over many decades into a massive force that is destroying the economic, social and natural capital that James discusses.
At the basic level, we need to have these conversations in order to foster new and innovative thinking, actions, policies on the part of our business owners and leaders, managers, policy makers at all levels and to embed a new mindset of what kind of economy will enable a prosperous and flourishing economy and society for all people and life – not merely for the “1%” in the U.S. (probably the top .01% globally).
Keep in mind that the “free market economy” practiced as today’s capitalism really is not based upon deeply held and spoken values in the U.S. or the west. The current economy has evolved – especially over the last 60 years – by certain major economic players with huge financial resources purchasing many of our policy makers (politicians) who in turn pass legislation, tax laws that favor the wealthy few over the interests of the vast majority of people. Just one example – in the 1970s the average corporate CEO’s compensation was about 35 times that of their average worker’s pay in their company. Today, that multiple is about 500 times. That means the CEO is making in about 3 hours what it takes the employee a full year to make. This is merely one example of the dangerously wide wealth gap.
Part of the conversation ought to be about taking a deeper dive in to what we really mean by a “free market economy” (free market fundamentalism), what is today’s reality, and what kind of an economy do we want in the future. That is, if we choose to open our eyes and mind.
So, what is a “free market economy” and what is a “true market economy”. James, Dan Beam and I began these discussions way back in 2007 and 2008. James and I believe the time has come to widen the conversation, explore the realities and foster new thinking about what kind of economy do we want for our children and future generations – AND for ourselves. My friends at the Fowler Center for Sustainable Value (Case Western Reserve University) are coming out with a new book in the fall (2013) – “The Flourishing Enterprise”. The essence is a vision of where we might want to go in the long term (4-6 generations – 100-150 years) as a society and civilization.
“Imagine a future where all life on earth will flourish forever”. Who would not want this as our future? The key is obviously, how do we get there? There are no simple answers, especially in an era that is only growing in complexity, where technologies are growing at an ever increasing rate – far more quickly than our psychology and social thinking can adapt to. Some technologies can be incredibly helpful to massive numbers of people and life’ while other technologies have potential consequences that can be devastating to people and life. So much of this is about our willingness to open up our thinking, take off the blinders and honestly reflect on the future we’d like to create, and then make it happen.
Today’s “free market economy” has come to mean to most people something like the following: “I have the freedom to do whatever I want, however I want, and whenever I want to do it. I have the freedom to do what I think is best for me and my family with no regard to my community – local and globally. I have the freedom to lie, cheat, obsfucate, tell “normal business lies” in the effort to maximize my short term profits at all costs. I can buy the politicians to write legislation that favors me, my company, with no regard for anyone else. I can do this as long as I attend my house of worship and demonstrate that I am a good “Christian, Jew, Muslim”, you name it.
The game is about exponential growth in revenue and profits, increased shareholder value, at all costs. I have the freedom to minimize my taxes (the dues we must pay for a civilized society) and put that burden on someone else. This is how – for example – people who make $1 billion in a single year get to pay only 15% of their income as taxes. (They bought members of Congress to write such lopsided laws.) This “free market economy” has morphed into “free market fundamentalism” – the so-called “free market” as religion to some. It is simply not the case.
The economy has evolved as it has because real people with highly individualistic goals (maximizing their own financial well-being at the cost of the common good) have their fingers and toes on the levers and buttons of power – the policy making apparatus in our states and, especially the federal government. And there’s plenty of “blame” to go around – this is a bi-partisan affair with both Dems and Republicans for sale and being purchased.
The “free market economy” has taken us to the brink and if we continue down this road we are at great risk of social and environmental breakdown. If that happens, the economy goes with it. So, we can continue to pretend that “Everything is OK – “business-as-usual” will get us out of the mess that it has created.” If that’s your belief, I have a bridge I can sell you in Brooklyn.
Many of us believe we can design and create an economy that works for all, not merely the .01% or even 1%. And our place-holder term for this is the “true market economy”. As James describes it, a true market economy is one that adds to our natural, social and economic capital, that adds to our national, global, environmental and social balance sheet, where we are not living off what is today our diminishing capital base on all fronts. Our capital base has been in serious decline especially since the 1970s – that’s just 40 years, and that depletion is accelerating every day. To think this can go on forever is to be delusional and to pretend everything is just fine.
The “true market economy” – in my mind – begins with several key principles:
– True Costing
– Truth, transparency and honesty in the economy
– Open book reporting and accountability
All businesses and economic players must take into account the real costs of their products and services. We can no longer simply act as though it’s just fine to maximize shareholder value with disregard for “stakeholder” value. An example of this is using rivers, oceans and the atmosphere as a garbage dump for our waste. Our current policies around this kind of activity are essentially insane.
For example – we actually subsidize the burning of oil and other fossil fuels through a combination of direct subsides, tax policies and other more hidden means that benefit the oil/fossil industry while they do not include climate, pollution and other costs in the equation. We all know that the wars in the middle east are about access to “our oil under their sands”. Are the costs of the wars embedded in the price at the pump? Of course not.
When New York City’s Mayor, and other policy makers tried to add 1-2 cents per ounce of sugar water (sugared sodas/drinks) to begin to cover the real health costs of these products – diabetes and other health issues – the soda water industry (from Coke, Pepsi and many others) reared its head and killed the idea – fearful this minor change would hurt revenues and bring attention to the reality that their products are unhealthy for kids and everyone else.
There are so many subsidies and other forms of corporate welfare hidden from view. A true market economy would simply call for sunlight. Transparency is a critically important value within a true market economy and the American people and taxpayers have the right to honest and transparent information about how their money is spent and to hold their representatives, national and community leaders accountable. If the American people decide that they are just fine with subsiding the burning of fossil fuels then it can continue. However, what we have now is anything but a “true market economy”. It’s more like “false market economy.”
Truth, Transparency and Honesty
Telling truth, transparency and a high level of honesty are core values in “true market economy.” In this first addition to James’ ideas, a true market economy must benefit not only the individuals, but the common good. This is a critically important issue. Dana Meadows, in the book she and her husband (Denis Meadows) published in 2004 – “The Update – Beyond the Limits” (the sequel to their groundbreaking study in 1972, “Beyond the Limits”), expressed an insight that is now embedded in my own psyche. Her insight is that the root cause all of our core challenges in this era can be traced to two issues:
1. Our extreme focus on individualism
2. Our extreme focus on short term thinking
We Americans are not particularly good at nuance – we tend to think in black and white terms. This is not how the real world works. The answer is not to morph from the individual to the community. The answer is to strike a balance of the individual AND our community; a balance of short AND long term thinking, and there is no magic formula. Simplistic black and white thinking is no longer sufficient.
If we continue to hide the truth from the marketplace, if we continue with our desire to be opaque rather than transparent, and see honesty as a weakness and truth as something to fear as a competitive disadvantage, then by definition we are all making lousy choices in the marketplace – as individuals, businesses, communities.
Open Book Reporting / Accountability
As growing numbers of people are beginning to recognize, what we refer to as GDP (Gross Domestic Product) has nothing to do with a measure of economic, social or environmental health. It begs the question, what are we measuring why are we measuring it and for what purpose. Imagine if our businesses used their own GDP as a measure of success. Does revenue alone tell us the story we want to hear? of course not.
Does GDP measure how healthy we are, how our education system is doing in the year 2013, how our oceans, forests and water supplies are faring? How happy are we as a people? After all, isn’t our “happiness” and sense of well being important to us? How about we develop and keep a set of books and meaningful measures that are honestly reported every year, or even 6 months – for all citizens to examine? How about we include an honest and open accounting of ALL subsidies – whether hidden in the tax codes, in the form of exemptions to certain environmental regulations that actually create health problems for citizens but are not reported anywhere – shining the light of transparency.
I will leave it here for today and look forward to a widening conversation beyond James and I.
Wishing everyone a true and honest relationship in a true market society that my children will truly appreciate