Business with a purpose

I have been thinking very hard about the "purpose" of business lately. This is because my team has been thinking and working through what we want our business model to look like for a food hub in Spokane. We keep getting intrigued by some of the contemporary business ideas such as, technological solutions, creating the leanest business you can which still solves the problem identified, and efficiency. We are trying to solve the problem of missing infrastructure in the Spokane food system which makes connecting small and medium sized local farmers to large food service institutions very difficult. This is a problem faced by most cities and towns around the country as our food system has been built into one of very large corporate farms which mostly export commodity crops while local towns and cities then import most of their food. 

Our struggle then, has to do with finding solutions to this problem which are still in line with our core values and stated purpose of this particular business; which is to maximize happiness. First, we thought that maybe we could just create a virtual food hub which is basically just an online platform for connecting farmers with those who wish to purchase their products. This seemed attractive for our technological age, but does it achieve our purpose? No, it does not. Part of maximizing happiness for us is creating good paying jobs in Spokane, which needs them. Another aspect of our purpose is ensuring that farmers receive the value that their products deserve. Yet another is building the market for local food which is healthier, has a lower carbon footprint and adds to the economic multiplier effect in our area by keeping dollars and wealth local. 

Then we started thinking that our business could just facilitate the distribution of local produce to local buyers without actually owning the produce (inventory) and with a minimal need for a facility. This was also combined with our notion that to be a competitive contemporary business you need to be ultra efficient. So, we would have the minimum services necessary to solve our problem, and therefore the minimum amount of employees necessary. We again asked if this model would achieve our core purpose and again the answer was no. 

It turns out that achieving our purpose necessitates a more complex business model. We need a building so that we can aggregate the local produce, grade it, pack it to meet the large volume orders from food service customers (B2B), and ensure high quality products. We also want to create jobs, build the local food system and maximize value for farmers. This necessitates not just aggregation and distribution, but also value-added processing equipment and perhaps a commercial kitchen where farmers and food entrepreneurs can turn raw produce into non-seasonal value-added products. 

We also determined early on that in order for us to achieve our purpose we need to choose the right business structure. As my friend and colleague Lauren Fruge noted in a recent post about private vs. publicly held companies, ownership and structure really matter and can strengthen or inhibit the ability of your business to live its values. We are building our model as a worker and farmer owned cooperative. This way the key stakeholders are in ownership and governance positions instead of those who simply contribute large sums of money to the venture. 

So, keeping the deep purpose of your business in the forefront of business model generation is of the utmost importance as your team iterates the model to solve the problem you have identified as a business opportunity. Sometimes the quickest, leanest, most efficient and technologically sexy model will not be that which most effectively achieves your purpose. We are a community of humans embedded in a natural system after all, so if we don't set and live out a purpose deeper than that of a machine, we will not create very desirable systems let alone maximize happiness. 

Stakeholder Start-up Strategy

I am always interested in how stakeholder engagement or analysis changes so much depending on your position and therefore your literal perspective. Much of stakeholder analysis and engagement literature is written for the large corporate audience. For instance, a great piece by Neil Jeffery called "Stakeholder Engagement: A Roadmap to Meaningful Engagement," is very helpful, yet pointedly aimed at the large corporate audience. Jeffery says, "It is particularly important in the context of running an organisation responsibly and is integral to the concept of Corporate Responsibility. An organisation cannot be serious about Corporate Responsibility unless it is serious about stakeholder engagement – and vice versa." I agree wholeheartedly with this statement, yet it is not something you would need to say to an enterprise that is embedded in its local context already. This statement would be like a resident of Cleveland that the city has the second lowest median income ( $18,500) among American Cities; the resident would know this fact well as it is part of their daily reality.

I was thinking about how we got to the place where businesses need to be taught how to successfully engage with stakeholders, versus it being the starting place in their business plan development and execution. It largely has to do with the scale of economic entities in our current system, in that many corporations are larger than many national governments and have revenues sizing in multiples of third world country's GDPs.

For an alternative example, lets look at Green City Growers (GCG) in Cleveland Ohio. They are one of 3 new worker-owned cooperatives which are part of the Evergreen Cooperatives, a community wealth building strategy to create jobs, build wealth, and stabilize neighborhoods. For starters, here are Evergreen's community engagement goals:

• Create a shared sense of ownership and responsibility based on the concept of partnership and co-investment between grassroots and institutional stakeholders.
• Build cross-neighborhood connections to promote a unified identity among stakeholders in the neighborhoods.
• Identify, develop, and support local leadership within local residents, groups and community organizations.
• Deconstruct historical barriers between stakeholders, enabling residents to the access the social capital opportunities provided by local anchor institutions, and helping the institutions to be more responsive to the community needs, interests, and priorities.

The Evergreen Cooperative Corporation (ECC) started with a robust stakeholder and community engagement strategy before they were even an operational network of worker-owned cooperative businesses. So, for Evergreen and Green City Growers, stakeholder engagement is the strategy for both launching and sustaining viable enterprises. As you can most likely tell from the goals above, this strategy is also place based or rooted in a particular context. I will now lay out some of my GCG stakeholder analysis, which will also help tell their story. 

ECC is the central organization in this strategy, in its operational phase. To start at the beginning though, The Cleveland Foundation is central. In 2005, the Cleveland Foundation was seeking to develop a "Greater University Circle Initiative" which would revitalize the Greater University Circle (GUC) part of Cleveland. This is a grouping of very poor and diverse neighborhoods surrounding what they termed the "Anchor Institutions" of the City. Those being large institutions, with significant economic impact, that are unlikely to offshore their operations. Among these Anchor Institutions were the Cleveland Clinic, University Hospital and Case Western Reserve University. These three institutions represented $3 billion in annual procurement of goods and services. The majority of this $3 billion was sourced from outside the Cleveland City limits, let alone the GUC.

So, the GUC Initiative was launched to address the issue of poverty and take advantage of the $3 billion anchor institution procurement stream opportunity. They quickly partnered with The Democracy Collaborative (TDC) who had expertise in community wealth building strategies. TDC lead a series of community roundtables and events to learn more about the GUC issues from the residents themselves and to gather community leaders to talk about solutions. The key conversations were of course with the anchor institutions. TDC then partnered with Towards Employment, a non-profit which connects low-income folks in Cleveland with jobs and training, thus acquiring a workforce from the GUC. They also partnered with the Ohio Employee Ownership Center (OEOC) for their expertise in creating business plans for worker-owned cooperatives along with specialized training in democratic ownership for worker owners.

The Evergreen Cooperative Corporation was created as the 501c3 that would oversee and hold together all of the pieces and parts of this strategy. The Cleveland Foundation, along with the anchor institutions, invested a hefty sum with Enterprise Cleveland, a community development financial institution (CDFI), to create the Evergreen Cooperative Development Fund. The fund would act as some low cost start-up capital for enterprises such as GCG. Also, as the cooperative enterprises under the umbrella of ECC become profitable, they will return 10% of their annual profit to the fund. This will allow the network of cooperatives to self-replicate by creating their own pool of capital to loan from.

The City of Cleveland was also important in this strategy. They are committed to improving the quality of life in the City of Cleveland by strengthening our neighborhoods, delivering superior services, embracing the diversity of our citizens, and making Cleveland a desirable, safe city in which to live, work, raise a family, shop, study, play and grow old. The City was able to help leverage New Markets Tax Credits as well as HUD Section 108 loans and grants to capitalize GCG.

GCG is a 3.25 acre hydroponic greenhouse operation in the heart of Cleveland. They will produce 3 million heads of organic lettuce and 300,000 pounds of herbs annually. Their key customers are the anchor institutions, which agreed to purchase the majority of their products. Another key stakeholder of GCG, are the worker-owners themselves. This enterprise has no employees as such, because everyone who works at GCG quickly becomes vested as a full owner.

To wrap this all up, stakeholder analysis and engagement can be used not only to achieve buy-in or legitimacy with certain groups, but as the key strategy for successful business incubation and operation as well.

The New Economy

There has been more and more attention focussed on this idea of the New Economy lately, and rightly so. Things in our economic system are not going so well for the majority of folks who rely on it for their livelihoods. We love to think that we are all lone rangers of the west here in the US, but the truth is that we are all necessarily linked to the economic system both in our country and now globally with the effective foothold of globalization, or the New Imperialism, firmly established. The interesting thing, however, is that things have not been going really well for the majority of folks since the begginning of our time here on this continent. There have been times of better and worse, but not good, healthy and equitable times. So, this idea that perhaps we should finally get radical (to the roots) about creating a New Economy is very refreshing!

So what is the idea of the New Economy all about and how do we get there concretely? First I will talk about the idea, then the possible set of tools or strategies to get there. A recent article in Yes! magazine by David Korten called, "What would a down-to-earth economy look like?," sums it up nicely. Korten is basically arguing that we should (perhaps now we must) organize our economy more like nature organizes ecosystems. He states, "An economy is nothing more than a system for allocating resources to productive activity—presumably in support of life. In fact, nature is an economy, with material and information exchange, saving, investment, production, and consumption—all functions we associate with economic activity." And...nature organizes itself in a way that sustains all life and in many circumstances allows it to flourish. Our economic system is supposed to be about sustaining life, but instead has the majority enslaved to the minority as wealth generating machines, all the while poisoning those it is supposed to support and destroying the very ecosystem we all rely on to function at all.

Korten lays out a matrix to help differentiate the charicteristics of nature vs. the Wall Street economy which I find very helpful:

Wall Street vs. Nature:
Defining value: Money vs. Life
Primary performance indicators: Growth, financial returns, flows, and assets vs. Life's abundance, health, resilience, and creative potential
Primary dynamic: Competition to maximize self-interest vs. Cooperation to optimize self- and community interest
Decision-making power: Global, top-down, centralized, and concentrated vs. Local, bottom-up, and distributed
Time frame: Immediate return vs. Sustained yield
Local character: Uniform vs. Diverse
Resource control: Monopolized vs. Shared
Resource flows: Global, linear, one-time use from mine to dump vs. Local, circular, perpetual use, zero waste
Deficits of concern: Financial vs. Social and environmental
Measure of efficiency: Returns to financial capital vs. Returns to social and natural capital
Growth: Infinite growth of money and material consumption vs. A stage in life's endless regenerative cycles of birth, growth, death, and rebirth

We talk alot about using bio-mimicry in manufacturing and process design for more sustainable business, but we do not talk much about bio-mimicry in terms of how to structure the very economic system within which all business operates.

Now, how do we go about doing any of this? I am going to highlight several strategies of the New Economy which are being called Community Wealth Building strategies. The Evergreen Toolkit provides some great literature about both community wealth building and the model of the Evergreen Cooperatives in Cleveland Ohio. The toolkit was authored by the Democracy Collaborative, also in Cleveland Ohio. I want to highlight four of the key community wealth building strategies and then talk to the strength not of any one strategy, but of all four of them when taken together. I would argue that re-developing the economy in each locality, by each locality, along the lines of the following community wealth building strategies, is a powerful and effective way to move towards the New Economy and the "down-to-earth economy Korten layed out.

The first strategy is called Anchor Institutions. It is a term for key institutions in a community. Anchor institutions not only include universities and hospitals, but a broader range of place-based institutions, including cultural and arts centers such as museums, libraries, community foundations and other locally-focused philanthropies, faith-based institutions (such as churches, mosques, and synagogues) and community colleges. In many places, these anchor institutions have surpassed traditional manufacturing corporations to become their region's leading employers, and leading spenders in terms of procurement. This community wealth building strategy is really about building new businesses and infrastructure around the needs of the core anchor institutions in your community. This is important both because the anchor institutions are large, unlikely to pick up and leave, and generally already have a social mission. These institutions currently procure and do business with the business as usual mega corporations which generally do not reside in the same community, do not pay living wages, do not have a social mission, and do not truly build community wealth, but instead extract wealth from local communities and efficiently funnel it up to the few.

The second strategy is about Social Enterprises. Social enterprise refers to non-profits that operate businesses both to raise revenue and to further the social missions of their organizations. These businesses build locally controlled wealth, which helps stabilize community economies, and represents a shift in non-profit operation toward a model of collaborating with ‘client’ populations in community-building efforts. As of 2005, social enterprise businesses in the Social Enterprise Alliance trade association generated $525 million in business-revenue, helping support $1.6 billion worth of mission-related work. These enterprises are on the cutting edge of social entrepreneurship and the creation of new and hybrid structures which will make up the New Economy.

The third strategy is about Worker-Owned cooperatives. A cooperative is any business that is governed on the principle of one member, one vote. The first modern cooperative was a retail co-op founded by 28 people in Rochdale, England in 1844. Originally selling butter, sugar, flour, oatmeal, and tallow candles, business expanded rapidly in scope and scale as the co-op succeeded in elevating food standards — rejecting then- common tactics such as watering down milk. Co-ops today exist in many sectors of the American economy, including banking (credit unions), agriculture, electricity, housing, and grocery stores. All told, over 130 million Americans are members of at least one cooperative or credit union. Credit unions alone have assets exceeding $600 billion. Non-financial cooperatives are also growing. Retail food cooperatives, if grouped together, would constitute the fourth largest chain in the natural- foods industry. Worker-Owned cooperatives are businesses like those above, but they further differ in that they have no employees. Every person that labors to create value for the business, is also an owner of the surplus created by that labor and has substantial powers of governance. The Evergreen Cooperatives are a great example of this type of business.

The fourth strategy is about Community Development Financial Institutions or CDFI's. First formed to combat red-lining in the 1970s (a practice whereby banks would refuse to make loans to minority neighborhoods and would literally draw a red line circling the proscribed area on a map), CDFI's have grown to include a variety of community-focused banks, credit unions, micro-enterprise funds, loan funds, and venture capital funds that have assets of $20 billion, which they use to provide loans and technical assistance to meet the credit and finance needs of low-income individuals, community development corporations, and other community entities. CDFI's are banks run as social enterprises, and have been playing an important role in financing the New Economy.

So, how does this all fit together into an effective and exciting New Economy strategy to build community wealth and mimic natural systems? Korten says, "We would favor local, cooperative ownership and control. Organizing from the bottom up in support of bioregional self-reliance, our economic institutions would support local decision-making in response to local needs and opportunities. Cultural and biological diversity and sharing within and between local communities would support local and global resilience and facilitate life-serving system innovation." By harnessing the green and entreprenurial benefits of social enterprises, organized structurally as Worker-Owned Cooperatives to democratize decision making and the creation of wealth, the functional units of the economy, businesses, take on a more local, resilient and equitable nature. Then, as with Evergreen, if you center new worker-owned cooperatives around a CDFI like financial institution, the enterprises can be creatively and more democratically funded, and you can "entrap capital" produced and stored by these businesses for future use in funding new cooperatives. This capital becomes community capital controlled by the very enterprises that created it and store it (by storing I simply mean when you have capital in a short or long term account in a bank) for the community to use in democratic and sustainable development. The Anchor Institution peice comes in at the very heart and begginning of this strategy as initial worker-owned cooperatives can be created to better provide the materials, supplies and services which the anchor institutions are currently sourcing from extractive corporations outside of their community.

This was a whirlwind tour of what the New Economy can look like both theoretically and on the ground. More to follow in due time.

Are we asking the right questions?

Only once in a while will I return to what I think is the central conundrum of business and economics today, growth. The vast majority of our society is probably only subcontiously aware of growth as the major driving factor of our current economic system. Those in the business and economics world are very aware that our system is about and demands growth. Then there is the very small group of progressive folks like those of us at BGI that want to create a truly sustainable world so that we, our relatives, kids and grand kids can actually have any sort of future at all, let alone one that is happy and hopefully equitable. However, I would say that even among us BGI types, growth is not something we are centrally concerned about. 

We must realize that the human race is already living far beyond the carrying capacity of the island called earth that we all live on. Our population is scheduled to reach at least 9 billion by 2050, and if our economies and consumption/affluence levels continue to grow at their current pace or faster, we will be looking at needing, not the current 1.5 earths minimally required to keep us going presently, but more like 6 to 9 earths depending on who is calculating. If all 9 billion people of earth from 2050 wish to live at the same levels of affluence of the developed world, which is a legitimate desire, then we would actually need 20 times the energy and resources that we currently use! Ted Trainer says, "The problem of Third World deprivation cannot be solved unless the rich world reduces its consumption dramatically and lives on something like its fair share of world resource wealth.  Yet its supreme goal is to increase its levels of production, consumption and GDP," in his paper titled "The radical implications of a zero growth economy." 

So, the problem is that our economic system, which we have spread to almost the entire globe at this point, requires growth. Growth is how we try to solve problems like unemployment, poverty, ect. Growth is the goal we aim for. Growth is what is required by our financial system which is structured to extract ever increasing levels of ROI, which is what Marjorie Kelly says, "puts the squeeze on public corporations." Growth is the result of a system which magically creates wealth when a bank makes a loan using the fractional reserve system. 

What should an economy strive for and measure and maximize? Purpose is definitely the right answer here (see Jill Bamburg's presentation at the recent BGI TEDx event), but even if our society was made up entirely of quadruple bottom line businesses, I think growth would still be an issue; capitalism requires it, our financial system requires it. In a recent book entitled "Enough is Enough" by Rob Dietz and Dan O’Neill, Herman Daly writes in the foreword, "Enough should be the central concept in economics. Enough means 'sufficient for a good life.'"

A system which is truly "steady state" or "no growth" will require radical changes. If we go back to Ted Trainer, he notes, "In the coming conditions of intense resource scarcity, viable communities will have to be mostly small, self-sufficient local economies using local resources to produce what local people need." I think that much of the "New Economy" movement has been driving in this direction if not explicitly for the reason of our little living way beyond the carrying capacity of the island earth problem. The movement recommends strategies such as place-based businesses which are truly rooted in a community and of an appropriate scale. Another strategy is in regards to finance; slow money, patient capital, and localized wealth creation and entrapment are reccomended. The strategy which my project team is most interested in is that of networks of mutually supporting worker owned cooperatives centered around a worker owned financial institution. 

We are currently researching the Evergreen Cooperatives in Cleveland Ohio. The lens through which we arrived at this decision was actually that of income and wealth inequality, something our current economic structure creates with high efficiency. This strategy of building multiple worker owned cooperatives in a local community, serving industry sectors which can benefit from import substitution and are centered around the community's anchor institutions, is a promising one both from the social and economic standpoint. More in depth information about the Evergreen Cooperatives can be found at www.EvergreenToolkit.org. 

I do not know if this strategy completely helps us to get to a steady state economy, but it is the best closest thing I have seen proposed and tried so far. Trainer says that in a new economy, "At least the main economic decisions would have to be made by deliberate social discussion, debate and planning...because this is the only logical alternative to leaving them to “free markets” and the owners of capital competing to gain." The network of mutually supporting worker owned cooperatives (also called Sustainable Community Economic Development) provides the infrastructure to create this kind of system made by "deliberate social discussion" and provides every member of the wealth producing mechanism ownership, governance and voice. I believe that this kind of radically democratic economic structure will have to be intentionally developed to suceed and displace the current system if we are to have any hope at acheiving real social and economic sustainability for the sake of the world. 

Its also super exciting! 

What does "risk" really mean?

So what does risk really mean in our economy today? We all know that every investment involves some risk. We are led to believe though, that our system is setup with the proper structures in place to minimize risk for investors, lenders, lendees, and ordinary folks with a pension, insurance or a college fund for their children. The 2008 financial crisis should have thrown all of this into doubt, however, there are still some very maligned mental models of risk operating in our society. I will explain my meaning with an example. 

Amy Cortese has a wonderful article in the New York Times about crowdfunding, or a cutting edge investment mechanism whereby many ordinary people would be able to make small investments in new small businesses or ventures. Cortese says, "To its advocates, crowdfunding is a way for capital-starved entrepreneurs to receive financing that neither big investors nor lenders are willing or able to provide." This idea has been around for a couple of years and was popularized by the success of Kick-starter. The difference is that Kick-starter facilitates crowdfunding through donations, not investments seeking a return; meaning it is currently legal while actual crowdfunding of investments is not.

The JOBS act signed by President Obama in the middle of 2012, contained crowdfunding legislation which is still not in play because the Securities and Exchange Commission (SEC) has not completed the requisite rule writing. The SEC had until the end of 2012 to finish its work on the JOBS act, but failed to meet that deadline. "The JOBS Act contains investor protections. For example, legislators capped the amount that unaccredited investors can invest through crowdfunding in a given year to $2,000, or 5 percent of their income, whichever is greater," Cortese points out. Comment from the SEC on the rule writing process has focussed on the complexity of creating regulation which would provide sufficient protections for investors and mitigate risk. 

The Institute for Local Self Reliance made a recent post about some successful attempts at crowdfunding within the current laws. They write of a California-based company, (Solar) Mosaic, which is working to install community solar electricity projects funded by a broad based group of individual investors. On their latest project, "The combined capacity of 235 kW of solar capacity sold out in just 24 hours to over 400 investors with an average stake of just $700.  The investment uses a common securities law exemption (Rule 506 of Regulation D), and investors will earn a 4.5% annual return (net of fees) over 9 years, greening the economy and their pocketbooks." 

This is where we encounter the skewed concept of risk in our current system. SEC Rule 506 of regulation D is the closest thing to crowdfunding currently available. It allows the investment project to privately solicit investment from an unlimited amount of "accredited" investors, but only up to 35 "unaccredited" investors. The SEC defines accredited investors as those with at least one million dollars in semi-liquid assests not including real-estate, or an annual income of over $200 thousand for at least the last two years. The current rules imply that those meeting the definition of accredited investors automatically understand risk and can invest in projects like the Mosaic community solar arrays at will, while those not meeting the definition of accredited investors do not and must be limited in their activities. 

Somehow the SEC regulations are keeping us all safe by reducing risk, however, they are also severely limiting the ability both of non-rich folks investing in projects they care about and important new ventures receiving the capital they need to be successful. These new kinds of investment projects and "crowdfunding in general, have 'the potential to be disruptive,' Harvard Business School Professor Clayton Christensen says, by opening up financing to companies that have traditionally struggled to raise capital and to investors who have been excluded from the market."

To take this discussion further, I turn to a post by Dr. Norm Becker regarding our system of shadow banking. He points to an article called "Shadow banking: Economics and policy priorities," which points out two important aspects of our current system which drive what it called "shadow banking," or the financing activities which are derived from real assets and investments, but which themselves are not real or tangible. The article explains that, "The first key shadow banking function, securitisation, is a process that repackages cash flows from loans to create assets that are perceived by market participants as almost fully safe and liquid." Securitisation was a major factor in the 2008 financial crisis which put our entire economy into a massive recession. This process is completely legal and permitted by the SEC. 

The second shadow banking function is called "collateral intermediation." The authors of the article say that, "One of the main challenges in using collateral is its scarcity. The shadow banking system deals with the scarcity through an intensive re-use of collateral, so that it can support as large as possible a volume of financial transactions." This process is highly complex, involves risking very large amounts of real assets as collateral for multiple investments of varying types allowing companies and investors to leverage what they really have (or increase their capital multiplier) many times over. This process also can allow multiple entities to point to the same collateral asset for multiple other investments, each one of which then holds a claim to that original asset. This practice again is completely legal and permitted within current SEC regulations. 

Crowdfunding is in some ways new financial territory, and in some ways an old story of many people pooling their money to support a new business they value. However, our current economic system defines risk in such a way as to deem crowdfunding (even when locally constrained) as highly risky and complex, while securitisation and collateral intermediation, which are both enormously and unimaginably larger in scope and complexity, not risky enough to be further regulated and constrained. As I have pointed out before in my blog, power plays a highly important role in shaping our system and its structures. It is in the interest of the highly wealthy beneficiaries of our current system to deem shadow banking practices as low risk, while stifiling and delaying community level investment mechanisms due to their inherantly high "risk." 

Ready, Steady-state, Go!

Tonight's journey started with a read of Norm's post, "The Implications Of A Zero Growth Society," which was more intriguing than I originally though it would be. He recaps some arguements and concepts having to do with creating a no growth, zero growth, or solid state economy. These movements and concepts are in reaction to the radical discovery that we live in a bubble which contains finite amounts of resources and fragile organic ecosystems with limited carrying capacities both for extraction of materials and for absorption of wastes. Norm notes that, "our global consumer culture, and the nature of our economic system is predicated on constant economic growth.  In order to address the problem of global warming we will need a different culture and a different economic system." Which is to say both that the need for a different economic system is great and that it would require a very radical change. 
Further down the rabit hole we go. Norm linked to a very interesting paper by Ted Trainer called, "The radical implications of a zero growth economy." Trainer's paper is very interesting as I have to admit liking the idea of a steady state economy, but also not really knowing much about what that would entail. As is implied by the title of his paper, this kind of economy would not look like ours with the simple adjustment of no growth, but would need to be radically different. He states, "It is not just a matter of getting to an economy that does not grow any further; the imperative is to reach a steady state economy in which production, consumption, investment, trade and GDP are very small fractions of their present quantities."
I would love to go into the deeper mechanics of a steady state economy at some other time, yet for now will instead point out some very interesting issues that come along with it. Inequality is a fond topic of mine. In this economic system we accept a large amount of economic inequality as legitimate or necessary or inevitable. Part of how we do that is because of the mythology that says anyone can be rich and live the American Dream if they just work hard enough. The other way we do it is through the mythology that economic growth is the way to eliminate economic inequality as it becomes the "tide which raises all boats." Trainer points out that economic growth is actually the concept and mechanism by which economic inequality is created and perpetuated. In a steady state economy everyone understand and finally acknowledges that the economic pie cannot simply grow forever, but instead is a fixed size. If this were the case then, "inequality would have to be addressed and dealt with consciously and deliberately, involving social decisions regarding distribution and fair shares...which again would involve a very different kind of society" notes Trainer. So in addition to being a solution to or a necessity of global climate change, the steady state economy might be a place where we all have to get serious about equity and finally have no greed inducing mythologies to hold us back. 
Another interesting tid bit about life in a steady state economy relates to what the purposes of social structures and the meaning of life really are. In our current system the meaning of our existence is tied to consumption and accumulation of wealth and material goods, and the social structures are for the purpose of facilitating those goals for a few, supported and made possible by the many. In a steady state economy, the purpose of social structures is to facilitate a meaningful and quality life. Trainer explicates that, "People would have to be concerned to produce and acquire only that stable quantity of goods and services that is sufficient for a satisfactory quality of life, and to seek no increase whatsoever in savings, wealth, possessions etc. It would be difficult to exaggerate the magnitude of this cultural transition."
Speaking of the cultural transition, I found this amazing speech by Christine Milne, a senator from the state of Tasmania in Australia. She is speaking about the kind of economy they need to build in Australia in order to create the world in which they wish to live. She asserts, “Surely it’s time that those who advocate economic growth derived from resource extraction and pollution as the major path be the ones labeled wacky, loopy, irresponsible, divorced from reality or connected to the CIA.” I wonder how long it will be before top elected officials are saying things such as this, and getting re-elected after doing something about it? I do not ask this rhetorically either. We must move not only beyond our false mythologies and conveiniently forgotten history of the evolution of these human created social structures brought about by power and those who wield it--not simply by "good" ideas benevolently implimented and with unintended consequences--but also beyond alternatives which leave the core structure of this system intact. We must create a system which facilitates true human happiness and harmony with our natural ecosystem. 

The Global Economy and You

We learned this week about how the global economy functions and is structured. This was again a frustrating experience for me. Much of economics the religion seems to be about rationalizing what those at the top of western societies want to do for their benefit. The creation of economics and its increasing rationalization and rootedness in abstract mathematical formulas and "laws" was perhaps the most useful intellectual innovation for the wealthy. This allowed the changes to society needed for their pursuit of more and more wealth to be justified and legitimated by a "science."
 
Globalization and the international financial institutions (IFI's) were the most interesting concepts in this weeks lesson, and also the most contentious. Just as Western society has been conquered by the fairly new capitalist way, backed by the science and rationality of economics, Globalization is the new frontier of imperialism which allows the western countries and corporations to conquer the third world nations. We learned about the methods used by the IFI's to spread the "Washington Consensus" far and wide. More and more international trade agreements were pursued by the developed nations after World War II. With the creation of the IFI's such as the World Trade Organization, these sorts of trade agreements came to be institutionalized, normalized, and almost necessary for all countries to be part of.
 
For developing nations this new global trade regime came at a great cost. They were bombarded with the gospel of comparative advantage so that they would both "open" their nations to trade as well as restructure their entire economies in the hopes of one day being as wealthy as the developed nations. Opening your economy also meant you would become eligible for international investment. Investors and experts from the IFI's would bring in large amounts of loans to be used for infrastructure. The developing nations would take on the debt, but western multinational corporations would most often do the work recommended. Whole industries would be re-structured so that nations could better maximize their competitive advantage. As we did learn from our text, this also had a downside; vulnerability and volatility. Changes in the weather or the market could violently disrupt a whole nation's exports, leaving them in a bind. Many of these nation's took on large debt burdens, paid western companies large sums for infrastructure, and then found themselves unable to pay their debts. Then the IFI's would swoop in and forcefully make "structural adjustments" to their economies. This usually took the form of cutting as much government spending as possible, reducing as many tariffs and taxes as possible, and deregulating as many industries as possible.
 
I called this the new frontier of imperialism for a reason. The western multinational corporations, and in turn the wealthy from the western nations, were able to get paid to extract the natural resources, establish dependencies on our products and companies, create new markets, access dramatically lower cost labor forces and therefore maximize their profits, all without firing a shot or swinging a sword. The same goals of imperialism were accomplished, but this time by a new type of missionary and military. That of the global economy.
 
This effects us in the U.S. as well, especially in regards to the recent presidential election and the looming "fiscal cliff." Norm wrote recently, "The super rich and Obama also share a common view of the global economy.  It is providing huge rewards to those who benefit from globalization and it is punishing the middle class in rich countries as wages, and standards of living converge across nations." This was all in response to an interview of Chrystia Freeland by Ezra Klein in her Washington Post blog, about how "Romney is Wall Street’s worst bet since the bet on subprime." In this interview, Freeland speaks about her insights from numerous interviews with members of what we would call the "super rich." One insight was that the wealthy mainly backed Romney in the election because they viewed him as their best shot at more deregulation and lower taxes; the "Washington Consensus" on home territory.
 
In a recent New York Times article called, "How the Tax Burden has Changed," we can see why the wealthy would want to at least keep the tax system the way it is, if not improve it further for themselves at the detriment of everyone else. This article presents research on taxes from 1980 to 2010. Key findings are that all taxes have actually decreased in the last 30 years. Also, the share of local and state taxes paid by the bottom third of income earners has increased versus that paid by the top income earners; mainly in response to declining municipal revenues and reduced federal support. And the kicker, the distribution of benefits from our tax system as a whole benefits those in the top income brackets much more than those in the bottom half of income brackets.
 
This is all to say that the global economy and our very own economy are structured to benefit the same small group of people. Yet, we all now worship the god of neoclassical economics which was created to make the unjust seem logical. The wealthy in our society are regarded as hero's, job creators, innovators, and intellectuals; a regard that they perhaps deserve since they have been able to create and perpetuate a system which maximizes their wealth and power at the expense of the majority of the world's people and ecosystems.

What to do about the Fiscal Cliff?

What is so interesting about fiscal policy? This week I learned how the federal government's fiscal
policies effect the macroeconomic model I talked about last week. This is the model that describes
the total output of the economy equaling the incomes of households, which is then "leaked"
through savings and taxes (adding the Government into the picture). The taxes are reinjected
through government spending, and the savings are used as investment by businesses, all of which is
added to consumption by households to equal aggregate demand.

So, in Norm's post this week on the looming "fiscal cliff" I think we can apply this new fiscal policy
lens. Norm is talking about an article from the New York Times by Paul Krugman which explore's
the upcoming automatic reduction in government spending and tax cuts which was agreed upon in
2011 in response to the debt ceiling discussion. In the article, Krugman argues that President
Obama should not allow the tax cuts for the wealthy to be exempted from the bill as the
Republican Party is pushing for. Norm notes that this will be hard to accomplish as Obama wants to
exempt the middle class tax cuts from the bill, which is what is allowing the Republicans to bid for
the wealthy tax cuts exemption. Krugman says that if Obama cannot exempt the middle class tax
cuts, then he should let the bill move forward and take effect as planned. Many argue that this would
throw us back into further recession.

So this change in fiscal policy would increase taxes and decrease government spending to reduce
the government debt. In our macroeconomic model, this would decrease aggregate demand overall,
thus slowing the recovery through a decrease in consumption of output which then decreases total
income to households. I would argue, after reading Richard Coo's comments on Japan's failed and
successful efforts to end their very similar recession of the late 90's, that we need to increase
government spending right now as the most effective means of increasing aggregate demand. We are
experiencing a "balance sheet recession" according to Koo, which means that even with interest
rates from the FED of 0%, companies are not able to create new jobs because they are stuck paying
down their debts (as their liabilities currently exceed their assets, this is a must). Also, because
government spending is much more direct and effective at increasing aggregate demand than is
cutting taxes, and has a higher economic multiplier effect, government spending is what we need.
We also learned that even increasing taxes while increasing government spending, increases
aggregate demand.

The most effective way out of this recession then, is to increase government spending both on
social programs to help the multitude currently in need, and on direct job creation programs. I
would also keep some attention paid to our issue of government debt by partially financing all of
this increased spending with the elimination of tax cuts on the wealthy and on capital gains. It was
the very wealthy which maneuvered the financial sector into the role of grand casino in the housing
boom which caused this recession in the first place, and made them large sums of money, which
were then taxed at a much lower than fair rate. Thus, financing the recovery with increased taxes
on those at the top, is the the least our country could do to even be allowed to speak the word
"justice" with any kind of authority again. This method would also be very effective since, as I
discussed last week, tax cuts for the wealthy really have not led to faster or better economic
growth ever in our history.

I want to end by throwing in another little snip-it of reality which complicates our economic
models and is painfully absent from mainstream discourse. I was just reading a report from the New
Economics Foundation called, "The Economics of Oil Dependence: A Glass Ceiling to Recovery."
This report discusses the link between the rapidly decreasing stock of the finite resource we are so
heavily dependent on in the U.S. and the global recession. They define Economic Peak Oil as, "The
point at which the cost of incremental supply exceeds the price economies can pay without
significantly disrupting economic activity at a given point in time." This concept is very important as
all data point to us reaching Economic Peak Oil around 2014-2015. This is due to the complete lack
of new sources of crude oil in general, and in terms of low cost sources--as is evident by the recent
scaling up of oil extraction from the Alberta Tar Sands and subsequent need for the new Keystone
pipeline, which is a highly inefficient and costly source of oil. Technology only increases our usage
efficiency of oil products by 2-3% per year, a snails pace compared to the speed at which global
consumption of oil is increasing.

I bring this into the discussion not just because it is not being talked about, but also because we
have an opportunity to make a significant and lasting recovery effort. If we did increase government
spending, financed in part by allowing tax cuts on the wealthy to expire, and directed it all to a
Citizen Conservation Corps style jobs program focused entirely on the creation and
implementation of green energy projects, then we would be doing something more impactful and
worthwhile for future generations than simply reducing government debt.

Taxes and a Healthy Economy

The relation of tax rates to the health of our economy is and has long been contentious. I was interested to see a recent post by Norm Becker which contained the summary remarks of the Congressional Research Service report on tax policy. A key finding was that, “the real GDP growth rate averaged 4.2% and real per capita GDP increased annually by 2.4% in the 1950s. In the 2000s, the average real GDP growth rate was 1.7% and real per capita GDP increased annually by less than 1%.” They compare these rates of GDP growth to the income tax rates from those two periods to make the point that, “analysis of such data suggests the reduction in the top tax rates have had little association with saving, investment, or productivity growth.” This is important because the income tax rates from 1945 through 1970 were significantly higher than they have been in the last 40 years, and yet real GDP growth, and particularly GDP growth per capita, have slowed with the decreasing tax rates on the top income earners in this country. Why is this and why all of the heated debate about income tax rates in recent years?

I have several proposed reasons which, oddly enough, come from a study of neo-classical macroeconomics, or the very school of thought that those in the U.S. who argue for reduced tax rates for the wealthy are supposed to be champions of. First, let me sketch out the basic model: the production of goods and services by firms (output) creates payments to households (income). This income is put towards either consumption or Savings. Savings create the capital stock which firms can use as investment in their production operations (intended investment). Total consumption by households and intended investment by firms equals spending or aggregate demand. If there is full employment and if all savings are efficiently used as investment by firms, then the aggregate demand should equal output, where we started.

One very important thing to understand about all economic models and schools of thought is that they are theoretical. That is to say, not necessarily representative of what really ends up happening in an economy. For instance, taxes and government spending are not represented in this model. So, proponents of lowering taxes in general argue that taxes just reduce the income of households which then decreases the overall level of spending which can result from consumption and investment. This would be unhealthy for the economy because then aggregate demand would not be sufficient to meet the total output of producers, which would then ripple through the whole cycle causing unemployment, recession, and reduced or negative growth. The other argument used for lowering taxes specifically for the top income earners in society is that the savings of those top earners becomes the investment stock of firms and is also directly invested to create jobs and increase spending, thus increasing the health of the economy.

To respond firstly to the issue of government taxes in general, we must realize that if taxes and government spending were properly represented in this theory, all monies diverted to the government from incomes, also end up both as incomes for government employees and as consumption and investment in the economy through government services and programs. Thus, taxes still work through the cycle to increase aggregate demand. In fact, all taxes get spent in the economy unlike some of household income which is diverted to savings (called a leakage in the model).

More importantly, when we look at the incomes of top earners in the U.S. we find several reasons why the argument for diverting less and less of their income to taxes as a policy for a healthy economy, holds no water. Leakages as savings from the incomes of the wealthy can create the investment stock for business expansion, operation or creation. However, this does not happen when a large share of their income is stored in off-shore bank accounts for the purposes of avoiding taxes. The money in those accounts is not accessable as the capital stock for investment in job creation or expansion in our economy and it is not available to be spent by the government if it had been taxed. Also, when the untaxed incomes of top earners is used extractively through investment in venture capital endeavors which require rapid growth of industries through measures of austerity and reckless abandon (low paid employees, turning quick profits through risky activities, tax avoidance) the long-term health of the economy is decreased. As we saw in the lead up to the recent crash and recession, much of the untaxed incomes of the wealthy were invested in derivatives and other clever financial instruments which do not play any part in aggregate demand or the actual production of goods and services. Often now the excess wealth of top income earners is invested in private equity firms spurring mergers and acquisitions which succeed through rapid and extensive off-shoring of more expensive U.S. jobs and outsourcing company functions to the lowest bidder globally.

John Maynard Keynes had a slightly different, but still limited take on the classical macroeconomic model. In his line of thought, households do not just automatically direct all of their incomes to savings and the rest to consumption. They automatically consume at a level called “autonomous consumption” which would account for basic necessities regardless of their income. Then they also have a “marginal propensity to consume” which changes with their income level and confidence in the health of the economy. In line with this theory I would argue that we could more effectively stimulate aggregate demand by raising the incomes of the majority of folks who cannot even meet their required autonomous consumption levels (ie. a living wage) let alone a very significant marginal propensity to consume. Plus the majority of households in our economy which have low to moderate incomes, spend all of their income, contributing directly to aggregate demand thus increasing aggregate demand. So, it would be much more effective to tax a larger share of the incomes from top income earning households in the U.S. in order to stimulate aggregate demand. The decrease in their excess income which would would have been put towards the detrimental activities described above, would instead be spent in the economy by the government.

Even if my argument and logic make sense, you may then wonder why this argument to lower taxes overall and specifically those of the top income earners seems so loud. In an Economist article called “The Rich and the Rest,” they state that, “one analysis suggests that 80% of the total [campaign spending] comes from fewer than 200 donors.” They also point out that 90% of the income gains since the recession have gone to households in the top 1% of income earners. This paints a very clear picture of where power in our society lies. If there are 200 people at the top that control 80% of the financial sway in elections, and are part of the small group which not only caused the recession, but now are the only ones recovering from it, then it would be in their direct but narrow self-interest to reduce taxes on the wealthy.

Banking Oligopoly

The topic this week is Markets. This is a tricky economics topic because the terms "market", "markets", and "market economy" are used so often in the mainstream without any real critical discussion on what these terms really mean. When we learn about markets in economics, we are often only taught the abstract, theoretical meaning from the school of thought called neo-classical economics. In this theoretical world, markets are magical places where there are no barriers to entry for producers, all involved have perfect information, and there is perfect competition. This means that there are many small buyers and sellers, all of which wield no power over the structure of the market. Only in this setting can a market truly facilitate the laws of supply and demand and move towards an equilibrium position which is equally beneficial to both buyers and sellers.

Lets look at the banking industry in the US through the lens of markets. First off, let me state that no market in the real world functions without power, with perfect information, and with no barriers to exit or entry. If you read this post by the Institute for Local Self-Reliance on the banking system, you find immediately that this industry market is not one of perfect competition. First, they note that, "the top banks now control 60 percent of U.S. bank assets, but provide only 27 percent of small business loans." The market for banks in the US operates more like an Oligoply, defined as a market which is dominated by a small group of producers/sellers where entry is difficult. Why is this important? Well, both sides of the political system constantly legitimate everything they do and stand for in terms of how much their policies support small and family businesses. Small businesses after all do create the largest share of jobs in the economy, and they operate more as a model perfect competition market than any other sector. I imagine that early economists were modeling their theories for how markets work based on their experience with thriving local economies filled with many small businesses competing with each other.

Is the American Dream actually about inequality?

The American Dream is a complex phenomenon. I think that it is a great dream in many respects and perhaps can be boiled down to, "everyone deserves a good life." However, there is also a dark underbelly to our concept of the American Dream. This dark underbelly is composed of both the mental models held at large in our society concerning the American Dream and the actual structure of our economic system.

Lets start with a discussion of the structure of our system. In one of Norm's posts yesterday he talked about the role our financial sector is supposed to play; that of allocating capital to its most productive uses. So, this sector of our economic system is really supposed to act more as a secondary level sector. What I mean by that is its role is secondary to, or to facilitate the activity of, the productive parts of the economy. However, Norm notes that, "financial assets grew from 81% to 137% of GDP between 1990 and 2005." This is indicative of a financial sector which has started to use its wealth and power to generate its own product, more wealth and power, instead of facilitate the growth of industries which produce real goods and services that people need. If the products produced by financiers, banks, and Wall Street are equal to 137% the value of GDP (which is supposed to measure the market value of all real goods and services), then this sector is using wealth to produce wealth for the wealthy. We are all currently experiencing the results of this development in our economic system as we struggle through what is being called The Great Recession which was caused by the highly risky activities of the financial sector. The events which led up to the Great Recession can be most aptly described by what a former BGI student called, a "profit tornado." 

Introduction to Joelw99

Hello. My name is Joel Williamson. I grew up in Spokane Washington and also currently live there. My interest in studying sustainable business at BGI stems from a life unfulfilled by the current structure of our society. My great grandfather came to the US in the early 1900's trained as a master gardener. He ended up settling down in Spokane and founding a flower growing greenhouse business called Jacobson's Greenhouses in 1917. The business was passed through the generations and my brother and I were born on the family land with my father and mother the primary partners. It was a fantastic childhood! We had a wonderful place to live and play with family members and life-long employees always watching out for us.

Then, in the early 1990's times really started to get tough. I saw my father become more and more stressed as he tried everything to keep our entire livelihood together. By 1998, on the brink of bankruptcy, we had to close the family business and lay off all of our employees. This destroyed our family in many ways which I still deal with today.

It was not until much later in life that I realized the larger economic context within which our struggle played out. I began to learn about the conglomeration of various firms in all industries. Grocery stores were the ones that had an effect on us. As they got bigger and out-competed the local stores, they also stopped buying local products. This really effected our business as our biggest buyers vanished from our community. Then in 1994 and 1995, NAFTA and CAFTA hit, changing the game completely. Now the rose industry in the US could not compete with the tariff free imports, and four years later, we were out of business.

Through all of this continuous conglomeration of industries and outsourcing of jobs, the wealthy make more money and the rest of us make less and less, if we have a job at all. So, I have enrolled at BGI to learn as much as I can so that I can build a local, resilient and equitable economy in Spokane.

 Rob Krassowski, 13, and Andy Loomer, 12, members of Boy Scout Troop 333, help clean up greenhouse glass broken during a severe hail storm at Jacobsen’s in July 1995 in the Moran Prarie area of Spokane.