I.  Economics in General

       Western economic theory has been established on bad philosophy, and it has unwisely based itself on models drawn from the natural sciences rather than history and social thought.  Marx and his followers are a partial exception.  However, more fundamental change is needed.

       Unfortunately, very few highly qualified economists have broken ranks with the dominant guild and proposed that we re-think economic theory from the ground up in terms of process categories.  Indeed, Herman Daly, who has done this, has been a lonely figure, completely rejected by the guild of economic professionals.  Fortunately, he has had an enthusiastic following among environmentalists, humanists, and religious people.  Since the Nobel Prize in economics is controlled by mainstream economists, he has never been considered for that, but he has been awarded the Nobel “Right Livelihood” award.

       As a process thinker, he views the human economy in the context of the larger economy of nature.  This by itself makes an enormous difference, since the dominant economic theory treats nature only as resource for human use.  Even this contribution of nature is belittled, since economists teach that resources are substitutable for one another without limit, and that technology can solve all problems of resource shortage.  Given these axioms, economists feel little need to examine environmental problems in factual detail.

       These standard economic teachings have supported the goal of infinite economic growth measured by market activity.  Viewing the world from the perspective of process thought, Daly calls for a stationary state economy, once there is sufficient production to meet the real needs of human beings.  Daly is not saying that no nation needs larger production than it now has.  China, for example, still needs to grow economically in order to meet the needs of all its citizens.   

       However, Daly does mean not only that the aim of a nation like China should be to aim at sufficiency and stop with that.  He also means that the aim should be meeting human needs without damaging the human environment. Growth as now defined may do real human beings more harm than good. 

       Daly asserts that market activity is a poor measure of authentic growth.  Influenced by Daly, Mark Anielski has written The Economics of Happiness.  However, as long as the hegemony of standard economic theory is not broken, these  ideas will have no effect on commercial or governmental action.  The standard procedure will continue to be to increase market activity and then to moderate the resulting destruction and suffering by another set of activities.  From the process perspective this is foolish.  We should adopt policies that directly improve the sustainable well being of human communities and individuals.

       The process perspective on human nature is also profoundly different from the one that has shaped Western economic theory.  The dominant economic theory is based on an extreme version of the Western Enlightenment.  It supposes that the world consists of separate individual things that relate to one another only externally.  In this view, individual things can be relocated in any context without changing what they are.  Process thought is more like traditional Chinese thought in holding that each individual entity is what it is largely by virtue of its relations to other things.

       In economic theory the important point for process thought is that human beings are what they are largely by virtue of their relations to others.  People can have good lives only as they live in healthy communities.  Process thought teaches that we are “persons-in-community.”  This means that, for the most part, economic improvement is the improvement of the economic well being of communities. 

       The idea that the goal of the economy is to benefit persons-in-community contrasts with the now dominant economic theory.  In its view, those to be benefited are isolated individuals whose goal is the consumption or possession of more goods and services.   From the perspective of process thought, forcing a person to leave family and community in order to earn money at some distant place does great damage both to the individual and to those he or she leaves behind.  On the other hand, the standard economic theory teaches that if the family has more total income as a result of this separation, it is better off.  Human relations count for nothing.   Human community is ignored altogether. 

       The application of this dominant theory has destroyed tens of thousands of communities around the world for the sake of increasing “productivity.”  Process thought notes that the means adopted to increase productivity decrease human happiness.  Studies of happiness indicate that it is primarily connected with human relationships, just those relationships that economic theory ignores and that economic practice damages.   Also much of the increase of productivity damages the environment.

       Standard economic theory argues that market activity increases when there are no barriers to the movement of capital and goods.  The theory implies that the removal of all barriers to the movement of labor would also be ideal, but economists have not pushed that point.  Accordingly, economists have strongly supported transnational corporations in their pursuit of economic globalization. 

       From the process perspective this is fundamentally wrong-headed.  Globalization disempowers individuals and even nations.  It subordinates political actors to economic ones. It is an assault on human community and, through that, on human happiness.  It speeds up the unsustainable use of the world’s resources and the pollution of the global environment including changing weather patterns.

       I have indicated that for process thought the study of history is important, whereas mainstream economists in the West prefer deductions from their models.  Historically it is important to see that prior to 1980 the world was organized  predominantly in terms of national economies.  That is, nations were the units of development.  The World Bank, for example, was supposed to provide advice in how to accomplish goals that national governments set.  Many governments tried to develop relatively self-sufficient economies.  The idea was that the developed nations and the Bretton Woods Institutions would assist them in doing so by grants and loans.  Of course, there was a great deal of international trade, but this trade was intended to serve the national economies involved in it.

       The Reagan Revolution and the accompanying Washington consensus rejected this global economic model.  The new view was that development would be chiefly by corporate investment.  Corporate investment would increase greatly on it each nation subordinated its local economy to a global one. 

       Since many nations were having difficulty paying their debts, the Bretton Woods Institutions were able to impose “structural adjustment.”  This did away with protection of local business, allowing transnational corporations to buy them up or put them out of business.     

       In order that the debtor country be able to pay its debts, purchasing power was reduced by currency depreciation. This made production of goods for export cheaper, while people could not afford to buy as many goods.  Development was to be export-driven.  Each country was to specialize in what it produced best and import everything else.  Governments no longer had the power to direct resources to those in the nation with greatest needs or to protect their environment from foreign exploitation.

       Theoretically this process was to make each of the countries involved more prosperous.  In fact, most of them became more heavily indebted and impoverished.  All the examples of healthy national development are cases where strong governments refused to turn over basic decision-making to foreign corporations and Bretton Woods Institutions.  Japan, South Korea, Taiwan, Hong Kong, Singapore, and China all took advantage of liberalization policies in other countries, but all maintained national control over their own economies.

       As more and more people have recognized the false promise of economic globalization, the tide has turned against it.  Most of South America has largely expelled the International Monetary Fund.  The prospects of extending a NAFTA-like agreement to the whole of Latin America are dead.  Sadly, Africa has been devastated by a combination of globalization and internal strife, and it shows little prospect of recovery. 

       From the point of view of process thought, national economies, interacting internationally, are far superior to a single global economy.  National governments often make mistakes, and some of them are terribly corrupt, but they have the possibility of being concerned for the well being of their citizens.  The global economy is inherently unconcerned.

       There are, however, no national economies that are basically organized on process lines.  Some in Europe do take care of the real wellbeing of their people and work hard to preserve their environments.  They come close, but they do so more by ad hoc adjustments of economic theory to needed practice than by rethinking the theory and acting on it coherently.  For this reason, some are falling away from their best achievements under the pressure of globalization.

II. Finance in Particular

       The current interest in economics focuses on finance.  The bursting of the financial bubble reveals the fact that in the past decades, closely related to the Reagan Revolution and the Washington Consensus, there has been an explosion of growth in the financial or “virtual” economy, vastly greater than the growth in the real economy, even when this is misleadingly measured by market activity.  No one knows what consequences the “meltdown” of the virtual economy will have for the real economy.

       It is encouraging to note that the collapse of the financial world in Argentina did not lead to the collapse of the real economy.  It did, however cause great disruption.  The owners of many stores and factories closed them, but the workers re-opened and operated them.  There was, of course, great confusion, but there were still goods and services available.  No one starved.  

       Today anxiety about the consequence of the collapse of the financial bubble for the real economy seems to be a major factor in the slowing of the real economy.  Initially we were told that the collapse of Wall Street banks would dry up lending.  This was the reason, so the banks claimed, that they should receive trillions of dollars from the public purse.  However, it now turns out that the banks have money to lend.  The problem is that the talk of economic slowdown has caused the public to be cautious, so that a slowdown has in fact resulted from the anxiety. Under these circumstances businesses are reluctant to spend money on expansion. The banks have difficulty finding borrowers.

      The truth is that money, the basis of the world of finance, has been little studied by economists.  As an outsider to the discipline, I had wrongly supposed that it was a major topic.  When I was co-authoring a book with Herman Daly, For the Common Good, we entitled a series of chapters beginning with Alfred North Whitehead’s name for a logical fallacy: “misplaced concreteness.”  These dealt with such topics as the market, land, and human nature.  I encouraged him to write a chapter on money, where the misplaced concreteness is obviously important, but he said that no one knew enough about money to write such a chapter.

       I was shocked, and when we were invited to produce a second edition, he agreed to try.  There is an “afterword” on money in this edition.  Much of what little I now understand about money and finance comes from working with him on this afterword.  I am glad to say that over the years since then, I have heard no serious criticisms of this essay and I have heard considerable appreciation from knowledgeable people.  Accordingly, I am reasonably confident of its basic accuracy.

       I have become increasingly confident that a crucial issue in the world today is the creation of money.  Money is created by making loans.  These loans are repaid with interest.  The extant supply of money overall suffices for the repayment of the loan, but additional money is required to pay the interest.  Hence the more important loans are in a society, the more its economy depends on the increase of lending.  Since this increase is for the payment of interest, the collection of interest is the basis for the growth of wealth. 

       In most Western countries the banking system is under the control of private interests.  This means that if the government spends more than it receives in taxes, it must borrow from the banks.  Accordingly, in the United States, payment of interest on the national debt becomes an ever increasing part of its budget. 

       There is, however, another possibility, one that is concealed from the great majority of people, at least in the United States.  The government can create money.  It can do so either by lending it, as the banks do, or simply spending it into existence.  Of course, if private banks are also creating money, the government will be in danger of causing inflation if it creates a great deal.  However, if private banks create none or very little, the government can create a great deal without causing inflation.

       In American history, some of the colonies, including Pennsylvania created their own money.  As a result they were quite prosperous.  The privately owned Bank of England got the British parliament to forbid this practice. This prohibition caused depression in the colonies.  This depression had far more to do with revolutionary sentiments in the colonies than did the famous tax on tea. 

       The new constitution forbade the states creating money, expecting this to be done by the federal government.  However, the bankers were successful in preventing the government’s power in this respect from being extensively utilized.  They were helped in their effort to prevent the federal government from creating money by the popular assumption that money should always be convertible into gold.  Acting on that assumption limited the supply of money made available by the government to the amount of gold held in its vaults. 

       The United States continued on the gold standard , well into the second half of the twentieth century.  The ending of that standard led to the universal recognition that convertibility into something else is not what gives money its value.  The value of money depends entirely on the confidence of people that other people will accept it in exchange for goods.  This had been understood by the American colonists and by Lincoln, but it still came to many as a great surprise. 

       The one occasion in the history of the United States when the government issued “fiat” money was during the Civil War.  If Lincoln had been forced to raise taxes sufficiently to fight the war, it is probable that the North would not have had the stomach to continue very long.  To avoid strengthening the opposition to the war, Lincoln financed it by issuing “greenbacks.” To prevent a recurrence of such government actions, the bankers organized the Federal Reserve, owned by Wall Street banks and operated in their interest.  The U.S. treasury is now forbidden to create money.  Even our currency is created by the Federal Reserve Bank.

       With the banks able to create virtually unlimited amounts of money, vastly more than the real economy can absorb, in recent decades they have gone wild.  They have loaned money for the purchase of financial assets that are less and less grounded in the real world.  As taxes on the rich have been reduced in the United States, the money that is supposed to flow into productive enterprises has flowed instead into the virtual economy.  This financial bubble, much larger than any other, was bound to burst, but it was so little understood either by economists or by those financiers who created it, that the bursting still took the “experts” by surprise.  

       China has, in this regard, an enormous advantage.  I do not know how much money is being created by private banks in China, but it is my impression that in comparison with size of the Chinese economy, it is still relatively small.  If China can keep this small, or even abolish it, then China can spend its way out of any depression that threatens it.  I am delighted to see that this seems to be the government’s policy.  It will not need to borrow money or even sell off its dollar assets in order to do this.

       The present global financial crisis poses a threat that it will be exploited to the benefit of financial globalization.  There will be discussion among our global leaders about how to control the financial system to revitalize it and to prevent another similar collapse.  The proposal will be to fully globalize it and centralize control over it.  We may be sure that whatever role national governments play in this new central power, the actual decisions will be made by bankers for the sake of financial institutions. 

       I fully expect that the American public will assume that this is a good thing and will support the development of global financial institutions.  I trust that China will not subordinate its financial system to any such global control.  Indeed, I hope that China will help to make clear to the world the extent to which the global financial institutions will control the global economy for the sake of the private banks.   Their power is already far too great.  A further consolidation of power in their hands will be disastrous.

       There is a slight hope, very slight, that this will turn out to be a “teachable” moment in the United States. The first national effort is to restore the huge financial system and to consolidate its power.  But it may be that the unraveling of the system will proceed despite the government’s efforts to save it.  Significant segments of the public might then recognize that the world would be far better off if nations everywhere assumed power over their banking systems and created their own money. 

       There is no need to forbid private banking, but there would be a need to do away with the fractional reserve system.  This allows banks to lend many times as much money as they hold in deposits.  Under the new rules, banks could only lend the money deposited in them.  Their profits would come from the difference between the interest they pay depositors and the interest they collect from borrowers.  They could also charge for financial services to customers.

       We cannot do away with a “virtual economy.”  However, if we abolished fractional reserve banking, the virtual economy would be greatly reduced in size and would function largely in the service of the real economy.  This would make for a much more sustainable system.  Whereas the nationalization of the creation of money would require a huge change in the United States, I think China is close to it.  For China the important decision is to avoid being sucked into a global financial system that disempowers individual nations. 

III. A Green Economy

       The beginning of serious reflection about the need for an economic theory based on process philosophy rather than the substance thinking of the European Enlightenment was prompted by concern about the environment.  The most fundamental features of Daly’s thought center on the necessity of developing a human economy that operates sustainably in the context of the natural one.  This goal most profoundly distinguishes the process perspective from both capitalist and traditional Marxist thinking.

       Today talk of a “green” economy is widespread.  To date no other economist has done work on this topic comparable to Daly’s.  One of his close followers played the key role in organizing the International Society for Ecological Economics.  Its membership includes many who follow Daly, but also many others who, without basically abandoning traditional economics, nevertheless understand that economic activity must cease to rush humanity toward catastrophe.  Nowhere is the urgency of ecological economics greater than in China. 

       The present situation is one in which the government is prepared to spend a great deal of money on infrastructure and other projects that will provide useful work to replace demand for export manufactures.  Some of this money could be spent in the greening of Chinese industry and city life. 

       China could also direct its resources to the improvement of the lot of the poor, thereby also increasing internal demands for goods.  This could be the beginning of a deeper shift from an export-driven economy, necessarily dependent on the purchasing power of other countries, to a self-sufficient economy supplying the goods and services needed by Chinese.  From the process perspective, this would be a great gain.

       China is now committed to the improvement of life in its vast rural areas.  Current plans for large expenditures would be particularly beneficial for a move toward a green economy in this context.  If the money is spent for rural infrastructure, education, and healthcare, life in rural China will be improved.  If agricultural produce is priced at its real value, farmers will become prosperous, and the demand of rural people for industrial goods will rise. 

       It would be a mistake to allow the essentially artificial crisis of finance to direct our attention away from the deeper ecological one.  The world faces shortages of fresh water, energy, and food.  Global temperatures are rising, and as a result glaciers are melting.  Delta regions that are now agriculturally highly productive will be ruined by the inflow of salty ocean water.  

       We will have to learn to produce more food with less fossil energy, less water, and less arable land.  Chinese farmers have engaged in highly-productive, labor-intensive, and generally sustainable agriculture for centuries.  Their knowledge of how to do this is precious.  Modernizing agricultural trends in China should be reversed.  Instead, farmers may learn even more productive methods of farming with less water and with no fossil fuel. Such farming is possible.  How the government works to improve rural life will determine whether it will be done.

       Process thought wants to understand reality from the “ground” up.  Traditional economics developed in relation to the industrial revolution, paying little attention to agriculture until it became industrialized.  From the perspective of process thought, the condition of the land and the way it is used provide the place to start.  The agricultural economy comes next. Commerce, cities, and industry come only after that. 

       Like all “modern” nations, China has focused on industrialization.  But it now has a chance to strengthen its rural base so that it can survive the crises that lie ahead.   May it learn from the financial crisis the danger of being sucked into the destructive patterns of the global economy and the possibility of becoming a self sufficient nation living sustainably on its land!

                             By Prof. John B. Cobb, Jr.

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