The Economic Crisis of the Commons
Arthur Warmoth, Ph.D.
Sonoma State University
In the postmodern world, the economic system has become the basis of human adaptation to the environment. Conventional economics is essentially the economics of markets, of manufacturing and trade. As a result, insufficient attention is paid to the question of the nature of money as such, and to the large arena of economic activity that cannot be traded in markets. This economic arena is sometimes referred to as public goods and services. However, it is worth noting that there is no widely accepted term to refer to these collectively consumed goods, services, and collectively held assets. Recently some commentators have begun to refer to this economic arena as "the commons" (Rowe, 2002; also see the section "Further Reading on the Commons" below).
The commons can be defined as all activities and ecological assets essential to or useful for human wealth and well-being that cannot be produced and distributed to individuals operating in price auction markets. In other words it includes all productivity and assets that must be produced and/or consumed, at least in part, collectively. We find most aspects of the commons, ranging from the integrity of the environment to the social fabric of our communities, are in a state of crisis today. This is because we simply do not know how to think about the economics of these critical systems, including politics, health care, education, public safety, retirement security, employment security, energy, transportation, housing and land use, and culture and the arts.
The economics of the commons are fundamentally different from the economics of markets. Unfortunately, the economics of the commons does not include an elegant self-regulating mechanism comparable to the "invisible hand" of price auction markets that serves the economics of commerce so well. Our relationship to the commons is characterized by mechanisms that operate according to rhythms and orders of conceptual complexity that are different from those governing markets. In the long view of history, the commons has primarily been managed by the largely unconscious (or more accurately, embodied in iconic and narrative consciousness) hand of incrementally evolving tradition. Since the Renaissance, it has become increasingly the province of the conscious hand of politics, which is ideally guided, though often misguided, by reason. These political processes are widely recognized as vulnerable to whim and corruption. The founding fathers of the United States believed that they had succeeded in creating a new form of democratic political process that provided historically unparalleled accountability to the people. It embodied an innovative system of checks and balances that they believed would limit the negative impact of unbridled self-interest and provide a level of reflective deliberation that would generally permit wisdom and the long view of the public interest to prevail. While this system has served us reasonably well for the past two centuries, the last half century has seen the ascendance of economic power and the acceleration of rates of social change powered by the information technology revolution. This increasing domination of politics by economic power has led an increasing bias in the direction of short term economic interests in our approach to issues related to the commons. It has led to an ideological emphasis on the reliance on markets as the solution to all economic and political problems. This in turn has tended to obfuscate our efforts to respond politically to the negative ecological side effects of industrial production and to directly address pressing issues of social equity and cultural pluralism. However, information technology also gives us the historically unprecedented ability to examine and interpret the fine structure of the commons in ways that could conceivably enhance our ability to make informed political decisions.
The tragedy of the Bush administration, and of conservative political strategy for the several last decades, is that it combines religious fundamentalism with free market fundamentalism. Free market fundamentalism is sometimes referred to as the Washington Consensus, as it is the basis of the conditions imposed by the International Monetary Fund and the World Bank on developing economies in need of international aid (Stiglitz, 2002) . It is also called "neo-liberal economics," especially in those parts of the world where "liberal" has not become a negative stereotype.
This is truly a Faustian bargain with the devil, and in the absence of a clearly defined alternative, combined with the post 9/11 fear factor, it has succeeded in attracting a very slim political majority that is now being recklessly interpreted as a mandate. The good new is that this policy is simply not sustainable. How and when it will eventually collapse of its own weight, and how many souls will be sacrificed in the process remains to be seen. But this paradigm is based on economic theory that cannot continue to work indefinitely because it is based on the unsustainable practice of creating wealth through paper entrepreneurialism (Reich, 1983) and the unsustainable expectations of endlessly available natural resources and exponential economic growth (compound interest).
There are two domains of the commons: the natural commons and the social commons. The natural commons includes air, water, earth, sunlight-all natural resources. It also includes all ecological and genetic processes, the basis of all life on earth. It includes all of the processes summarized in the Gaia metaphor.
The social commons includes our cultural heritage. Jonathan Rowe's (2001) view of the commons includes our "languages and cultures, the stores of human knowledge, the informal support systems of community, the peace and quiet that we crave." It also includes our instinctive relationship with nature and our impulse for creative expression. It also includes public services such as public safety, education, transportation infrastructure, public health and health care access, and environmental protection.
And it includes collective arrangements for economic security, including insurance and provisions for retirement security through investments and Social Security. It is our collective provision for retirement security that has recently been devastated by the criminal conspiracies of high flying capitalist speculators such as President Bush's friend Ken Lay of Enron and their felonious accountants such as Arthur Anderson. Indeed, it is somewhat amazing that there is not more middle class outrage at the devastating assault on these institutions that we trusted to care for our collective economic well being in our declining years. However, there are well thought out alternatives, such as Jeff Gates' (1998, 2001) proposals for saving capitalism by democratizing ownership. (See also the section on "Democratizing Asset Ownership" below.)
A Primer on the Economics of the Commons
The reason we need an economics of the commons is because the globalization of market economics has led to the monetization of all aspects of human existence. Since accountants are everywhere-and hopefully are now being required to act with more integrity-we need to develop methods for tracking our wealth and well-being held in common, as well as the wealth that held by individuals (and those individuals created by legal fiction called "corporations").
The economic activity of the commons is created and managed mainly in three ways:
· Custom or tradition
· Voluntary association (non-profit organizations, mutual aid societies, investment and insurance pooling)
· Law and public policy
"Custom" is the mainstay of the management of the commons in traditional societies. Social arrangements in traditional societies have evolved slowly over countless generations. They include what José Ortega y Gasset calls "usages": the repertoire of practices that includes ritual and ceremony, as well as more mundane practices, and the repertoire of knowledge that is embodied in imaginal and narrative consciousness. They include complex provisions for the maintenance of the commons because human evolution is essentially a collective activity. The basic adaptive unit of evolution is the gene pool, not the individual. Tribal traditions, including respect for the earth and all of the values and practices we admire in Native American and other tribal cultures have evolved a complex social commons because this fabric of social relationships is the basis of successful adaptation to the natural environment, the natural commons.
The development of agriculture made the larger scale social organizations of cities and feudal societies possible. As scale of organization increased, the rule of law and evolution of strategic policy began to supplement tradition as the basis for social organization. Whereas traditional arrangements generally evolve on the basic of incremental innovations that are generally the result of conscious reflection, law and strategic policy are the result of conscious thought on a much more elaborate scale. These innovations are dependent on the level of ecological sophistication achieved by a given society. They generally take the requirements of ecological systems into account, but there have been major miscalculations, such as deforestation and over grazing.
In modern industrial society, the management of the commons falls both to government and to voluntary associations (often organized as nonprofit organizations). Governments and legal frameworks are created by political processes that were originally legitimized by the divine rights of feudal aristocracies. However, since the 18th century, political legitimacy has increasingly required some degree of democratic accountability to the citizens who make up a society. Along with the evolution of political democracy, groups of individuals have developed a diverse repertoire of voluntary self-organizing systems to manage common interests.
Governments have also created legal persons composed of many individuals called "corporations." These legal persons are expected to contribute to the well-being of society by producing goods and services with ever greater volume and efficiency. While the principal focus of corporations tends to be productivity for price auction markets, it should be borne in mind that the creation of corporations is legitimized as public policy because increasing productive capacity is recognized as a public good or social benefit. The fact that corporations are franchised to serve the common good suggests that they should be held accountable for their effectiveness in this regard. Our respect for the invisible hand of the market should not prevent us from holding corporations producing for the benefit of markets to avoid responsibility for the intended or unintended negative impact on the social and natural environment.
The three core public policy issues in the management of the economics of the commons today are:
· The need for conservation and environmental restoration
· The disintegration of civic society and community life (including education, health care, public safety, cultural identity, and community and family relationships)
· Dysfunctional design flaws in the economic system itself (including the design of money and of the institutions for translating savings into productive investment)
Conservation and environmental restoration has been widely recognized as a critical political issue for decades. Substantial progress has been made, but much more needs to be done. Recently, the environmental movement has focused on the concept of "sustainable economic development" as a way to integrate the variety of issues involved, as well as to emphasize that ecological sanity and economic growth are not incompatible. Recent discussions of practical economic strategies for achieving environmentally sustainable development include works by Lester Brown (2001), Paul Hawken, Amory Lovins & L. Hunter Lovins (1999), and Hazel Henderson (1999).
Breakdown of public civility and community and family relationships has been the subject of much public handwringing by commentators and politicians for years. In California, the disintegration of civic society is rapidly becoming a serious political and economic problem as the state faces the largest budget deficits since World War II as a consequence of the economic meltdown following the dot.com bubble as augmented by the criminal conspiracies of the paper entrepreneurs. Vital public services are threatened, including education, health care, public safety, transportation, and environmental protection, and we thus find ourselves loosing faith in our political leaders and in the political fabric of democracy itself. As a result our political problems are increasingly felt to be economic problems, and the second and third areas of the crisis of the commons begin to merge.
Economists generally recognize two functions of money: medium of exchange & store of value. Both of these functions are of substantial social value, which is why we have tolerated the substantial design flaws in the current systems for so long. The most basic function of money is to serve as a medium of exchange. According to Bernard Lietaer (2001), "Money is an agreement, within a community, to use something as a means of payment" (p. 41). (It should be noted that the "something" needs to be countable.) This definition describes the function of money in all times and places. Its value comes not from the fact that it is a thing, but from the fact that it is a social agreement to use some thing as a measure of value.
All contemporary national currencies are bank debt-created fiat money (Lietaer, 2001, pp. 32ff). This means that new money comes into existence by creating new bank accounts based on loans or bank debt, issued on the authority of the government (which is responsible for controlling the quantity in circulation, primarily with the twin objectives of providing adequate liquidity for a healthy, growing economy and avoiding an inflation-provoking oversupply). Although governments do print bills and mint coins, most of the money supply actually exists in the form of bank accounts and other financial instruments. The primary way in which modern governments create money is to authorize banks to create new accounts, based on interest bearing loans. Banks are required to maintain a certain quantity of capital reserves to partially cover their depositor's accounts, but that amount only protects a part of the deposits, which is why it is called fractional reserve banking (and why federal deposit insurance became necessary).
The obvious problem with this system is the need to manage the money supply in order to avoid inflation, a task which is assigned in the United States to the Federal Reserve Board. Too much money in circulation leads to inflated prices, with their obvious disruptive effects; too little means recession. However, there are additional less obvious problems inherent in the design of this system based on interest-bearing loans. 1) Because the money required to repay the interest on the bank loans is never created, conventional money is necessarily scarce (participants in the economy must compete for both profits and credit); therefore the system promotes competition over cooperation. 2) Furthermore, the unfunded interest requirement promotes the concentration of wealth and the inevitability of a certain amount of bankruptcies. 3) Guaranteed compound interest also creates an impossible expectation or assumption of endless (infinite) economic growth. 4) Because the system is primarily under the control of national governments, it encourages national consciousness and discourages identification and empathy with other citizens of the planet. (Lietaer, 2001, pp. 50-52.) 5) Because interest has the effect of discounting future real economic returns, the system favors short term time horizons over the long term planning horizons required for environmental sustainability (op. cit. pp. 242-248). 6) As J. M. Keynes (1935) pointed out, recessions and depressions are basically caused by a shortage of liquidity (Keynes called it "effective demand"), not by a shortage of need or productive capacity. Recessions occur when those who hold liquid assets elect to hold onto them, rather than recycling them through the economy as productive investments. As the money supply dries up, so does trade and employment.
However, these problems are not insoluble. While virtually all contemporary national currencies are designed according to this model, there are many alternative, or complementary, forms of monetary design, some of which are succeeding in the real world; and they are solving these problems. For example, according to Lietaer there are more than 2,500 community currency systems currently in operation. For a more complete discussion the design of money as a system, see the bibliography on "Complementary Currencies," below, especially the works of Lietaer and Thomas Greco (2001).
The institutional arrangements that implement the second function of money, money as a store of value, also require scrutiny. Indeed, design flaws inherent in translating money from the first to the second function are responsible for much of the mischief attributable to the capitalist system. The breakdown on this system, as seen in the recent Wall Street scandals, has focused public attention on this as a particularly acute example of the crisis of the commons. This crisis has alerted us to the dangers inherent in attempting to privatize our retirement security, as the welfare of our elders, as well as of our children, is essentially and morally a social concern.
As Keynes recognized, shifting liquidity from current consumption through savings into investment serves the socially useful function of investing in future increases in productivity and is essential if recession is to be avoided. However, as Reich pointed out in his exploration of paper entrepreneurialism, there is a strong temptation to achieve paper profits by the non-productive manipulation of the system, rather than by engaging in the more challenging task of finding and realizing productive investment opportunities in real space and time. Correcting this design flaw in our financial institutions will require major changes in public attitudes. It is true that the real wealth required to redeem the claims on new wealth that appeared to exist at the height of the dot.com bubble did not exist and probably could note be created using current technologies and financial institutions. But the hope for unearned income dies hard. Imperial capitalism, as it has operated in modern industrial democracies, buys sufficient voter loyalty by importing unearned wealth in the form of underpriced natural resources extorted from so-called undeveloped countries. A realistic and sustainable system of savings and investment would recognize that average return cannot exceed the overall growth rate of the economy, and some productivity growth needs to be shared with labor and management.
The impulse for speculation, or gambling, appears to be deeply rooted in human nature. The hope for unearned riches, and perhaps the desire to live vicariously the lives of the rich and famous, fuels the public's willingness to accept the present system and to resist progressive taxes such as the inheritance tax. However, it is highly unlikely that current investment practices could adequately fund the retirement needs of the baby boom generation, even in the absence of the recently documented abuses of the system. Fundamental reform of the institutional arrangements for retirement security are in order (Gates, 2001, pp. 60-64, 123-144). The key to a tolerable future will be shared participation in increased productivity, not in increased. Gates proposes several mechanisms whereby this could be accomplished by democratizing capitalism, a viable alternative to the bureaucratic inefficiencies of traditional socialism (op. cit., pp. 221-295). In addition democratizing capitalism and strengthening the transfer payment mechanism of the Social Security System, adequate provision for the coming elder boom will require the development of a whole repertoire of labor intensive mutual aid systems, such as the Hureai Kippu, or Health Care Currency System in Japan (Lietaer & Warmoth, 1999).
The public sector also invests in areas such as education, health, public safety, transportation infrastructure, housing, and environmental protection. The public is also becoming increasingly aware of the need for public investment in our common interest in health care access and affordability. Public policy should support, not discourage, progressive taxation and the taxation of accumulated assets, in order to recover for the public the component of economic growth that is created by collective social organization (Henry George's "single tax," 1879). Furthermore, public policy needs to systematically track the return on public investments and to encourage channeling private investment into productive public and private uses.
What can I do? Some immediately available personal strategies for investing in the commons include:
· Take responsibility for what happens to your savings. Explore micro-banking or microinvestment and responsible investment organizations.(See Co-Op America for information about the latter.)
· Invest in conservation and environmental restoration ("natural capitalism")
· Demand more democratic accountability from organizations managing your investments: Mutual Funds, PERS; the corporations in which you invest your savings.
· Cultivate realistic expectations for the return on your investments. Most of what you can expect to get back will be the capital you put in. (Your investments are "capital' in the labor/management/capital formula, and the fruits of economic growth should be shared among all three factors.)
· Lobby against the economically and environmentally destabilizing assumption of compound interest.
· Recognize the extent to which your personal wealth is represented by collectively held assets, e.g. public services, open space, cheap education. Lobby for progressive taxation and the taxation of accumulated assets. Participate in progressive politics and support alternative media.
The economic commons is a socially constructed system; it is a system that has been designed. Unfortunately, most of that design has been accomplished by historical trial and error, and the current version embodies some egregious errors. However, that which has been designed can be redesigned. It is not to late for democracy to take back the commons.
Galbraith, John Kenneth. (1958). The Affluent Society. Boston: Houghton Mifflin.
Gates, Jeff. (1998). The Ownership Solution: Toward a Shared Capitalism for the 21st Century. Reading, MA: Addison-Wesley.
Gates, Jeff. (2001). Democracy at Risk: Rescuing Main Street from Wall Street. Cambridge, MA: Perseus.
Hardin, Garrett. (1968). The Tragedy of the Commons. Science, 162: 1243-48.
George, Henry. (1879, 1979). Progress and Poverty. New York: Robert Schalkenbach Foundation.
Greco, Thomas H., Jr. (2001). Money: Understanding and Creating Alternatives to Legal Tender. White River Junction, VT: Chelsea Green Publishing Co.
Keynes, John Maynard. (1935). The General Theory of Employment, Interest, and Money. New York: Harcourt, Brace & World.
Lietaer, Bernard & Arthur Warmoth. (1999). "Designing Bioregional Economies in the Context of Globalization." In Joseph Kruth & Andrew Cohill, Eds. Pathways to Sustainability, published online by Tahoe Center for a Sustainable Future at <http://ceres.ca.gov/tcsf/pathways/chapter2.html>.
Lietaer, Bernard. (2001). The Future of Money: Creating New Wealth, Work, and a Wiser World. London: Century.
Reich, Robert B. (1983). The Next American Frontier. New York: New York Times Books.
Rowe, Jonathan. (2001, Summer). The hidden commons. Yes! <http://www.futurenet.org/18Commons/rowe.htm>
Rowe, Jonathan. (2002, Autumn). The promise of the commons. Earth Island Journal, pp. 28-30.
Stiglitz, Joseph E. (2002). Globalization and Its Discontents. New York: W. W. Norton
Also, see my web site on Sustainable Community Economics at http://www.skaggs-island.org/sustainable, especially the article on "The Economic Metacrisis in Sonoma County."
from Jonathan Rowe (2002)
David Bollier. Silent Theft: The Private Plunder of Our Common Wealth (Routledge, 2002)
Whose Common Future? (by the staff of the Ecologist) (New Society, 1993)
Peter Barnes. Who Owns the Sky? (Island Press, 2001)
Lawrence Lessing. The Future of Ideas: The Fate of the Commons in a Connected World (Random House)
James Boyle. Shamans, Software, and Spleens (Harvard, 1996)
Olaf Egeberg. (1994). Non-Money: That Other Money You Didn’t Know You Had. Washington, DC: The McGee Street Foundation.
Paul Glover. (1998). Hometown Money: How to Enrich Your Community With Local Currency. Ithaca, NY: Ithaca Money.
Thomas H. Greco, Jr. (1994). New Money for Healthy
Communities. Tucson, AZ: Thomas H.
Thomas H. Greco, Jr. (2001). Money: Understanding and Creating Alternatives to Legal Tender. White River Junction, VT: Chelsea Green Publishing Co.
We know of no definitive book on micro-lending, but the best known system is Muhammad Yunus’ Grameen Bank in Bangladesh. “Banking on People,” The News Hour with Jim Lehrer (PBS, April 24, 2001) is an introduction to the Grameen Bank. To order a transcript, send $5.00 to News Hour Transcripts, Strictly Business, P.O. Box 12803, Overland Park, KS 66212. There are also many web sites on the topic.
Democratizing Asset Ownership
Jeff Gates. (1998). The Ownership Solution: Toward a Shared Capitalism for the 21st Century. Reading, MA: Addison-Wesley.
(2001). Democracy at Risk: Rescuing Main Street from Wall Street. Cambridge, MA: Perseus.
Gates examines a variety of approaches to democratizing ownership and their implications for the future of ownership.
Henry George. (1879, 1979). Progress and Poverty. New York: Robert Schalkenbach Foundation.
A classic study of the social construction of wealth as the basis of land value. His single tax model was popular in the late 19th century, and it deserves to be pondered today.
Louis O. Kelso & Mortimer J. Adler. (1958). The Capitalist Manifesto. New York: Random House.
A critical study of the implications of capital ownership and the importance of democratizing ownership as a way of increasing the constituency of stakeholders in the social order. Kelso’s ideas were the basis of the ESOP (Employee Stock Ownership Plan) movement.
Shann Turnbull. (1975). Democratising the Wealth of Nations from New Money Sources and Profit Motives. Sydney: The Company Directors Assn. of Australia, Ltd.
An overlooked classic that explores the possibilities for using accounting models and methods to democratize the economy. A sane alternative to Arthur Anderson!
Lester Brown. (2001). Eco-Economy: Building an Economy for the Earth. New York: Norton.
A sustainable civilization requires the global redesign of economic systems according to sound ecological principles. He is also founder of the Earth Policy Institute, which has a web site at <http://www.earth-policy.org/>
Paul Hawken, Amory Lovins & L. Hunter Lovins. (1999). Natural Capitalism: Creating the Next Industrial Revolution. Boston, Little, Brown & Co.
A comprehensive review of theory and practical experiments aimed at incorporating principles of ecological sustainability into the design of economic institutions and systems. The book includes an extensive description of the pilot project taking place in the city of Curitiba, Brazil, under the leadership of Jaime Lerner and his colleagues. Check out their web site at <http://www.naturalcapital.org/>
Hazel Henderson. (1991). Paradigms in Progress: Life Beyond Economics. Indianapolis, IN: Knowledge Systems, Inc.
(1999). Beyond Globalization: Shaping a Sustainable Global Economy. West Hartford, CT: Kumarian Press.
Hazel Henderson is a leading futurist who has been toiling in the vineyards of alternative economics for decades. Beyond Globalization is an elegantly compact blueprint for economic sanity.