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David Korten: Agenda for a new economy (2009)

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Leonie Humphreys

Joined: 23 Sep 2008
Posts: 219
Location: West Dorset, UK

PostPosted: Wed Jul 15, 2009 6:58 am    Post subject: David Korten: Agenda for a new economy (2009) Reply with quote

David Korten: Agenda for a new economy (2009)

This topic is dedicated to the work of David Korten, in particular his book ‘Agenda for a new economy: from phantom wealth to real wealth’. I have quoted from his book and presented his argument for reforms leading to social justice and environmental sustainability as well as critiquing his 12 point ‘New Economy Agenda’ (see below), suggesting how his aims may be achieved. I hope this is useful!

David Korten talks of ‘looking upstream’ to find the reasons for the current global problems relating to social injustice and environmental degradation & pollution.

Korten states that:

‘Capitalism is what happens in a market without appropriate rules. Economic power becomes increasingly concentrated and turns from the production of real wealth to the production of phantom wealth. A lack of market rules is the cause. The implementation of market rules is the corrective.’

Korten’s distinction is that ‘real wealth’ is goods and services and ‘phantom wealth’ is money. It is worth quoting from his book his notion of ‘phantom wealth’ as this is particularly poignant at the current time of economic insecurity. This is taken from a chapter entitled ‘Modern Alchemists & the sport of making money’:

‘The capitalist ideal is to create money out of nothing, without a need to produce anything of real value in return. Wall Street has turned this ideal into a high-stakes competitive sport. ....'

On ‘phantom wealth’ in particular Korten states:

‘In business school, I learned the art of assessing investment options to maximise financial return. My teachers never mentioned that what we were really learning was to maximise returns to people who had money, that is, to make rich people richer. Nor did they mention that if pursued mechanically, the methods we were learning might result in the creation of phantom wealth. That concept didn’t exist.

Buried in the details of our calculations, no one asked, What is money? Why should we assume that maximizing financial return maximizes the creation of real value? I don’t recall whether such questions ever occurred to me. If they did, I kept them to myself for fear of being dismissed as hopelessly stupid.

Nor did our teachers ever point out, perhaps because they didn’t recognize it themselves, that money is only an accounting chit with no intrinsic existence or value outside the human mind. Certainly, they never told us that money is a system of power and that the more dependent we are on money as the mediator of human relationships, the more readily those who have the power to create money and to decide who gets it can abuse that power.

If we had been paying close attention, we might have noticed that many fortunes were the result of financial speculation, fraud, government subsidies, the sale of harmful products, and the abuse of monopoly power. But this was rarely mentioned. ....’

On the subject of money creation by the banks Korten puts this clearly and simply, under the heading ‘Alchemists in eyeshades’:

‘Most people think of accounting as a rather boring subject, but pay attention here, because nearly every dollar in circulation has been created by a private bank with a deceptively simple accounting sleight-of-hand. Understand how it works, and you understand why our current system of debt money created by private banks for private gain makes it possible for a few people to acquire obscene amounts of unearned money while sticking the rest of us with the bill.

My college economics professor taught us that banks are financial intermediaries between savers and borrowers: A saver makes a deposit, and the bank lends the money to a borrower to finance a business or home. But that isn’t the way it really works.

Unless you are holding a long-term certificate of deposit, you have immediate access to the money you deposit in your bank. If you borrow money from the bank, you also have immediate access to the funds in the account that the bank created in your name when it made the loan. When a loan is issued, the bank’s accountant enters two numbers in the bank’s accounting records: She records the borrower’s promise to repay the loan as an asset, and the money the bank puts into the borrower’s account as a liability.

At first glance, it looks like these entries cancel each other out, which in a sense is true. The key is that neither entry existed previously. With the accountant’s entries, the bank created new money from nothing in the amount of the loan principal and caused the amount of money in the economy as a whole to increase. At the same time, the borrower acquired a legal obligation to repay the principal with interest.

This, in fact, is how all money (except for coins and some special notes) is created. It should be noted that the bank-created money is purely electronic. There isn’t even a paper record. You might say it has no existence outside the human mind.

Needless to say, granting banks the right to create money with a computer keystroke and then lend it about at interest makes banking very profitable, and Wall Street, which owns the banks, enormously powerful. It also contributes to financial instability and inequality, creates an economic growth imperative, and distorts economic priorities, all costs to society .... . The damage is increased by orders of magnitude when banks discover the profit potential in putting this money creation power at the service of financial speculators and predators engaged in the creation of phantom wealth.’

Korten has not elaborated to explain that even this is not the whole story and that banks lend many times what they actually hold as deposits.

Returning to the bigger picture of what Korten’s book is all about he states that:

‘Markets absolutely need governments, not to direct every aspect of the economy, but to set the framework of rules within which people and businesses can self-organise in ways that balance individual and community interests.’

All this sounds very sensible and he proposes the following remedies:


1. Redirect the focus of economic policy from growing phantom wealth to growing real wealth.
2. Recover Wall Street’s unearned profits, and assess fees and fines to make Wall Street theft and gambling unprofitable and ensure any investment is in Main Street economy (ie real wealth production).
3. Implement full-cost market pricing (ie price to include ‘externalities’ such as worker, consumer, family, community and environmental health).
4. Reclaim the corporate charter.
5. Restore national economic sovereignty.
6. Rebuild communities with a goal of achieving local self-reliance in meeting basic needs.
7. Implement policies that create a strong bias in favour of human-scale businesses owned by local stakeholders.
8. Facilitate and fund stakeholder buyouts to democratise ownership.
9. Use tax and income policies to favour the equitable distribution of wealth and income.
10. Revise intellectual property rules to facilitate the free sharing of information and technology.
11. Restructure financial services to serve Main Street (eg cooperative banks).
12. Transfer to the federal government the responsibility for issuing money.

[Those that are particularly interested may also like to visit Korten’s website and particularly this page which concerns: ‘Draft - New Economy Working Group Ten Top Framing Messages’.]

To deconstruct his argument it is necessary to begin with Korten’s first statement ‘Capitalism is what happens in a market without appropriate rules. Economic power becomes increasingly concentrated and turns from the production of real wealth to the production of phantom wealth. A lack of market rules is the cause. The implementation of market rules is the corrective.’ But capitalism is more deeply rooted than ‘market rules’. The fundamental flaws of the current economic system are embedded in the roots of capitalist ideology, that is the division of the factors of production into land, labour and capital with the associated distribution of wealth into ‘rent’, wages and a ‘return’ to capital. It is in the understanding of this premise of capitalism that the problems that have ensued as well as the potential solutions to the current problems can be understood and dealt with effectively at the causal level. It is essential to grasp the significance of ‘rent’. This boils down to unearned (or ‘surplus’) income derived from private ownership of land and natural resources. Its significance will come out in the telling below.

Many of Korten’s proposals seem to emanate from a critique of the symptoms of the current global capitalist system. In some respects Korten seems to have addressed the fundamental causes of the problems that have ensued from the global capitalist economy – namely social and environmental injustices – but in other respects Korten has not looked upstream far enough to reach the source, or rather the causes, of these problems.

It may be helpful to examine his 12 proposals from the perspective of the causes of the production of phantom wealth as opposed to the production of real wealth, as Korten puts it. In so doing, the remedies may shift somewhat.

Most of Korten’s agenda (see above – points 1 - 12) I will argue could be dealt with through tax and monetary reform. The reasons for this will be explained below. However points 4, 10 & 12 I would support as he suggests. Point 8 may not be necessary should tax and monetary reform be implemented. The big question is why and how could tax and monetary reform deal with all the other points. This requires some explanation which I will endeavour to provide.

Beginning with Korten’s first point, he suggests that economic policy should be redirected from growing phantom wealth to real wealth (Korten states this point is linked to 12 – monetary reform – with which I agree). His solution is to change the goals and the indicators of the success of an economy from GDP to ‘real wealth’ indicators such as those related to children’s health and health of natural systems. This indicator shift would be useful but only superficial in practice, unless it is backed by a down to earth shift in economic policy in order to shift from encouraging accumulation of ‘phantom wealth’ (ie money) towards ‘real wealth’ (ie goods and services). Both the monetary reform he indicates and tax reform would be essential in my understanding. The indicators only illustrate what is happening in the economy (in a more or less useful way). Changing the indicators as he suggests may show up the problems in the economy but these indicators (or even goals) cannot in themselves change the system. The proposal I am putting forward for tax reform is based on a shift in taxation from employment and production (ie in the UK: PAYE/NI, VAT & corporate tax on marginal profits) to ‘rent’ (or currently perhaps super-profits). Here is where the fundamental ideological as well as practical shift needs to occur in the capitalist system. This, I believe, is in fact what Korten implies when he states that (appropriate) ‘market rules’ need to be implemented. But I would describe the current capitalist system as flawed at the level of the ideology since ‘rent’ was always assumed by the classical economists (with the notable exception of Henry George, who may or may not be considered to be a ‘classical economist’?) to be paid to the owners of land and natural resources rather than to the community which creates the ‘rent’. Whereas Korten suggests that the capitalist system merely lacks appropriate ‘rules’. Nevertheless, changing the rules or shifting the understanding and practical implementation of the ideology, would come to the same thing in the end. The effect of such a shift in taxation could help to lead to all the outcomes that Korten values so long as it is implemented alongside the kind of monetary reform that he does suggest. Currently unearned income is driven into the hands of owners of land and natural resources due to outright ownership of these finite resources, upon which the whole of humanity is obviously reliant.

This shift in taxation would also lead to the outcome in his proposals 6 & 7 (and perhaps lead to 8 being unnecessary in the long term) since in shifting tax off employment and production generally and onto unearned income derived from private ownership of the Earth’s ‘free gifts’, this would free up the ‘margin’ of production, in other words new and small business. Since small and new businesses tend to be labour rather than capital intensive, they would be liberated to take on employees without such a heavy burden of employment taxes, and would pay taxes after ‘break-even’ (ie the point where costs of production equals the income of the firm), once the firm became successful enough to begin to earn profits. Coupled with appropriate monetary reform (where usurious interest charges were eliminated for example) this would expand the potential for the establishment of new and small business considerably. Competition between small or start up businesses and large/established/monopoly businesses would become much more fair, since currently large corporations benefit from capital investment being tax deductible whilst small firms reliant upon labour have to pay almost double the nett wages due to employment taxes in order to employ someone and moreover (and this is important) employment taxes are taken before ‘break-even’ whereas tax on profits is taken after 'break-even'. But it would not deter business that genuinely requires capital investment since they too would benefit from reduced costs of labour, even for skilled, well-paid employees, and would also only pay taxes once profits are good.

This shift of tax therefore could form the platform for a general shift from large corporate production to small local production. Small businesses which are less capital intensive and more labour intensive tend also to be more environmentally benign as well as of course creative. This aspect of the potential for a positive spiral of effects from this kind of economic reform is rarely even considered, but is what I think Korten is driving at in points 6 & 7 and why point 8 may become unnecessary.

The issue of whether this shift would lead to less tax take for the government can be answered simply by pointing out that the current imbalance in the distribution of wealth illustrates that where the real wealth is today is ‘phantom’ (& ‘unearned') and it is this source which would be tapped for community (ie government) needs – in other words there’s plenty of it – it’s just that it is being privatised rather than tapped for the community. Furthermore with the positive effects of the potential for full employment and arguably a more naturally healthy community (ie. better production methods – therefore less poisons in the food chain and less stress/health problems with employment opportunities increased) the governments expenditure on social security and health would decrease.

This shift in taxation is the key to Korten’s point 9 – the equitable distribution of wealth and income – since it favours effort (ie work) over ownership (ie unearned income) & speculation ('phantom' wealth) and could lead quite naturally towards a reduction in the differential in incomes towards what Korten suggests, from around 1000 to 1 currently to around 15 to 1, which as a point of interest, is an indicator of a just society which has been used by ‘thinkers’ from Plato onwards.

Korten’s point 2 is dealt with partially as a by-product of the above shift in taxation and monetary reform. In other words with a secure ‘Main Street’ or real wealth production base as well as a more localised, small business based economy, investment may naturally shift towards real wealth production. Moreover, the incentive for 'unearned income' and ‘phantom’ wealth would diminish since it would now provide the more significant tax base for the economy thus discouraging such activity at source, rather than regulating it. However, regulation of Wall Street would undoubtedly play a part in any such reforms.

I hope it is also apparent that this shift could also deal with Korten’s point 5. In particular food security at the national level, since farming is one of the production processes hardest hit by the current system. The reduction of employment taxes would help farming a great deal and specifically organic farming.

Korten’s point 3 can be addressed both through the above shift in tax and with any additional appropriate ‘green’ taxes or fines to prevent pollution and degradation of the environment. Protection of the natural environment (and indeed people’s health if it is undermined by production techniques) will always be a community and/or government duty.

To conclude, I found Korten’s suggestions aimed at social justice and environmental sustainability to be both stimulating and useful and it seems to me that reforms to shift tax from production onto unearned income and monetary reform, if taken together, provide a fundamental and essential tool kit for achieving Korten’s aims.

I welcome comments, questions &/or critiques of my critique of Korten’s valuable work.

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Richard Glover

Joined: 29 Sep 2008
Posts: 185
Location: Ealing, London, UK

PostPosted: Wed Jul 15, 2009 8:01 am    Post subject: Inspiring! Reply with quote

Thanks for bringing his work to our attention, and for your assessment of it's value in how it can guide and inspire us.

To change the status quo seems to be a formidable challenge. The thinking and understanding that informs public policy and determines the rules on banking, taxation, accounting, finance, investment and so much more seems to be blind to the matters you and Korten have raised. The practical steps by which this situation can be transformed to a new understanding, in tune with Korten's and our instincts, need to be taken, when we (or whoever) can see what they are.

The combination of Smith, Marshall, Keynes, and many others seems to have established this thinking and understanding. I sense Keynes is the best target, and am currently thinking on the lines of Brian Hodgkinson's New Model of the economy as being a good starting point, especially the sections on the macro economy; this is all that anyone seems to consider. Through this, it may be possible to start with the simplicity and validity of the circular flow model (households and firms), and gradually introduce vital aspects of a truer microeconomic understanding to bring out the real significance of rent, commercial money creation and interest, and all these other modern distortions.

I wonder if there is time before the conference ....
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Michael Shepherd

Joined: 07 Dec 2007
Posts: 1395
Location: London, UK

PostPosted: Wed Jul 15, 2009 9:12 am    Post subject: Reply with quote

May I insert what is sometimes called an info-mercial at this point ?

For a demonstration of real wealth being created under one's eyes... every square yard of Art in Action.

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Leonie Humphreys

Joined: 23 Sep 2008
Posts: 219
Location: West Dorset, UK

PostPosted: Tue Jul 28, 2009 6:09 pm    Post subject: David Korten's reply Reply with quote

I posted my comments on David Korten's website and received this reply:

July 26 2009 davidkorten

Leonie: Thanks for sharing this detailed and thoughtful analysis. I gather that we are in substantial agreement and appreciate your engaging this dialogue around my writing with other members of the School of Economic Science Community.

David Korten
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