Saturday, December 20, 2008

Civil Endowment Theory

This post is an effort to set forth in summary form the essential points of a Civil Endowment System that forms the heart of the Special Proposal as described in my previous post.

Although some of this is theoretical in nature, it is extremely timely, because although it does not offer a quick fix for the current economic mess, it does offer a slow fix. By analogy, a Civil Endowment System is like good diet and regular exercise as a way to attain health. In some sense our current collective economic behavior is like someone who smokes, lives on junk food, sugar, and caffeine, never exercises, and then wonders why radical surgery or even chemotherapy has become necessary.

The analogy, of course, is not exact, but our world is indeed approaching critical condition. It is clear that the current economic pattern is unsustainable. This means that it will inevitably change, but how? Will it change through collapse, destruction, and catastrophe? Or will we succeed in designing a system upgrade with new insights, new functionality, and new paradigms?

Adding a Civil Endowment System to our current financial and economic structure is a proposal for just such a system upgrade. In many ways, what is proposed is as different from classic capitalist and socialist models as they are from each other. At the same time, it can take root and grow organically within our global society as it is, and it can do so without violence, appropriation, or even substantial political change.

It is interesting that a proposal for a Civil Endowment System could be the subject for an article entitled “Fixing the Free Enterprise System.” That would probably appeal to a business audience. But another completely apt title would be “Economic Justice for All Humanity.” That would probably appeal to a different crowd – more my personal crowd, I would say, although I also own a business and can relate to that sort of thinking. It could also appeal to an environmental constituency under the title: “Sustainable Development: Where's the Money REALLY Going to Come From?” What is significant is not these slightly grandiose titles, but that a Civil Endowment System is the programmatic proposal in each case.

Concerning the “free enterprise system,” many of us dispute whether it really exists at all. (The term “market economy” is more widely used in professional circles.) Whatever you call it, many people think that it is necessary to scrap the whole idea of capitalism and start over. Unfortunately that is the sort of Utopian thinking that got economics in the sort of mess that it is in today. Capitalism isn't just going to go way, and the historically proposed alternatives are even worse. In reality, both socialistic and capitalistic economic theories are highly Utopian. This will be the subject of a future post, and it's not my idea, by the way. But the bottom line is this: business is not going to go away. Self interest isn't going to go away. And hopefully personal freedom isn't going away. And although government in general is deeply involved in even so-called free or market economies, government isn't structurally capable of fixing such an economy. I will further state here that government is structurally incapable, or at least inadequate, at actually running or controlling an economy (socialism/communism). Moreover, it has been tried. The socialist experiments are history, and they are overall a history of failure. At the same time, it can safely be said that capitalism in its present form is a dismal failure too, one that has the dubious honor of potentially destroying the world.

I am personally quite sensitive about the question of what is Utopian, since when some people ingest the details of the Special Proposal they will undoubtedly suggest that it is a Utopian dream. It is not, but until you understand that the basic ideas of classic socialism and capitalism ARE Utopian, you'll probably not see that. Stay tuned for that discussion.

In the U.S., there is little mainstream support for out-and-out socialism, although it is quite interesting that the Bush administration has been buying banks lately! What there is though, is quite a bit of emphasis on the assumption that the current economic mess is the government's to fix. Though I generally support short term measures such as are being taken (with all the reservations and distaste that many people have about who the bailout does and doesn't bail out), we have to come to grips with the limitations of government in establishing a decent economic order. Of course the government has a role to play, and it should do that well. When you have an administration as disastrously corrupt and incompetent as the current one, and with the structures and conventions we have currently in place, combined with the general malaise of a society adrift and in denial about the realities of history, we definitely will get the sorts of boom and bust cycles we are now seeing. To summarize, let's just say this: although government intervention is necessary in the current crisis, and although significant government involvement and regulation of the economy is a given in today's world, we shouldn't assume that the government is going to fix the structural problems that exist in our economy. If we do assume that, we will miss the chance to really fix or even begin to remedy such problems. Government can't do it.

If we are to be pragmatic, we will try to find a way to get from the current situation to something better, and not only think about the short term. That is the emphasis of the Special Proposal.

Civil endowment theory begins by pointing out the power of capital. Capital, in the sense of being the direct investment of resources to launch productive processes, is powerful because it is the initiator and driver of the these processes. It is an essential ingredient. As such it also carries with it complex qualitative outcomes. We could say that the investment of capital is both a tipping-point type causal factor, and a long-term or persistent type causal factor. It is a tipping point factor, because it initiates a particular type of economic activity. It is persistent because it locks into place that mode of activity for a certain period of time.

When we talk about the power of capital, do not assume I am discounting other forms of economic power. It is possible to talk about the economic power of government, of individual choices, of consumer fads, of fear, of jealousy, even the power of, say, celebrities. But capital is more primary than these kinds of power, more creative, and carries with it certain kinds of potential or real freedom, though this freedom is often hidden from view or understanding. What is interesting about the power of capital is that there is some transformative flexibility in its application. You can build a green factory, or a wind power farm as opposed to digging a coal mine. You could even start a bank that treats customers fairly rather than ripping them off. You could launch enterprises that plan to transfer ownership to the workers over time. These are just a few (and by this point in time, well known) improvements of capital behavior.

The basic idea of “capital behavior,” refers to the way the intentions behind investment are put into practice. From this point, students of economics will note that I'm using a modern, more general definition of capital than the original 19th century one, which more or less referred to factory equipment. Nowadays, the definition of capital has expanded to mean any investment intended to create economic productivity, including money used for that purpose. As noted in a previous post, this modern definition creates the immensely slippery problem of confusing true investment with speculation. Even assuming we are able to understand the difference, from the time of Marx, it has been more or less assumed that capital is extractive, exploitive, exclusive, and materialistic, and that it has no conscience, no kindness, and indeed no ethics whatsoever. Certainly that is the behavior of much capital in today's world, perhaps the majority. Thus there is an assumption that capital only exists to feed and multiply itself, like some sort of invasive parasitic or viral infection. This sort of capital I humorously (but accurately) call “reptilian capital.” It is cold blooded and carnivorous. It eats it own young when it feels like it. It answers to no one.

Of course, that is a one-sided and incomplete view of capital, but we must be realistic as to the degree that such a model truly applies. Greed- and fear-based investment is huge, and don't forget it. At the same time, there have always been business people who are decent and well intentioned, and thus there has always been some degree of responsible capital behavior. Most recently there are significant trends such as socially responsible investing (SRI), socially responsible business, and green business. All these are wonderful ideas, and the fact is that the capital behind such ventures is changing its character. Probably many of the people involved with such ventures don't see it as a change in the nature of capital itself, but rather just in the intentions behind doing business. However, there is a lot to be gained by seeing it as a change in the quality of capital. To express this, I have coined the phrase, “Capitalism can't be reformed, but capital can.”

To put it briefly, a very precise and refined definition of “reformed capital” is the economic power base of the Special Proposal. It is called civil capital, or civil endowment capital. The “leap” that led to the formulation of this special notion of “civil capital” involves the recognition that not only would it be beneficial, but it would actually be economical, for there to be a perfected form of capital that would serve the whole of human society.

This postulated economical quality of civil capital, by the way, is a technical way of talking about the economics of compassion. At the most basic level, of course, by compassion we are talking about a quality of heart and mind, and it is that quality that provides the most fundamental basis of my work. But the other meaning of the phase is that, if undertaken skilfully, compassion IS economical. It has a positive economic benefit. It is worth it in all senses of the word.

What is civil capital? A simple definition is this: “capital whose beneficiary is the social whole.” I use the term “social whole” rather than “human whole” here, because, as we will see, civil capital endowments can be designed to serve populations that are subsets of the human whole.

Every form of investment has a beneficiary, which is usually -- but not necessarily -- its owner. In the case that the beneficiary is not its formal owner or administrator, the fund is often called a trust. One common form of trust is the endowment for non-profit organizations such as universities or charitable organizations. Trusts and endowments are not civil capital, because they have a limited beneficiary, and more importantly because the investments usually are managed according to the standard exploitive/extractive model of reptilian capital. Usually they just exist to provide cash income over time. However, the legal structures and social conventions associated with trusts and endowments are highly significant in enabling the establishment of civil capital.

Civil Endowment Capital takes a radical step beyond SRI and other endowment models in that it is fully dedicated, on a beneficial basis, to the social whole. In other words, the direct financial benefits of ownership, along with the positive effects rippling out into the economy, are all granted to the whole of humanity. Those benefits are endowed to civil society, which leads us to the term “civil endowment.” We could say that all humanity effectively owns the civil endowment, in a very real sense of the word. Although there are not existing conventions or institutions by which this universal ownership can take place, such ownership can be established through the beneficial ownership of a fiduciary agency. It is possible, without any changes of law or even custom, for a non-profit organization or NGO to hold assets in trust for the entire human race. Civil Endowment Theory defines the beneficiary of civil endowment, the universal beneficiary, as follows: all human beings now living, and all human beings yet to be born. This is clearly different than SRI, since in the case of SRI the assets are owned by the individuals or groups investors and, though intended to be ethically invested, the assets (and the direct economic benefits thereof) will always remain under that ownership. The second key point of this definition is that it includes all humans yet to be born. Although there is no assumption made here that we have full and complete foreknowledge of what the best investments will be for the longest possible term, the responsibility implicit in this definition is that we must do our best for the longest possible term. The phrase “seventh generation” comes to mind. Did the Native Americans who coined that phrase mean seventh as opposed to sixth or eighth generation? I can't say, but I doubt it. Probably it is more of a beautiful metaphor for how we should think, and that is the sort of unbounded time horizon specified in the phrase “all humans yet to be born.”

If capital were to be invested for this universal beneficiary, what sort of capital behavior would be needed? In many ways, the very definition of the beneficiary leads us directly to the answer. And as it turns out, it is not hard to see that the behavior of civil capital must be exactly what decent and progressive people have been clamoring for for years: the elimination of severe poverty, economic opportunity for all (including closing the obscene gaps between rich and poor), protection of the environment (sustainability), and the general achievement of economic justice. That is a very rough sketch of what I call the civil investment paradigm. In its full expression, though, this paradigm involves a great deal of complexity and would require the development of a completely new investment decision-making model.

In particular, civil investment would not prioritize financial extraction, but rather it would emphasize optimizing the qualitative macroeconomic outcomes resulting from the economic activity inherent in the investment. This follows logically from the nature of the beneficiary. If the beneficiary is everyone, on the longest possible time horizon, we simply can not undertake business activity that is exploitive, extractive, unjust, or unsustainable. This might be such a shocking idea to people in the investment and business world that they may simply be unable to understand it, or certainly to question whether any “money can be made” under such a paradigm. This is so because in today's mindset, just as it is hard for many to differentiate investment from speculation, it is hard to differentiate profit from productivity. In fact, there is a huge difference. In the world of extractive capital, success is measured in terms of profit, whereas in the world of civil capital success is recognized by productivity in relationship to the human consequences of production and natural liabilities such as resource depletion and environmental degradation. It is entirely possible to work for optimal productivity for the satisfaction of human needs under such a protocol. In addition to its productivity in directly satisfying human needs, capital functioning in this way would be a qualitative macroeconomic stimulus. This second quality is of extreme importance. There are two reasons for this. First of all, civil capital will accumulate gradually, and is not intended to supplant or replace private wealth. Even as a very small percentage of the total economy, however, civil capital could exert a positive qualitative stimulus. Going along with this point, it should be made very clear from the beginning that it is absolutely NOT the intention of Civil Endowment Theory to take over all the world's capital or in some way dominate or control the functioning of the broader economy. Instead, civil capital should find its own level, probably as a modest percentage of total invested assets. It should also be noted that part of the strategy of civil capital would be to establish and secure private assets for individuals as an integral part of its functioning, through such vehicles as employee ownership, loans for housing, and the like. The Civil Endowment System is meant to be a multi-functional qualitative tonic for the economy, not a takeover.

The establishment of a Civil Endowment System is doable without revolution or political transformation. It is essentially a civil sector/private sector initiative. There is tremendous will in today's world to move out of the current fossil-fueled industrial economy with its grotesque business cycles and injustices, and toward a more progressive and humane future. That will is constantly stymied, not simply by lack of capital, but by lack of capital that understands and supports and indeed expects such goals. By this reasoning, civil capital as defined above should be created, because it needs to exist.

The presence of this reformed capital, operating under the civil investment paradigm, is an essential structural enhancement to the free market system. Indeed it can be said that a robust system of civil capital completes or fixes the system design of a market economy. Civil capital can thus be called “the perfection of capital.”

Where will civil capital come from? My answer to this is perhaps the most radical and potentially controversial aspect of civil endowment theory. In simplest terms the answer is this: generosity. I have tried to discuss in my earlier posts just how immense a role human generosity plays in the economy of our world. Much of it is usually overlooked: the generosity of parents to children and children to parents; the generosity that supports all of the world religions; the generosity that builds schools, hospitals, and funds the arts; and the outpouring of giving to total strangers in times of natural disasters. The human race has plenty of generosity.

I believe we could build a worldwide civil endowment of about $1000 per capita in about a generation, say 25 years. I know: that's around 7 trillion dollars. By comparison, please note that worldwide estimated military spending for one recent year, 2004, was 1.1 trillion dollars. Just under half of that was by the U.S. That is for one year. Don't forget that civil capital endowments will be permanent, productive aggregations of resource that will trickle in as available from many sources. Note that the socially responsible investing (SRI) segment of overall financial investments is said to be about 2.71 trillion dollars. Thus a $1000 per capita civil endowment would be a pool of resources that is equivalent to about 7 years of total global military expenditures and 3 times the current aggregate SRI amount. I am just using this $1000 per capita figure as a reference point to think quantitatively about a level that could be considered structural in the sense of making a definite and stable difference in the quality and character of the world economy. But civil endowment is a good idea even at much smaller levels. I am setting a target of one penny per capita (today that would be about 67 million dollars) for a symbolic level of operation, and a hundred times that ($6.7 billion) for a catalytic level of influence. These three levels: symbolic, catalytic, and structural are the three qualitative levels of influence possible for civil endowment. Of course, it is possible that experience may show that these figures are significantly wrong. If we make a goal of achieving a structural level of aggregation, clearly new methods of fundraising are going to be needed. I have done considerable thinking about this, and perhaps the most realistic idea is to structuralize inputs through various methods, basically making small but steady flows of resource to the endowment a built-in part of doing business. This could include micro fees on certain kinds of transactions, such currency transactions, which would also create a modest curb on speculative behavior.

Related to this is the possibility of building civil endowment inputs into the structural design of a world currency, an idea that has been widely advocated by economic thinkers. It is entirely reasonable that any conversions to and from that currency should carry a tiny load that would end up in the civil endowment. There are many other types of micro fees that could be applied. Another area is revenue sharing by firms started with civil venture capital. It is quite possible that if the idea of civil endowment gained public attention and legitimacy, members of the tiny percentage of humanity with great wealth would contribute significant chunks of wealth (say a penny per capita) to the effort to give it credibility. It is possible too that a significant number of people could join in the goal of $1000 per capita by endowing one person in the time frame of their own lifetime, as a sort of personal legacy gift to the human race. Poorer people could give less. It is quite important that civil endowments NOT be funded by government and taxation in general, because once money is taken from people by coercion, resentment builds up, and there is a whole cultural habit pattern around what gets done with government money that encourages waste, fraud, corruption and incompetence. With that said, I believe there are important variations of civil capital endowments that could possibly be instituted to serve semi-public functions like Social Security and public education, which therefore may be funded by payroll deductions and taxes. But that brings in a whole other level of complexity from a political point of view, and is very much a “second phase” idea in this proposal. Civil capital in its pure form would be given freely, with understanding of its purpose. The best government support I can envision is that such contributions would be made tax deductible. Although there is a rock solid justification for such a deduction, since the money would go to direct investment in the “real” economy, it is by no means assured, at least in the U.S., that tax-exempt donations would be easily allowed by the IRS, mainly because it is such a radical concept.

To answer questions and doubts about the realistic possibility of mobilizing human generosity on this scale for this purpose is somewhat beyond the scope of this article. Clearly it is a question that needs to be examined soberly and thoroughly. But those who dismiss such a notion out of hand are probably stuck in a sort of one track of economic thinking, one that compartmentalizes various kinds of human motivations. The great economist Kenneth Boulding categorized types of motivations as transactional, fear based, and integrative. This last category refers to acts of kindness and generosity, things that are meant to bring people together. It is very easy to assume that economic actions are primarily transactional, and to take for granted fear-based motivations. Many economists have pointed out, however, what Hazel Henderson calls “the love economy.” Her analysis focuses on countless hours of unpaid labor, mostly by women, mostly in the care of family members. But really the love economy includes what Boulding calls “the grants economy.” In any case, as I have tried to sketch above, it is really a huge part of human life. What remains to be seen is whether the case can be made, and accepted, in broad enough scope, for the formation of civil capital.

The Civil Fiduciary

Once there is a significant body of civil capital, we need to ask ourselves how that will be managed. Indeed this question was the one most pointedly asked in response to my last post by my friend Jim Kukula, who among the countless (sic) readers of Trickle-In, has been perhaps following my thoughts with the most attentiveness (or at least the most feedback.)

The legal institutions and social customs associated with managing investments for individuals and groups are well established worldwide. A dictionary definition of fiduciary is “a person to whom property or power is entrusted for the benefit of another.” The word can be used as an adjective as in “upholding your fiduciary responsibilities.” Fiduciary institutions are organizational entities that do this kind of work. Broadly speaking, this includes banks (in the sense that they maintain deposit accounts or even safe deposit boxes), but most directly refers to investment management firms, pension fund managers, and so on. Certain government and non-profit organizations engage in fiduciary work as well. It is clear that civil endowments will need to be managed by fiduciary organizations of some kind. The structure, governance, and accountability of such organizations must be carefully established such that they will function as intended.

As has been amply demonstrated in the recent financial meltdowns, there are tremendous pitfalls in having one's investments managed improperly. The for-profit fiduciary world brings tremendous actual and potential conflicts of interest to the table. In the worst cases, it is like gambling at a casino run by the most addicted of gamblers. The for-profit fiduciaries are not just working for fees (which themselves are often excessive). They are players in the same game. They are big players and risk takers, with your money, for their gain.

This is not to say that all for-profit fiduciaries are crooks, which is is equivalent to saying that a whole industry is corrupt. It is really enough to say that the inherent conflicts of interest in such arrangements are inappropriate for civil endowment. This leads us to the notion of a non-profit fiduciary. It turns out there are quite a few such organizations in existence. (I am not talking about non-profit organizations that have endowments. These are usually managed by for-profit fiduciaries, which often take astounding fees.) Non-profit fiduciaries include state agencies, state or municipal pension funds, and the like. I do not know of any non-profit fiduciaries that manage, for example, the endowments of other non-profits. In any case the people who fun non-profit fiduciaries are paid professionals. Thus the basic outline of what I would like to call the Civil Fiduciary exists in today's world. Needless to say, just being organized as a non-profit does not automatically make an organization suitable to invest in the civil endowment paradigm, but it does remove a major structural flaw, namely the conflicts of interest and business culture problems mentioned above.

A Civil Fiduciary Organization (CFO) will be a non-profit organization charged with investing and managing civil capital. I believe such organizations would need to be newly chartered and created. There are some possible benefits of re-purposing or adding the civil fiduciary function to existing organizations, but the discussion of that is a bit too involved for this post. In any case, the people who will do the work will be paid professionals. They will be accountable most directly to the standards of the civil investment paradigm, and formally to their own organizational boards and to legal authorities. At more of a civil society level, they would be accountable to donors and to the international public. I envision that there would be any number of CFOs, operating throughout the world. CFOs will make direct investments according to the goals of civil endowment. It may be the case that they would create wholly owned for-profit companies to undertake activities such as venture capital investment, ownership of banks, and the like.

In addition to the accountability mentioned above, there is a need for a standards body, a separate (also non-profit) organization that would monitor and certify CFOs. This organization would also need to have the power to de-certify CFOs that fail to maintain proper standards. They would bring to light irregularities and mistakes as well as successes. There would need to be strict control of certain terminology, such as “civil capital,” “civil endowment,” and so forth, such that the CFOs stay on mission. This organization could be called the Civil Endowment Institute. It would perform research and creative work in addition to certification of CFOs.

It is clear that the art and science of civil endowment investing would be a continuous work in progress. Thus each CFO would need to do research and creative thinking, along with analysis of investment results over time. A great deal of communication and collaboration would be constantly needed. The whole system of civil fiduciary organizations would have to be one large, decentralized learning system. By allowing multiple CFOs to function more or less independently, albeit with centralized certification, the issue of over centralization can be minimized.

The other question that must be addressed concerns the institutional control of fundraising. The way that funds are brought into the civil endowment system, and the public perception that process creates, is as close to a make-or-break issue as I can imagine for this idea. It will probably be best for CFOs to have no role in fundraising, but merely be the custodians of civil capital. This would remove the perception (or reality) of Ponzi-style fundraising and investment, and create another layer of accountability. Thus there would be a need for one or more of a third type of institution, a Civil Endowment Foundation. These foundations would raise and receive funds and distribute them to qualified CFOs. The Civil Endowment Institute would, in its role, set and monitor basic fundraising standards.

Though complex, this system of three institution types would create a matrix of accountability, a system of checks and balances similar to those in modern political constitutions.

The Civil Endowment Model: Variations and Extensions

Before we launch into some very interesting extensions of the civil endowment idea, let's be clear what the most pure form of civil capital would be. Pure civil capital would be owned on a beneficial basis by the universal beneficiary, namely all living humans and all humans yet to be born. It would be invested to bring benefit to humanity as a whole, in the longest foreseeable time frame. The source of this pure civil capital would be freely given resources: “from human beings, to humanity.” That is a sketch of what I have called the perfection of capital. But a civil endowment system could and probably should be more extensive than this, and be used to address more specific and localized economic challenges.

The Individual Civil Endowment

At the far end of the spectrum from a universal endowment, civil capital principles could be applied to individuals. Whereas pure civil capital applies to humanity as a whole, it is possible to endow a particular human being with civil capital, and invest it in ways that would benefit that individual in his or her lifetime, all without violating the basic principles of civil capital. This can be done by viewing the individual as a responsible, aware, world citizen, and investing accordingly. Thus the only main difference in this type of endowment is that the type as well as the productivity of the investments would be tailored to the life of a particular human being. The individual endowment would not be personal private property but, like a trust fund, it would carry various kinds of benefits and rights depending on the age and circumstances of the individual. In the best-case scenario, an individual would receive an individual endowment at birth. The productivity of the endowment would be applied towards food and health care in the earliest phase of life, toward education in childhood and teen years, and then would provide backing for productive work in adulthood. In old age it would provide basic retirement support. At the time of death, it would not be an inheritable asset, but would instead revert to the general pool of assets for individual endowments. Over time, the aggregate of individual endowments could become quite significant. In coordination with other forms of civil capital, the macroeconomic effect could be almost as beneficial as universal civil capital. It could also be a popular and engaging way to build the civil endowment system because people could create endowments for themselves or loved ones, investments that would help them in their lifetimes and then help all humanity after death. I would hope also that people in wealthier nations would develop the custom of endowing strangers in poorer places, just as people nowadays send monthly payments to poor children internationally.

Endowments for Public Pension Systems

In the U.S., debate has raged in recent years about the possible privatization of the Social Security system. You will notice, no doubt, that in the current financial situation of market meltdown, recession, and even possible depression, no one seems to be talking about that! The private investment markets are a mess. Clearly there has been a wholesale betrayal of the principles of true investment, with speculation replacing investment across the board. The hardest hit are those with 401k type plans, managed in mutual fund accounts on a passive basis by for-profit investment managers. In up-market conditions, such funds do well; in bad times people lose their retirement savings. The very rich lose more money in dollar terms, but they're still rich. The ordinary worker loses far more.

In such an environment, it may seem ludicrous to talk about investment of Social Security revenues, instead of the current pay-through system, where the payroll deductions of currently active workers fund the retirement checks of those who are receiving benefits today. Though there is much talk of the “account balance” of the Social Security system, that is merely an accounting device. There is no money in the bank. Today's workers are funding today's retirees. In some sense this is a neutral and safe mode of operation for Social Security. Certainly it is superior to throwing billions into the speculative casino-like markets as they are currently structured, under the dubious stewardship of the wolves of Wall Street.

With that said, it must also be said that the nice folks who want to privatize Social Security have a point. Their point is that if your retirement savings are accumulated throughout your working life, that means much of it will be taken out of your pay decades before you retire. Even at modest rates of return, you should do better by investing it than just giving it to the government, which immediately gives it to someone who is now retired. But even more significant than the potentially superior returns to the individual, is the potential benefit to society -- the macroeconomic effect if all that investment resource were to move into the economy at large. Pumping vast sums of money into true investments, not speculation, would create vast numbers of jobs, vast amounts of economic wellbeing, solve environmental problems, solve social problems, and increase tax revenue. The overall effect, of course, depends on the crucial issue of using the correct investment paradigm. I am convinced that an appropriate civil investment protocol could be designed for retirement funds in general, and Social Security in particular, that would have immense benefit. This will probably not happen any time soon, and not just because of current market conditions. The concept of Civil Endowment Investing needs to be tested and proven, at least initially, in its purer form, before there is any real chance of its acceptance in the highly sensitive (and rightly so) institution of Social Security. It is possible though, that a route to such a system coming into being could be found through an altruistic variant of SRI that would move private retirement investment further than SRI toward a civil endowment model. At that level, such a retirement investment would be little different than an individual endowment, except that the retirement account would optionally self liquidate as needed in the payout phase. In other words, it would not necessarily be passed on to the next generation, as would the individual endowment mentioned above. This type of account would not be civil capital, but would be an example of a further extended auxiliary to civil endowment that I call “parallel funds.” The goal for a Social Security endowment would, however, be to create a permanent fund that would increase over the generations and which would guarantee the elderly not just the necessities of life, but genuine dignity in old age. And for society at large, the Social Security endowment would be a treasure of investment capital for a vibrant and prosperous economy.

Civil Endowments for Public Education

It is interesting to note that when public school systems were first instituted in the United States, it was standard practice to give them rather large chunks of land. I need to do more research on this, but I believe the idea was that this land was to be rented out to farmers and the rent would pay for the schools. If that was the model, then the founding fathers were trying to create a permanent endowment system for their public schools! Back then, land wasn't considered to be capital, but clearly in a more current definition, and based on the intended usage, it was capital, and it was meant to be quasi-permanent. However, history shows that the land was almost always gradually sold off by the school systems to bring in more substantial short term revenues. Whatever the wisdom of that, I believe it is time for school systems to find new ways of endowing themselves. No one needs to be told that public schools need help. At the same time, local economies are often starved for investments that provide jobs, housing, health care, and so on. I believe it would be helpful to create a system of public school endowments that would raise money locally, and create permanent pools of capital to be invested and reinvested in that same community. (There are a few local public school endowments existing in the United States, but from my research they do not carry with them the notion of local re-investment or anything like the civil investment paradigm. They are small, extractive endowments designed to provide small-scale support to local school budgets for things like art programs.)

The local investment of endowments, important as it is, creates significant risks if those investments are also chosen and managed locally. Therefore, it is probably better to spread the risk by creating state level or national level non-profit education endowment fiduciaries that would pool the endowments from participating school systems, but commit to invest and manage locally amounts of capital commensurate with the size of the local endowment. In other words, if the Elk Horn, North Dakota school system has a 10 million dollar endowment, the North Dakota CFO (certified for education endowments by the Institute for Civil Endowment), would be committed to invest that amount locally, but direct returns on the endowment would be based on a state or national average proportional to the size of the endowment. This would spread out risk of failed investments, and deliver an average productive return to school budgets, while leaving the positive ripple-out effects locally where they belong. Thus the benefits are twofold: investment in the community, which inevitably increases the tax base along with the wellbeing of the community, and a direct financial return to the school budget. Overall the school endowment system could reduce reliance on property taxes over time, and stabilize school budgets as state and federal support fluctuates.

There is also the issue of fairness in property tax based funding. New York State has a system where older home owners get a reduction on their property taxes. This has an aspect of kindness and fairness, both because older homeowners often have more limited or fixed incomes and because they've perhaps paid their share. That is all well and good, but it would make more sense economically if some property tax money went into the Public School endowment, because their history of payment would translate to the maturing of investments over time. Then the longer a person had been paying into the system, the more real economic justification there would be for their being excused from further burden. It is quite possible that older homeowners could stop paying school tax altogether, either by paying into the endowment for a given number of years, or by making extra payments to the endowment during high income years to reach a certain threshold.

I believe there would also be strong community support for charitable fundraising locally for such endowments, from grassroots effort on a small scale, all the way up to large donations and bequests by wealthy individuals. One interesting and very educational tradition that might spring up is for the students themselves to do some sort of fundraising activity on a yearly basis that would make a permanent contribution, however modest, to their future education and that of all students yet to enter the system. Needless to say, this would help the kids understand and appreciate the nature of civil endowment, its altruistic intent, and help them make a connection with the actual work of building the system. Probably the kids would have an easier time understanding it than their parents!

An example of how these types of endowments might synergize is as follows: say a school system with a civil endowment also had a certain number of students with individual endowments. During those student's school years, the individual endowment income could be paid either directly into the school budget, or more interestingly, into the endowment for that school. The parents of those children could get credit against future tax payments by channeling endowment income from their kids into the school endowment. This could encourage higher-income parents to create individual endowments for their kids. It gets very interesting.

There are several other possible variants of civil endowments, such as organizational endowments and local economy endowments, as well as perhaps endowments based on demographic factors. This last possibility, such as an endowment for Native Americans, international refugees, and so on, has a certain appeal, but also has obvious shortcomings since it is discriminatory, even if in a generally positive direction. I will leave the discussion of all these variations for future posts. However, one type of demographic endowment that recently came to mind, and which I find quite appealing, is an endowment for the poorest of humanity, say, the poorest billion on the planet. I recently saw a United Nations statistic that 963 million people worldwide last year didn't have enough to eat. Then there's that lovely statistic that about 50 thousand people a day, mostly children, die of hunger and malnutrition. That stuff starts to haunt you if you think about it a lot. There have been a lot of interesting proposals for business to help address the problem of extreme poverty. Where's the capital for that going to come from? Think: civil endowment for the poorest.


To give a really thorough exposition of civil endowment theory would require much more theoretical explanation, including a romp through systems theory as applied to economics. Stay tuned for that. But to summarize a systems view, we could say that capital reform is an “opportunity point,” a point of possibility -- or to use a fancy term, motility. In longer term thinking, it is a qualitative macroeconomic stimulus. At the inner or psychological level of society, the activity of building a civil endowment system would be a potent force for human unity. Exactly how contributing to civil endowment can be transformative for the giver is one topic that deserves much greater discussion than I can give it here. But suffice to say that beneficial effect of giving to the civil endowment is one reason that this idea is beneficial at any level of scale.

Most broad proposals for economic reform focus on abrupt system-wide changes that are highly improbable, such as abolishing the Federal Reserve System, canceling NAFTA, and other political steps. By contrast, civil endowment is non-political and incremental.

Although we don't ordinarily recognize it, we can change the behavior of capital. This change has begun to happen through the movements toward socially responsible investing, socially responsible business, and green business. This influence and power is already changing the way many companies do business. The inspiration of Civil Endowment Theory is that this trend or movement can be vastly refined and expanded. From a moral and compassionate point of view, capital can be perfected.

In future (and hopefully shorter) posts, I will talk about “the leap,” by which I mean the process and the internal tipping point by which I came to see the possibility of a civil endowment system. The leap was not concerned primarily with the practical description of the institutional structures outlined here (although the fact that it is institutionally possible is part of the leap). More fundamentally, it was more a perception of possibility, the possibility that we can radically change our assumptions about capital, who capital benefits, and how it could be accumulated, invested, and managed. In seeing that, we can see how civil endowment can be an effective leverage for system-wide economic reform. As such, Civil Endowment Theory is a logical, non-Utopian outcome of contemplation on the economics of compassion.

Friday, November 21, 2008

Introducing: The Special Proposal

As I have said in my earlier posts, there is a body of pragmatic suggestions that has arisen from my creative work on economics over the years. Though these ideas have been essentially complete for quite some time, I have chosen to first present more general theoretical work on an economics of compassion derived from Mahayana Buddhist thought. For reasons I discuss below, I have decided to move ahead quickly at this point with a preliminary presentation of my pragmatic ideas. For some time I have been calling this body of pragmatic thought The Special Proposal.

To be entirely thorough in preparing the ground for this material, it would be good to lay out some more detailed theoretical writings before bringing forth the proposal itself. Topics such as the economics of scope, which is itself a subset of a system theory of economics, would provide a slow and gradual approach to the proposal at hand. But I am presenting this material at this time for two reasons. First, it could be argued that a discussion of the six-fold economics of compassion, which I have presented at some length in my previous post, is really adequate in its own way as a preparation for The Special Proposal. In particular, it arises from the implications of the co-centric wisdom aspect of that presentation. However, it should be noted that I believe there is a route to The Special Proposal through the logical resources of economics as a social science, albeit economics as broadened in scope by the progressive thinking of the likes of E.F. Schumacher, Kenneth Boulding, Hazel Henderson, and Herman Daly. I plan to explore these avenues of thought in future posts and in my upcoming book, The Economics of Compassion.

The second and most compelling reason for presenting this body of thought now is a sense of urgency around the financial and economic crisis that is now unfolding here in the United States, with effects worldwide. In the midst of all this, I really do not see all that much creative thinking going on, so I thought I would throw some really unusual ideas into the mix and see what happens!

If we consider our individual economic activity, there are clearly countless ways that we can bring compassion into that activity through practicing the principles of the six-fold economics of compassion (generosity, ethics, tolerance, diligence, focus, and wisdom) in our own lives. When it comes to applying such principles in a broader organizational or societal context, it is not quite as clear what should -- or can -- be accomplished. Nevertheless, the power of organizations and collective action in general makes it quite compelling to search for ways to do so. In other words, although it is not always clear or easy how to move institutions or society at large toward an economics of compassion, the leverage and potential benefits of such shifts certainly make it worth investigating. And it is probably true that individual action, important as it is, is not going to help humanity turn the corner fast enough, except perhaps as individual action functions in leadership and creativity. Thus, though individual action is indeed crucial, changing or creating institutions and the prevailing mentality around economics on a society-wide level is the key here.

If we are to be pragmatic, we need to go beyond mere development of principle and planning, important as that is, to effective action. To achieve effective action, or even a glimpse plan for such, we need to respect the truth of cause and effect. In essence, this means we need to be honest about the subject of economic power. By contemplating economic power with a simple respect for cause and effect, we may come to a vastly different sort of consideration than the kind of cynicism, resignation, or blame game that leaves many progressives spinning their wheels. It is very easy to get angry when we think about who has power and how they use it. It is easy to wonder how we might take that power from “them,” rather than think about how “we” might obtain and use power.

If we look generally at how to address the great economic issues of our times, namely poverty, the environmental question, and economic justice in general, we need to be careful to channel our thinking in productive directions. Even if we focus specifically on economic power, there are areas that will be more or less helpful. There are many areas of economic power that can be considered, and I do not exclude them from consideration, even if I choose to emphasize other areas. Specifically, the area of political power over economic activity is one that is very much in the public eye right now. When many of us think of fixing the economy, we habitually think of what the government can or should do. I am not so naïve or ideological in orientation to to think that the government, or the political process in general, could or should possibly be disentangled from the economy. But neither am I so naïve as to think the government can fundamentally fix the economy. Government activity, for better or worse, is undeniably an aspect of economic power. However, The Special Proposal is not fundamentally based on governmental power. Instead, it rests on two aspects of economic power that may seem disparate or even unrelated. The first is a virtue of the human spirit, and the second is a principle of economics that is at once abstract and a bit mysterious, and at the same time extremely tangible and potent. I am referring to generosity in the first case, and in the second, to capital.

In essence, The Special Proposal is this: that a new form of capital be created, invested, and maintained, which will be called civil capital, or more elaborately, civil endowment capital. The aggregations of such capital will be called civil endowments. The beneficiary of civil endowment capital will be a specially defined one: the universal beneficiary. The universal beneficiary is defined as follows: all living human beings without exception, and all human beings yet to be born. The fundamental method for the formation or accumulation of civil capital will be generosity. The resources that will make it up will first and foremost be given voluntarily by human beings, for human beings. It should not be assumed that standard processes of charity and philanthropy would provide the sources of civil endowment, yet they could, at least in the beginning. More likely for the long term is that the bulk of input could come from various small and steady streams of contributions derived from routine transactions (similar to microtaxes) and from cash flow of businesses capitalized by the endowment. In the sense that these streams would be voluntary in nature, they would fall into the category of generosity. This slow and steady input to a permanent capital fund, by the way, is the implication of the term “trickle in.”

Of course, civil capital will have its own internal productivity over time, but civil capital will not follow the greed-based investment paradigm which I cheerfully call “reptilian capitalism.” It is not about the cold-blooded replication and multiplication of itself. In other words it will not be invested according to the “normal” speculative, extractive, and exploitive paradigm of conventional capitalism. Instead, it will be invested according to a civil endowment investment paradigm. This paradigm is simply in keeping with the defined beneficiary of civil capital, namely all of humanity, now and for the future. In brief, civil capital will be invested in ways that benefit all of humanity, with no one excluded. If the beneficiary is everyone, it doesn't work to exploit someone, and it doesn't work to poison someone, and it doesn't work to ignore someone.

It may be hard to visualize how this is possible, but a starting point is the simple avoidance of harm. The global economy as it is currently structured is deeply harmful to each and every one of us, especially if we think about the future. It is harmful to each of us most obviously in environmental ways, with the very real and multiple threats of global ecological catastrophes looming over each of us and all humans yet to be born. The tragedies of deep poverty, human conflict, and lack of opportunity affect individuals in more varied ways. Yet if we are able to see ourselves as citizens of the world, the conditions and the suffering of our fellow human beings cannot fail to affect us. The implications of co-centric wisdom, and simple compassion as well, are that the economic interest of the whole of humanity is of direct bearing on each of us on many levels.

This sense of a whole system awareness is at the core of the proposal for civil endowment. The investment of capital is an extremely potent long term causal mechanism in the evolution of the economy. Creating a body of capital that will benefit the whole system, from the core, as it were, can have a tipping effect. The body of theory pertaining to this idea is called civil endowment theory. I look forward to providing a more rigorous discussion of this from the point of view of economic systems theory. Suffice to say for now that capital is a unique sort of causal vector, one that operates in the formative and qualitative dimensions of an economy. I will also say that its power has gotten a bad rap because it has been applied selfishly. The emergence of socially responsible investing (SRI) is a huge step toward a different type of capital altogether. SRI is not civil capital, however, because it lacks several important structural features of civil capital. Though invested ethically, ownership remains with private investors who expect a good return in a fairly short time frame. By contrast, civil capital is fully owned on a beneficial basis by humanity at large and is invested in what can be called maximum horizon time frame, namely the farthest foreseeable future.

Civil capital endowments would be administered by a system of NGO (non-profit) organizations collectively called the civil fiduciary. There is a long history of administration of capital assets by third parties on a beneficial basis, and there is also a long history of non-profit civil society organizations holding and investing assets, usually for the financial support of the organization itself. Thus the establishment of a civil fiduciary would merely be a restructuring or refining of existing organizational missions and professional skills. This last point is by no means meant to minimize the challenge of such a project, but it is definitely not a Utopian dream.

Civil endowment theory is a structural innovation, an enhancement, to the theoretical structure of free market economies. It can be said that the establishment of a civil endowment system completes or perfects a free market economy. Therefore, civil capital can be called “the perfection of capital.” Without being grandiose, it is clear from the implications of civil endowment theory that it solves the system-level issues that have divided economic thinkers of right and left for centuries. I have no illusions that this assertion will be instantly accepted, nor does it matter very much. I am content with a gradual process of, from my own side, explaining the reasoning that led to what I call the leap, (the recognition of the possibility and potential of a civil endowment system) and from a community point of view, with engendering support and development of a civil endowment system in practice.

One objection to this idea, of course, is as follows. “Well, of course if there were truly massive amounts of resources devoted to the wellbeing of all humanity, it could have some real impact, but how will you get people to give that much money, and how long will it take?” In response to that question, it can be shown through reasoning that a civil endowment system would be helpful to humanity at any level of scale. It could do so at three levels: symbolic, catalytic, and structural. The first level is mainly the inspiration of the idea, and its activation as a seed for transformation. At that level (and at all the others) the act of giving to the endowment, however that is done, is a transformative affirmation for the giver; it changes the consciousness of the giver. And the symbolic power of the endowment, even when small, creates inspiration along with whatever tangible benefit it accomplishes. At a catalytic level, the causal vectors inherent in investment decisions become significant enough to influence tipping points in the vast matrix of events that make up the system of the world economy. The civil endowment influences the economy through a process of leverage. Finally, at a structural level, a really stable enhancement of the wellbeing of humanity is possible.

Admittedly, this is a hypothesis, and to enact it would be an experiment. Certain types of obstacles could arise, such as political opposition. Though civil endowment theory is not political in nature, political factors (and not just opposition) could affect its success in general, or its applicability in various parts of the world. The Special Proposal is most immediately applicable in countries that have basic open-society conventions: private property, rule of law, and fundamental institutional freedoms. It should be noted though, that the existence of a vibrant civil endowment system could encourage open society in places (including the United States) where that openness is less than complete or threatened.

It also may be possible that humanity in general is just too stubborn and stuck to absorb ideas like this. However, that's the beauty of leadership. Not everyone has to “get it” at once, or ever. Not everyone has to be inspired to contribute to the well being of all humanity. It will take leadership and inspiration, but that's how things get done. Therefore I'm not one of those people who likes to listen to those who start sentences with “People will never . . “ It's true that some people “will never” but many other people are very open and willing to look at new ideas. Those people are called leaders.

In summary, the rationale for civil endowment system is an outgrowth of the co-centric wisdom principle as explained in the six-fold economics of compassion. It recognizes the global economy as a profoundly interconnected system. The possibility and the need for civil endowment can be seen through a rational analysis of economic power as it operates in today's world, combined with a recognition of potential efficiencies of universal scope, all within the view of a global macro-economy functioning as a whole system. Finally, it rests on a philosophical point of view, which can also be expressed as a kind of faith or confidence, that there is enough compassion present in the human race to turn our global economy around, if we just can create the appropriate methods and institutions for doing so.

Sunday, October 26, 2008

Dear Friends, It's the Speculation

I must confess that the original title of this post was, “It's the Speculation, Stupid.” But I thought better of it. To say it that way is a little too cute. The problem is not just that we're all stupid a lot of the time. It's that we're stupid even when we're smart. And that's the flavor of speculation, actually. What may be smart, at least temporarily, for one person becomes stupid if everyone does it. So if we're all stupid, I guess it makes more sense to be friends, friends in our stupidity, but friends the same.

This is my first post where I take the issues of our immediate economic life to hand, rather than stepping back and presenting my ideas on a more general economics of compassion. No doubt I'll say some things that are, well, stupid, but it's a risk I need to take. As deeply as we need a new body of foundational economic theory, we need that theory translated into common sense in the present.

Alan Greenspan testified before a Congressional hearing the other day about the current financial meltdown. As much as I disagree with him fundamentally in so many areas of economic thought, I respect the man. He speaks well, and we can learn from him, especially from the nuanced language he uses. And I respected the fact that he admitted -- now that he's out of power of course -- that he made some mistakes. But the one word he didn't mention (at least in his prepared remarks, which are all I heard) was speculation.

People in the financial world don't like to mention that word to often, but it's the elephant in the living room, isn't it? Part of the problem is that it is often hard to distinguish between what could be called legitimate or even principled investment on the one hand, and speculation on the other. Another problem is that speculation certainly is not the exclusive province of the very rich. If you count homeowners and anyone who has stock investments, or even (indirectly) insurance of any kind, there are a lot of us in the game.

Speculation is something that falls under the general umbrella of what I call the “veil of money.” Money is an absolutely lovely invention, but it has serious flaws because people are, well, human. At the most fundamental level, money is a veil because it puts a linear demarcation of value on things that are inherently qualitative. How much is it really worth not to be hungry? Or to be cured of an illness? For that matter, how much is a clove of garlic really worth? Economists often avoid this issue by saying that something is worth what people are willing and able to pay. But there's still the fundamental problem of quantifying things that are really qualitative. Because of that, and because price really depends on perceived value, which (to put it mildly) can vary, economists have long known that price is not the same thing as actual value. Perhaps this is a gross simplification, but it certainly speaks to the problem of speculation.

In any modern economy, investment is necessary, so what is the difference between a constructive and principled investment and speculation? Simply put, if an asset is purchased merely on the expectation that it will inflate in price, and especially if it is subsequently sold to reap financial profits, it is speculation. In other words, if the whole purpose of an investment is to extract profits based on price inflation of the asset itself, we have a speculative investment. Notice that I'm not equating price and value here. Some investments, say a business that grows over time, do increase in actual value. That sort of increase in value is what stock investors and investment advisors often look for, or at least claim to look for. If the price goes up wildly due to extraneous factors such as “irrational exuberance” or just a bull market, most investors think that is just fine of course. Perhaps we could say, to be fair, that average investors, if there is such a thing, are often taking a strategy in which speculation plays a part, but not the whole part. It is hard, however, to categorize things like currency and commodity trading, and the recent hedge fund craze, as anything but speculation. And the sort of speculation that brought down the house of cards this fall was beyond even ordinary speculation. It was an orgy of extractive market behavior at its worst. It was layer upon layer of questionable debt and esoteric financial instruments (so-called derivatives and the like) being bought, repackaged, sold and resold.

Extractive investment, by the way, is a much broader concept than this sort of financial speculation. The very conduct of a business can be extractive in nature, and often is. Exploitation of natural resources, of labor, and degradation of the environment are all features of extractive business models. Setting those major issues to the side for a time, the practice of rampant speculation in financial investments is the type of extractive behavior that has brought us to the crisis we now face.

It is intuitively obvious that everyone can't make a killing in a speculative economy, but why is that so? In answering that question, we come to a truly fundamental principle, namely the economics of scope.

Most people are familiar with the notion of economics of scale, which means that certain kinds of efficiencies do or don't occur depending on how much of an activity, say manufacturing an item, you do. This is a well defined and well understood principle of economics. What has not been elucidated so clearly is the economics of scope, which I define to mean the behavior of economic action in relation to the whole system in question. Although this may seem to be leading toward rather mystical territory, there is actually a very good example of the economics of scope in classic economics, namely, the monopoly. In the case of monopoly, it does not so much depend on the size of the market in question, but whether one firm effectively controls the entire market. If that is the case, it is called a monopoly and certain very serious problems come up.

Economics of scope as a general principle has huge implications for the sorts of economic problems we face in the present day world. It is, in fact, a useful umbrella concept for the crucial issues of our times: the environment, social justice, even economic war vs. peace. What we find with economics of scope is that inevitably our activity takes place in some kind of larger context, some kind of system. As we push to the edge of system scope (i.e. as our actions come to affect the whole system) , certain non-linear effects come about. Economics of scope is itself a subset of the more general principle of co-centricity outlined in my earlier posts. The notion of pushing the boundaries of system scope is a little difficult to explain. The closest analogy I can make is in comparison to relativity theory, where it is said that as a physical object approaches the speed of light, its mass starts to increase wildly. In our everyday world, we would expect changes of speed of an object to have no effect at all on its mass. And that is more or less what we observe. But approaching the speed of light is some sort of fundamental system boundary of the physical universe. Different stuff happens on the edges of systems. And so it is with economic, ecological, and social systems, in so many ways.

Classic macroeconomics actually addresses the issue of economics of scope, though I don't know that the term has ever been used before in this way. In Keynesian macroeconomics, the central government attempts to use its powers of spending and taxation to impact trends in the overall economy of a nation. The problem in today's world of course it that we have a global economy. (I'm not implying that the lack of global government is a problem; I'm just saying that Keynesian macroeconomics can't be practiced on a global scale, though Keynes himself of course was instrumental in building some of the international economic institutions that try to operate at the global level.) All this is not to mention the fact that Keynesian macroeconomics never worked all that well anyway, even when it is not, as it has been in recent times, grossly distorted by political incompetence and hypocrisy.

But I digress. The point to made from the perspective of economics of scope is this: if an insignificant proportion of economic actors in an economy engage in speculative behavior, it is more or less insignificant. They may incur some sort of moral failings on an individual basis, but the overall economy will not be effected. But when everybody or close to everybody is involved with, or exposed to, speculative risk, it simply does not work out. When your whole banking system is sucked into wild speculative investments on “securitized” (a very ironic term) mortgages for real estate that was itself involved in a wild and unsustainable spiral of price inflation, mortgages for which “we did not correctly price the risk,” (to paraphrase Greenspan's quaintly understated admission of failure) you have a whole economy falling into a vortex of illusion. It's the pervasiveness of the speculation that collapsed the house of cards, and that's a good example of economics of scope. It is a system-scope level of failure.

I don't believe I've said anything truly original about the crisis here, but at least it's an opportunity to introduce the key concept of economics of scope. And by looking at what is truly a toxic and corrosive style of investment, we may be able to move toward a glimpse of the characteristics of a healthy investment paradigm.

For more on the roots of the current crisis, see this very informative (and not too long) article about the current crisis by Herman Daly.

(If you don't know who Herman Daly is, he's worth studying, to say the least.)

And for an article on the recent Greenspan testimony that's a lot harder on him than I was above, but with which I fundamentally agree, see this David Corn piece from Mother Jones.

Tuesday, October 7, 2008

The Six-Fold Economics of Compassion

Is it possible to build an economic theory based on compassion? From a Buddhist point of view, the answer would be yes, especially because compassion is considered to be inseparable from wisdom. If we were to ask the same question about wisdom, i.e., “Is it possible to build an economic theory based on wisdom?” the answer would be, “Of course.” In fact, if we didn't build it on wisdom, it would simply be invalid. Well then, if wisdom and compassion are inseparable, it looks like compassion is a valid basis for our theory. This is obviously not meant to be an exhaustive justification of an economics of compassion. Sometimes raising questions is enough. What does it really mean that compassion is inseparable from wisdom? If that is true, what implications does it have for our ordinary understanding of compassion? And what does it really mean to develop an economics of compassion?

The classic definition of compassion is the wish to relieve a being or beings of their suffering. It is the thought that, “May they be free from suffering.” In many ways, this simple definition is enough for all that will follow, but I would like to use a slightly more elaborate definition, one that is a summation of what is known in Mahayana Buddhism as The Four Immeasurables. The first of these is the aspiration that all beings without exception may have happiness. And interestingly enough, the Tibetan prayer that makes these aspirations adds "and the causes of happiness." The second is that beings may have freedom from suffering and its causes. The third is that beings have the higher forms of joy associated with the spiritual path, and finally may they have the profound equanimity associated with wisdom. This is a very simplified explanation of the Four Immeasurables, but it adds depth to the simpler notion of compassion as aspiring that others have mere freedom from suffering. These four facets of aspiration are called immeasurable, by the way, because they apply to all beings, and because they are immeasurable in depth and profundity even for one being. Thus you could say they are “immeasurable to the immeasurable power.” I use this more elaborate definition of compassion because it support the full range of human aspiration. It works well with a post-materialist viewpoint of human culture, one of going beyond mere material sufficiency to areas such as learning, the arts, creativity, and spirituality.

Generating compassion in an unbiased way, which means having an impartial outlook towards all beings, can be seen as an essential expression of the co-centric wisdom, the wisdom that includes all, and excludes nothing. Much more can and should be said about unbiased compassion in an economic context. Often, of course, in our economic behavior human beings display great kindness for people we are close too, especially family members or members of a larger social unit or country. But often the reverse is true for people we regard as “other.” We often treat such people with at best indifference, or quite often with varying degrees of exploitation and downright cruelty.

The ability to be fully inclusive, to think in terms of humanity as a whole, as well as to regard each individual impartially, is part of the wisdom potential we all possess. This is not to say that everyone holds such an attitude, of course. Nevertheless, it is entirely possible for any one of us to do so.

An important point I'd like to raise here is that this body of writing (my blog and my upcoming book) is not an attempt to talk people into having compassion. Of course, I do advocate compassion. I hope people will develop it, maintain it, and increase it. It's just that I feel I would be talking down to people if I felt I had to push it on them. The reality is that compassion is inherent to our human minds. It is not a religious attitude, and it is not imposed by law or even custom, though of course social influence is important. But the bottom line is that this body of theory is most fundamentally about how to apply the compassion we already have to economics. I am still working on my own compassion, and I'm not a spiritual teacher. There are plenty of sources available to learn about compassion, far better ones than myself.

And of course there have been many attempts to apply compassion to economics in history. The original ideas behind socialism and the free enterprise system both contained elements of social compassion, though from different angles. The older idea of the “benevolent despot” is another form of compassion in economics, and the more recent concept of the welfare state derives from such a outlook. Even Keynsian macroeconomics, which boils down to rather abstract government actions around fiscal and monetary policies, carries this intention, since in theory it tries to make the economy better for everyone.

I will have much more to say about all of the above in the future, but the task at hand is to put forth a very general economics of compassion. In fact, the “General Economics of Compassion” was the original title for this part of my theory. But as I developed an explanation which uses the six paramitas of mahayana Buddhism as a framework, “The Six-Fold Economics of Compassion” seemed to be a much nicer title, so I'm going with that. However, note that what follows is a general description, one that doesn't make practical recommendations of a specific nature for the present day world. The special proposals that are at the heart of my pragmatic economic ideas will come somewhat later.

Let's say we have a general attitude of compassion, one that is intended to be unbiased. In some ways it may be easier to think in terms of “humanity as a whole” rather than caring for each individual, but really it is the same thing. And we are ourselves each part of humanity's whole, of course. In fact, as we explore the co-centric wisdom further, we will increasingly see that our individual fate, and hence our individual interest, is utterly tied up with “humanity as a whole.” We could say with real certainty at this point in history that a very significant part of each of our individual economic interests is the interest of the human whole. And conversely of course, the interest of the human whole affects every individual. This fact is extremely important in the considerations behind my special proposal, but for now we can view it as merely a reminder that compassion isn't entirely altruism, in the sense that it isn't entirely negligent of one's own interest. Still, generating unbiased compassion is a stretch, and it is something that should be contemplated rigorously. That's as far as I'll go in terms of advocating compassion. Let's contemplate it. If it works, let's put it into practice. And by the way, my practical theories to come don't depend on everyone having compassion, nor do they necessitate imposing compassionate behavior on people. That will not be necessary, and indeed it is not possible.

For the sake of discussion, let's assume there are some people who do want to practice an economics of compassion. Let's say there's at least one. Or maybe two: you and me. How do we go about it?

Mahayana Buddhism provides us with a set of six perfections (paramitas) which are the means of completing the much larger task of bringing all beings to spiritual enlightenment. They can be directly applied to positive economic behavior in the following ways: Generosity, Ethical Discipline, Tolerance, Diligence, Focusing, and Wisdom. These six economic virtues are named almost identically to the translations of the names of the paramitas from Sanskrit and Tibetan, with something of an exception on the fifth, so I will discuss that briefly first, then cover them in order.

Among the mahayana paramitas, the fifth is called dhyana (Sanskrit), samten (Tibetan) and meditation or concentration in English. Samten in Tibetan is literally “stable thought” which has the meaning of “stable mind.” It applies to the practice of training one's mind at a basic level. It involves focusing the mind (concentration) but also taming the mind to reduce the influence of negative psychological patterns (kleshas). All meditation practice in Buddhism is said to fall into the categories of shamata and vipasyana, and this fifth paramita pertains to the shamata aspect of meditation. Strictly speaking, it is not entirely accurate to say samten refers to meditation, because meditation also includes vipasyana, which pertains to the sixth perfection of wisdom or prajna. (Some accounts of Buddhist meditation, however, catagorize both shamata and vipashyana in the sense of their being practices, under the 5th paramita, and use the sixth paramita to refer purely to wisdom itself.) In any case, the economic virtue of focusing carries many of the same implications that the focusing aspect of basic meditation practice does in the Buddhist path, but applied to economic behavior.

Focusing as an economic virtue could also be called “focal application” or “appropriate focus.” In most general terms it means having the mental presence and direction that enables us to do anything properly. It is the natural focus of work, of study and learning, of planning and reflection, and all the work of the mind that pertains to economic thought. Without focus our minds are ruled by confusion and we will never see things clearly or get anything done.


With generosity, we find a starting point that is quite easy to understand, and it seems to pertain directly to economics. The only problem is that economists have generally not found a comfortable way to incorporate generosity into their theories at all. There is evidence that some of the early theorists of economics were frankly baffled by the concept, or specifically by the tendency of people to simply give things away. They could not reconcile the notion of an exchange economy with basic kindness. It didn't add up. Later thinkers of the socialist ilk, including those of the “weeping” variety, have tended to see economic inclusion as a political right, not as something that is particularly to be achieved by generosity.

And then there is the whole messy question of non-monetized transactions. Hazel Henderson has famously pointed out the “love economy” as practiced most notably by wives and mothers throughout history, and the importance thereof. The fact that such a vast amount of economic benefit is simply given away by unpaid or underpaid workers makes it very hard for economists. They like nice neat things that have numbers attached to them so they can put them into equations. Suffice to say that the significance of generosity at the family level has been underreported.

In any case, if we start with individual economic behavior, not broader theory, it is clear that generosity is a clear and valid way to practice the economics of compassion. In fact, without the generosity of parents to children in particular, and people to their close relations in general, human society as we know it would simply not exist. Although such generosity does carry with it the attachment (and obligation) that goes with such relationships, the fact is that is most typically also an expression of love and commitment. It's part of the “love that makes the world go 'round.” The fact that generosity of this sort is so pervasive, so ubiquitous, and so natural demands that we acknowledge it in our economic thinking. It also points to deeper possibilities of generosity as we (at least some of us) come to acknowledge the inclusive unity of the global human family.

Another aspect of material generosity is that of charity and philanthropy. Again, these areas of economic activity play a huge role in human society -- and increasingly so. People give so much, in so many ways, to people they don't know at all, and for so little (or no) return or recognition, that it is simply amazing. Although there are many shortcomings to charity and philanthropy, including the general criticism that it merely tends to perpetuate the existing system of haves and have nots, we still need to recognize that, in some measure, this type of economics of compassion has existed for a very long time. Whether human generosity can be further mobilized to decisively address critical global problems is one of the great questions of our time. The question is not just whether it can be mobilized, or how, but most pointedly, how can the natural generosity of humanity be utilized to transform the economic landscape?

Another dimension of material generosity is one not normally associated with generosity at all, namely conservation. If you think about it, what is the implication of not wasting resources? First of all, you save money. But beyond that, that resource is available for someone else. Simple as that. So, we could view conservation as an expression of generosity.

Conservation in its environmental implications also relates to another major category mentioned in traditional Buddhist accounts of generosity, namely the “generosity of protection.” Clearly if you protect someone from harm in some way, you have given them a great gift, perhaps the gift of life itself. The relevance of this to our contemporary economic activity is this: environmentally positive behavior is a form of generosity. Although this may seem to be just another way of talking about it, I think it is of significance. Any environmentalist knows of the great challenge of shifting human behavior (whether as individuals or in organizations) toward more positive environmental actions. Often there is a lot of guilt and blame attached to the old wasteful and destructive ways of doing things, and a lot of authoritarian righteousness associated with it all. Often the level of compliance and the willingness to change is rather shallow. We need new ways of encouraging each other to behave more in harmony with the planet and with a future that isn't going to be a total disaster. Framing the protection of humanity from environmental harm as a form of generosity is a positive way of approaching this, and it brings out the natural human heroism that we're all capable of.

The third category of generosity can be called the “generosity of truth.” It is actually generous to study, to contemplate, to look for answers, and to communicate those answers. It is generous to courageously proclaim the sorts of “inconvenient truths” we all need to hear. Again, this is another way of framing actions that we who are progressive minded already accept and honor. But again, if we see this in a new way, we may find new strength to practice this form of generosity. Often there is a strong flavor of criticism and anger in our proclamation of truth. Certainly there is blame enough to go around, but seeing the communication of truth as a form of generosity makes it more likely that we will temper it with understanding and kindness -- and maybe we will actually be heard. Maybe something will get done.

Ethical Discipline

Ethics and morality are of course deeply intertwined with economic behavior throughout history. If you study the subject economic history, you will see fascinating shifts in what has been considered ethical or moral. For example, in the Europe's Middle Ages, making a profit “for it's own sake” was deemed immoral and in fact illegal by the Catholic Church. Some cultures to this day regard usury (lending money at interest) as immoral. Then there are certain basic principles that can be regarded as universal, across cultures and history, such as the injunction against stealing.

In any case, what this discussion may contribute to this vast body of thought may just be a few significant points of emphasis. The first is simply a consideration of why we might want to practice ethical conduct. To practice ethical conduct out of compassion is a refreshing shift of emphasis from the heavy shroud of legalistic moralism surrounding the subject. Typically there is an emphasis on morality/immorality in terms of its consequences, whether they be legal or other-worldly repercussions, or spiritual outcomes, from whatever point of view you have. The eastern traditions emphasize the inevitable law of karma, which follows us independent of human retribution or even divine judgment. To avoid negative ethical or moral actions out of concern for their impact on one's own future is entirely justified. But even more powerful and profound is to do so out of compassion for others. And in some sense it is more natural too. You don't steal because you don't want to deprive someone of something that is theirs, not because you may get caught or suffer from bad karma in future lives. It is direct and simple. Although ethics can be quite complicated, compassion will usually steer us in the right direction.

Buddhism talks about morality in terms of avoiding negative actions and adopting positive ones. In economic terms, it is clear that some things to avoid would be stealing, deception, fraud, manipulation, cruelty, and exploitation. On the positive side we can enact ethical discipline by practicing fairness, honesty, and kindness in economic dealings.

Another dimension of ethics could be called the “morality of post-materialism.” Al Gore has made the well-known point that global warming is not a political issue, but rather a moral one. The kinds of actions that will enable us to stop global warming are indeed moral in their scope. To paraphrase another famous quote, we can't cure global warming “with the same mentality that is creating it.” There needs to be some sort of fundamental critique of materialism and realignment of values. The possibility of relaxing our obsessive drive for material consumption and convenience is a prerequisite for changing our economic way of life and gradually putting human values and human wellbeing first. That is the morality of post-materialism.
This leads directly to a last point, which can be called “the special morality of planetary-scope compassion.” We are at a point in history where some of us, at least, can see the possibility of human citizenship at a planetary level. There are many actions we can take in expression of that, some of them very simple. Just about any action that reduces environmental harm is actually an act of planetary citizenship, or planetary compassion. And there are many many other specific actions we can take at this level of ethical conduct. It is mentioned as a separate point because the co-centric approach emphasizes whole systems. Human society in the global ecosystem is one such whole system. To contemplate how to take compassionate action in relation to this whole system is a very high level of ethical engagement.


The third paramita is often translated as patience, but its essential meaning is actually closer to tolerance. Just as ethics are presented as a remedy for negative actions in general, tolerance is presented as the remedy for anger. It is probably not necessary to go to great length in discussing the tremendous dangers and suffering that anger and hatred bring to humanity. The world stage and the “news cycle” give us plenty of examples every day. The play of anger and aversion in economics may be a bit more subtle, but it is extraordinarily corrosive in effect. And tolerance in economic life can be correspondingly incredibly healing and transformative. In particular, tolerance can temper the negative effects of competition. There is a vast difference between pure economic competition in a free economy and the sort of competition that takes place in war--or even sports. Competition at a psychological level carries with it a great deal of anger and jealousy. It is destructive. It should be a no-brainer that cooperation is better than competition, or that economic competition should be fair and respectful. The reason cooperation and fair competition are so hard to achieve is that human beings carry a great deal of negativity towards those we perceive as “other.” We are fine with getting something at someone else's expense, especially when it pertains to our livelihood. On the other hand, there is a growing realization amongst at least some human beings, that there ultimately is no “other.” We're all in this together. Despite this growing awareness, non-aggression is a tough one. Those of us who seek justice and environmental sanity often develop a great deal of anger towards those who don't. And if we don't get angry, how are we going to motivate ourselves to change things?

These are hard questions, and I'm not going to patronize my readers with simple answers. However, it is possible to envision and create economic systems that don't emphasize harmful competition, and do emphasize cooperation. Generally speaking, it is rather radical to mention the notion of non-aggression in an economic context in today's world. It seems like a foreign concept. Probably it brings up the thought that if “we” behave with non-aggression, “they” will take advantage of us. There is a tremendous amount of thought and discussion that can and should go into this question of economic non-aggression. If appropriate ways of enacting non-aggression can be implemented, they could represent a potentially key turning point in economic history.


When we talk about diligence or exertion as an economic virtue, it does not mean simply working hard. It means applying hard work and perseverance in the context of truly positive and skillful ways of working, ways that benefit others and avoid harm. In fact, it can take a lot of work just to find modes of livelihood that are not harmful. A great deal of research is going on these days, for example, into how to do all manner of industrial processes in ways that don't harm the environment. That is a good example of proper exertion. Improper diligence, of course, happens all the time. People work tremendously hard to strip the world of its resources, to exploit the work of others, even to steal. In the movie “Heat,” Robert DeNiro plays a master criminal who works with great skill and meticulous planning and discipline. That's a fine example of the opposite of what is meant here by diligence. Unfortunately all such examples are not fictional. And it is interesting that so often the people who have good intentions for the world, gentleness, and ethics, somehow don't work as hard as the crooks. For better or worse, quite literally, it takes diligence to get something done.


We have looked at focus a bit earlier, and now we will look at in more detail in the economic context. The first point to be made here is that focus is the practice of disciplining the mind to promote stability of mind and attention as a basis for economic integrity in work, consumer behavior, and business behavior.

Integrity of work is perhaps the simplest to understand: to get something done, we have to focus on it. That is an ongoing requirement. Normally we don't think of “doing the job right” to be an act of compassion, but in reality it usually is. Think about the people who drive buses and trains, or fly planes. Think about medical people, teachers, financial professionals. In fact, all kinds of work affect others. Doing a good job in many cases can be a matter of life and death. Proper focus and attention are required to do the job right.

In consumer behavior, it is interesting to note that having a focused and trained mind will help avoid being swayed and influenced by advertising and marketing messages of all kinds, including peer pressure. It presents the possibility of being centered in one's buying behavior. The old fashioned term for this is being “sensible.” Being sensible in today's world doesn't always mean buying the cheaper product. It may mean not buying something at all, or buying a more expensive product that's better for humanity. Having the judgment and character to make such decisions requires a stable mind. A stable mind comes from focusing.

In business behavior, the main point to be noted is that focus brings about the penetration necessary to make correct decisions. By correct decisions I mean responsible decisions. And in the context of the economics of compassion, a responsible decision is one that is responsible to all humanity. That's a tall order, of course, but without the appropriate mental focus, we wouldn't have a chance to make such decisions. We wouldn't even have the ability to make correct decisions, say for our own business in the short term.

An even broader application of focus is in the general mind training needed for stabilizing compassion altogether. I use the term mind training intentionally here, because there is a mahayana system that has been passed down through the Tibetan tradition called lojong, which quite literally means “mind training.” Its emphasis is on making the attitude of compassion for all beings one of stable focus and commitment. This tradition is present in all the major lineages of Tibetan Buddhism, and has been championed by the great teachers of that tradition in present times. The importance given to turning compassion into a genuine discipline points out the importance of really establishing such an attitude in an unshakable way. Usually we have compassion that is limited in several ways. As mentioned above, we usually have compassion for people we like. According to Buddhism this may not be compassion at all -- or if it is, it is compassion mixed with attachment. The defect of this is that we are biased, and our minds easily switch over to total cruelty towards those we dislike. The other problem is that our compassion is sporadic. Sometimes we think very kind thoughts and try to do nice things, but just as often we behave with more or less total self absorption. Having a stable outlook of compassion does not mean living a life of martyrdom or ascetic sainthood, but it does mean finding some consistency in attitude and behavior. It means remembering compassion when things get complicated. All this comes from making compassion an object of focus, and training on that. By doing so, it eventually becomes thoroughly familiar. It becomes part of our very character.

Finally, we can discuss mental focus in terms of its being a condition for generating insight and wisdom concerning economics. The fact is that economics is a complex subject and presents a vast array of conceptual information, much of it confusing and much of it contradictory. Certainly the main schools of economics that have come down to us in the European tradition are seriously contradictory and indeed in serious conflict. We may be in an era of history in which the “free market” system seems to have won the conflict with socialism/communism, but that appearance may itself mask a deeper fragmentation of actual theory and practice. And the evident defects and potentially catastrophic flaws of a market system are glaringly obvious at this point in history, despite the ascendancy of the system itself. And in practice, the complexities of a globalized economy in crisis require a clarity that doesn't just come from more information or from following the opinions of so-called experts. Those who will provide real leadership in economics are not only going to be the professors (learned as they are) or the think tank pundits of C-span (often with very real ideological conflicts of interest), or the hired hand economists of investment banks and brokerage firms. Much has been said of the failure of economics as a profession. In many ways it is unfair to blame economists for the state of the world economy today, but at the same time it is reasonable to ask that those who study and profess to knowledge about the subject evolve in their insight and capacity to help humanity. Ordinary people are going to need to understand economics too, perhaps just to survive. Bringing a strong focused mind endowed with compassion to the subject of economics is a great service to humanity. Through such a focus, we will come to develop economic wisdom, which in my earlier posts I have described as post-materialism and co-centricity. Recently it has occurred to me that perhaps a better term for the second aspect of wisdom is “co-abiding.” I will explore this in future posts, but for the purpose of a brief explanation of the six-fold economics of compassion, these earlier posts will cover the topic of the sixth virtue, wisdom.