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.

1 comment:

twothings said...

David, I find your Civil Endowment Theory to be a concise and helpful explanation of how capital works today and generally convincing as a new "idea for our time." Somehow I (not an Economics major) am on the mailing list for the newsletter at Bard's Levy Institute and I haven't read anything as interesting in that letter as your Theory.

In reading this, I felt that you have an idea that many people have been searching for in the dark. You've managed to think out the problem and then proposed the foundation for an approach in a better direction that doesn't drift off into a general wringing of hands.

I'd like to see more about how it might work in practice (who does what when to what effect).

I also wondered in passing to what extent if any a civil endowment approach would undercut existing non-profits and other approaches to "generosity."

I haven't yet read your other entries so I'll do that in the next few days.

Thanks for telling me about your blog!