Monday, November 16, 2009

The Vision of Civil Endowment

To build an economic system on the basis of human compassion may at first seem idealistic, naïve, or just plain impossible. But if we take a deeper look, it starts to look refreshingly possible. In my work to connect economic theory with the insights of Mahayana Buddhism, I've outlined six economic virtues that correspond to the six transcendent qualities by which a person on the bodhisattva path puts compassion into practice, eventually leading to full spiritual awakening. In other words, I've looked at the kinds of actions or qualities that are traditionally taught to bring about enlightenment, and looked for a related economic pattern. Except for one or two of them, you don't even have to change the names. The economic virtues are: generosity, ethics, non-aggression, diligence, focus, and wisdom.

A dismissive response to this line of thinking might be: “Fine, what's the big deal? If people would just do all that good stuff, society would be in great shape. What else is new?” What's interesting though, is that it turns out that there are very readily identifiable economic efficiencies that arise from each of these virtues, whether they are practiced individually, within institutions, or in society as a whole. This suggests that it should be possible to design economic structures and institutions based on those efficiencies.

My contemplation on how to make use of those efficiencies and build a more compassionate economic system in practice has led me to develop the theory of civil endowment. The key point of this body of thought is that we could create a new kind of capital which would be fully dedicated to the common good. This new kind of capital, called civil capital, would form the civil endowment. The other important point is that this civil endowment would be administered by civil society institutions created specially for that purpose. Structuring this innovation as a civil society initiative largely sidesteps the political process, where fundamental economic reform remains highly unlikely. It also avoids relying on the even more unlikely event that the business sector -- and especially the financial part of that sector -- will reform itself.

The great need for general economic reform, especially in addressing the vast and widening gulf between rich and poor, is justification enough for the establishment of a civil endowment system. But on top of that we have the extreme urgency of the multiple crises that human society faces. All this seen together should make us all the more willing to look beyond our existing toolbox of ideas, not to mention our stale rhetoric and dogma. We need major innovation in economic theory and practice, or the human race may not survive the historical era we are entering now. It's that serious.

Civil endowment theory is such a system innovation. It is also non-utopian, in the sense that it can be instituted in today's world, as it is. It is not an attempt to scrap the existing economic system, but rather to institute a new paradigm incrementally. For it to work, it is true, there must exist at least the basic features of open society, such as the right to form organizations, fundamental economic freedoms, ownership rights, and the rule of law. Though these conditions do not exist worldwide, there are enough places where they do exist to establish the system. And, as it happens, a civil endowment system would do much to preserve and promote open society worldwide. Thus, there is every possibility that it would help move closed (i.e. authoritarian) societies toward openness. Open society and civil endowment are mutually reinforcing, a statement that cannot be made about either capitalism or socialism.

From a theoretical point of view, this system of thought and practice is fundamentally outside of the categories of capitalism or socialism. It is not socialism because it does not rely on government ownership or control of productive enterprise. It is not capitalism because it does not promote extractive or exploitive investment, or productivity that destroys the world we live in. Nor does it, at a more theoretical level, subscribe to the notion that selfish behavior creates the common good. Instead, it works to create beneficial causal factors that work at the scope of the whole system (global human society and the ecosphere), which are implemented on a civil society basis rather than a political one.

It is important to be clear that this proposal is not an attack on business, private property, or on responsible self-interest. Nor is it a repudiation of the needed role of governments in the economy. It does, however, point out the possibility of an increased role for civil society in guiding the economy, one enhanced by the real economic power inherent in the civil endowments. Civil endowments could function as a stabilizing and moderating part of the overall economy, one capable of providing leadership and of addressing the crushing human problems of our times. The investment of civil capital would be used as needed in a given context. In the developing world it could promote basic sufficiency for all and the kind of sustainable infrastructure development that could nurture truly healthy economies. In the more developed economies, it could help reverse the wide and increasing gap between rich and poor, and bring healthy re-development to devastated post-industrial economies such as that of the United States. Importantly, it could play a major role in supporting renewable, non-fossil energy investments. Though there is a lot of private money going in that direction, much, much more is needed.

A quick way into the theoretical world of civil endowment is the little phrase, “capitalism can't be reformed, but capital can.” This is the counter-intuitive essence of the proposal. If we create a substantial system of NGO-administered capital fully committed to the common good of humanity, we will not have abolished private property, economic rights, or even “free enterprise.” We will simply have created an open-society economic system that moves beyond capitalism. To the extent that capital is reformed, the unbounded lust for profit that characterizes primitive capital is no longer the primary value or driving force. Human wellbeing is the primary value. Thus, though it may seem paradoxical, the way to diffuse and transcend the contemporary destructive manifestation of capitalism is not to eliminate capital but to reform it.

What would this reformed capital be like? Here is a summary that introduces the key ideas:

Civil capital is a form of finance capital which is invested as an endowment for the universal beneficiary, under a strict investment paradigm for the benefit of all humanity on an unbounded time horizon. As such, it optimizes both social and natural capital. Although the maximization of profit and productivity is not part of the civil investment paradigm, all retained earnings and productivity are endowed to the beneficial owner of civil capital, the universal beneficiary. Civil capital is managed by civil society organizations which are accountable to society at large.

Let's consider at a few of the phrases used in this definition:

The Universal Beneficiary
refers to all human beings now living and yet to be born. This unique designation of people in both the present and future creates the unbounded time horizon of the civil investment paradigm.

The Civil Investment Paradigm
refers to capital investment for non-frivolous economic productivity on behalf of the Universal Beneficiary. In practice, this paradigm is informed by the principles of environmental and social sustainability, universal sufficiency, and social justice.

Civil society organizations refers to specially created non-profit organizations that would function as fiduciaries for civil capital and its investment, preservation, and evolution.

Attitudes toward capital within the various camps of economic theory and practice are such that there is a bit of a Catch-22 in operation. On the one hand, those who recognize the tremendous power of capital tend to only see it in terms of selfish motivations and benefits. That is true, actually, for most of those who either think capital is great, and for those who are against the whole idea. Among those who love capital, some theorists or individuals continue to harbor the notion that “everyone acting selfishly yields the best result for society.” This notion, and that of the “invisible hand” of markets, is in wide disrepute, yet it remains a secure refuge of rationalization for the materialist. The wealthy and powerful believe in capital, and they know how to use it. On the other side of the ideological divide, those who yearn for “the common good” have tended to neglect the investment process, and implicitly, capital itself, and think more in terms of governmental regulation or control on the one hand, or individual actions and social movements on the other. And therein lies the catch. Neither side sees the transformative potential of capital once it is liberated from its selfish application. If anything, I hope that my contributions to the conversation will cause people of both persuasions to rethink what capital is and what it could be.

What is meant by investment here is the actual commitment of economic power to a productive purpose. The “crest of the wave” of any modern economy (including ones that are government controlled) is the ongoing process of investment. Although governmental involvement is a major factor in any modern economy, the real driving force as an economy moves forward through time lies within the actual investments that are made. The economic processes that are enabled by each investment as it happens are at the absolute core of the economy, and especially at the core of the way an economy changes and evolves. This is why the reformation of capital could be tremendously effective in reforming the economy itself.

If we look at human needs in the coming decades, the transition to a sustainable, non-catastrophic future for our race requires a vast and skillful transition in how investment is made, by whom, and for whom. Briefly put, those investments need to do what is necessary, on the scale that is necessary, to provide for the sustenance of the human race in a way that is ecologically sustainable. Who will make those investments? Where will the will and the leadership come from, not to mention the actual investment resources, to transition to a post-fossil energy economy? And who will benefit from the immense profit and productivity inherent in such investments? The answer to all these questions is, at least potentially, “all of us.”

But to answer these questions in greater depth, we need to delve into the fundamental theory of capital. This realm has received little attention since the basic ideological divide between socialist and capitalist dogma was laid down in the 19th Century. But if we undertake an analysis with a fresh mind (a journey undertaken brilliantly by Folkert Wilkin in his book The Liberation of Capital), we find a rather subtle realm, a realm in which tremendous creative and indeed compassionate possibilities reside. A key possibility within this basic capital theory is that capital could function without the relentless and amoral quest for profit. In other words, there could be a post-materialist conception of capital. Furthermore, there could be an altruistic conception of capital. Key to both these points is that capital could function without selfishness. Civil capital is the practical conception that arises out of these possibilities.

At this point you may rightly ask, “Well, how is this idea of civil capital different from Socially Responsible investing?”Socially Responsible Investing (SRI) and the more recent notion of “impact investing” are very positive movements, but don't forget that the people who put the money up for such investments want their money back, with profit. They may be willing to earn less and work harder for what they earn, but the basic selfish orientation of their capital is unchanged. They are trying to invest with a sense of ethics, which is a good thing, but it is still their capital. Civil capital, by contrast, is detached from private ownership. Its beneficiary is the universal beneficiary. Therefore, the investment decisions associated with it, along with the dispensation of the returns on those investments, are wholly different from any sort of private capital.

To explain this point about private capital, I use the playfully evocative terms “reptilian capital” and “mammalian capital.” Reptilian capital is cold blooded. It is concerned only with selfish return on investment. It has no ethical compunctions. It abides by laws and regulations only for pragmatic reasons. The reptilian capital paradigm rules much of our business and financial world today. We should never underestimate the extent and power of this mentality in our society. At the same time, there is an investment mentality based on more decent instincts, instincts that are warm blooded. Hence the term “mammalian.” This mindset is concerned with environmental and social outcomes as well as profit. Out of such a mindset comes the world of SRI, impact investing, and socially responsible business. To understand civil capital, we need to see that it goes far beyond even the laudable mentality of mammalian capital. The key difference is in the beneficiary. Instead of the financial returns and other benefits of ownership going to the investors, the returns on civil capital go to the universal beneficiary. The secondary difference, but also a crucial one, is in the administrative structure of civil capital. It is managed by socially accountable NGOs, by people who are not motivated by personal financial return.

Admittedly, it may be a little hard to visualize at first how this “return to the universal beneficiary” would happen in practice. Are we going to send a dividend check to everyone on Earth? In theory, that could happen, though not immediately. It would take a long time for enough civil capital to accumulate for that. It is possible, though, that even in the early phases of such a system, productivity could be channeled to those who need it most in creative ways. In practice, any profits of civil investment would most likely be re-invested as the system develops. As significant as that is, the financial returns or growth of civil endowment is not really the primary benefit of civil endowment investment. What is more significant, and what can take place on any level of scale, is the qualitative stimulus effect that civil capital can have on an economy. Going back to the nice folks who brought us SRI, what they realized, in their wisdom, is that quite apart from financial return, a capital investment has a qualitative real-world impact in terms of the economic actions it promotes. Those actions in turn have effects, not just in the sphere of the overall economy, but also socially and environmentally. It was this “ripple-out” effect that the SRI folks want to cultivate, albeit while taking the profits for themselves. Quite apart from the question of the financial returns of such investments, the paradigm under which civil capital would be put to work would open up a whole new realm of investment thinking, since the time frame under consideration would be unlimited, as would be the social scope of action and benefit. Therefore, it is not just the question of “who gets the profits” that makes civil capital vastly more beneficial than SRI. The unbounded scope of the event horizons in the investment decisions, both socially and temporally, opens up profound possibilities for the best possible kinds of economic development.

Furthermore, the economic power that results from the productivity of civil capital can be used in far more creative ways than simply sending everyone a check. There is actually a route to true economic democracy lurking in this paradigm. Though economic democracy is an imprecise concept, and one that has many proposed expressions, it is also an idea that has a deep resonance for those who favor economic justice. Unfortunately, most of the proposals associated with economic democracy are, at least on their own, more or less impossible to implement. They also show little likelihood of addressing -- let alone solving -- the paramount issues of our time, namely, global warming and global poverty. Civil endowment funds, on the other hand, could be targeted at precisely these most crucial problems and gradually bring about the conditions necessary for greater economic democracy and participation.

Many of those working for economic change today point to another area of concern, namely monetary policy. Again, a robust civil endowment system paves the way for progress in this area. We need to be really clear that as long as the reptilian profit motive of bankers is the main driving force, whether it is within the institutions themselves or in their unconscionable influence on public policy, real progress is not going to happen. Though there is a great deal of public outcry, and indeed perhaps some movement toward re-regulation of the financial industry, I do not believe that the answer to the problem can be -- or even should be -- coming from the government. The alternative route, which is thus one of the most urgent and effective potential uses of civil capital, would be to create financial institutions that are non-predatory, out of which could come any number of benefits, including monetary and credit reforms. One very exciting outcome of this could be the creation of both local and global currencies that are superior to the current national currencies. This could happen if there were simply financial resources available to create them, which in turn is entirely possible if there were institutions committed to economic justice for all.

Another screaming need for a new investment paradigm is in the field of media. Advertising-supported media is not necessary a flawed business model, but at least in large-scale mass media it has become horribly corrupt. This is most evident in the case of the rising power of politically biased and even extremist news organizations we see on TV these days. More generally it is reflected in the insidious materialism that advertising promotes in society. On the other side of the fence, we see various state controlled news outlets engaging in their own extremes of distortion and control. Clearly neither the ruthless lust for profit, nor authoritarian state control is going to going to lead to “fair and balanced” media. The backing of civil capital would open up new realms of possibilities for media that is truly responsible to truth and to the public benefit.

The wide range of benefits that could potentially arise from a civil endowment system has led me to call civil capital the “perfection of capital.” The term, though perhaps grandiose, is appropriate since civil capital is designed to be in optimal accordance with compassion and wisdom in principle and human wellbeing in practice. It is detached from selfish motivations and unskilful applications of economic power. It integrates and perfects the various forms of capital such as finance capital, invested productive capital, as well as social and natural capital. It is perfect because it is designed to be perfect.

Once we see the value of civil capital, we need to ask two pragmatic questions: “Where does civil capital come from?” And, “How is it managed?”

The refreshingly simple answer to the first question is: human generosity. Not only is generosity a fundamental part of the human culture and economy, but as society becomes more globalized we see that people are often willing to give very compassionately to groups of people with whom they have no personal connection. Though people give very liberally in the case of disasters such as hurricanes and tsunamis, the power of generosity has not yet been mobilized to actually reform or heal our economic system. To galvanize human compassion and giving for this specific purpose will take time, but there is no reason to doubt that people would support it once the concept of civil endowment becomes known and its benefits understood. Beyond the sphere of direct individual giving, there are a vast range of possible revenue streams that could be directed to the endowment system. Extremely small percentages of various kinds of transactions, such as currency conversions and international capital transfers could create micro-streams of input to the system. This is similar to the “Tobin Tax” concept that has already been proposed to fund worthy projects on a global scale. A civil endowment system would be a worthy recipient of a tiny percentage of many types of transactions. There are in fact countless ways that revenue could come into the system. Keep in mind that the civil endowment would be a permanent and self-enriching body of resource. Revenue streams from civil endowment backed companies could be built into their business model from the beginning. Although all the inputs to the system would involve generosity, they clearly would not all be direct gifts. It would be more like building generosity into a system. Once established, the small streams deflected from economic processes would trickle into the endowments and not particularly deprive anyone. This notion of structuralized generosity is a key element in the feasibility of such a system.

It is actually very important that civil endowments come into being through acts of generosity, rather than through confiscation by taxation, because through the actual act of giving to the whole human race, the giver is transformed and the interdependent cycle of a compassionate economy is set in motion. To see that human compassion and generosity is sufficient – and necessary -- to start the civil endowment system is an “ah-ha” moment that I call “The Leap.”

Finally, there is the question of the management of civil endowment. I propose that special non-profit fiduciary organizations be set up to do this work. They would be publicly accountable for their actions, and operate under a strict charter. Most likely there would be both paid professionals and volunteer governance boards as part of this structure. Under the civil investment paradigm, the nominal owner of the assets would be non-profit organizations (NGOs) with a transparent administrative structure. These organizations would make the basic decisions about investment of the capital, and monitor the results of the investment. An NGO of this type could be the direct owner of for-profit entities such as holding companies, banks, or venture capital firms, or it could invest indirectly through financial professionals. The key would be to not only enact the civil investment paradigm, but to refine and evolve it over time. Probably it would also be necessary to have a specialized NGO functioning as a standards body for the NGOs that actually hold civil assets. Finally, it might be necessary to separate the functions of fundraising and asset management. With that approach, there would be one or more civil endowment foundations responsible for accumulating the assets that form civil capital, and distributing them to the administrators of the endowments. This three-fold system would create a system of checks and balances, defuse potential conflicts of interest, and generally decentralize the functioning of the civil endowment system.

There are trillions of dollars in assets under management today by trained fiduciary professionals. Unfortunately, they operate under the wrong set of rules. It is also the case that many non-profit organizations have endowment funds under management, some of them huge. However, the purpose of these endowments is to generate cash income for their non-profit work. Some have migrated in varying degrees of a socially responsible investment strategy, but basically they are still about extracting cash on an ongoing basis. Though the civil endowment model is clearly different than this, the basic societal framework of non-profit organizations owning and managing large endowments is clearly established. In the case of a civil endowment system, NGOs have a new role: that of owning and managing large endowments for the wellbeing of the human race. If this is their purpose, it makes no sense whatsoever to make investments that are based on theft, exploitation, or the very destruction of the planet we live on. Thus the whole extractive investment model that has characterized modern capitalism from the beginning can be jettisoned.

What happens to profit, that concept so dear to traditional capitalists, under this model? It is still possible for businesses to make a profit under this model, but it would not be the overriding concern, nor would short-term profit expectations be of anywhere near the same significance that they take on currently. It is important to bear in mind that in reality, profit is just an accounting concept. What is more significant is the concept of productivity, which means actually producing a good or service that people need. As long as you make investments that do that, the system will do what it's meant to do. On a broader scale, the civil endowment system as a whole does not need to make a profit, in part because profit is reckoned on the basis of a specific accounting period. The civil investment paradigm is based on an unbounded event horizon. This doesn't mean that there could be no quantitative evaluation possible for its success or failure. But the actual criteria for success of specific investments would be more of a combination of qualitative and quantitative results. Keep in mind that there would be an ongoing income to the endowment system through structuralized generosity. Broadly speaking, if the system is seen to be valuable to humanity, people will continue to give resources to it to make it function. With that said, it is my hypothesis that civil endowments will be robustly profitable in the long term and will create a tremendous amount of decentralized private wealth along the way. The basis for this hypothesis is a rather esoteric concept known as “the efficiency of universal scope.” The essence of this efficiency is the view that causal factors that operate to enhance the health of a whole system will produce greater productive results than factors that destabilize or drain the system in some way.

It is inevitable, and actually preferable, for a civil endowment system to start out small. At first its presence would be, at least from a global perspective, purely symbolic. As it grows however, it could become a catalytic force, and eventually grow into a structural component of a vibrant and prosperous world economy.

Clearly there is no way to know how important such a system could become, or how soon it could begin to address human problems. I'm sure that as I explain it down the road, there will be plenty of objections that start with. “People will never . . . .” There is no doubt that the concept requires leaps of vision. But the leaps involved are as much of reason as they are of faith. It is actually rational to support a system that enhances the wellbeing of all humanity, because in an interconnected world, each of our prosperity -- and indeed our survival -- depends on the wellbeing of the whole of society. Civil Endowment Theory is not inimical to self interest. It merely points out the practical truth that each of our self interests includes, at least to some degree, the interest of the human whole. There are vast numbers of intelligent people these days who understand this. This is why, on balance, I am persuaded that a civil endowment system has real possibilities for implementation. It is a practical expression of a truth millions have seen.

As for those who don't understand it, it is important to see that this proposal by no means requires universal buy in, or even widespread awareness that it exists. It will not be imposed by any government or promoted with any kind of coercion. It is a voluntary initiative by those who see its value. Furthermore, because of the transformative character of the act of giving to a universal endowment, it can be argued that it is beneficial at absolutely any level of scale. Even a penny, given with the intention to benefit every human being now living and those yet to be born, is an expansive and uplifting act. With such a gift, the doors of possibility open to the practice of economic compassion for humanity as a whole, for the unbounded future. It is simultaneously an act of kindness, of hope, and perhaps most surprisingly, of pragmatism.

Concerning the feasibility of this idea, there are really two questions. The first is systemic: would civil endowments actually have the qualitative benefits that they are designed to have? And second: if such a system did indeed potentially have the salutary effect on the world economy that it is intended to have, would people have enough generosity to make it happen in on a large-enough scale? The answer to both questions is, “Well, let's try it.” This is admittedly a hypothetical proposal. There is no way that I know of to make theoretical models for such a thing or, for that matter, speculative prognostications. But the key thing that makes me want to push ahead is the point mentioned above about scale. If it has at least some benefit at any level of scale, why not move forward? Why not take the steps to create such a system, and take them deliberatively, cautiously, but decisively? In doing so, we can unify the outlook of compassion and practicality, and learn what works and what doesn't. Though I cannot personally predict the future of a system that has yet to come into existence, I am absolutely convinced that we need to take creative and transformative steps in the realm of economics. I am equally convinced that compassion is a worthy governing principle for guiding what we do. The idea of civil endowment is my synthesis of social vision, economic theory, and pragmatic planning at this urgent point in human history. It is my contribution to the conversation that is so important for all of us. You are warmly invited to join in.

(My thanks to Carl Frankel and Arya-Francesca Jenkins for their helpful editorial suggestions on this post.)