Evolving Economies from Lose-Lose Vicious Circles to Win-Win Cooperation and Sustainability, March 1997

© Hazel Henderson, 1997Summary of Presentation for the “Managing for Sustainable Development” Plenary Session.

Rio + 5 Forum
Rio de Janeiro, Brazil
March 13/19, 1997

Managing organizations and societies for sustainable development requires a transdisciplinary, systems approach. Clearly, this means that economics–even ecological economics, social economics, or any other hyphenated hybrid of this discipline and its professionals—must be subordinated within such broader systems models and approaches. As I argued in Politics of the Solar Age (1981, 1988), the 300-year history and sociology of economics led to its excessively abstract deductive reasoning which sought to mimic the mechanistic models and Cartesian science of Western Europe during that period known as the Enlightenment. Thus economics (never a science and still focusing on competitive markets and prices) can be useful, but cannot provide a holistic framework for steering organizations, societies, and individual choices toward sustainable development.

There is a role for economics–but economists cannot remain “in charge” of development policies conceived within the obsolete national frameworks and trade models of macro-economics. Indeed, a limited micro-economics focusing on full-cost prices, life-cycle costing, corrected statistics, internalizing social and environmental costs, as well as overhauled macro-economic indicators is indispensable. Other macro-policy tools are important, including a full range of ecological taxes: on pollution, depletion of virgin resources, planned obsolescence and waste, as well as advertising and promotion of such products and services. Furthermore, finance ministers as well as their economists, will need to listen and often defer to environment and social ministries. Competition-focused economics, while useful, does not embrace all of the cooperative, win-win strategies studied by game theorists, which are often “contrarian” and innovative and avoid the “herd” behavior so evident in markets. Game theorists (who won all the Nobel economics prizes in 1994) can lead us away from today’s lowest common denominator global playing field of vicious circles toward the fullest range of responses to our crises and virtuous circles: higher global standards, corporate codes of conduct, and global agreements.

Shifting taxation from incomes and payrolls to overuse of natural resources can help to fill budget shortfalls and move societies toward full-cost pricing and ecologically sound corporate and individual behavior. Subsidies and other “bribes” to achieve such goals are usually less desirable, lose-lose games (due to their well-known distorting effects on technological and infrastructure decisions, often leading to new entrenching of special interests, industries and consumer privileges). Trading pollution “licenses,” advocated by some ecological economists, are almost never justified, except to achieve internationally equitable distribution of resources that cannot be achieved via political agreements. [1] Yet such trading of pollution licenses must also be legislated in the political arena, and therefore does not qualify under “free markets” in any case. So far, the experience with setting up legislated markets for trading pollution licenses, such as those on the Chicago Board of Trade, have been distorting and fallen far short of the benefits promised by economists.

For these and other reasons, it is a misnomer to talk of “economics for sustainable development” until the major paradigm shifts needed to overhaul economics have become operational. Today, game theory as well as systems and chaos modeling can fill this gap between the theorizing of well-meaning ecological economists in academia and the real world. Today’s realities of turning around the operations of the World Bank, the International Monetary Fund (IMF), global corporations, and taming the global financial casino remain a yawning chasm still to be crossed. These global markets operate at instantaneous speeds. Real economies operate in annual and decade cycles, while sustainable economies must operate on nature’s even longer time frames. The World Trade Organization (WTO) so far is obstructing moves toward ecological standard-setting in products and their manufacture, while the Polluter Pays Principle, promulgated by the OECD in 1972, is rarely enforced anywhere in the world.

Movements toward sustainable development and implementation of Agenda 21 agreements are increasingly demanded by civic organizations in many countries, but hampered by entrenched political power, institutions, and financial interest groups–all operating on win-lose economics. All these opposition forces are compounded by today’s deregulated, market-driven globalizations of technology and finance, reinforced by information systems dominated by currency and bond traders, commercial advertisers, and corporate values. These real world institutions, interest groups, corporations, and governments are the manifestations of the past 300 years of theorizing within traditional economics: of win-lose maximizing competitive individual self-interest, ignoring social and environment costs. Most of the world’s real economies are outside of money systems: traditional cooperative, unpaid subsistence and barter based on ecologically compatible livelihoods in villages, families, and communities worldwide. The unrealities of today’s global financial casino, its $1.3 trillion of daily currency flows (90 percent of which are speculative) and its current $20 trillion of derivatives have decoupled from the real world’s producers and consumers, from the small businesses of the world’s cities and “main streets,” and from those working in real forests, fields, and factories around the world.

Today’s stock markets fall at what is good news for the real economy: lower unemployment and interest rates–while markets rise at signs of recession, unemployment and higher interest rates–evidence of how far the abstract economies of financial cyberspace have veered away from real earth-bound economies. Expectations of bondholders in global bond markets have almost doubled average interest rates over the past decade making these expectations for higher returns far greater than most OECD economies’ average GDP-growth rates can deliver. As global capital markets have mushroomed, along with the globalization of transnational corporations (TNCs), governments everywhere are in retreat. Their leaders, also under the spell of win-lose economics, too often engage in competitive “bidding wars” to “lure” TNCs to locate facilities in their countries so as to create jobs. These bidding wars broker taxpayers’ funds to subsidize such new corporate facilities, often at absurd costs, for example the London-based Economist reported (February 1, 1997, pg. 25) that in 1991 paid Auto Europa, the state of Alabama, USA, “bribed” Mercedes-Benz with $167,000 per job created. These enormous corporate subsidies might have financed micro-businesses or provided guaranteed incomes for life to many of these prospective job holders.

Today’s global economic warfare, which I have documented in Building a Win-Win World (1996), is the result of millions of public and private decisions still straightjacketed within economics’ narrow range of win-lose games which tend toward cutthroat, lose-lose, begger-thy-neighbor vicious circles. The broad range of altruistic, cooperative win-win games and creative innovation is revealed by game theorists, based on evidence from psychology and cultural anthropology. Today’s global race to the bottom includes cutting domestic safety nets, social and environmental deregulation, brokering wage rates and social benefits to “create the right business climate” often without even extracting assurances from corporations that they will stay or help pick up unemployment and welfare costs if they leave for greener pastures to exploit.

Although today’s global casino is in dire need of international agreements to harmonize all major security, accounting, disclosure rules, currently there is insufficient leadership from the USA, the European Union, Japan, and other major OECD and newly industrializing countries (NICS) to convene a “new Bretton Woods.” The G-7, under pressure from NGOs and after the Mexican peso crisis and other debacles, addressed some of these issues rhetorically at its Halifax Summit in 1995. The G-7 called for harmonization of securities regulations, currently being spearheaded in the private sector and called for the IMF to become a “Global Securities and Exchange Commission.” The IMF, still dominated by traditional economics and the policy assumptions of the so-called “Washington consensus,” is unsuited to today’s requirements and risks in the global economy. The World Bank has, in the past two years, made an ideological and rhetorical about face characterized in its new Wealth Index in 1995, and its recently espousal of micro-credit and other grassroots development strategies. However, the civil war is still raging within the World Bank staff to make its new sustainable development models operational in its lending policies. The IMF is still imposing lose-lose structural adjustment directives, budget cutting for education and health, export-led growth, and ill-managed privatization on developing countries–often furthering their downward spiral.

Economists, even those concerned with sustainable development, have focused almost exclusively on the need for full-cost prices, green taxes, advocating removal of subsidies to unsustainable practices and, at last, to overhauling national accounts to include social and costs. The valuation of environmental resources should be at replacement costs–not based on Pareto Optimal welfare formulas, such as Willingness to Pay (WTP) and contingent pricing. Unpaid work, estimated in 1995 by the UNDP’s Human Development Report at $16 trillion is still missing from global GDP. I have crusaded for 25 years for all these important steps to correct traditional economics. [2] All these steps are necessary, but clearly not sufficient. Structural and institutional analyses and systems and ecological approaches to corporate management and redesigning of industrial processes go far beyond the excessive statistical aggregations of macro-economics and identify additional policy interventions.

Governments need to redraw the charters of all major corporations, wherever domiciled, to expand the mandates of management beyond traditional maximizing returns to stockholders to allow managing so as to balance the interests of all stakeholders, including employees, suppliers, customers, neighboring communities, the environment, and future generations. The growing ranks of socially responsible companies, investors, and mutual funds (representing $650 billion in assets in the USA alone) are new “contrarians” inventing win-win strategies beyond market herd behaviors. They are promoting higher global standards, codes of corporate citizenship, principles for ecological sustainability, including the CERES Principles for Ecological Sustainablity, Business for Social Responsibility, the Social Investment Forum (in the UK and the USA); the Caux Principles, as well as the activities of the World Business Council for Sustainable Development, and those insurance companies promoting less climate-risky sustainable energy systems beyond fossil fuels and nuclear power. [3]The WTO must be a focus of NGO pressure to steer its rule making toward sustainability. One of WTO’s few correct rules are those which make illegal the lose-lose “bidding wars” described earlier. In addition, the WTO should require corporations to post social and ecological bonds, similar to the up-front impact fees levied by many states and cities in the USA–prior to development of facilities. This could prevent “social and ecological dumping” and help assure fuller cost pricing. WTO should also rule against all corporate subsidies to unnecessary, wasteful resource extraction, energy infrastructure, private automobile use and public transportation infrastructure. This would help assure that world trade in commodities is conducted at full cost with energy and transportation unsubsidized by local taxpayers support facilities–which should subject all commercial “free riders” to user fees. When economic and themodynamic analyses are aligned–much of today’s world trade will be revealed as irrational and be replaced by genuine local and regional economies of scale.

National governments, in addition to shifting taxes from payrolls to natural resource exploitation and pollution, overhauling statistics and GDP national accounting, need to cooperate in pursuing a series of international agreements. These should be geared to tame the volatility and speculation in global financial markets, reduce money laundering, tax evasion, and other criminal activities. Governments can institute, with the assistance of relevant UN agencies, public-private and civic sectors in global standard setting to raise the “ethical floor” under today’s lose-lose global playing field. National politicians will eventually see the wisdom of “pooling” much of the sovereignty they lost when they deregulated their capital markets in the 1980s. Governments can then cooperatively assess user-fees on all commercial uses of common public resources, biodiversity, and the global commons (oceans, atmosphere, the electromagnetic spectrum, Antarctica, satellite parking orbits, and financial cyberspace), and set fines on abuses, including money laundering, tax evasion, currency speculation, arms and drug trafficking, and cross-border pollution not covered by Agenda 21 and other international agreements. [4]Local governments can resist pressures from global retailers, services chains, and mall developers to displace local merchants. These global TNCs still operate as free riders on the infrastructures at below-cost energy prices and at the exclusion of many social and environmental costs. This allows them to penetrate local markets with below-cost prices, then after locals have been put out of business, they can raise prices without their competition. development banks, local credit unions, and micro-credit groups should be favored over branches of large national and global banks free riding on the unregulated info-structures of financial cyberspace. These banks, tied into the global casino, accept local deposits and paychecks but these funds tend to be “vacuumed out” of the local branch bank each day onto the global electronic funds transfer systems (EFIS) to be lent out worldwide. At average global interest rates, local communities and businesses can no longer afford these interest rates to borrow back their own deposits for local development purposes. It is also important for local communities to engage in as much barter as necessary, including high-tech exchanges using personal computers, such as local exchange trading systems (LETS) and the many kinds of local scrip currencies now circulating in towns in the USA, Europe, and other OECD countries. These tools can complement scarce national currencies where monetary policy is ill conceived or too restrictive so as to help clear local markets, employ local people, and provide them with alternative local purchasing power.

[5] As futurists and systems thinkers, we are beginning to understand that shifting toward more ecologically sustainable, equitable forms of human development is occurring at seven levels of our societies: As futurists and systems thinkers, we are beginning to understand that shifting toward more ecologically sustainable, equitable forms of human development is occurring at seven levels of our societies:

1) Individual: de-materializing and de-monetizing individual and family life-styles toward personal development, earth ethics, and sustainable values (Henderson, 1995);Local Government: enacting government ordinances to encourage sustainable lifestyles, for example, pedestrian and cyclist options, zoning for mixed use densities, encouraging local currencies, solar and renewable resource options, recycling, while rejecting subsidizing via taxes and bond issues of global-scale corporate intrusions; Corporate: enacting redesign of corporate governance toward the stakeholder models and re-engineer manufacturing processes in line with corporate obligations under the 1970 OECD Polluter Pays Principle; 4) National: governments can institute “green” taxes on resource waste and depletion and pollution, while removing taxes on incomes and payrolls and implementing the overhauling of GNP/GDP national accounts toward multi- disciplinary, unbundled quality-of-life indicators and broader policy tools beyond macro-economics, and observing WTO rules on tax holidays to lure corporate relocations;5) International: redesigning and renegotiating of trade agreements for democratic access for developing countries, democratizing all international financial institutions, central banks, and trade negotiations to include representatives of employee unions and voluntary civic society. Implementing full-cost pricing, life-cycle costing, and application of corrected national accounts and quality-of-life indicators. Implement user-fees for all commercial uses of global commons and taxes and fines for abuses, including United Nations infrastructure, commercial protocols, and peace keeping operations. Moving the World Bank and the IMF toward democracy, transparency, equity, and bringing them back within the United Nations’ jurisdiction, reinvigorating ECOSOC, the UN Centre on Transnational Corporations, and other UN agencies.6) Civic Society: strengthening and fostering the growth of civic society and education for global citizenship, including favored tax status and free public access channels on all global telecommunications media through treaties such as those governing the electromagnetic spectrum and other common heritage resources;

Planetary Biosphere: implementing agreements and the plan of action of the Cairo Conference on Population and Development, the Women’s Conference in Beijing in 1995, and the Social Summit in Copenhagen in 1995, as well as Agenda 21 and previous Action Plans that can move human societies toward sustainability and protect the planet’s biodiversity. Bringing women into full partnership at all decision levels, can lead to healthier societies, stable populations, and sustainable, truly human development..

Sustainable development can eventually be achieved locally, nationally, and globally by such diverse and innovative strategies. Multi-lateral cooperative agreements and international standard-setting can continue building on the 50 years of quiet progress achieved under the auspices of the United Nations. Pooling national sovereignty is the best strategy to address the many environmental and social costs and problems beyond the capacity of any single nation, as outlined in the 1995 report of the Global Commission to Fund the United Nations, which I co-edited with Harlan Cleveland and Inge Kaul. [61 Competitive economic and military policies can be redirected toward genuine national security through such cooperative international agreements and global governance structures. New revenue streams from user-fees on global commerce can be collected by many nations under such agreements–both to fill their own domestic budget gaps and to fund the many agencies of the public, private, and civic sectors working to further the great transition to global sustainable development.

NOTES

[1] H. Henderson, Building a Win-Win World Berrett-Koehler: San Francisco, 1996; and Paradigms In Progress., 1991, reprint by Berrett-Koehler: San Francisco, 1995.
[2] For example in H. Henderson in Harvard Business Review, 1971, 1973; Business Economics, 1970; Columbia Journal of World Business, 1972; Financial Analysts Journal, 1974; also Politics of the Solar Age, Doubleday: New York, NY, 1981 and TOES, 1988; Creating Alternative Futures, Putnam, 1978, Kumarian, 1996.
[3] H. Henderson, “Transnational Corporations and Global Citizenship,” paper submitted for the Conference on Global Citizenship, sponsored by the United Nations Research Institute on Social Development (Geneva, December 9-12, 1996).
[4] H. Henderson and Alan F. Kay, “Introducing Competition to the Global Currency Markets,” Futures, Vol. 28, #4, pp. 305-324, (UK,1996).
[5] H. Henderson, Building a Win-Win World, op.cit. Chapter 9:”Information: The World’s Real Currency Isn’t Scarce.”
[6] The United Nations: Policy and Financing Alternatives. Global Commission to Fund the UN: Washington, DC, 1996. For copies write to: Global Commission to Fund the UN, 2100 Connecticut Ave., NW, Washington, DC, 20008. Or fax: 904-826-0325.

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