© Hazel Henderson, 2005
Word Count 6,974
International Symposium UNISINOS
University of Sao Leopoldo
Sao Leopoldo, Brasil
May 17-19, 2005
Thank you for the honor of addressing this distinguished symposium and its vital theme of re-integrating human knowledge so as to address the human condition in this new century.
The human family numbering now over 6 billion is clearly the most biologically successful species on planet Earth. We have evolved from our birthplaces on the African continent to colonize every part of Earth, consuming 40% of all its primary photosynthetic production – leading to the current and mass extinction of other species. We have conquered the oceans, the Moon and outer space and now set our sights on Mars. To continue our spectacular technological success and preserve the options for our grandchildren’s survival, we must now face ourselves and fearlessly diagnose our major failures: the persistence of war and poverty. The UN Millennium Development Goals (Figure 1) provide an initial agenda. Fulfilling these Goals and shifting from fossil fuels to renewable resources and their sustainability can employ every willing man and woman on earth and expand global prosperity.
Reappraisals of the work of Charles Darwin together with new evidence from historians, archeologists and anthropologist now clearly point to the evolution of human emotional capacity for bonding, cooperation and altruism. (Figure 2, Darwin’s Thesis�) Competition, territoriality and tribalism, rooted in the fears of our past, served humans well in our early trials and vulnerability. So did cooperation and the ability to trust and bond with each other – controlled by the hormone oxytocin. Higher levels of this hormone during pregnancy and lactation bonds women to their children, over the extended developmental period to maturity. Today, research by scientists from many fields, neurosciences, endocrinology, psychology, physics, thermodynamics, mathematics and anthropology have invalidated the core assumptions underlying economic models – as I will show in this paper. This new research reveals economics as a profession, not a science.
Political economy studies, as they were originally termed, rose to academic prominence after the publishing in 1776 of Adam Smith’s great work “An Inquiry Into the Nature and Causes of the Wealth of Nations“. Invoking the scientific knowledge of the day, Smith related his famous theory of “an invisible hand” that guided the self-interested decisions of business men (sic) to serve the public good and economic growth. Smith drew parallels ascribing this pattern of human behavior to Sir Isaac Newton’s great discovery of the physical laws of motion.
These principles of Newtonian physics can still be used to guide space craft to land on distant celestial bodies – most recently, Titan, one of Saturn’s moons.
Economists of the early industrial revolution based their theories not only on Adam Smith’s work, but also on Charles Darwin’s The Descent of Man and The Origin of Species (www.thedarwinproject.com). They seized on Darwin’s research on the survival of the fittest and the role of competition among species as additional foundations for their classical economics of “laissez faire” – the idea that human societies could advance wealth and progress by simply allowing the invisible hand of the market to work its magic. In class-ridden Victorian Britain, this led economists and upper-class elites to espouse theories known as “social Darwinism:” the belief that inequities in the distribution of land, wealth and income would nevertheless produce economic growth to trickle down to benefit the less fortunate.
Charles Darwin saw the human capacity for bonding, cooperation and altruism as an essential factor in our successful evolution. In retrospect, how otherwise could we have gone from the experience of over 95% of our history lived in roving bands of 25 people or less  – to today’s mega cities: Sao Paulo, Shanghai, Mexico City or Jakarta? These improbable metropolises, along with global corporations and governance institutions such as the United Nations and all its agencies, the European Union, now expanded to embrace 25 formerly warring countries – could never have emerged without humanity’s capacities for bonding, cooperation and altruism.
So as we have evolved into our complex societies, organizations and technologies of today – we need to re-examine our belief systems and the extent to which they still may be trapped in earlier primitive stages of our development. Why for example do we underestimate our genius for bonding, cooperation and altruism – seemingly stuck in our earlier fears and games of competition and territoriality? Why do we over-reward such behavior and still assume in our economic textbooks and business schools that maximizing one’s individual self-interest in competition with all others is behavior fundamental to human nature?
Why is our equal genius for bonding and cooperative behavior – even altruism not taught in business schools as the true foundation of all human organizations and our greatest scientific and technological achievements? In reality, as every business executive knows, competition and territoriality are channeled within structures of cooperation and networks of agreements, contracts, laws and international regulatory regimes that allow airlines, shipping, communications, and other infrastructure to undergird global commerce and finance. Thus, the formula for humanity’s success has always rested on cooperation while embracing competition and creativity. Yet, shocking evidence documents that the very methods and curricula taught in most business schools encourages managers in the kind of behavior that produced the wave of corporate scandals and crimes at Enron, Worldcom, Parmalat, Tyco and Arthur Andersen.
What do deep, primitive beliefs about the primacy of competition and territoriality have to do with poverty and war? All are rooted in ancient human fears – of scarcity, of attacks by wild animals or other fearful bands of humans. Rooting out these fears – deeply coded in our “us-versus-them” political and economic textbooks – is the essential task of our generation. We must move beyond this economics of our early reptilian brains – to the economics of our hearts and forebrains! These old fears underlie today’s continuing cycles of oppression, poverty, violence, revenge and terrorism. Indeed, if we humans do not root out these now-dysfunctional old fears, we will destroy each other.
Meanwhile, the fantastic potential we have created for further successes through fulfilling the UN Millennium Development Goals and building prosperous, equitable, sustainable human societies is now within our grasp. The new �superpower� of global public opinion is already rejecting the old dysfunctional dogmas. Over ten million of our fellow humans demonstrated peacefully worldwide against the preemptive war on Iraq. Yet as Thomas Kuhn described in his Structure of Scientific Revolutions old dysfunctional beliefs often persist long after they have been disproved.
So it is with today’s economic textbooks and the entire paradigm underlying the �Washington Consensus� model of development. We have evidence of its bankruptcy all around us: widening poverty gaps, the digital divide, unbalanced, unsustainable economies mired in debt – breeding despair and terrorism, diverting resources from enhancing human life to military weapons, death and destruction! All this is not a flaw in human nature – but a flaw in our encoding of our past in that set of dysfunctional beliefs that deny humanity’s true genius – those cooperative, bonding and altruistic skills that have undergirded all our progress to date! Dysfunctional beliefs are deeply entrenched in models of economics. This malfunctioning source code underlying economics is still replicating behaviors and organizational structures that imperil human survival under 21st century conditions.
Echoes of these theories are still heard today and propounded in mainstream economic textbooks as theories of �efficient markets�, rational human behavior as �competitive maximizing of individual self-interest�, �natural� rates of unemployment (codified as the NAIRU rule of central bankers) and the ubiquitous �Washington Consensus� formula for economic growth (free trade, open markets, privatization, deregulation, floating currencies and export-led policies). Lately, the US Federal Reserve Board’s use of �neutral� interest rates has been exposed by the Levy Institute as convoluted and favoring asset owners above workers’ wages (www.levy.org).
All these theories underpin today’s economic and technological globalization and the rules of the World Trade Organization, the International Monetary Fund, the World Bank, stock markets, currency exchange and most central banks. Since the 1980s and the waves of global deregulation and privatization unleashed by Britain’s Margaret Thatcher and US President Ronald Reagan, central banks have lobbied for freedom from political control – even by democratically-elected governments. Even Britain’s labor government under Tony Blair conceded this autonomy to the Bank of England.
How was this quiet “coup” achieved by central bankers and their advocates among the economics profession? Certainly not due to their performance in achieving their targets of non-inflationary economic growth and fuller employment – given the recent history of financial crises booms, busts, bubbles, un-repayable debt and un-employment. The policy drumbeats of economists and market players supported central banks. They were buttressed by their claims that economics with its increasing use of mathematical models, had matured into a science, matching the feats of natural sciences since Newton and Darwin in discovering the laws of nature. Economists’ theories from Smith’s “invisible hand” to Vilfredo Pareto’s “optimality” were elevated from theories to the status of scientific principles.
Enter the Central Bank of Sweden. In 1969 the Bank of Sweden put up $1 million (US) to create a prize to confer scientific status and legitimacy on the academic discipline and policy advocacy of the economics profession. Thus, the Bank of Sweden named its economics prize “in memory of Alfred Nobel” and lobbied this designation onto the Nobel Prize Committee. As his descendant, Peter Nobel put it, “The Bank of Sweden, like a cuckoo, laid its egg in the nest of another very decent bird, infringing on the name and trademark of Nobel.” Since 1969, most of the Bank of Sweden Prizes in Economic Science has been awarded to US economists espousing the Chicago School policies of laissez faire “free markets” typical of its most prominent prize winner Milton Friedman (who is often erroneously described as a “Nobel laureate”). Peter Nobel added, “These economists use models to speculate in stock markets and options – the very opposite of the humanitarian purposes of Alfred Nobel.”
Fast forward to December 2004 and the revolt of scientists, including members of the Nobel Committee and Peter Nobel himself. They all demanded that the Bank of Sweden’s economics prize either be properly labeled and de-linked from the other Nobel prizes – or abolished. The reason for this sudden outburst, which had been brewing for some time, was the awarding of the economics prize to two more Chicago School economists Edward C. Prescott and Finn E. Kydland for their 1977 paper purporting to prove by use of a mathematical model, that central banks should be freed from the control of politicians – even those elected in democracies. The mathematicians pounced – pointing to the many mis-uses of their models by Prescott and Kydland and other economists to “dress up” their questionable theories and unscientific assumptions (Dagens Nyheter, Stockholm, Dec. 10, 2004).
As this news spread around the world (InterPress Service, Jan 2005, LeMonde Diplomatique, Feb. 2005) the usual heralding of the new economics prize winners in the mainstream financial press was strangely muted. Editors and spokespersons for market fundamentalism fell quiet in their citing of their favorite policies as backed by some “Nobel laureate” in economics. Yet economists need not be embarrassed by this unmasking as a profession rather than a science. Many honorable professions are content with this term: those who practice law, medicine, engineering, architecture and other such applications of knowledge. Lawyers in particular are happy to be known as advocates. Similarly, we now know, economists have always been advocates of various government policies, regulations or deregulation, and of the interests of their clients (most often bankers, financial firms and corporations in general). There is no quarrel with these advocates, whether lawyers, economists or lobbyists, or their roles in policy-making. All that is necessary is clarity on the part of these professionals and all advocates – so that the public is fully informed – and the issues are argued honestly.
The globalization of finance and technology, the spread of privatization and deregulated markets have produced a range of unanticipated consequences. For example, today’s global Information Age has already become The Age of Truth – where careless corporate actions can destroy a global brand in real time. Business leaders worldwide have responded by embracing the idea of good corporate citizenship, both at home and globally. Two thousand companies (including some 600 in Brasil) have signed on to the ten principles of Global Corporate Citizenship of the Global Compact, launched by the United Nations in 2000, covering human rights, workplace safety, justice and ILO standards, as well as the environment and anti-corruption. Civic groups worldwide now monitor all the companies who have engaged with the Global Compact, to see if they are walking their talk. Backsliders are publicly shown on hundreds of websites. The World Social Forum has successfully linked hundreds of thousands of civic activists and organizations and made the beautiful city of Porto Alegre a mecca of innovative thought. The independent global media company I chair, Ethical Markets Media LLC’s TV series on US public broadcasting stations is benchmarking higher standards, corporate ethical performance and socially-responsible investing worldwide.
Capitalism’s great proponent, Adam Smith, would hardly recognize this evolution of markets and companies toward social and environmental responsibility. Similarly, such changes in corporate behavior have been driven by pension funds and millions of investors who care about their children’s future and the state of our planet. Students and prospective employees also ask about companies’ performance on human rights and the environment, while new auditing standards of the Global Reporting Initiative (GRI) prescribed “triple bottom line” accounting for people, profit and environment. Six hundred global corporations now comply with GRI accounting in their Annual Reports. (www.gri.org) (Figure 3)
Sustainability has become a buzzword and even Wall Street’s venerable Dow-Jones now has its Sustainability Group Index. The surprise to economists, mainstream financial players and media is that these new indices: London’s FTSE4Good, the US CALVIN and Domini Social 400 Index, as well as Brasil’s New BOVESPA, regularly out-perform the mainstream Dow-Jones and Standard and Poors 500. Are we witnessing an evolution of human collective behavior toward moral sentiments and altruism? Or is cooperation for the common good now a condition of our survival? I submit that both are involved.
The stages of human development are illustrated well in this diagram by futurist Duane Elgin (See Figure 4, Evolutionary Inflection). We are also entering the Age of Light (See Figure 5, The Age of Light). As we humans shape this current global stage in our development, our new awareness of our beautiful planetary home is calling forth the expanded identity I call “planetary citizenship.” (See Figure 6, Toward Planetary Citizenship). This larger identity enfolds and gives deeper meaning to our identity with our family, our community and companies, and the country of our birth. We are enriched by the unique expressions of so many other cultures in our world. We savor their art, dance, music, literature and especially their cuisine! This human mutual appreciation for diversity is the starting point for planetary citizenship and the necessary transition to global sustainability.
Fundamentally, we humans have three basic resources at our disposal for this transition – information, matter and energy (See Figure 7, Three Modes of Resource Use). Of these, information is primary, since the quality of information drives our use of matter and energy. The history of the social innovation of markets is instructive, since they are now evolving rapidly. Markets of course, were created by humans, not by any deity. Adam Smith’s “invisible hand” was in reality our own human invention, as recognized by historians of science. Yet, this belief in an “invisible hand” persists in many economic textbooks – even today!
The organization of markets by the British Parliament three centuries ago fostered the rapid evolution of industrialism. These early markets described by Adam Smith sparked many innovations. The British laws that legitimized markets and protected property rights led to a revolution of individual entrepreneurship, creativity and innovation, which spread across the Atlantic Ocean and Europe. This 300 year-old wave of industrialism spread around the world and today is still changing Japan, China, India and reaching the other ancient cultures of South East Asia from Vietnam and Cambodia to the Islands of Polynesia. Yet, industrialism must be reshaped because it is socially and environmentally unsustainable.
The early markets of the Industrial Revolution and their business leaders created the infrastructure platforms of concrete, steel, electricity, mechanized production, shipping, roads and ports that still undergird today’s societies. But the market freedoms provided by social legislation limiting companies’ liabilities, enforcing property rights, upholding their patents to their inventions, also brought great harm to less fortunate, vulnerable members of society. Who can forget the history book horrors of those early sweatshops: the children chained to spinning machines in textile factories, the women dragging carts of coal on their hands and knees in Britain’s coal mines. Britain’s Enclosure Laws drove countless thousands of peasants off their ancestral common lands. As production moved from homes and villages to factories, hoards of hungry people wandered around the country begging for food and shelter. Industrialism’s goal was labor-saving via investments in technology. Machinery, property rights and enclosure drove peasants and small farmers off the land and into factories. Then, as factories automated their production lines, workers moved into service sectors. Today, services are being automated. Full-employment promises fall short and un-employment remains an ironic result of industrialism. Today, economists are admitting that the flip side of their model of “productivity” is more unemployment. This “trickle-down” model of job-creation is also revealed as broken.
In every country where industrialism took hold, the “tortoise” of social innovation lagged behind the “hare” of technological innovation. The history of the industrial revolution with all its good and bad news has included the lagging response of social rules to distribute the fruits of mechanized production and steer technological development and regulations to repair its social costs and environmental damage. The very notion of an “invisible hand” inhibited broader views and visions of how economic systems could be steered to foster the common good, shared prosperity and protect nature’s wealth. A few industrialists evolved from their single-minded accumulation of money and material goods – into philanthropists who pointed publicly to the sin of hoarding. They gave away their gains to foundations that to this day promote peace, education, health and the alleviation of poverty and exclusion from the benefits of access to both markets and society.
The economist, Joseph Schumpeter best described these processes of “creative destruction” that also drove this greatest period of technological innovation in human history. The Information Age superseded industrialism itself in the mid-20th century. This new wave of innovation has produced all the good and bad news of today’s globalization of markets and technology. In my Politics of the Solar Age (1981, 1986), I documented the ideological biases of neoclassical economics and the unreality of many of the inaccurate assumptions underlying even today’s economics textbooks. The new chorus of scientists in physics, mathematics, neurosciences and ecology joined their Swedish colleagues in calling for the Bank of Sweden Prize in Economics to be broadened, properly labeled and disassociated from the Nobel Prizes – or simply abolished. The objections from the “hard” scientists who study the natural world and whose research findings are therefore subject to verification or refutation included scores of ecologists, biologists, natural resource experts, engineers and thermodynamicists. I documented their critiques of economics, building on the 1971 classic by Nicholas Georgescu-Roegen, The Entropy Law and the Economic Process, which I reviewed in the Harvard Business Review (1971).
Other scientists including physicist, Professor Dr. Hans Peter Durr of Germany’s famed Max Planck Institute agree that economics is not a science. Durr says “economics is not even bad science because its core assumptions are incorrect.” I had previously asked Prof. Durr “how could such a scandalous mis-use of other sciences have continued unchallenged for over 40 years?” Durr replied that academic etiquette usually restrained scholars from other fields from straying into other disciplines, especially with such criticisms. Austrian physicist, systems theorist and best-selling author, Fritjof Capra told me that “The dimension of meaning, purpose, values and conflicts is critical to social reality. Any model of social organization that does not include this critical dimension is inadequate. Unfortunately, this is true for most theoretical models in economics today.”
Even the growth of hybrid professions – so-called ecological economics, natural resource economics and others, cannot escape economics’ fundamental errors. Many critics liken these to religious beliefs, such as the postulate of “an invisible hand” of markets and since so many of its “principles” are unlike the tested principles in physics that can guide a spaceship to the moon. For example, I showed that economics’ Pareto Optimality “principle” ignored prior distribution of wealth, power and information – and could lead to unfair social outcomes. Dressing up such concepts in fancy mathematics tends to disguise their underlying ideologies. Professor Robert Nadeau, a distinguished historian of science at George Mason University in the USA has also examined such flaws in economics in his recent books.
The temptation to mathematize concepts and faulty assumptions in economics is understandable, because it obscures these value-laden biases. This conceals public issues as too “technical” for the public or even legislators to understand. Thus, economists gain influence with the wealthy and powerful institutions in society which usually employ them. Neither have economists been held to the same standards of accountability as other professions. If a doctor makes a patient sick, a malpractice suit can be filed. Economists’ bad advice can make whole countries sick – with impunity. Today, economists from the IMF and central banks to those serving financial firms all bemoan the trend toward spending rather than saving. They refuse to acknowledge that this behavior is shaped by advertising, credit cards and the constant barrage of consumerism on global mass media.
Neuroscientists, biochemists and those studying the role of hormones, as well as psychologists, anthropologists, behavioral scientists and evolutionary biologists are now dealing death blows to economics’ most enduring error. This lies in its model of “human nature” as the “rational economic man” who competes against all others to maximize his own self-interest. This fear and scarcity based model is that of the early reptilian brain and the territoriality of our primitive past. Neuroscientist Paul Zak at Claremont University has linked trust, which enables humans to bond and cooperate, to the reproductive hormone oxytocin.
Indeed, we now know from brain science why people are susceptible to behavior change via mass media, advertising and other forms of persuasion and lures to instant gratification. Opportunistic economists are now teaming up with brain researchers using MRIs (magnetic resonance imaging) to explore how the “reptilian” portions of the human brain (associated with the limbic system) are susceptible to irrational urges, instant gratification and short-sightedness. Now that economists’ models of human behavior (as “rational” maximizing of self-interest in competition with all others) are under attack by such brain research, this field is being colonized as “neuro economics” or “behavioral economics” in the same way that economists captured other disciplines as “ecological economics” and “environmental economics.” I pointed out that the long history of this tendency to colonize other disciplines with false claims of universality was due to the power and financial advantages of economists as apologists for the powerful interests of business and finance.
It remained for honest reporters, Peter Coy to explain in Business Week “Why Logic Takes a Backseat” (March 28, 2005) and Justin Fox’s “Why Johnny Can’t Save for Retirement” in FORTUNE (March 21, 2005). Humans are always “of two minds” about the signals in their lives and environments. They shift back and forth between their pre-frontal cortex (the seat of rational decision-making) and their reptilian, limbic brains. As yet, few have focused on the implications of this new brain research for the crucial role and responsibility of the advertising and commercial media industries. Over $500 billion is spent annually on advertising to over-ride our rational pre-frontal cortex and its longer-term decisions “to save for a rainy day” and tempt us to run up credit card debts to buy goods on impulse – through sophisticated manipulation of our senses and limbic brains. Advertising in the USA is a pre-tax cost for companies – to promote mass-consumption. Today, mass-consumption of goods as an engine of economic growth is un-sustainable.
The critique of economics by mathematicians is that people don’t behave like atoms, golf balls or guinea pigs. Unlike the economists “rational economic man” people are often irrational and their motivations are complex, with many, especially women, enjoying caring, sharing and cooperating often as unpaid volunteers. (See Figure 8, Full Repertoire of the Human Behavior) Chaos theorist and professor of mathematics at the University of California, Ralph Abraham believes that economics may one day become a science. Abraham is researching the new mathematics employed by some economists, by programming “agents” in computer models that are supposed to mimic human behavior. Prof. Abraham adds, “The prize in economics should be broadened in line with the full spectrum of social sciences to which it belongs and it should be distanced from the Nobel awards, like the Fields Medals in mathematics.” Yet Peter Nobel maintains that economics is not a science. Riane Eisler, systems scientist and author of the best-seller, The Chalice and the Blade, agrees. The agent-based computerized efforts to make economics more scientific may pay off in the future. One recent model “Sugarscape” funded by gullible foundations, simply recreated poverty gaps and trade wars. I suggested that if they had programmed half of their “agents” with the behavior females so often exhibit (by choice, or involuntarily in patriarchal societies) they might have produced different results. Economics is patriarchal to its core, which accounts for the rise of feminists economics.
Today, all economies are still mixtures of public and private sectors, two sides of the same coin. Humans invented markets, which are always created by human rules and laws. The “invisible hand” is our own – and we should be proud of this! The two top layers of the “cake” of total productivity, the private and public sectors, rest on two lower layers ignored by economists: the Love Economy of unpaid work and Nature’s Productivity (See Figure 9, Total Productive System of an Industrial Society). Mass communications and the Internet helped spawn the new Third Sector: the citizen non-profit groups, charities and foundations of global civic society. The World Social Forum, launched in Porto Alegre, in 2000, has focused the global debate about new paths to sustainable human development. The “cultural DNA” of societies always determines the size and scope of public, private and civic society sectors: based on their unique history, values, goals and beliefs that energize their people. The one-size-fits-all economic theories of development, such as the “Washington Consensus” have been discredited as they encountered the realities of the Love Economy, diverse cultures, topography, climate, agriculture and the basic productivity of ecosystems.
Cultural DNA still drives development in all societies – even though these human, social and cultural assets (and sometimes liabilities) are overlooked in economic textbooks, theories and the statistics they generate. In fact, these economic textbooks and models are now over a hundred years out of date. Economic models are still based on the Newtonian “clockwork” ideas of general equilibrium. Thus, they are also blind even to the dynamic change and technological evolution engendered by the very markets and industrialism on which economists claim to focus and interpret! These dynamic changes are now mapped by other disciplines: chaos theory, system dynamics, physical and behavioral sciences and game theory. Today, economists are beginning to focus on this colossal error and awaking to the fact that general equilibrium economic models cannot be used to guide macro-economic policy in rapidly-evolving technological societies.
Economists’ colonizing tendencies expanded to “capture for our profession” (as a UK-based economics society put it) the issues of global warming and climate change. Hyphenated societies of ecological-economists, social-economists, political-economists, health-economists, labor-economists, behavioral-economists, neuro-economists and evolutionary-economists tell this story of intellectual colonialism. Economists trump other disciplines in academia too. Their departments and business schools receive the lion’s share of funds, research contracts, power and prestige. Economics is politics in disguise. Cost-benefit analysis or a carefully crafted economic impact statement can squelch any government reform or new social or environmental initiative. Such analyses emphasize the costs of change to existing interests, while ignoring or downplaying the current costs of the status quo on other actors, the environment or future generations. Cost-benefit analyses fail to estimate the future benefits of alternative policies and average out costs and benefits so as to obscure who are the winners and who the losers of a proposed policy. All this confuses the general public into believing that the issue is “technical” rather than political.
Today, the chinks in economists’ armor are becoming widely evident – as has the game of preempting the work in other disciplines. Psychologists won recent Bank of Sweden Memorial Prizes in Economics for challenging simplistic economic models of human behavior. Even Harvard University may soon allow a new course in its economics department that challenges the orthodoxies still undergirding the policies of the IMF and the decisions of Wall Street and the world’s bourses. A few economists borrowing from psychologists and real world observation now admit that we humans are not always competitively maximizing our own self-interest – the standard economic view of homo economicus. Many people enjoy giving as well as receiving, care about what kind of world we are leaving our children – “irrational” behavior to an economist. No wonder economics is called “dismal.” As London-based, The Economist, points out, this re-think undermines orthodoxy in such major policy areas as free trade, taxes, school vouchers, as well as globalization and the environment.
An article by journalist, Robert Lee Hotz, “Anatomy of Give and Take” in the Los Angeles Times (March 18, 2005) describes a recent experiment at Baylor College of Medicine in Houston, Texas where two women were observed with the use of a $2.5 million brain scanner, as they interacted in a game involving financial and investing behavior. The brain researcher’s goal was to test and hopefully discover the secret of trust, the crucial human behavior that makes markets possible – and the variable missing from the mathematics used by economists in their models. Neuro scientist, Paul Glimcher (of New York University) explained that “we have started looking for pieces of economic theory in the brain.”
After monitoring the many moves between the two young women, it turned out that, contrary to the theory of many game theorists, these two female players trusted each other. Traditional game theory predicts that lack of trust on the part of both players would cause both to lose (the Prisoners Dilemma). The outcome of the women’s game was that both won. Such optimal outcomes are termed “win-win” games as opposed to the “win-lose” games of economic theory and the “lose-lose” outcome of the Prisoners Dilemma game.
This outcome also challenges game theorist, John Nash’s famous equilibrium, for which he won a Bank of Sweden Prize in Economics, and which “predicts” that in economic transactions between strangers predicting each other’s responses – that the optimal level of trust is zero! Economics was always based on patriarchal values – ignoring the work of women in child rearing, caring for the old, community volunteering as “uneconomic” in GNP. Economics did not predict the rise of socially-responsible investing (now at $2.3 trillion in the USA alone) and textbooks still imply that caring, sharing, volunteering and cooperating are irrational unless self-serving!
MIT-trained economist, John B. Perkins, author of Confessions of an Economic Hit Man (2004) documents the misuse of economics to over-estimate GDP-growth projections to justify the huge World Bank and IMF loans to many developing countries in the 1980s, which ensnared them into unrepayable debt. The best-known economists in the USA are admitting these and other errors, including Paul Krugman, Joseph Stiglitz and Jeffrey Sachs. Unsung women economists revealed the patriarchal bias of economic theories and led the way in pinpointing these and other errors. They devised more realistic models – from Sweden’s Alva Myrdal, India’s Devaki Jain, Denmark’s Esther Boserup, to Argentina’s Graciela Chichilnisky, Brasil’s Aspasia Camargo and futurist Rosa Alegria, Germany’s Inge Kaul, New Zealand’s Marilyn Waring and many others in the USA and other countries.
Statistical revisions, including those to overhaul GNP and GDP national accounts were pledged by 170 governments at the Rio de Janeiro Earth Summit in 1992. (See Figure 10, Gross National Product Problems). They were also recommended by the largest-ever global convening of statisticians of sustainable development and Quality of Life (ICONS) in Curitiba, Brasil October 2003. Such statisticians have also repeatedly recommended that GNP and GDP record national assets: the value of public infrastructure investments in roads, public health facilities, sewage-treatment, ports, airports, schools and universities that underpin the productivity of modern economies. In too many countries, these asset accounts, which properly balance the public debts undertaken to construct such vital infrastructure – are not recorded! Such public works, buildings and facilities are immensely valuable and should be amortized over their lifetime of use – often over a hundred years! Try running a company like this, where your balance sheet could not include the value of your factories and capital assets! The USA made some of these needed corrections in January 1996 and these “stroke of the pen” corrections accounted for one third of the budget surplus of the Clinton administration. Canada followed suit in 1999 and went from a deficit to a $50 billion budget surplus. The investments called for in the Millennium Development Goals, the Monterrey Consensus and other proposals, such as the Global Marshall Plan, must be properly accounted as assets, since they will also produce dividends for societies as they transition to sustainability.
Today, in our Information Age, we acknowledge the value of investments in Research and Development, management education and employee training programs. Accountants are learning to account for intangible assets, goodwill, brands and other reputational risks and benefits. Risk-analysis models, such as those of Innovest Strategic Value Advisors now calculate social and environmental risks overhanging a company’s balance sheet – which if not recorded, can be overlooked and lead to sudden loss of shareholder value. Multi-billion dollar US public pension funds now require companies in their portfolios to disclose their plans to mitigate risks of climate change. Similar disclosures are mandatory in the European Union. Another area is corporate advertising, which is coming under increasing public criticism. I founded the non-profit EthicMark Institute, which will be based at Case Western University at the Center for Business As Agent of World Benefit, founded by David Cooperrider and Judy Rodgers. The EthicMark Institute will recognize advertising campaigns that inspire and enhance the human spirit with the “EthicMark” certification. (See www.ethicalmarkets.com.)
The World Bank was catching up with all these statistical innovations – beyond macroeconomic models to multi-disciplinary systems approaches – using all the multiple metrics beyond money to map these diverse aspects of human development and progress. This progress may easily revert to the neoconservative agenda and laissez-faire models of the past. I and my partner, The Calvert Group of socially-responsible mutual funds use the multi-discipline approach in our Calvert-Henderson Quality of Life Indicators, which are updated regularly at www.calvert-henderson.com (Figure 11). The World Bank was also going multi-disciplinary – replacing some of its macroeconomists with sociologists, anthropologists, epidemiologists, educators – and even civic society representatives. Under neoconservative management these policy innovations may be reversed. In its 1995 report on the Wealth of Nations, the Bank acknowledged that 60% of this wealth is comprised of human capital and 20% ecological capital. Financial and built capital (factories and monetary assets) represented only 20%. For 50 years the Bank focused most of its attention on “economic” growth of this 20% of countries’ wealth. Now, the Bank is shifting its focus to that 60% of human capital with more health and education investments – recently citing the education of girls as a country’s best investment.
Yet the Bank has not, so far, campaigned to add even public asset accounts to GNP/GDP. Neither the Bank nor the International Monetary Fund (IMF) require the addition of asset accounts, even for infrastructure assets, let alone for education and health – the most vital investments to maintain that 60% of the human capital comprising the wealth of nations. These accounting corrections will shift statistical focus to longer-term and sustainable investments. Brasil is helping the IMF to correct its GNP/GDP accounting. In April 2004, the IMF agreed with Brasil that its vital backlog of infrastructure investments in rapidly-growing urban areas for basic sanitation and other public facilities should not be accounted for in ways that would increase the public debt. However, the IMF only agreed to the correct accounting for these public assets as a “pilot project,” an intellectually absurd position! The IMF is still resisting adoption of these corrections due to pressure from Wall Street bond holders, banks and other financial special interests that benefit from high interest rates. This issue can be advanced at the next WTO round, by the Group of 20 and the G-77.
I and other critics of the IMF’s many mistakes over the past decades are now calling for the permanent overhaul of their GNP/GDP and all other macro-economic models. The IMF should not only set up proper accrual accounting of assets for all investments in public infrastructure – but should re-categorize education and public health from “consumption” to “investment” in human capital. The World Bank and the UN System of National Accounts (UNSNA) should make similar corrections and add nations’ public investments in education and public health to these asset accounts and amortize them over 20 years – the time it takes to raise a child to a healthy, well educated, productive adult. It is these accounting corrections that can reveal the opportunities for long-term financial and social returns in the Millennium Development Goals, as Jeffrey Sachs shows in The End of Poverty (2005).
As these statistical innovations reflect the technological changes in our information-based societies, and are reported in mass media, citizens in all democratic societies will align with these evolving values. New business school curricula now cover all these new issues and indicators. Pre-eminent is Brasil’s Amana-Key Desinvolvimento e Educacao in Sao Paulo. Others include, World Presidio College in San Francisco, which offers an MBA in sustainable business and the Center for Business as Agent of World Benefit at Case Western University, Cleveland, Ohio. Citizens will understand and place education and self-development as the best investment individuals, companies and societies can make in a better future for all.