PRINCIPLES OF THE DEMOCRATIC ECONOMY VS. THE EXTRACTIVE ECONOMY

“Democracy needs to move inside the economy.. [It is not enough to put] such values as sustainability or fairness on the outside of the system through regulation and social safety nets.. These values need to be in the DNA.” 

Marjorie Kelly and Ted Howard (2019:8): The Making of a Democratic Economy. Building Prosperity for the Many, Not Just the Few. 

The first 7 principles are quoted from Kelly and Howard (ibid.) [Additional comments and quotes from other sources in brackets, emphasize, bullets, numbering added. Order of some text rearranged.]

As shown, there is much overlap with the principles of Community Wealth Building (CWB) (2 min. video here).   «[CWB] is a set of tools to reorganise local economies so that wealth is not extracted, but retained and recirculated locally, benefiting local people and communities.» (Frances Jones: Where’s the community in community wealth building? )

The 8th principle, slightly reformulated, is taken from Joe Guinan and Martin O’Neill (2020): The Case for Community Wealth Building.

(1)       The common good comes first: The principle of community

  •  At the core of a democratic economy is the common good, in keeping with the founding aims of democracy in politics. “There must be a positive passion for the public good, the public interest,” as John Adams wrote “and this public passion must be superior to all private passions.”

A democratic economy designs social architectures around what we value, with community and sustainability the alpha and omega, our inter-relatedness and interdependence at the center. It involves the develop­ment of what ecologists call symbioses. As conservationist Aldo Leopold once put it, “Politics and economics are advanced symbioses” in which free-for-all competition is replaced by structures for cooperation.

[So] community is the foundational principle of a democratic economy. At the base of such a system is a picture of the self as person-in-community,. The self- contained individual in the real world does not exist.. because the social character of human life is primary. Community creates the conditions in which each of us may flourish. [1] ..[And] the ultimate community is the earth, for good lives are not possible without a healthy environmental ecosystem. [In sum] The first moral principles of this system are com­munity and sustainability, for as indigenous peoples have long known, the two are one and the same.

  •  By contrast, the extractive economy’s picture of the self is an isolated individual—a rational economic man out to maximize his own gains, or in business, the self-made man.

(2)       Creating opportunity for those long excluded: The principle of inclusion

 The prosperity of ordinary people is the sun around which a demo­cratic economy orbits. That points to a principle of inclusion for those long excluded…

(3)       Building community wealth that stays local: The principle of place

The work of building a democratic economy is grounded in loyalty to geo­graphic place. The real economy of jobs and families and the land always lives someplace local. Cities and towns are places people care passion­ately about, where working together for the common good instinctively makes sense.

 The democratic economy begins with building community wealth of many kinds.. Keeping this wealth local means using locally rooted ownership, ideally held broadly, to create resilient, shared prosperity.  [Here the inspiration from Community Wealth Building (CWB) is evident:]

  • Community wealth creation is fed by the power of institutions anchored in place, like hospitals, universities, and colleges.. As nonprofit anchors [2] take up an anchor mission—buying, hiring, and investing locally—money recirculates in the community, creating a multiplier effect, generating greater community stability and well-being.
  • By contrast, globalization and financialization are the hallmarks of the extractive economy. The place that drives this economy is no place at all, for it embodies a worldview of a generic, commodified economy,[3] where investments cross borders with the click of a mouse..Benefits are said to trickle down, when actually the system extracts wealth up from communities and sets it spinning in the ethereal realm of speculative trading.

 [In the Context of Community Wealth Building, Guinan and O’Neill (ibid.) formulate these related principles of a democratic economy:

  • The central role for multipliers and internalising the circulation of money, with investment stick­ing rather than capital being extracted.
  • Economic development understood not as a partnership between the state and business, in which the state is unaccountable and subordinate, but as a multi-stakeholder process.
  • Place matters, and direct investment in neighborhoods.]

[As elaborated by Democracycollaborative.org (sourced from a now dead link):

“When a purchase is made locally, that money stays in the community longer, because local businesses are more likely to spend locally. This translates into greater local prosperity, greater community stability, and a tighter-knit network of local people and businesses—all key to building community wealth.

Collaboration matters. Building community wealth isn’t just about more money locally,-it’s about the power that comes from building lasting relationships of mutual supportFostering effective collaboration between anchors, local government and neighborhood residents isn’t just a matter of convenience or capacity, it’s intrinsic to the project of community wealth building.

Localizing investment matters. There are vast pools of capital in the investment portfolios of local anchors, in personal and institutional bank deposits, and in our pension funds and retirement plans—imagine what’s possible if these investments were put to work locally building community wealth, rather than fueling Wall Street and The City’s extractive casino economy?

Place really matters. Don’t expect wealth to trickle down. Without an intentional place-based strategy to make sure local assets work to build local wealth, there’s nothing stopping wealth from leaving your community. And you need an intentional strategy to make sure that locally the hardest hit parts of your community are first in line for new opportunities: inequities won’t undo themselves.”]

(4)   Putting Labor before Capital: The principle of good work

  • In the extractive economy, income to capital is to be maximized; income to labor is to be minimized. This mandate is embedded in the structure of the income statement, which defines income to capital as profit, something to be increased, while income to labor is defined as an expense, to be endlessly decreased.

A similar bias is found in corporate purpose focused on gains to capital, board membership limited to capital, and a culture of investing that defines maximum income to capital as the prime aim. As the custom has it, no amount of investment income is ever enough.

This bias toward capital leads to the ongoing effort to expel labor income from the system, however possible.

  • In a democratic economy, good work at a living wage is a central aim. Workers are to be accorded dignity and work itself is honorable—a vital part of develop­ing what philosopher Martha Nussbaum calls full human “capabilities.”

 Economic and political freedoms reinforce one another. Labor comes before capital. [4] This principle was articulated by Abraham Lincoln, who observed that labor is “the superior of capital,” deserving “much the higher consideration.”

[Guinan and O’Neill (ibid.:54) are linking economic freedom not only with political freedom, but also with ‘real democracy’ (own term):

“Democracy cannot take firm root in a society where economic hopelessness undermines a sense of political agency, where deep social inequalities make citizens into mutual strangers, and where economic instability precludes active determination of a community’s economic development, making the ambition to shape our collective future seem unattainable and sapping the attention and energy that citizens need in order to exert themselves politically.”]

(5)   Creating Enterprise Designs for a New Era: The principle of democratized ownership [5]

In today’s own­ership design, corporations are

  • short-term in orientation,
  • require endless growth,
  • measure success by profit and share price,
  • externalize costs onto the environment and,
  • too often, are amoral in decision making.

 If our economy is to become fit for an era of ecological constraints, enterprise design will evolve away from [this] extractive design.

  • In a democratic economy, enterprises are understood to be human communities. Ownership resides with different publics, which could be the workers, the community, the municipal authority, or where appropri­ate, investors. Democratic enterprises are appropriately scaled, with living missions and with decision making by moral agents—which is more likely when ownership is locally rooted and close to daily operations. 
  •  Rather than seeing enterprises as living systems, the extractive econ­omy views them as pieces of property to be owned and sold by the prop­ertied class. Workers are economically disenfranchised, much as women and blacks were once politically disenfranchised.

[This is reflected in the strategy for Community Wealth Building:

«..Community Wealth Building supports democratic collective ownership of the local economy through a range of institutions and policies. These include worker cooperatives, community land trusts, com­munity development financial institutions, so-called ‘anchor institution’ procurement strategies, munici­pal and local public enterprises, and public and community banking.

Community Wealth Building is based upon economic interventions that seek to intervene not ‘after the fact’, in an attempt to redistribute the eco­nomic gains from a lopsided economic model, but by re-configuring the core institutional relationships of the economy in order to produce (…) more egalitarian outcomes as part of its routine opera­tions and normal functioning. As such, it represents in microcosm a new approach to a more democratic economy.

The aim of this process of democratic expression is to shift the position of individual citizens from being bystanders, who can only watch economic forces play out in their local communities, to active participants, who can collectively give some form and direction to the economic future of their local area. At the heart of this strategy is the promotion of alternative models of ownership, whether worker cooperatives, land trusts, or forms of local public enterprise accountable to the community and under collective democratic control.»

(Guinan and O’Neill, ibid.:2,5-6,48, emphasize added)

(6)       Protecting the Ecosystem as the Foundation of Life: The principle of sustainability

  •  In the extractive economy, sustainability conversations with corporations and investors must fit within the frame of profit maximiza­tion, showing how to make more money through sustainable practices.
  • The UN Brundtland Report defined] sustainability as meeting present needs without compromising the ability of those in the future to meet their needs. This is a new economic morality, and in a world of sustainability, everything must fit itself within this

When a stream is damaged by mountaintop removal of coal, for example, the damage is off-screen to financial statements. Since the stream is not an asset owned by the mining company, the enterprise has no fiduciary duty to maintain it.

 Stream damage is not considered “material.” [6] Financial statements tell us: gains to capital owners are real. Tons of debris dumped into a stream that has flowed for thousands of years and may never flow again—that is not real.

(7)       Investing and Lending for People and Place: The principle of ethical finance

  •  In the extractive economy, capital seeks to enjoy maximum income while bearing little cost for negative consequences. Decision-making power over investments is wielded by financial managers, who maintain that power only by delivering maximum returns. Thus, neither the managers nor the owners of capital feel responsible for the system’s ill effects. Those within the system—corporate executives, investment advisors, wealth holders, foundation executives—are often quite caring, yet feel compelled to act as the system demands.

    When the first moral duty is a fiduciary duty to maximize returns on investments,in effect it becomes the only duty, requiring all other concerns—the well-being of communi­ties, employees, and the environment—to be justified in terms of impact on capital.         

  • The concept of a democratic economy bridges the divide between progres­sive and conservative ways of understanding the world—the conservative focus on strictness blended with the liberal focus on nurturance.

A dem­ocratic economy includes the strictness of financial accountability but also requires ecological accountability, which is ecological strictness. It includes nurturant concern for the common good, yet values the individual free­dom to flourish, an aim embraced by both conservatives and liberals.

 A democratic economy is a maturation of both worldviews. It is this deep moral structure that makes these principles, this new paradigm, a compass in difficult times.

 [So] in ethical finance, social and ecological benefit is the aim. Making money results when this is done well.  In a world of inequality and ecological fragility—with limitless growth not possible—how income is allocated becomes more critical. Ethical investors begin to recognize a moral obligation to limit wealth accumulation. Banks and monetary authorities seek to deploy assets to create resilient ecosystems, build assets for the many, and grow the institutions of the democratic economy.                                                                                                                                                                                                                                                                                             ”

Marjorie Kelly and Ted Howard (2019:8): The Making of a Democratic Economy. Building Prosperity for the Many, Not Just the Few. 

 

Guinan og O’Neill (ibid.:84-85) gives us the 8th principle, though the term ‘the long-term goal’ is replaced by what we here deem a more appropriate term, namely ‘the ultimate goal’. As shown in the course overview on Cooperative Social Entrepreneurship, we are focusing on tools for system change that have already been tested and proven in different places around the world. The perspective need not, therefore, be ‘long-term’.

(8)    Systemic Change-The Ultimate Goal

Systemic change is the ultimate goal, since the current system destroys the environment and produces inequalities, making it necessary to move beyond amelioration to build systems that produce different outcomes.

As elaborated by Democracycollaborative.org (sourced from a now dead link):

«This isn’t about one or two good projects, or a small corner of a procurement budget getting earmarked for local vendors while everything else remains business as usual. It’s about taking the first steps towards truly transforming our economy so that it works for the many, not the few.»

Finally, and although not putting system change as a separate principle, Kelly and Howard (ibid.:21) do note this:

“Systems produce outcomes, not as aberrations but as logical results of how they’re constructed, what the goals are, who holds power. If we want outcomes consistent with the spirit and vision of a democratic economy, we need to design for these at the system level. The essence of any human system is its first principles.”       

Notes:        

[1] David Bollier reflects this understanding through his term «Nested I»  as he explains in this video (see his explanation as from 1.43 min. into the video).

[2] CWB’s  focus on ‘anchor institutions’: “Cleveland’s community wealth building’ project emphasises the role large institutions rooted in a municipality such as hospitals, airports, colleges [and universities], housing associations [at the very local level] – and local authorities themselves – can play as ‘anchors’ around which regional economic ecosystems can stabilise and grow. By allocating more of their spend budgets to local suppliers and producers, recruiting from the workforce on their doorsteps and incubating local businesses and community organisations, the anchors can keep wealth flowing in municipal economies.”  Justin Reynolds (Aug. 2017): Could Preston provide a new economic model for Britain’s cities? [emphasize  and text in brackets added]

«Anchor institutions are large established organisations ..rooted in local communities, with significant economic influence through their spending power, employment behaviour and management of land and assets. They have the scale to powerfully influence the way the economy operates in their local area and to become a driver of social justice.» Local trust: Building community wealth in neighborhoods

[3] “Within a capitalist economic system, commodification is the transformation of things such as goods, services, ideas, nature, personal information, people or animals into objects of trade or commodities. Commodification is often criticized on the grounds that some things ought not to be treated as commodities—for example, water, education, data, information, knowledge, human life, and animal life.” (https://en.wikipedia.org/wiki/Commodification)

[4] Cf.  the undersigned’s course overview for Cooperative Social Entrepreneurship, Part 1, Lessons of Mondragon (section on ‘Schools of Social Entrepreneurship’) and Part 2: ‘Product as a Service’ Business Models

[5] This principle is elaborated upon in ‘The Need for System Change: Ownership Design’

[6] «What is Material in Accounting?.. Items are considered to be material when they have an excessive impact on reported profits, or on individual line items within the financial statements» (https://www.accountingtools.com/articles/material)