Sunday, February 2, 2020
Capitalism Slowly Grows Up
written 26 January 2020
published 2 February 2020
Logical conclusions are only as good as the assumptions upon which they are based. With flawed assumptions, the best logic will give garbage conclusions. As I have stated before, the core erroneous assumption of our species is the belief in absolute separation within a unity reality. This degrades our entire society. In capitalism, this error manifests in two significant ways; the assumption of exclusive gain, and the assumption of disposable debt.
The concept of exclusive gain is deeply rooted in capitalism, beginning with the definition that all people are greedy, and only operate from extreme self-interest. While this initially seemed scientifically validated by Darwin's focus of competition, further investigation showed that cooperation is at least as powerful a force throughout the natural world. Humans are wired for compassion, which shows up at a very early age. The arc of civilization is the growth of cooperative social forms.
Despite this, business orthodoxy has defined the sole purpose of a corporation to be maximum return to shareholder investors, producing today's extreme economic inequity which threatens social stability. But the unity of reality, expressed as cooperation, is beginning to change even capitalist thinking. Last August, Jamie Dimon, Chairman of Business Roundtable, announced that henceforth, a Corporation shall benefit all stakeholders: customers, employees, suppliers, communities, as well as shareholders, because “the American dream is alive, but fraying." A small step, but significant.
The disposable debt concept assumes that when I sell a problem asset, it will no longer affect me, ignoring the fundamental connection underlying the economy. The housing meltdown of 2007 showed the flaw in this assumption. Mortgage brokers made bad loans that would default within months, but quickly sold them off to other fiscal entities. This was so "profitable" that trillions in bad debt was created. These toxic loans were bundled together with good loans, then broken into pieces which were defined as new assets with various risk ratings. These were then sold to unsuspecting banks and investors. When the defaults started to mount, nobody could trust the worth of any particular investment, because each one consisted of parts of thousands of individual loans, an unknown number of which were worthless. The entire financial system came close to seizing up over one weekend.
Climate change presents a similar problem. The illusion of disposable debt lets capitalism use the environment as a limitless garbage dump, assuming no consequences, since no charges show up on the books. Yet atmospheric carbon pollution, a degradation of the commons, is changing the temperature of the planet. The problem continues to grow, despite decades of warnings, and the economic costs are beginning to register.
The National Centers for Environmental Information’s annual climate report said the number of billion dollar climate and weather related disasters in the United States more than doubled in the last decade, to over $800 billion. The National Oceanic and Atmospheric Administration reported US weather related disasters in 2019 cost $306 billion, about 1.3% of the GDP for the US, which only grew 2% last year. As the climate gets more erratic, the cost of weather disasters will increase.
The World Economic Forum in Davos included climate discussions this year, but not as a primary concern, because business leaders focus short term. That is why Enron was the darling of Wall Street until it collapsed in bankruptcy. But bankers and investment fund managers have to think long term, so their climate concern is more acute. This week the Bank of International Settlements stated "climate change poses unprecedented challenges to human societies. Central banks cannot consider themselves immune to the risks ahead." Laurence Fink, CEO of BlackRock investment fund, which manages over $7 trillion, recently announced they are putting climate change and sustainability at the center of their investment approach. "Climate change has become a defining factor in companies' long-term prospects. We are on the edge of a fundamental reshaping of finance."
It has always been a false argument that we must choose between a healthy environment and a healthy economy. Without an environment suitable for humans, and stable enough for long term investments, there can be no economy. Capitalism is growing up and beginning to shed false illusions, but with the fate of humanity at risk, the pace needs to quicken.