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AN ECONOMY OF, BY, AND FOR THE PEOPLE

THE GREAT WAVE RISING WORLDWIDE

Principles of a democratic vs. extractive economy

“You can feel the tow of the tsunami,” Sandy Wiggins said. “There’s a great wave rising, and you can feel the power of it, even though it’s just beginning.”

He was speaking to two dozen of us seated in a circle with him at a San Francisco gathering of community foundations to learn about place- based impact investing, where the aim is to earn financial returns while creating social or ecological benefit. Marjorie was there as a visiting specialist in mission design for finance. Sandy—former chair of the US Green Building Council—was part of the organizing team from the Business Alliance for Local Living Economies and RSF Social Finance.¹

It was the group’s first meeting, and a foundation president asked, “What is impact investing?” It was a safe place to admit you had no clue. Yet by the end of the cohort’s 18 months together, most of these community foundations—in areas from the rural South to urban Rhode Island—had launched their own place- based investing project: turning a parking lot into a high- rise, mixed- use project; starting a local investing fund; developing a large urban farm in a food desert; or persuading a board to devote 5 percent of a nearly $1 billion endowment to place- based impact investing.

As these philanthropic leaders sat together, what was striking was the fire and heart in the room. These were people stewarding hundreds of millions of dollars in assets, conspiring like college kids in a dorm plotting revolution. Then they’d go home, wrestle with cautious boards and investment advisers telling them they couldn’t do these things, yet go on to make real projects happen.

The movement for a democratic economy is a different kind of revolution. It relies on the momentum of activists, grassroots leaders, and progressive politicians, but it also involves unlikely allies like these foundation leaders, as well as impact investors and progressive business leaders: innovators who are stewards of wealth. Also involved are mayors and governors, economic development leaders, and nonprofit directors. It’s an unlikely stew of talent and fire and boldness.

AN INVISIBLE ARMY

Few people understand the reach of the redesign already underway. Non-profits are running social enterprises that exist to hire the hard-to-employ, like Tech Dump in Minneapolis, which trains the formerly incarcerated in electronics recycling. Social enterprises use business methods to tackle social problems. A network of these, the Social Enterprise Alliance, has more than 900 members in 42 states.² Social entrepreneurship is taught at business schools like Oxford, Harvard, and Yale.

Increasing numbers of nonprofit hospital systems are working on local economic development, like Rush University Medical Center on Chicago’s West side, with net assets of $1.7 billion and total operating revenue of about $2.4 billion.³ To address entrenched poverty among communities of color there, Rush set out to use all its resources—buying, hiring, investing locally—to affect the social determinants of health, such as job scarcity, poor education, and violence. US hospitals and health systems spend more than $782 billion each year, employ 5.6 million, and have investment portfolios of $400 billion. As more, like Rush, take up the anchor mission of serving their communities, the potential for game- changing impact is substantial.⁴

Worker-owned cooperatives are growing rapidly—like Si Se Puede!, a Brooklyn house- cleaning enterprise owned primarily by Latinas. After Cristina, a Mexican immigrant and single mother, joined this cooperative, she saw her wages jump from $7 to $20 an hour.⁵ Unions are launching worker cooperatives; an example is Communications Workers of America Local 7777, which incubated Green Taxi in Denver, with a leadership and board made up entirely of immigrant drivers from East Africa and Morocco.⁶ Cities advancing worker co- ops include New York City; Newark, New Jersey; Oakland, California; Rochester, New York; and Madison, Wisconsin.

Companies with employee stock ownership plans (ESOPs) number more than 6,600 in the US, and ESOPs hold assets of close to $1.4 trillion.⁷ Included are companies like women’s clothing firm Eileen Fisher, with 1,100 employees, and New Belgium Brewing, the maker of Fat Tire Amber Ale and the fourth largest craft brewer in the country, 100 percent owned by its employees.⁸

Employee ownership is advancing in Britain, Scotland, and many other nations and includes companies like the John Lewis Partnership, the largest department store chain in the UK with 2018 revenue of £10.2 billion. The company’s 85,500 employees are all partners in the business, and each has a voice in how the company is run through a democratic system that has operated for close to a century.⁹

Also embodying deep change are 5,400 benefit corporations incorporated under statutes in 34 US states, including firms like Kickstarter and King Arthur Flour, which have embraced a legal commitment to the public good. There are the 2,655 similar B Corporations in 60 countries, certified by the nonprofit B Lab.¹⁰

The US cooperative sector—businesses owned by the people they serve—represents more than $500 billion in revenue and employs 2 million people, yet it remains surprisingly invisible and is rarely discussed in business schools. Cooperatives include credit unions, which are member-owned; agricultural cooperatives like Sunkist, Ocean Spray, Land O’ Lakes, and Organic Valley; and consumer cooperatives like REI. Worldwide, cooperatives employ more than 12.6 million and have more than 1 billion members, with combined revenues of well over $3 trillion. Among the largest is the Mondragon Corporation of Spain, a worker- owned federation including 98 worker- owned cooperatives, with 80,000 workers and €12 billion in revenue. It sells products worldwide and has its own bank, university, business incubators, and social welfare agency.¹¹

The so-called “social economy” is substantial in Canada, particularly in Quebec, which has more than 7,000 collective businesses with annual revenue of more than $40 billion. Quebec has committed as much as $100 million in some years to advance the sector, and Canada’s federal government created a cocreation steering group of people from across the nation to help develop its social economy strategy.¹²

Public ownership has begun to reemerge across the world as a viable strategy in the wake of the 2008 financial crisis. Beginning in Latin America, there’s been a global movement to reclaim community ownership of water systems after the disastrous failure of many extractive, investor-owned water ventures. This movement has reclaimed public ownership of water in at least 235 cases in 37 countries, benefiting 100 million people.¹³ In the UK, the tides of public opinion have turned dramatically against the privatization led by Prime Minister Margaret Thatcher. In a 2017 poll, the free market think tank Legatum Institute, to its horror, found overwhelming public support for nationalizing various industries: 83 percent supported public ownership of water, 77 percent gas and electricity, 76 percent trains, 66 percent defense and aerospace, and 50 percent banks. “Written off for so long as a relic of the past,” our colleague Thomas Hanna has written, “public ownership may again be taking its rightful place” among strategies for creating a better future.¹⁴

State-owned banks already play significant roles in places like India, China, Germany, and Latin America, and in many cases, helped those nations survive the Great Recession of 2008. In the European Union, there are more than 200 public and semipublic banks, with another 80-plus funding agencies, comprising about 20 percent of all bank assets. Germany’s 413 publicly owned municipal savings banks, Sparkassen, hold more than €1.2 trillion in assets. And, as The Economist noted, these banks came through the global financial crisis “with barely a scratch.”¹⁵

In another model, more than 1,100 community development financial institutions exist in the US, financed to a large extent by investors.¹⁶ They are part of an impact investing field growing rapidly across the globe. A 2016 survey by the Global Impact Investing Network (GIIN) found impact investors had committed $22.1 billion into some 8,000 investments, out of the portfolios of investors who collectively manage close to $114 billion in assets. GIIN cofounder and CEO Amit Bouri predicts “Impact investing will become part of ‘a new normal,’ galvanizing capital markets to play a significant role in tackling or even solving big global challenges such as poverty, inequality, and environmental degradation.”¹⁷

It adds up to a force bigger than most anyone knows. Our society is in a moment of breakdown, yet we’re also in a time of deep redesign. That’s the source of aliveness we see so often in the communities we visit and work in. There’s a feeling of something frozen beginning to flow, the paralysis of fear or despondency or confusion (“What is impact investing?”) becoming forward motion.

WHY BRING DEMOCRACY INTO THE ECONOMY?

Democracy provides a unifying concept for this work. The reason was articulated well by philosopher John Dewey. He said democracy is not “simply and solely a form of government,” but is an ethical ideal, relevant to many social spheres, including the economy and the workplace. In Dewey’s view, the ability to be a mature moral actor, to experience freedom and human dignity, best comes to fruition when we live and work inside the welcoming, human- scale, ethical design of democratic social institutions of many kinds.¹⁸

Dewey’s thought prefigured that of Amartya Sen, the Nobel Prize– winning economist, who described economic development as a process of removing “various types of unfreedoms”—such as poverty and lack of economic opportunity—“that leave people with little choice.” Sen contrasted this with narrower measures of development, such as gross domestic product (GDP) growth or technological advance. What Dewey and Sen hold out is a vision of freedom achievable only in a democratic economy: not the freedom of corporations to roam the globe in search of maximum financial extraction, but real economic prosperity for all.¹⁹

By contrast, the extractive economy is about the privilege of the few. The capital bias at its core is rooted in the human heart, in the perpetual quest for status. This value system is given expression through institutions, processes, and policies favoring those who possess wealth. Values and institutions combine to create an unequal distribution of privileges, resources, and power between the owners of capital and everyone else.²⁰

Bias based on wealth is as illegitimate as bias based on race or sex. Yet although racism and sexism are far from eradicated in society, each has at least lost widespread legitimacy. The same cannot be said of this third form of bias, capital- ism.

Another word for capital is assets. Owning and controlling assets is the defining characteristic of virtually every economy, as The Democracy Collaborative cofounder and political economist Gar Alperovitz has often observed. In the ancient monarchy, the king and aristocracy owned the land of the agrarian society. In communism, the state owns the means of production. In early-stage capitalism, the robber barons owned the infrastructure of the rising industrial economy. In our era, ownership has passed into financial markets, which is why we now think of assets as financial numbers. That’s the lens through which the extractive economy defines economic success, the lens of benefit to asset holders: a rising stock market, maximum profits, growing returns to investment portfolios.

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.

PRINCIPLES OF THE DEMOCRATIC ECONOMY VS. THE EXTRACTIVE ECONOMY

The principle of community: The common good comes first. 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, a concept articulated by ecological economist Herman Daly and theologian John Cobb. The self-contained individual in the real world does not exist, they write, because the social character of human life is primary. Community creates the conditions in which each of us may flourish. The ultimate community is the earth, for good lives are not possible without a healthy environmental ecosystem.²¹

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. These concepts nourish fantasies of individual triumph that shape behavior in destructive ways, encouraging aggressiveness, negating the privations suffered by others and creating expectations of untrammeled freedom at odds with mature behavior.

The principle of inclusion: Creating opportunity for those long excluded. 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—most profoundly, racial inclusion after centuries of racial extraction. A democratic economy sensibility calls on us to recognize the racialized bedrock on which our economic system was built. As we look to the days of the system in its infancy, we can better understand the pitiless gaze of capitalism that did not shrink from reducing persons to “property,” commodity goods with no inherent dignity.

The extractive economy carries in its genetic code the ethos of its founders—brutal men like Carnegie, Gould, Vanderbilt, and Rockefeller—who mirrored the ethos of the 19th century. It was an age of enslavement of black people and genocide of Native Americans, a time when women were denied rights of citizenship, and when workers were shot for attempting to organize. It was a social order permeated with biases based on race, sex, and wealth.

The principle of place: Building community wealth that stays local. 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: social networks, the built environment, cultural riches, individual skills, ecological assets. Keeping this wealth local means using locally rooted ownership, ideally held broadly, to create resilient, shared prosperity. Community wealth creation is fed by the power of institutions anchored in place, like hospitals, universities, and colleges, which represent more than $1.7 trillion in economic activity—close to 9 percent of US GDP. That’s more than the agriculture, utilities, and mining sectors put together and roughly equal to the information sector.²² As nonprofit anchors 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.²³

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, where investments cross borders with the click of a mouse, where firms are objects lured from place to place by the $100 billion in government incentives given annually in the US.²⁴ Enterprise ownership is largely absentee and elite, with the wealthiest 10 percent holding 84 percent of stocks.²⁵ 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.

The principle of good work: Putting labor before capital. 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.”²⁶ Economic and political freedoms reinforce one another. Labor comes before capital. This principle was articulated by Abraham Lincoln, who observed that labor is “the superior of capital,” deserving “much the higher consideration.”²⁷

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.²⁸ 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.

The principle of democratized ownership: Creating enterprise designs for a new era. 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. Various forms of public, private, cooperative, employee, and common ownership are structured at different scales and in different sectors to create the beneficial outcomes we seek. Democratized ownership does not simplistically mean direct voting on managerial decisions. Governance design is appropriate to the living purpose of each enterprise, with proper authority delegated to management, as is required by any efficient operation.

If our economy is to become fit for an era of ecological constraints, enterprise design will evolve away from extractive design. 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. 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.²⁹

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.³⁰

The principle of sustainability: Protecting the ecosystem as the foundation of life. 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 founding generation of America did not trim their arguments to the pleasure of the monarch. They articulated truths held to be self-evident. That’s what the UN Brundtland Report did in defining sustainability as meeting present needs without compromising the ability of those in the future to meet their needs.³¹

This is a new economic morality, and in a world of sustainability, everything must fit itself within this frame. It is the perspective of the whole—the only perspective consistent with the new physics, which teaches us the world is not a collection of objects but a communion of subjects. Humans are not masters of the earth but members of it.

The extractive economy is waging a war on nature, not so much deliberate as it is heedless, for impact on the natural world is simply invisible. 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.” 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.

The principle of ethical finance: Investing and lending for people and place. In ethical finance, social and ecological benefit is the aim. Making money results when this is done well. Responsible banking institutions and impact investing have vital roles to play in bringing money back to the real world, reaching actual companies to fund operations, diminishing the casino economy of speculative trading. 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. This is the prudent investor, reimagined.

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.

STRICT AND NURTURANT

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.³² 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.

In outlining these various principles, we’re presenting ideals, fully aware that the real world is messy. Most of us step in it more often than we soar on wings. In our work at The Democracy Collaborative, and in every project we write about, everyone is making huge mistakes. How could we not, when everything is being reinvented? This work is not about perfection. A great wave is rising, but it’s not carrying us effortlessly where we wish to go. As one participant in the San Francisco circle said, “We ourselves are the tsunami.”