Economic myths

By David C. Korten, 13 March 1998

The following is based on David C. Korten, When Corporations Rule the World (Kumarian Press and Berrett-Koehler Publishers, 1995)

World Bank economist John Page recently told a meeting of Middle Eastern officials that the global economy is like the bullet train from Osaka to Tokyo. If you miss it, its gone and there is no way to catch up. He urged them to get on board quickly by restructuring their economies.

Harvard Business School professor Rosabeth Kanter, in her book World Class, tells us that the future belongs to those who are willing to give up their loyalties to community and nation to seek personal financial success in the global economy. She warns that those who remain loyal to people and places will be left behind.

Business Week tells us that East Asia-where the number of non-Japanese multimillionaires is expected to double from 400,000 in 1993 to 800,000 in 1996-is the leading example of what a global free market economy has made possible. “There are new markets for everything from Mercedes Benz cars to Motorola mobile phones to Fidelity mutual funds. . . . To find the nearest precedent, you need to rewind U.S. history 100 years to the days before strong unions, securities watchdogs and antitrust laws.” Scant mention is made of the fact that free market economies have also left 675 million Asian's living in absolute deprivation.

We should be more than skeptical of an economic model that calls on us to give up all loyalty to place and community, says we must give free reign to securities fraud and corporate monopolies and deny workers the right to organize, and tells the poor to run faster and faster after a train they have no chance of catching-so that a few hundred thousand people can become multi-millionaires by destroying nature and depriving others of a decent means of livelihood.

Millions of people around the world are no longer buying this monumental fraud against humanity-and their numbers are growing. We are coming to realize that the extravagant promises of the advocates of the global economy are based on a number of myths that have become so deeply embedded in Western industrial culture that we have grown to accept them without examination.

• The myth that growth in GNP is a valid measure of human well-being and progress.
• The myth that free unregulated markets efficiently allocate a society's resources.
• The myth that growth in trade benefits ordinary people.
• The myth that economic globalization is inevitable.
• The myth that global corporations are benevolent institutions that if freed from governmental interference will provide a clean environment for all and good jobs for the poor.
• The myth that absentee investors create local prosperity.

TAKE THE GROWTH MYTH

Our measures of growth are deeply flawed in that they are purely measures of activity in the monetized economy. Expanded use of cigarettes and alcohol increases economic output both as a direct consequence of their consumption and because of the related increase in health care needs. The need to clean up oil spills generates economic activity. Gun sales to minors generate economic activity. A divorce generates both lawyers fees and the need to buy or rent and outfit a new home-increasing real estate brokerage fees and retail sales. It is now well documented that in the United States and a number of other countries the quality of living of ordinary people has been declining as aggregate economic output increases.

The growth myth has another serious flaw. Since 1950, the world's economic output has increased 5 to 7 times. That growth has already increased the human burden on the planet's regenerative systems-its soils, air, water, fisheries, and forestry systems-beyond what the planet can sustain. Continuing to press for economic growth beyond the planet's sustainable limits does two things. It accelerates the rate of breakdown of the earth's regenerative systems-as we see so dramatically demonstrated in the case of many ocean fisheries-and it intensifies the competition between rich and poor for the resource base that remains.

The disparities in this competition have become truly obscene. In 1960 the annual compensation of the average CEO of a major US. company was 40 times that of the average worker. In 1992 it was 157 times as much. The average CEO of a large corporation now receives an annual compensation package of more than $3.5 million-their reward for growing company profits by destroying millions of jobs.

Over the past 3 years the profits of the Standard and Poors 500 largest corporations have grown an average of 20% a year. Stock prices are at record highs. For the most part, these gains went to people who have nothing better to do with their money than gamble on price movements in the giant global casino we call a stock market. During 1995, wages, salaries and benefits-compensation for doing real work-increased only 2.7%-the smallest rise on record.

The competition is made especially visible by the many development projects in Southern countries-many funded with loans from the World Bank and other multilateral development banks-that displace the poor so that the lands and waters on which they depend for their livelihoods can be converted to uses that generate higher economic returns-meaning converted to use by people who can pay more that those who are displaced. All too often what growth in GNP really measures is the rate at which the economically powerful are expropriating the resources of the economically weak in order to convert them into products that all too quickly become the garbage of the rich.

TAKE THE MYTH OF FREE UNREGULATED MARKETS

It is almost inherent in the nature of markets that their efficient function depends on the presence of a strong government to set a framework of rules for their operation. For, example we know that free markets create monopolies, which government must break up to maintain the conditions of competition on which market function depends. See The Betrayal of Adam Smith.

We also know that markets only allocate efficiently when prices reflect the full and true costs of production. Yet in the absence of governmental regulation, market incentives persistently push firms to cut corners on safety, pay workers less than a living wage, and dump untreated toxic discharges into a convenient river. In our present competitive context if management does not take such measures, they are likely to be replaced by the owners or bought out by someone with less scruples who will.

Take the example of the Pacific Lumber company in California. It pioneered the development of sustainable logging practices on its substantial holdings of ancient redwood timber stands, provided generous benefits to its employees, fully funded its pension fund, and maintained a no lay-offs policy during downturns in the timber market. This made it a good citizen in the local community. It also made it a prime takeover target. Corporate raider Charles Hurwitz gained control in a hostile takeover. He immediately doubled the cutting rate of the company's holding of thousand-year-old trees, reaming a mile and a half corridor into the middle of the forest that he jeeringly named “Our wildlife-biologist study trail.” He then drained $55 million from the company's $93 million pension fund and invested the remaining $38 million in annuities of the Executive Life Insurance Company, which had financed the junk bonds used to make the purchase—and subsequently failed.

Once upon a time local communities looked to corporations not only as sources of jobs, but as well of tax revenue to help cover the costs of essential local infrastructure and public services. For example, in 1957, corporations in the United States provided 45 percent of local property tax revenues. By 1987 their share had dropped to about 16 percent.

Local governments are now forced by the dynamics of global competition not only to give most large corporations tax breaks, but as well to directly subsidize their operations with public funds. South Carolina has been praised by the business press for its successful competitive bid for a new BMW auto plant. The company was attracted in part by cheap, nonunion labor and tax concessions. In addition, when BMW said it favored a 1,000 acre tract on which a large number of middle class homes were already located, the state spent $36.6 million to buy the 140 properties, destroyed the homes, and leased the site back to the company at a $1 a year. The state also picked up the costs of recruiting, screening, and training workers for the new plant, and raised an additional $2.8 million from private sources to send newly hired engineers for training in Germany. The total cost to the South Carolina taxpayers for these and other subsidies to attract BMW will amount to $130 million over thirty years.

This is what global competition is really about—local communities and workers competing against once another to absorb more of the production costs of the world's most powerful and profitable corporations.

The ways in which the poor often bear the majority of the burden is highlighted by the case of the Benguet Mining Company in the Philippines documented by Robin Broad and John Cavanagh in their book Plundering Paradise. In the quest for gold, Benguet Mining cut deep gashes into the mountains, stripped away trees and top soil, and dumped enormous piles of rock and soil into local rivers. With their soils and water sources depleted, the indigenous people in the area can no longer grow rice and bananas and have to go to the other side of the mountain for drinking water and to bathe. The cyanide used by the Benguet corporation to separate the gold from the rock poisons the local streams, kills cattle that drink from the streams, and reduces rice yields of people in the lowlands who use the water for irrigation. When the tailings and cyanide empty into the oceans they kill the coral reefs and destroy the fishing on which thousands of coastal people depend.

The company reaps handsome profits. The local people bear the costs. Economists applaud the company's contribution to national output and export earnings. And the winners in the global economy are able to buy their gold trinkets at a more attractive price.

The one thing at which free, unregulated markets are truly efficient is in transferring wealth from the many to the few.

TAKE THE MYTH OF FREE TRADE

Many so called trade agreements, such as the North American Free Trade Agreement (NAFTA) and the General Agreement on Tariffs and Trade (GATT), are not really trade agreements at all. They are economic integration agreements intended to guarantee the rights of global corporations to move both goods and investments where ever they wish-free from public interference and accountability. GATT is best described as a bill of rights for global corporations.

TAKE THE MYTH THAT ECONOMIC GLOBALIZATION IS INEVITABLE

Many of the people who claim globalization is a consequence of inevitable historical forces are paid to promote that message by the same global corporations that have invested millions of dollars in advancing the globalization policy agenda. Economic globalization is inevitable only so long as we allow the world's largest corporations to buy our politicians and write our laws.

TAKE THE MYTH THAT CORPORATIONS ARE BENEVOLENT INSTITUTIONS

The corporation is an institutional invention specifically and intentionally created to concentrate control over economic resources while shielding those who hold the resulting power from liability for the consequences of its use. The more national economies become integrated into a seamless global economy, the further corporate power extends beyond the reach of any state and the less accountable it becomes to any human interest or institution other than a global financial system that is now best described as a gigantic legal gambling casino.

TAKE THE MYTH THAT ABSENTEE INVESTORS CREATE LOCAL PROSPERITY

Absentee investors are attracted by perceived opportunities to turn a quick profit-not to benefit a worthy local community. Though they do have real world consequences, most of what we call “international capital flows” are little more than movements of electronic money from one computer account to another in a high-stakes poker game.

From 1990 through 1994 Mexico became touted as an international economic miracle by attracting $70 billion in foreign money with high interest bonds and a super heated stock market. As little as 10 percent of this foreign money went into real investment. Most of it financed consumer imports and debt service payments or ended up in the private foreign bank accounts of wealthy Mexicans-including the accounts of the 24 Mexican billionaires the inflows helped to create. The bubble burst in December of 1994 and the hot money flowed out even faster than it flowed in. Mexico's stock market and the value of the peso plummeted. Mexican austerity measures and a sharp drop in U.S. exports to Mexico resulted in massive job loses on both sides of the border. Most foreign investment seeks to extract local wealth—not create it.

Economic globalization expands the opportunities for corporations to go about their business of concentrating wealth-and from the corporate perspective, it has been a brilliant success. The Fortune 500 corporations shed 4.4 million jobs between 1980 and 1993-while increasing their sales by 1.4 times. Their assets by 2.3 times. And CEO compensation by 6.1 times. These same corporations now employ only 1/20th of 1 percent of the world's population, but they control 25 percent of the world's economic output and 70 percent of world trade. According to The Economist magazine in each of seven major industries (consumer durables, automotive, airliners, aerospace, electronic components, electrical and electronic, and steel) five firms control more than 50 percent of the total global market-which qualifies them for the label highly monopolistic.

And the consolidation continues. The value of world-wide corporate mergers and acquisitions completed in 1995 exceeded the total for any previous year by some 25 percent.

LOCALIZE ECONOMIES TO EMPOWER PEOPLE

All over the world people are indeed waking up to the truth about economic globalization and are taking steps to reclaim and rebuild their local economies. Communities that embark on this path face basic choices as to how they will divide their efforts between competing for a share of the declining pool of good jobs that global corporations offer and working to create locally owned enterprises that sustainably harvest and process local resources to produce the jobs and the goods and services that local people need to live healthy, happy, and fulfilling lives in balance with the environment.

Experience with the real consequences of economic globalization is pointing to many important lessons. One such lesson is that economies should be local, rooting power in the people and communities who realize their well-being depends on the health and vitality of their local ecosystem. If it is protectionist to favor local firms and workers who pay local taxes, live by local rules, respect and nurture the local ecosystems, compete fairly in local markets, and contribute to community life-then let us all proudly proclaim ourselves to be protectionist.

Our development models-and their underlying myths-are artifacts of the ideas, values, and institutions of the industrial era. Corporations and the modern state have been cornerstones of that era, concentrating massive economic resources in a small number of centrally controlled institutions. These institutions brought the full power of capital intensive technologies to bear in exploiting the world's natural and human resources so that a small minority of the world's people could consume far more than their rightful share of the world's real wealth. Now as we push the exploitation of the earth's social and environmental systems beyond their limits of tolerance, we face the reality that the industrial era is exhausting itself-because it is exhausting the human and natural resource base on which our very lives depend. We must hasten its passage, while assisting in the birth of a new civilization based on life affirming rather than money affirming values.

Countless citizen initiatives all over the world are creating the building blocks of the new civilization. Powerful formative ideas are emerging from these efforts. For example, the idea that economies should be local, rooting power in the people and communities who realize their well-being depends on the health and vitality of their local ecosystem. A global economy empowers global corporations and financial institutions. Local economies empower people. It is our consciousness-our ways of thinking and our sense of membership in a larger community-that should be global.

Perhaps the most important discovery of all is that life is about living-not consuming. A life of material sufficiency can be filled with social, cultural, intellectual, and spiritual abundance that place no burden on the planet. It is time to assume responsibility for creating a new human future of just and sustainable societies freed from the myth that greed, competition, and mindless consumption are paths to individual and collective fulfillment.