The Making of a Democratic Economy: How to Build Prosperity for the Many, Not the Few
July 26, 2019
Marjorie Kelly and Ted Howard of the Democracy Collaborative offer seven principles for an "equitable, ecologically sustainable alternative" to the economy of, by, and for the one percent, and examples of them being put to work in the world.
The Making of a Democratic Economy: How to Build Prosperity for the Many, Not the Few by Marjorie Kelly & Ted Howard, Berrett-Koehler
When we speak of the “new economy,” we usually speak of big tech. And as Margaret O’Mara notes in her brilliant new book, The Code: Silicon Valley and the Remaking of America, Added together, the valuations of tech’s so-called Big Five—Apple, Amazon, Facebook, Google/Alphabet, and Microsoft—total more than the entire economy of the United Kingdom.” The UK is the world’s fifth largest economy. So the moniker applies well to these (relatively) new economic powerhouses.
Silicon Valley has become one of the greatest wealth generators of all time, creating “the richest people in the history of humanity”—richer even, relative to the rest of the population, than the robber barons of the original Gilded Age. And yet, according to Second Harvest Food Bank, one in four people in Silicon Valley is at risk of hunger. Those most affected are the community’s most vulnerable—the elderly and the young people. One in three children in Santa Clara and San Mateo counties, around 200,000 young people, are considered food insecure. It looks more like a new aristocracy, with updated technology, than a truly new economy. Marjorie Kelly and Ted Howard, of the Democracy Collaborative, share some of the numbers in their new book, The Making of a Democratic Economy:
Today we live in a world in which 26 billionaires own as much wealth as half the planet’s population. The three wealthiest men in the US—Bill Gates, Jeff Bezos, and Warren Buffett—own more wealth than the bottom half of America combined, a total of 160 million people. Since 2009, 95 percent of income gains in the US have gone to the top 1 percent. Meanwhile, an alarming 47 percent of Americans cannot put together even $400 in the face of an emergency, leaving most of us unprepared to face such ordinary mishaps as a flat tire or a child’s twisted ankle.
“There can be no real political democracy,” said Theodore Roosevelt, “unless there is something approaching an economic democracy.” The good news is that there is real progress on that front, on the ground in the real economy, and that is where Kelly and Howard's attention is focused. They define seven principles of a such a democratic economy—community, inclusion, place, good work, democratic ownership, sustainability, and ethical finance—and highlight the people, places, and enterprises that are putting these principles into practice.
What we find emerging is a coherent paradigm for how to organize an economy—one that takes us beyond the binary choice of corporate capitalism versus state socialism into something new.
The authors are decidedly anti-capitalist in the sense that they believe that people and planet should be at the center of economic concerns rather than capital, and believe “that it’s possible to design ordinary economic activity to serve broad well-being, not to extract maximum profits.” But they are in no way anti-enterprise or anti-business. The solutions they highlight are all tied to doing business, just not business-as-usual.
When we speak of a “free market,” we usually speak of deregulation and keeping the government out of the economy. Kelly and Howard cite instances in which regulation isn’t helpful, and may even be a hindrance. But adherence to the “free market” is often used as an argument by the powerful to take advantage of their already dominant position to lessen the freedom of, or even oppress, others. You can see this in the way big business uses its money and influence to lobby lawmakers to write legislation in their favor, but it goes much deeper. From its founding, the American economy was, indeed—contrary to the governing democratic ideals written in our declaration of independence and constitution—built on the oppression of entire populations, and it stretched across the Atlantic:
“The land that enslaved people planted in cotton,” Harvard professor Walter Johnson wrote, “had been expropriated from the Creek, the Cherokee, the Choctaw, and the Seminole.” In the emerging capitalist system of the 1800s—which knit together the cotton plantations of Mississippi with the looms of Manchester, England, and the financiers of New York—”[e]nslaved people were the collateral upon which the entire system depended,” Johnson noted. As cotton merchants loaned money to planters to finance operations until harvest, they required security. “That security was the value of the enslaved,” Johnson said. “Enslaved people were the capital. Their value in 1860 was equal to all the capital invested in American railroads, manufacturing, and agricultural land combined.”
The enslavement of African Americans and genocide of the indigenous population are both our government’s and our economy’s original sins. Kelly and Howard discuss how organizations like the Thunder Valley Valley Community Development Corporation and NDN Collective, rising from the Pine Ridge Reservation on which the Wounded Knee Massacre occurred, are building a new economy by returning to pre-colonial economic models based on the principle of community. They highlight Prosper Portland to discuss the principle of inclusion and the importance of investing in communities historically excluded and dislocated due to overtly racist policies. They visit the Evergreen Cooperative in Cleveland to emphasize the principle of place and the “power of institutions anchored in place, like nonprofit hospitals, universities, and colleges, which represent more than $1.7 trillion in economic activity—close to 9 percent of US GDP”—to use their economic power to work in the community and build wealth that stays local.
One of the most instructive cases is that of the environmental consulting firm EA Engineering, because it had tried and failed using a typical, extractive ownership model before instituting a democratic one. The authors explain how, as the company grew, it was encouraged to go national by advisors, and took the traditional route by going public on the NASDAQ exchange. They quickly found that "[q]uality work and integrity took a back seat to share price,” and staff morale plummeted. They found their environmental mission was incompatible with quarterly earnings, and founder Loren Jensen bought back controlling interest so he could return the company’s focus “immediately to the task of understanding environmental problems and what to do about them.” The company still does work on a national and even international, scale—with projects from Guam to West Virginia to Lake Ontario—but its ownership is now located back within the company. In fact, in 2014 Jensen and the minority partner who helped him buy back the firm eventually allowed themselves to be bought out as they transitioned to employee ownership under an employee stock ownership plan (ESOP), while also becoming a public benefit corporation (PBC). The environmental scientist and aquatic biologists who work there are now the company’s owners, and their environmental purpose aligns perfectly with their purpose as a public benefit corporation. After cycling through three presidents and getting into trouble with the SEC over accounting mistakes as a publicly traded company, their financial health has never been better since becoming a ESOP, and that health is widespread:
EA’s been profitable ever since. Legal and related costs for the new design were $750,000, but that “was much less than one year’s savings in taxes” … As an S Corporation fully owned by an ESOP trust, EA pays zero income taxes on profits at the enterprise level. Profits pass through to employees, who pay taxes when they retire and withdraw holdings, when they’re in a lower tax bracket.
It not only shows that there is more than one way to structure a profitable company, it is in the authors’ view, “a harbinger of enterprise design for a new era of equity and sustainability.” Founder Loren Jensen even “got additional personal tax advantages for selling to the ESOP.” While all the company’s economic advisors had urged it to go public, it has been through employee, mission-oriented ownership that it has found the best chance to thrive financially and survive to carry out its mission—to benefit both its employees and the environment. As Kelly and Howard write:
In the extractive economy, companies are seen as objects owned by shareholders, designed to manufacture earnings like so many ball bearings off an assembly line. EA is a model of a company as a living system, part of the larger living system of the earth, designed to benefit life.
Discussing why regulation won’t always work, they share the story of one of EA’s clients, chemical company Ciba-Geigy. EA conducted a study of the wastewater Ciba-Geigy had been dumping into the Atlantic Ocean at its Toms River, New Jersey facility, and found it was killing more than half of the mysid shrimp the water was tested on. So, in the early ’80s, after 34 years of dumping “5 million gallons, per day, of highly acidic, partially treated toxic waste” into the ocean, poisoning the town water supply by seeping toxic waste into backyard wells from a leaking company pipeline, resulting in dozens of childhood cancers, what did the Ciba-Geigy do when confronted with this environmental evidence?
Like many chemical companies at the time, it moved production to places like Alabama, Louisiana, and Asia, where wages and environmental oversight were much lower.
It is for this reason that the authors suggest that ownership design, based on the principle of democratic ownership, is just as important as technology and regulation for the environmental movement. And the time is ripe:
Retiring baby boomers are likely to sell or close 2.34 million businesses over the coming decade; many will simply shut down, resulting in layoffs and the loss of local jobs. If these could be converted to employee ownership, it could bend the curve of history.
The combination of being a benefit corporation and employee owned is especially powerful alternative:
EA Engineering has a legally binding duty to create public benefit, and as the company’s value grows, it goes to employees. The reason is simple but invisible: ownership design.
Just as we need to make such changes at the local and company level, we need large systemic change, as well. One of the more radical ideas in the book comes from Carla Santos Skandier, a Senior Policy Associate at the Democracy Collaborative the authors run. To confront climate change, she suggests the federal government “buy out the 25 largest US fossil fuel companies using the power of the Federal Reserve.” It would be accomplished through quantitative easing, costing nothing to taxpayer, and was the method the Fed used to save the big banks, believing their failure posed an existential threat to our economy and way of life. Surely climate change and ecosystem failure rise to the same level of need? Unfortunately, we are not moving in that direction. Last year, the United Nations Intergovernmental Panel on Climate Change warned that “carbon emissions must be slashed by 45 percent by 2030 from 2010, then crushed to net zero by 2050,” in order to prevent catastrophic global warming. Also last year, the United States surpassed Russia and Saudi Arabia to become the world’s largest crude oil producer.
This is the extraordinary end game of the extractive economy, which in its infancy did not shrink from commodifying human beings, in its maturity did not blink at dumping billions of gallons of toxins into oceans, and now in its aging fullness contemplates causing irreversible damage to life on earth, and shrugs.
The authors quote Aldo Leopold’s Sand County Almanac to suggest the kind of mindset shift we need to make: “We abuse the land because we view it as a commodity belonging to us. When we see land as a community to which we belong, we may begin to use it with love and respect.” Again, we're not exactly moving in the right direction. The Wisconsin sand that Leopold named his almanac after (even though there is no actual Sand County here in Wisconsin), highly sought after for use in fracking, is now being dug up, shipped all across the country, and buried underground in order to violently extract fossil fuel deposits in shale rock. It's emblematic of the larger economy:
Our economy is not only failing the vast majority of people, it is literally destroying our planet. It’s consuming natural resources at more than one-and-a-half times the Earth’s ability to regenerate them. Soil depletion has ravaged one-third of all arable land. Nearly two-thirds of all vertebrates have disappeared from the Earth since 1970, part of a sixth mass extinction that is terrifyingly underway. We are razing the only home our civilization has, yet we remain caught inside a system designed to perpetuate that razing, in order to feed wealth to an elite.
It doesn’t have to be this way. The vast majority of human beings on this planet—and the planet itself—would be better off if it were not this way. The biggest change needed to make it happen, as systems theorist Donella Meadows wrote, is “a new way of seeing.” The great achievement of the book is that Kelly and Howard offer such a new paradigm, which they describe succinctly near the end of the book:
A different paradigm doesn't start with capital as the center of the universe. It starts from the point of view of life. And reality looks something like this: there’s only one system, the earth, which is precious beyond measure. The economy and everything in it are subsets of this one system.
The economic tools needed to build a more democratic economy are readily available and already in wide use. There are examples out there and in the book—some centuries old, some introduced in recent decades—that we can borrow from and build on in our own enterprises. The only thing we need is the imagination, or perhaps moral clarity, to recognize that we don’t have to run our businesses for the benefit of elite, absentee shareholders—that such a system, rather than causing wealth to trickle down, “extracts wealth up from communities and sets it spinning in the ethereal realm of speculative trading.” The “new” economy of big tech extracts even more—our attention and data—and sells it to others who want to sell us a lot of things we really don’t need, just to keep that top spinning.
Matthew Brown, the Leader of Preston City Council in the north of England, perhaps put it best when he said that for the past 40 years, his community had really seen no alternative, “just managed decline.” Inspired by Cleveland and the way the Evergreen Cooperative partnered with anchor institutions in the city, they began experimenting. Now “[w]ith the pension fund, anchor procurement, the living wage, worker co-ops getting started, the credit union, the [community] bank,” Matthew said, “we’re really building a democratic economy.” It is examples like these that prove we can build a truly new economy, and we can do it anywhere and everywhere. And we’ll have to, because big tech and the financial elites that sit atop our current economic system, one based on extraction from communities like Preston (and most likely yours), are not going to build it for us.