Financial System as a Global Commons
Last week, Capital Institute co-convened with futurist Hazel Henderson at Ethical Markets Media (USA and Brazil), her company's facility in Florida, the new Committee on Transforming Finance (CTF). The CTF is a group of seasoned capital markets practitioners, scholars, and financial writers who share a belief that the policy responses to the financial crisis were more tinkering than transformative, our objective was to construct a statement on the need to transform the financial system to one that serves the economy rather than acts as its master, and to one that serves an economy that is just, and respects the imperative of ecological function.
The statement calls for finance to be recognized as a global commons.
This simple statement has profound implications and the potential to reframe the global policy debate as we begin to address the need for true financial reform. A press release, which summarizes the statement and the full TRANSFORMING FINANCE Statement with signatories are now posted at Ethical Markets.
Professor Leo Burke, from the Mendoza School of Business at Norte Dame, also a co-convener of the meeting, describes the global commons as “the total inheritance of humankind, upon which life depends. This includes more than natural resources such as forests, oceans, and air. It encompasses our intellectual and cultural heritage, for instance literature, art, and the internet. Seen in this light, our participation in the global commons is fundamental to being human.”
The commons is now becoming a “hot space.” With the economy now breaching the “safe operating space” of the biosphere, it is no coincidence that the 2009 Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel went to Elinor Ostrom for her work on successful stakeholder-based economic governance of the commons. These findings are important because they effectively refute Garrett Hardin’s famous 1968 article in Science magazine, “Tragedy of the Commons,” in which he argued that rational independent actors would deplete common resources while trying to maximize personal benefits. In other words, we’re doomed.
Proper governance of the global commons is the central challenge of the 21st century. Senior policy advisor to heads of State and international development expert James Quilligan writes in “State Capitalism, the Commons Economy in our Lifetimes:"
Another world is coming: where common goods are capped and protected; a portion of these resources are rented to businesses for the production and consumption of private goods; and taxes on their use are redistributed by the state as public goods to provide a social income for the marginalized and to repair and restore the depleted commons.
Professor Burke reminds us that the idea of a commons is not new. Indeed the Romans legally protected the concept of the commons through their differentiation of private (res privatae), public (res publicae), and common interests (res commones). The commons sector is distinct from the public sector because it represents the long-term common interests of all stakeholders. The nation state, by contrast, represents the too often short-term election cycle interests of a sovereign state, while the private sector, notwithstanding progress toward stakeholder capitalism, represents only private interests, and all too often judged on a quarterly basis.
We lack sufficient commons sector institutions to address modern challenges. The failure of the climate negotiations in Copenhagen this year highlights the pitfalls of an interdependent world, organized by only private and public sector, facing truly global commons challenges. This structural deficiency exists even assuming a perfectly functioning public sector, without the added complexity of private sector capture which is all too often the reality today.
Before turning to the idea of a global financial commons, let us summarize the core governing principles of a commons as developed over many years in multiple contexts:
• Stakeholder co-governance
• Access for all participants
• Acknowledgment of the intrinsic value and assignment of rights to the environment
• Subsidiary - Decision making at the most local level possible (but not more so)
• A commitment to ecological function and social justice, globally.
I first heard Peter Barnes, author of Who Owns the Sky, and Capitalism 3.0 (both in our Resources section) discuss finance as a commons in a speech a few years ago in which he referred to the stock market as a commons. The idea was simple: years of cultural norms and an institutional construct called the stock market enable companies to “go public” enabling entrepreneurs to reap enormous personal wealth from successful share offerings. Only institutional and cultural trust, and a publicly funded communications infrastructure and regulatory regime make this possible. As I recall, Peter was suggesting a commons tax to be paid by the company owners as give back to ensure the proper maintenance of the commons.
I recall at the time not fully buying the logic, although I was intrigued. Looked at through the lens of the Capital Institute, post financial crisis, it makes a lot more sense. In fact, it is quite clear that the stock exchanges, and all capital markets, credit markets, the payments system, and indeed the monetary system and money itself should be properly considered a global commons, given the importance their proper functioning has across global society. As we have learned quite painfully, virtually the entire world is impacted by financial system breakdown. Yet there is no “co-governance” by broad stakeholder groups in a global institution that addresses the global financial commons. Instead, the narrow interests of Sovereign State “experts” from finance ministries and central banks (responding to legislation that is often under conditions of private sector capture as in the case of the United States) negotiate among themselves for what they believe to be in their national interests.
One example of commons sector failure will be illuminating. Since the stock exchanges have been privatized, trading volumes have exploded, enabled by technology and more recently, with the advent of high-frequency trading. I have seen reports that 60% of trading volume on the New York Stock Exchange is now done by so called high-frequency trading strategies, and one firm accounts for over 4% of total volume. This suits the private interests of the exchange, which gets paid on volume. But the false liquidity and damaged resiliency (see “flash crash”) have destroyed trust and damage function for the broad stakeholder group that is left out of governance of the private exchange.
As best as I can tell, high-frequency trading amounts to technologically sophisticated front running and manipulation of commons participant order flow (including mine), a direct expense to the broad stakeholders at huge personal gain to the traders (which include bailed-out, too-big-to-fail banks such as Goldman Sachs). A properly governed commons sector would simply disallow such activity as it fails to serve the common good while harming the system in the process. High- frequency trading would certainly be taxed for the privilege of using the global commons, which provides the theoretical underpinning of my call for a Financial Transactions Tax (FTT).
We will unpack this idea of a global financial commons further in the months ahead.
A further word from Hazel Henderson:
As the lead convenor of the Transforming Finance meeting and co-drafter of our Statement, I want to point out that whenever market spaces get " full," the classic "win-lose" rules of competition for rival goods gradually change as market players' attention shifts from competing within the market "ballpark" to worrying about the viability of the ballpark itself and how to manage access to "non-rival " goods, i.e., those that can only be consumed collectively, like air.
At this stage of economic growth, opportunities for continued gainful activity shift to "win-win," cooperating on rules of interaction and for preserving the "ballpark." If no such cooperative activity occurs, the result is "lose-lose," e.g., loss of biodiversity, fish stocks, etc. Thus game theory becomes more suitable as a theoretical framework than neo-classical economics. I spelled all this out and pointed out why my late friend Garrett Hardin had overstated his case for privatizing commons in my " New Markets and New Commons," FUTURES, Elsevier Science, UK, 1995.