No More Band-Aid Solutions to the Financial Crisis: We Need to Build an Economy that Works

By David Korten, Berrett-Koehler Publishers, Inc.. Posted February 17, 2009.

Editor's Note: The following is an excerpt from Agenda for a New Economy: From Phantom Wealth to Real Wealth by David Korten, published by Berrett-Koehler Publishers, 2009.

Our economic system has failed in every dimension: financial, environmental, and social. And the current financial collapse provides an incontestable demonstration that it has failed even on its own terms. Spending trillions of dollars in an effort to restore this system to its previous condition is a reckless waste of time and resources and may be the greatest misuse of federal government credit in history. The more intelligent course is to acknowledge the failure and to set about redesigning our economic system from the bottom up to align with the realities and opportunities of the twenty-first century.

The Bush administration's strategy focused on bailing out the Wall Street institutions that bore primary responsibility for creating the crisis; its hope was that if the government picked up enough of those institutions' losses and toxic assets, they might decide to open the tap and get credit flowing again. The Obama administration has come into office with a strong focus on economic stimulus, and particularly on green jobs -- by far a more thoughtful and appropriate approach.

The real need, however, goes far beyond pumping new money into the economy to alleviate the consequences of the credit squeeze. We need to rebuild the system from the bottom up.

The recent credit meltdown has resulted in bailout commitments estimated in November 2008 to be $7.4 trillion, roughly half of the total U.S. gross domestic product (GDP). Congressional passage the previous month of a $700 billion bailout package to be administered by the Treasury Department sparked a vigorous national debate that focused attention on the devastating consequences of Wall Street deregulation. Other, even larger government commitments, including $4.5 trillion from the Federal Reserve, largely escaped notice. Large as the bailouts were, the failure of the credit system is only one manifestation of a failed economy that is wildly out of balance with, and devastating to, both humans and the natural environment.

Wages are falling in the face of volatile food and energy prices. Consumer debt and housing foreclosures are setting historic records. The middle class is shrinking. The unconscionable and growing worldwide gap between rich and poor, with its related alienation, is eroding the social fabric to the point of fueling terrorism, genocide, and other violent criminal activity.

At the same time, excessive consumption is pushing Earth's ecosystems into collapse. Climate change and the related increase in droughts, floods, and wildfires are now recognized as serious threats. Scientists are in almost universal agreement that human activity bears substantial responsibility. We face severe water shortages, the erosion of topsoil, the loss of species, and the end of the fossil fuel subsidy. In each instance, a failed economic system that takes no account of the social and environmental costs of monetary profits bears major responsibility.

We face a monumental economic challenge that goes far beyond anything being discussed in the U.S. Congress or the corporate press. The hardships imposed by temporarily frozen credit markets pale in comparison to what lies ahead.

Even the significant funds that the Obama administration is committed to spending on economic stimulus will do nothing to address the deeper structural causes of our threefold financial, social, and environmental crisis. On the positive side, the financial crisis has put to rest the myths that our economic institutions are sound and that markets work best when deregulated. This creates an opportune moment to open a national conversation about what we can and must do to create an economic system that can work for all people for all time.

Treat the System, Not the Symptom

As a student in business school, I learned a basic rule of effective problem solving that has shaped much of my professional life. Our professors constantly admonished us to "look at the big picture." Treat the visible problem -- a defective product or an underperforming employee -- as the symptom of a deeper system failure. "Look upstream to find the root cause. Find the systemic cause and fix the system so the problem will not recur." That is one of the most important things I learned in more than twenty-six years of formal education.

Many years after I left academia, an observation by a wise Canadian friend and colleague, Tim Brodhead, reminded me of this lesson when he explained why most efforts fail to end poverty. "They stop at treating the symptoms of poverty, such as hunger and poor health, with food programs and clinics, without ever asking the obvious question: Why do a few people enjoy effortless abundance while billions of others who work far harder experience extreme deprivation?" He summed it up with this simple statement: "If you act to correct a problem without a theory about its cause, you inevitably treat only the symptoms." It is the same lesson my business professors were drumming into my brain many years earlier.

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David Korten is a former economist with USAID, author of "When Corporations Rule the World," and an associate of the International Forum on Globalization.

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