by David C. Korten

It is a great pleasure to be making my third visit to the beautiful and historic city of Budapest. I have come to here to learn about your experience and concerns regarding Hungary's economic transition and to share some of my observations and concerns about the causes and consequences of the dysfunctions and instability now so evident in the global economy. I make no pretense to being an expert on Hungary. I therefore leave it to you to draw your own conclusions as to the relevance of my remarks to your situation.

I want to leave you with two messages tonight. The first is that the global capitalist system is now running wildly out of control and exacting a terrible price from society as its excesses spread deprivation and instability around the world. The second message is that there is a clear and promising alternative that has nothing to do with communism and Stalinist style central planning. Rather it involves acting to create that which capitalism promises, but does not deliver-democracy and a market economy.

I believe we are at a critical moment in human history. All of our lives and futures are being shaped by economic forces that are not well understood, even by those who are supposed to be in charge. I am among those the global capitalist system has favored. Indeed I have spent much of my life serving its cause. I now see, however, that we have created a global economic system that is ruled by money, not by people, and results in the blind pursuit of money at the expense of life. In my experience both Communism and Capitalism have proven their failure and our hope for the future depends creating alternatives based not on the blind pursuit of false ideologies, but rather on a deep and open reflection on what brings us real satisfaction in our lives and the ways in which we want to live with ourselves, our neighbors, and the planet.

Those of you who have read When Corporations Rule the World know that my inquiry into these issues has grown out of what I experienced during the 15 years I resided in Southeast Asia. During this period the region became known as the Asian economic miracle-a testimony to the power of capitalism to create great wealth for countries willing to follow the advice of the IMF and the World Bank. I saw the modern airports and highways, elegant five star hotels and grand air conditioned shopping malls being built and the imported luxury goods pouring in. Yet beyond the attractive glitter of capitalism's facade, I saw something deeply troubling-well before the region experienced financial meltdown in 1997. I saw life becoming more difficult for the vast majority of people. I watched the forests and coral reefs disappearing. I watched the rich cultures that had attracted me to Asia disintegrating.

I began to look more closely at the data from other developing countries and was shocked to realize that what I was witnessing was nearly universal. Eventually I began to realize that data from my own country, the United States, and from other northern industrial countries revealed similar patterns of increasing inequality, more people slipping into deep poverty, environmental destruction, and a deteriorating social fabric. It seemed something was profoundly wrong and it was deeply systemic. I spelled out many of the present global system's structural flaws in When Corporations Rule the World in an analysis I gather has touched a chord with many Hungarians. The economic chaos now spreading across the world is exposing with the consequences of these flaws with such stunning clarity that even many of capitalism's ardent true believers are becoming concerned. Let me share a quick overview of what is now happening.

As you know so very well, in the 1980s Capitalism triumphed Communism, a victory widely celebrated around the world, including in Hungary and other countries that lived under the tyranny of the Soviet system. We were told that capitalism would now bring the benefits of democracy and the market economy to all the world. The reality, however, has been quite different. We are just beginning to awaken to the fact that in the 1990s capitalism had a second but less touted victory-a victory over democracy and the market. Now we face the question of whether during the first decade of the 3rd millennium we may witness capitalism's triumph over life and our own ultimate destruction as a civilized species.

For those of us who grew up believing that capitalism is the foundation of democracy, market freedom, and the good life it has been a rude awakening to realize that under an unrestrained capitalism, democracy is for sale to the highest bidder, the market is centrally planned by global mega-corporations larger than most states, the destruction of jobs and livelihoods is rewarded as a virtuous act, and the destruction of life to make money for the already rich is treated as progress. We now see that capitalism's claim to be the champion of democracy and the market economy is patently false. To the contrary, capitalism is the mortal enemy of democracy and the market. Its relationship to them is much the same as the relationship of a cancer to the body whose life energies the cancer expropriates. Cancer is a pathology that occurs when an otherwise healthy cell forgets that it is a part of the body and begins to pursue its own unlimited growth without regard to the consequences for the whole. The growth of the cancerous cells deprives the healthy cells of nourishment and ultimately kills both the body and itself. Capitalism does much the same to the societies it infests.

Through the course of this century the world's great political competition was defined as a contest between communism and capitalism-as though these were our only two alternatives. We fell into the pattern of believing we had only two choices. Ignoring the grand diversity that existed even in our bipolar world, most of us were inclined to assume that if we were not a capitalist, then we must be communist-and vice versa. Now capitalist ideologues tell us that since communism has been totally discredited, laissez faire capitalism is our only choice short of a return to Stalinist central planning. Though it is a stupid claim, it often goes unchallenged.

Capitalism is a term coined in the mid-1800s to name an economic and social regime in which the ownership and benefits of capital are appropriated by the few to the exclusion of the many who through their labor make capital productive. This definition certainly holds true for the system that now proudly calls itself capitalist.

There is more to contemporary capitalism, however, than the rule and exploitation of the many by a wealthy elite. Contemporary capitalism has evolved into a system of autonomous rule by money and for money that functions on autopilot beyond the control of any human actor or responsiveness to any human sensibility.

The world's most powerful institution is the global financial system, which functions as a global financial casino staffed by faceless bankers, portfolio managers, and hedge fund speculators who operate with a herd mentality. Lacking accountability for the consequences of their actions, they send exchange rates and stock prices into wild gyrations unrelated to any underlying economic reality as they each day move more than two trillion dollars around the world in search of quick profits and safe havens. With reckless abandon they make and break national economies, buy and sell corporations, and hire and fire corporate CEOs-holding the most powerful politicians and corporate managers hostage to their interests. When their bets pay off they claim the winnings as their own. When they lose they run to governments and public institutions to protect them against loss with pious pronouncements about how the poor must tighten their belts and become more fiscally prudent.

Figure 1: Power Shift

I believe the key to identifying the alternatives available to us beyond capitalism is to look closely at the contrast between capitalism's promise to deliver democracy and self-organizing market economies with the tyrannical global rule by big money that it actually delivers.

This overhead illustrates essential differences between a market economy and the global capitalist economy. Please note that these differences have a very practical significance. They give us a simple and familiar answer to those who claim there is no viable alternative to global capitalism and its pathological consequences. The obvious alternative is to eliminate the capitalist cancer from the body of society to create the necessary conditions for democracy and a global system of market economies and compassionate cultures that honor the needs of life and living beings.

In a healthy market economy enterprises are human-scale and predominantly locally owned. Economic exchanges are shaped and controlled by people through the expression of their cultural values, their purchasing decisions, their democratic participation in setting the rules by which the market will function, and their ownership of local enterprises. It is a dynamic and interactive system in which people participate in many roles and bring their human sensibilities to bear on every aspect of economic life.

Political democracy and the market economy work well together as means of organizing the political and economic life of a society to allocate resources fairly and efficiently while securing the freedom and sovereignty of the individual. They create self-organizing societies able to function with a minimum of central coercive control. The special magic of the market is its ability to reward those who do productive work responsive to the self-defined needs of others as they add to the total wealth and well-being of society.

Capitalism, by contrast, is about using money to make money for people who already have more of it than they need. Its institutions, by their very nature, breed inequality, exclusion, environmental destruction, social irresponsibility, and economic instability while homogenizing cultures, weakening the institutions of democracy, and eroding the moral and social fabric of society. Though capitalism cloaks itself in the rhetoric of democracy and the market, it is dedicated to the principle that sovereignty properly resides not in the person, but rather in money and property-a decidedly undemocratic and elitist idea.

We are often told that deregulation and economic globalization are necessary to free the market. In fact, efficient market function depends on both regulation and borders. Deregulation and economic globalization free the institutions of capitalism from public accountability, lead to a concentration of financial and corporate power in the hands of financial institutions that function by their own imperatives detached from human interests and sensibility. Savings become aggregated into professionally managed retirement, trust, and mutual funds that have a legal fiduciary responsibility to maximize financial returns to their clients. Financial markets merge into a single unregulated electronic trading system prone to speculative excesses. Global corporations consolidate and concentrate their power through mergers, acquisitions, and strategic alliances beyond the reach of any state.

The financial institutions that act as proxy owners expect those responsible for corporate management to take a similarly narrow view of their responsibilities and send them a powerful message. A fair profit is not enough. Annual profits and share prices must constantly increase. The CEO who fails is likely to face a takeover bid or be fired by large shareholders. How the corporation increases it profits isn't the market's concern. As they say at Nike, just do it. The global corporation responds by using its great power to reshape cultures, limit consumer choices, pass costs onto the public, and press governments to provide subsidies and rewrite the rules of commerce in their favor. People become reduced to the roles capitalism chooses to define for them as workers and consumers.

In many instances the corporation responds the pressure of the financial institutions by destroying the most precious of all wealth, the living capital of the planet and society on which all life and the fabric of civilization depend. While you may not be experiencing all of these consequences here in Hungary, they are very strong patterns being play out by corporations on a global scale.

The great value of living capital is that it has the capacity to continuously regenerate itself. It is ultimately the source of all real wealth. To destroy it for money, a simple number that has no intrinsic value, is an act of collective insanity.

The mega-corporations and financial houses that dominate the capitalist economy continue to concentrate and consolidate their power over markets, technology, and capital through mergers, acquisitions, and strategic alliances without evident limit-even as they shed their responsibility for people by downsizing and contracting out. The statistics are sobering.

I'm sure you've heard many times from proponents of capitalism about how the market is much more efficient and responsive to the consumer than central economic planning. It is a strange claim to be coming from those who tell us how each new merger and acquisition is going to bring greater efficiency and benefits to the consumer, because the economy internal to a corporation is not a market economy. It is centrally planned by corporate managers to maximize financial returns to themselves and their shareholders. No matter what authority a CEO may delegate, he can withdraw it with a snap of his fingers. In the U.S. system, which is rapidly infecting Europe and the rest of the world, the corporate CEO can virtually hire and fire any worker, open and close any plant, change transfer prices, create and drop product lines almost at will-with no meaningful recourse by the persons or communities affected. Indeed, the power of the corporate CEO to dictate internal policy and action within the corporation would have made any Soviet planner green with envy.

Ironically, the global victory of capitalism is not a victory for the market so much as it is a victory for central planning. Capitalism has simply shifted the planning function from governments-which in theory are accountable to all their citizens-to corporations-which even in theory are accountable only to their shareholders.

We are moving very fast toward ever greater consolidation of this unaccountable corporate power. In the United States the total value of corporate mergers and acquisitions has increased at a rate of nearly 50 percent a year in every year save one since 1992. Most of these mergers and acquisitions are accompanied by large-scale layoffs. The greatest concentration is taking place in the financial and telecommunications sectors-with deeply ominous implications for the future of democracy.

Merger mania is spreading. Mergers world wide had a total value of $1.6 trillion in 1997-up 48 percent over 1996. European mergers and acquisitions set a record of $400 billion in 1996-double the level of just two years earlier. American investment banks, which are moving into Europe with a vengeance, were involved as advisors in two-thirds of the deals. Do not for a moment think that because Europeans believe in stakeholder capitalism that what I am talking about cannot happen here. It is happening here at this very moment. Stakeholder capitalism is being purged from European economies as inefficient and a violation of exclusive shareholder rights. The centralized economic control made possible by an integrated European market and a single currency will undoubtedly speed this process as financial power delinks from democratic accountability.

We often hear that global corporations are important sources of employment. If we look at the larger picture we see that their real strength is in controlling a major portion of the economy with very few workers. For example, the combined sales of the world's top 200 corporations are equal to 28 percent of total world GDP. These same 200 corporations employ only 18.8 million people, less than 1/3 of one percent of the world's population.

The large U.S. retailing chains such as Wal-Mart are well known for their intentional strategy of driving out small local retail stores with price promotions the small retailers cannot meet. Once the small retailers are driven out of business and local residents have no other option, they raise their prices. It is also estimated that for every job that a Wal-Mart store creates, it eliminates 1 and a half jobs previously supported by local retailers.

In general the development of shopping malls in the United States has had a devastating impact on community life by destroying down town business areas and the community commons. They concentrate business in the hands of the large chains that dominate the shopping mall spaces and, because of their location away from residential areas, increase dependence on the automobile and contribute to traffic congestion.

The Myth of Corporate Efficiency

I'm sure you've heard many times about capitalism's superior economic efficiency. If you've studied market theory you know it is assumed that the full cost of each good and service is internalized by producers and reflected in the prices of their products.

But capitalism is not the market. The success of global capitalism has been in large measure dependent on its ability to privatize the gains of economic activity for its managers and shareholders while passing the costs onto the larger society. Global corporations now routinely insist that governments provide direct subsidies and tax breaks in return for jobs. Similarly, they expect many workers to accept less than a living wage. They expect communities to bear the economic and health costs of their waste discharge. And they expect consumers to bear the consequences of dangerous and defective products.

Ralph Estes, a CPA with a distinguished academic and research career has compiled an inventory of studies estimating various costs externalized onto the U.S. society by unsafe and defective corporate products and practices. When added together, the total comes to $2.6 trillion a year-roughly 5 times the amount of reported corporate profits in the United States and 37 percent of 1994 U.S. GDP. Contrary to its claims, capitalism is extremely inefficient.

Those familiar with market theory know that a market can function efficiently only within a framework of rules that maintain certain necessary conditions. There must be rules and incentives to limit the growth and power of individual firms, encourage local ownership, and require firms to internalize their costs. Therefore, our goal should not be to eliminate necessary regulation, but rather to make it sensible and effective.

It is here that we experience the new global capitalism at it's most perverse. NAFTA, GATT, the World Trade Organization, and the Multilateral Agreement on Investment now being negotiated under the OECD all turn the necessary practice of market regulation on its head. To restore market efficiency and the equity essential to the legitimacy of its institutions, we must police global corporations to insure their adherence to essential market principles. Yet the international agreements and institutions in place and under negotiation not only fail to serve this need, they do exactly the opposite. They install corporate dominated mechanisms to police democratically elected national and local governments to prevent them from requiring the corporations and financial institutions that cloak themselves in market rhetoric to actually play by market rules. This is the real impetus behind formation of the WTO.

Global financial instability is now so great that even the most ardent defenders of laissez faire capitalism are starting to talk about the need for controls. We have seen the problems building for some years now in the rapidly shifting economic fortunes of a number of nations. Not long ago it seemed that Japan had become the invincible world economic power, eclipsing the fading fortunes of the United States and Europe. Then Japan's financial and real estate bubbles burst and countries such as South Korea, Thailand, Malaysia, and Indonesia became touted as models of the opportunities available to those who embraced neoliberal policies. Then their bubbles burst, followed by Russia, Brazil, and the United States.

To understand the causes of the instability we need to put aside the myths and illusions that shape our perceptions of what is going on in the international financial markets, starting with the myth that when we buy a share of stock we are investing in the creation of new productive capacity. Few people have ever really thought about what happens when they buy a share of publicly trade stock. Unless it happens to be a new issue, not a penny of what they pay for the stock goes to anything that might actually increase productive output. After the brokers take their commission the rest goes to the person who previously owned the stock.

In the United States, the big corporations are actually buying back their stock faster than they are launching new issues. This means that the net flow of money from the share markets into productive activity is negative. Overall the stock market is not a source of investment capital. It is simply a kind of gambling casino where we place our bets on which stock prices are going to rise and which are going to fall.

Unfortunately, the rise and fall of stock prices often does have significant real world consequences because banks find it highly profitable to loan large amounts of money to individuals and institutions that are leveraging their bets in the market.

The 1997 Asian financial crisis that turned Asia's much touted financial miracle into the Asian financial meltdown provides a useful illustration of the role of reckless bank lending in creating the financial instability that now plays itself out so visibly around the world. The Asian meltdown began in Thailand and rapidly spread through Malaysia, Indonesia, South Korea, and Hong Kong as economies collapsed one after another like falling dominoes. While specifics differed, the experience of Thailand is revealing of the underlying pattern repeated in country after country. During the phase in which Thailand was being touted as an economic miracle and a model of progressive economic policy by institutions such as the IMF large inflows of foreign money fueled rapidly growing financial bubbles in stock and real estate prices. As the inflated bubbles attracted still more money, much of it created by international banks eager to profit from loans to the speculators, who secured them with inflated assets. As the foreign currency reserves poured in, imports of consumer goods skyrocketed-creating the illusion of prosperity and a booming economy.

Yet since speculation in stocks and real estate was producing much higher returns than were productive investments in industry and agriculture, the faster foreign investment flowed into a country, the faster money actually flowed out of its productive sectors to participate in the speculative frenzy. Actual production stagnated or even declined in both the agricultural and industrial sectors. As a result foreign financial obligations were skyrocketing while the capacity to repay those obligations was declining. Obviously such a pattern of increasing consumption and declining production was not sustainable. Once the speculators realized this, the meltdown phase began. The speculators rushed to pull their money out in anticipation of a crash; stock and real estate prices plummeted, banks and other lending institutions were left with large portfolios of uncollectible loans, which impaired their ability to lend and created a liquidity shortage as financial collapse threatened.

The Wall Street bankers and investment houses that had helped to create the crisis through their speculative excesses and reckless lending-inveterate champions of the free market when the profits were rolling in-responded in typical capitalist fashion. They ran to governments and the IMF for public bailouts.

We see in the Asian experience an all too common reality of capitalism's ability to create an illusion of prosperity by creating a speculative frenzy, while actually undermining real productive activity and setting the stage for economic collapse. Similar dynamics were at work in the U.S. financial collapse in 1929, the U.S. savings and loan crisis in the late 1980s, and the deflation of Japan's financial bubble that began in 1989.

Making Money, Growing Poor

I now draw your attention to this overhead, which summarizes in fairly stark fashion what we are doing to ourselves on a global scale. A study by McKinsey and Company found that since 1980, the financial assets of the OECD countries have been growing at two to three times the rate of growth in gross domestic product (GDP)-a result of inflating assets values through pumping up financial bubbles. This means that potential claims on economic output are growing from two to three times faster than the growth in output of the things that money might be used to buy.

Figure 2: Making Money and Growing Poor

The distortions go far deeper, however, because an important portion of the output that GDP currently measures represents a decrease, rather than an increase, in our well-being. When children buy guns and cigarettes, the purchases count as an addition to GDP-though no sane person would argue that this increases our well-being. An oil spill is good, because it generates expensive clean up activities. When a married couple gets divorced, that too is good for GDP. It generates lawyers fees and requires at least one of the parties to buy or rent and furnish a new home. Other portions of GDP represent defensive expenditures that attempt to offset the consequences of the social and environmental breakdown caused by harmful growth. Examples include expenditures for security devices and environmental clean-up. GDP further distorts our reality by the fact that it is a measure of gross, rather than net domestic product. The depreciation or depletion of natural, social, human, institutional, and even human-made capital is not deducted. So when we cut down our forests or allow our physical infrastructure to deteriorate, there is no accounting for the loss of productive function. We count only the gain.

Economists in the United States, the U.K., Germany, the Netherlands, and Australia have adjusted reported GDP for their countries to arrive at figures for net beneficial economic output. In each instance they have concluded that in spite of substantial economic growth, the economy's net contribution to well-being has actually been declining or stagnant over the past 15 to 20 years.

Yet even the indices of net beneficial output are misleading as they do not reveal the extent to which we are depleting the underlying base of living capital on which all future productive activity depends. I know of no systematic effort to create a unified index giving us an overall measure of the state of our living capital. Obviously, this would involve significant technical difficulties. However, what measures we do have relating to the depletion of our forests, soils, fresh water, fisheries, the disruption of our climatic systems, the unraveling of our social fabric, the decline in educational standards, the loss of legitimacy of our major institutions, and the breakdown of family structures give us reason to believe that the rate of depletion of our living capital is even greater than the rate of decline in net beneficial output.

The indicators of stock market performance and GDP our leaders rely on to assess the state of the economy create the illusion that their policies are making us rich-when in fact they are impoverishing us. Governments do not compile the indicators that reveal the truth of what is happening to our wealth and well-being. And the power holders, whose financial assets are growing, experience no problem. In a global economy their money gives them ready access the best of whatever real wealth remains. Those whom capitalism excludes have neither power nor voice.

As we watch the social and economic devastation that capitalism spreads in its wake across the globe the time has come for some serious truth telling, starting with the stark truth that from the standpoint of its promise to being humanity universal peace and prosperity, capitalism is a disastrous failure. Through its ability to concentrate wealth it has brought us unconscionable inequality and condemned more than a billion people to dehumanizing and life threatening deprivation. Though its incessant glorification of individual greed and materialism it has intentionally and systematically degraded the essential moral foundation of just, sustainable and compassionate societies. Through its dominance and commercialization of the media it is destroying the rich diversity of national and local cultures that give our lives meaning and identity.

Through its ruthless exclusion of the economically weak and noncompetitive and its denigration of social responsibility it has ripped apart the social fabric that is the foundation of human civilization. In its mindless pursuit of money at any cost it ruthlessly destroys the life support systems of the planet on which the very survival of our species depends. By shifting power from people and democratically elected governments to financial speculators blind to all but their own short-term gains it undermines democracy and leaves national economies subject to violent boom and bust cycles unrelated to any economic reality.

We can no longer avoid the obvious fact that capitalism's failures are inherent consequences of its commitment to values and its institutions that favor money over life. To create a world in which life can flourish and prosper we must recreate our economies based on values and institutions that honor life, serve life's needs, and restore money to its proper role as servant. It will involve a great deal more than eliminating a pathology from our economic systems.

It is a matter of choice. Those of us who recognize our collective folly for what it is cannot limit ourselves to taking stands against harmful policies and practices. We must advance awareness of the viable and attractive alternatives it is within our means to choose. That is the primary thrust of my forthcoming book The Post-Corporate World: Life After Capitalism. It is also the focus of the group I helped to found, and whose board I chair, called the Positive Futures Network, publishers of YES! A Journal of Positive Futures.

As to economic alternatives, the answer, as I indicated earlier, is quite familiar to all of us-indeed it is the answer in which most of us already believe: democracy, market economies, and an ethical culture. I make specific reference to an ethical culture, because another of capitalism's myths maintains that by some wondrous mechanism the market automatically turns personal greed into a public good because Adam Smith said so. The market has no such mechanism and Adam Smith never said it did. Efficient market function absolutely depends on a culture of trust and mutual responsibility. To emphasize this fact, I refer to the alternative in my forthcoming book as the mindful market to underscore the important the efficient market function of an underlying ethical culture that encourages individuals to act with mindfulness of both their personal needs and the needs of the whole.

It is a choice the citizens of every country of the world would do well to consider. To follow the advice of the IMF, Wall Street speculators, and the bankers who are crafting the European Union is to buy into a system of rule by money that is taking us where no sane person should want to go. The alternative is to withdraw legitimacy and resources from the capitalist system and redirect them toward the creation of mindful market economies. Once we recognize that capitalism is the mortal enemy of the democracy, markets, and ethical culture on which most of us want to build our societies, it is not surprising that such a course calls for policies nearly the opposite of those favored by capitalism.

From Pathology to Health

Whereas capitalism prefers giant global monopolies with the power to extract massive public subsidies and avoid public accountability, the efficient function of markets depends on rules that keep firms human-scale and require producers to internalize their costs. Whereas capitalism institutionalizes a system of absentee ownership that keeps owners far removed from the consequences of their choices, the market economy favors ownership by real stakeholders-workers, owners, suppliers, customers, and communities-to bring human sensibilities to economic decision making. Whereas capitalism prefers the economic man or woman to the ethical man or woman, the market economy assumes an ethical culture that nurtures in its participants a mindfulness of the social and environmental consequences of their behavior. Whereas capitalism encourages and rewards the speculator, the market encourages and rewards those who contribute to wealth creation through their labor and productive investment. Whereas capitalism places the rights of money above the rights of persons and seeks to free it from restriction by national borders, the market seeks to guarantee the rights of persons over the rights of money and honors borders as essential to the maintenance of economic health.

It is time to start treating capitalism as the deadly cancer it is. We have the right and the means to heal our societies by ridding them of the cancer as we work together to build the culture and the institutions of the just, sustainable, and compassionate world if which we all dream.