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Robert McGarveyAre homo sapiens so ignorant, greedy and short-sighted that they will blindly jump into the abyss?

As a former geologist, I can tell you that on present form (exponential population growth, rapid species expansion into all corners of the globe, etc.), humanity is in the footsteps of almost every other dominant-species mass extinction in Earth’s history.

However, looking more optimistically at the problem, former Harvard Business School professor Dr. David Korten, author of A 21st Century Economics for the People of a Living Earth, is convinced that we’re threatened … but not doomed.

He offers some timely advice on how to avoid self-extinction.

His evidence for system change starts with our obviously ailing planet, but also includes our near-religious belief in gross domestic product as a measure of human progress.

And he points to flaws in modern capitalism that have facilitated a massive concentration of wealth in global society. Six humans – yes, only six – hold personal fortunes that are greater than the holdings of the 3.9 billion people who constitute the poorest half of humanity.

Korten believes the root of all evil is not only humanity’s wilful pollution of land, sea and air, but our willingness to recklessly follow a dangerous set of assumptions that underpin modern economic thought.

He advances eight principles that, he believes, will right our ship and create a better, more sustainable world.

His first few principles are important and well conceived. They include adopting well-being as a measure of human progress, focusing on positive (rather than negative) use of resources and establishing public control over private bank institutions while democratizing all new money (and credit) creation.

Korten then drifts away from practical solutions. He dreams of a more perfect future, where education is free and lifelong; where technology only serves life and is not used to destroy it; where every community is co-operative and self-reliant; where humanity (somehow) strikes a harmonic balance between all creatures, ending the idea that Earth is simply a playground for mankind.

While admiring these noble sentiments, it’s clear that – from a practical perspective – the real problem lies closer to home. Korten is right: there are fundamental flaws in neoclassical economics that distort the egalitarian potential of modern capitalism.

Amongst the more dubious assumptions that underpin modern economic thought is the idea that markets are pristine and essentially frictionless, that they’re constantly either in equilibrium or on the way to equilibrium.

It was from this frame that marginal utility analytics – the foundation stone of mathematical economics – emerged. Margin utility theory suggests that it’s always true that value in exchange on the margin automatically determines pricing throughout the market.

These foundational assumptions contributed to a mathematical castles-in-the-sky form of economics and through it a great narrowing of economic thought.

The die was cast.

In the late 19th century, economic thought left the objective real world and entered a super-reality, an imaginary plane where what really mattered was mathematical purity and logical consistency, where events in the real economy were less important than the complex econometric models that were driving policy decision-making.

What followed would be funny if it wasn’t so tragic.

Why do we place so much blind trust in market forces, allowing economic distortions to plague society?

Because, according to neoclassical economics, frictionless markets produce the optimum allocation of resources between alternative uses.

Why is wealth concentrated in the one percent?

Because the neoclassical production formula draws a distinction between capital and labour. Mechanical and financial elements of production are more important – and acquire vastly more surplus value – than human capital.

Why are developed economies stagnating?

Because neoclassical economics tells us that in a market economy, savings equals investment (i.e. our savings are automatically used to expand the economy’s capital stock).

Regrettably, over 90 percent of our savings are in managed funds invested in stock markets. In other words, the vast majority of our savings are essentially parked on the economic sidelines, unavailable for productive investment.

Regrettably, as our world enters an era with a vastly different set of economic drivers (digital), we’re still trying to manage the economy as if it were made up of factories producing physical widgets.

Korten makes the case that blind adherence and institutional inertia are the root causes of humanity’s bad choices.

The time for change is now and a good place to start is rethinking the foundational assumptions that underpin modern economic thought.

Robert McGarvey is an economic historian and former managing director of Merlin Consulting, a London, U.K.-based consulting firm. Robert’s most recent book is Futuromics: A Guide to Thriving in Capitalism’s Third Wave.

Robert is a Troy Media contributor. Why aren’t you?

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