Tuesday, April 21, 2009

Phantom Wealth v. Real Wealth

I recently heard a radio interview with David Korten, an author and engaged citizen, who spoke about two forms of wealth creation – phantom and real wealth. It really got me thinking.

Phantom wealth is basically money that is created out of nothing. And Wall Street was masterful at phantom wealth creation. Like pumping up financial bubbles, it was tech 8 years ago and of course, the whole mortgage debacle, which was based on the assumption that housing prices would only rise - like the stock market. And housing prices did rise, year over year, even though there was no change in the size of the home, its livability, its location or anything else. It was pure inflation. But it was treated as though inflating housing prices was actually creating real wealth. And it did create wealth right up until it did not anymore.

Real wealth is anything of real value or utility. It can be land, labor, education and ideas. And at the most basic level its healthy children and a strong family, it's a healthy environment, its capitalism when working.

Adam Smith praised in “Wealth of Nations” – a market that looks very much like a local farmers market: a place where small producers and consumers come together in a community to exchange goods and services. My firm advises clients more efficiently and competitively than the largest providers, yet it’s common to hear that bigger is better. Now what his writing has been used to justify is the consolidation and monopolization of economic power and, in fact, those who study Adam Smith's work in depth conclude that he actually wrote “Wealth of Nations” as a tirade against the concentration of corporate power.

What we need to face up to is that we are exceedingly consuming beyond what the planet can sustain. Now, we're often told that any change in our consumption level will require sacrifice – not exactly true. There are enormous opportunities to at once reduce our consumption and increase our quality of life. But it requires a reallocation of resources from those uses that are harmful, to a focus on meeting real needs and meeting the real needs of people. This requires our economy doing a 180 degree turn to focus on life needs rather than on increasing the financial assets of the already wealthy. Banks collapse our economy about every ten years (S&L crisis late 80’s, global banking crisis late 90’s and the current situation) which puts the whole economy into a condition of instability. We need banks terribly but let’s not abuse debt such that we all end up working for the banks in the end.

We need to redesign around a primary value on life, on the health of our families, the health of our communities and the health of our environment. But it requires local economic control, it requires local ownership, it requires the broadest possible participation in ownership (investing), and it means managing the economy for the long term. Now that means, using locally owned banks and local businesses when appropriate.

CBlakely 04-2009

Source: NPR interview with David Korten