From the Theory of the Firm to a Theory of the Community

/, Corporations/From the Theory of the Firm to a Theory of the Community

This is a revised and expanded version of a paper by David Korten circulated to participants prior to the February 2, 2018 Necessary Conversation webinar, hosted by the International Humanistic Management Association. (The video of the webinar has been posted; view it HERE…)

We humans organize around shared narratives, theories of reality, that guide us in making critical collective choices. When societies get their shared narrative wrong, they can make disastrously self-destructive choices. As a global society, we face a momentous choice we must get right. And our current narrative is fatally flawed.

Four defining developments of the latter 20th century make us the first species on Earth with the capacity to choose its own extinction. We:

  • Developed the technological capabilities to destroy Earth’s capacity to support life, including human life
  • Reached a level of consumption 1.7 times Earth’s capacity to sustain
  • Connected ourselves into a web of instantaneous communication that gives us the capacity—right or wrong—to choose our common future as a conscious collective choice
  • Removed constraints to the global consolidation of rule by corporations primarily accountable for maximizing financial returns to their richest shareholders.

These trends all have continued into the 21st century and led to a concentration of wealth unprecedented in human history. Eight individuals now own financial assets equal to more than the total financial assets of the poorest half of humanity. Oxfam reports that in 2017 the richest 1 percent of the world’s people captured 82 percent of the new wealth created. None of that increase went to the poorest half.

Residue of a 5,000-year Imperial Civilization, our dominant government and corporate institutions feature internal command and control hierarchies. The relatively recent introduction of representative democracy mostly inserted layers of elected officials into the command and control structures of government through competitive political processes in which the rich hold all the formal tokens. Institutional structures remain hierarchical and power remains largely hereditary.

For much of the Imperial era, city states and then nation states—defined by territorial boundaries—were the favored institutions of humanity’s rulers. As representative democracy threatened to hold rulers accountable to the will of the ruled, the corporation—for which geographical boundaries are now largely irrelevant—has emerged as the favored institution to secure elite control of Earth’s resources.

Until the late 20th century, the power of a corporation was largely subordinate to the power of the nation state that created it. Globalization has freed most corporations from that constraint. A series of international agreements, exemplified by the North American Free Trade Agreement (NAFTA), which launched January 1, 1994, and the World Trade Organization (WTO), which launched January 1, 1995, were landmark advances for interests intent on freeing corporations from their traditional accountability to nation states.

Democratic accountability of humanity’s ruling institutions to the people whose means of living they control is now mostly pretense. This presents humanity with an organizational challenge of a scale and complexity beyond anything we have previously faced.

Global corporations grow their profits and financial assets by driving global growth in consumption (GDP) that grows the human burden on Earth’s living systems and the inequality that strips the excluded of political power. The result is an existential threat to the viability of humans and the living Earth that sustains us. The threat will continue to deepen so long as we remain captive to a false narrative.

We Need a New Narrative

The institutional system driving humanity toward self-extinction is guided and legitimated by a Theory of the Firm embraced as their intellectual holy grail by most economists and many business school academicians. This theory posits that free (unregulated) markets act perfectly to maximize the well-being of the society. Individuals need only maximize individual income and the personal utility of their purchases. Corporations need only maximize financial returns to their shareholders.

Building on these assumptions, the theory supports reducing all human relationships to financial transactions mediated by a combination of money and individual legal contracts. It values humans only for their labor market price and ignores their essential material needs for air, food, water and other essentials.

In addition, the theory ignores emotional needs that can only be met by relationships based on mutual caring that monetary exchange tends to strip away. It dismisses personal or collective responsibility to care for one another and Earth. It strips away the democratic accountability of governments and reduces government’s role to enforcing contracts. In short, the theory denies all that makes us human, dismisses government’s most essential functions, and places no limits on the financial or political power that an individual or firm can accumulate.

The Theory of the Firm favors and legitimates exactly those collective choices that currently drive system collapse. They:

  1. Make money the primary measure of value and medium of exchange
  2. Give ever greater control of the creation and allocation of money to a declining number of corporations
  3. Transfer control of those corporations to an ever-shrinking minority of the human population
  4. Detach these corporations from attachments to place
  5. Give private purpose corporations dominance over the institutions on which the people in life-serving communities depend to govern themselves.

The theory’s embrace by academia narrows the focus of economics and management education to preparing students for careers of service to the failed system making the bad choices that threaten our common future. This deeply flawed theory must be replaced by a better theory.

The Case for a Theory of the Community

There is an emerging recognition in the life sciences that life as we know it exists only as communities of organisms that self-organize to create and maintain the conditions essential to their individual and collective.

Take as a prime example the complex multicell organism we know as the human body. Each human body is a community of tens of trillions of individual decision-making cells. With the support of an unimaginably complex communications system that science is only beginning to recognize, let alone understand, they self-organize to create and maintain the conditions vital to our individual existence. The resulting physical body is the container of our consciousness and the instrument of our highly advanced capacity for self-aware agency. Yet our conscious mind not only does not control these processes, it is largely unaware of them.

Earth is a vastly more complex living organism. Like humans—or any multi-celled organism—it survives as a living organism only so long as its countless composite of individual single and multi-celled organisms self-organize as a community. In the case of Earth, this involves creating and maintaining the conditions of atmosphere, water flow and purification, climate, soils, and other conditions on which the existence of all of Earth’s individual living organisms and communities of living organisms in turn depend.

The challenge of organizing a human society of 7.6 billion intelligent and self-aware people seems almost simple by comparison to the challenge that living Earth’s community of life has mastered. In learning how to do it in ways that work both for ourselves and for Earth, we have much to learn from living non-human communities that meet their needs through continuous exchange with no evident equivalent of money, command and control, legal contract, and only rarely an evident immediate quid pro quo. Yet, over periods that may span decades, there is usually some form of mutual benefit.

Lacking any pretense of interest in or understanding of life and its vital organizing principles, the Theory of the Firm recognizes only the firm, solitary human individuals, and relationships between solitary individuals mediated by money, legal contracts, free market competition, and myopic, purely individual interests. We should not be surprised that it is terminally deficient as a guide to organizing our relationships with one another and Earth. That it has taken us so long to notice its deficiency, should be cause for serious humility.

The future health and well-being of the species depends on rethinking and restructuring our institutions to align with the requirements of healthy living communities. This task must ultimately engage billions of people. They can benefit immensely in their efforts from the intellectual leadership of thoughtful members of the academy who recognize the failings of the narratives that currently align our most influential institutions of research and teaching in service to the agenda of a terminally destructive system.

Initial Organizing Principles of a Theory of Community

Life’s capacity to achieve its miracle of self-organization and its even more extraordinary miracle of self-evolution toward ever greater complexity, beauty, awareness and possibility is in turn a product of life’s complexity and seemingly self-aware intelligent agency. Despite our demonstrated failings, it appears we humans are to date the most advanced expression of evolution’s creative advance. We have yet, however, to develop the wisdom to use this capacity in service to the health and well-being of the Earth community that birthed and nurtures us.

The sorely needed Theory of Community will rest on a foundational premise supported by the understanding emerging at the leading edge of the life sciences.

Life exists only in multi-species communities that self-organize to create and maintain the conditions essential to their own existence. We humans are living beings. Therefore, we exist only as members of a multi-species living community.

Three foundational organizing principles follow from this premise. All have important implications for how we create, structure, and manage money, government, corporations, and markets as tools in service to life

Principle 1: Defining Value and Unit of Organization: The defining value of both society and the economy must be the health and well-being of the living community, which therefore must be the defining unit of organization.

If we embrace life—its health, well-being, beauty, and creativity—as our purpose and defining value, everything else relating to how we organize properly follows. Within this frame, all living beings that participate in and contribute to life’s existence and continued unfolding have intrinsic value. The distinctive value of humans resides in our unique capacities and our mostly unrealized potentials to serve life’s continuing regeneration and creative unfolding.

Money, markets, corporations, and government are all human creations. Each has a powerful influence on our human behavior, but none has a material or conceptual existence outside the human mind. Each is powerfully influenced by the acts of nature that impact us, yet nothing in nature can either recognize or respond to them. They are of value only to the extent that they serve us in our service to ourselves and the whole of Earth’s community of life. Specific implications include:

  • The creation of a government, the only acceptable purpose of a corporation is to serve the community within that government’s jurisdiction.
  • Each corporation must be accountable to the community that created it for serving the purpose for which it was created.
  • The corporation has legal standing only within the jurisdiction of that community or such other communities as choose to grant it license.
  • The corporation’s ownership must be long-term and local to the community it was created to serve and to which it is accountable.
  • There is no legitimate justification for the existence of a purely private purpose corporation and there is no place for speculation on the price and exchange of corporate shares.

Principle 2: Governance Structures and Processes: Command and control, a relic of our imperial past, must give way to self-governance within a global system of holarchy (nested communities) in which higher level governance structures support lower level resource control and self-organization

Living systems organize within structures that facilitate highly complex adaptive decision making by the community’s member organisms. We must learn to do that same. Human communities create institutions to facilitate their processes of self-governance. Ultimately, all institutions must be accountable to the people of that community.

The governance internal to individual institutions is also at issue. The most effective human teams and organizations are largely self-organizing, with people assuming tasks and roles as the situation requires without interference by a command and control hierarchy. The greater the need for creative adaptation, the more important and effective such self-organizing local processes become.

We can and must use our exceptional human capacity for self-aware agency to meet our own needs in ways that simultaneously serve others. At the same time, that capacity for agency makes us a potential threat to both ourselves and others.

Our educational systems must advance our proficiency in distinguishing between these choices with wisdom, intelligence, and a deep sense of moral responsibility to and for the well-being of the community that in turn cares for us. The freedom of the individual comes with a responsibility for the well-being of the whole.

A Theory of the Community will favor minimizing the monetization of relationships by creating incentives for all relationships, both monetized and non-monetized, to optimize the health, creativity, and well-being of both individuals and the communities they create. In a Theory of the Community, the primary role of institutions at higher system levels will be to facilitate local control and adaptive self-management to meet the essential needs of all the community’s members without shifting the community’s burdens to its neighbors. Specific implications include:

  • Define and organize communities as territorially defined bio-regions
  • Strive for a level of citizen participation in self-organizing community decision making and self-organization far beyond current structures of representative democracy
  • Structure and manage higher level governance institutions to protect and support lower level communities in controlling and self-managing themselves and their biosystems regeneratively to meet their material needs in ways that are spiritually fulfilling resilient, and creative
  • Demonetize human relationships to one another and nature to the extent feasible

Principle 3: Resource Flows: Each community must strive for local material self-reliance in providing a full, healthy, happy life for all its members.

Living organisms meet their needs for water, nutrients, and information based on what is immediately locally available. And they work with Earth’s local geological materials, structures, and processes to continuously regenerate soils, aquifers, streams, and rivers, sequester excess carbons and other wastes, purify the air, and even help to stabilize weather and temperatures.

Individual species may store for future needs and some may engage in regular migration over significant distances, usually in ways that make distinctive contributions to their own—sometimes multiple—communities. Others forage over modest distances.

Overall, however, natural biosystems meet their needs by adapting themselves to local conditions. And the community generally adjusts to keep local populations in balance with local conditions and the community’s regenerative capacity. Other than the droppings of migratory birds or nutrients from the bodies of dying salmon, most everything needed locally is acquired and processed from local resources. So long as each local community is meeting its needs in balance with its local living system resources, the global system is stable and balanced.

Specific implications for the organization and self-governance of human communities include:

  • Meet energy needs primarily with local capture of solar and wind energy
  • Minimize the transfer of material resources both within and between communities
  • Maximize the free exchange of knowledge, information, technology, and culture within and between communities
  • Organize all material processes around continuous circular flows
  • Prohibit one community from expropriating the resources of or shedding its wastes onto another

Critical Challenges

We have urgent need to build consensus around a Theory of Community to displace the Theory of the Firm and guide us in restructuring our institutions and preparing our youth to lead a civilizational transformation without precedent in the human experience. We may expect that the theory will challenge us to:

  1. Break up concentrations of corporate power and restructure the individual pieces to assure each is accountable for fulfilling a public purpose beneficial to the communities in which it does business. This will require significant changes in corporate law and internal corporate organization and management.
  2. Take democracy to the next level as a participatory process of community self-organization, not just a voting contest between two or more establishment candidates.
  3. Replace GDP as the primary measure of economic performance with measures of the health and well-being of people, communities, and nature—giving priority to equality, material sufficiency, and spiritual abundance for all.
  4. Redraw the boundaries of political jurisdictions to align in so far as possible with biosystem boundaries and seek to optimize economic self-reliance within each jurisdiction.
  5. Demonetize relationships by strengthen non-financialized relationships between people and between people and the lands that sustain them.
  6. Provide incentives to keep human populations in balance with the regenerative capacities of the bioregions in we live.
  7. Invest in life sciences research advancing understanding of the organizing principles, structures, and processes of healthy living systems.
  8. Transform management education to prepare future leaders with the knowledge and skills needed to lead institutional transformation and the creating of resilient self-governing communities.

These tasks potentially engage the creative energies of multitudes of forward looking scholars possessed of the confidence, discipline, and intellectual curiosity required to move beyond the limitations of existing theories and institutional structures. We must together—and with due haste—achieve a rapid advance in our understanding of how life organizes, our human nature, and our human contribution to creation’s continued unfolding as we engage the challenge of finding our way to a viable, prosperous, and fulfilling human future.

This is a revised and expanded version of a paper circulated to participants in the February 2, 2018 Necessary Conversation webinar with David Korten sponsored by the International Humanistic Management Association. David thanks Michael Pirson for drawing his attention to the significance of the Theory of the Firm and the need for a Theory of the Community. And Michael Pirson and Erica Steckler for their editorial guidance in the preparation of this paper and the organization and facilitation of the webinar.

2018-02-09T15:13:08+00:00 February 7th, 2018|Categories: Community, Corporations|