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

/, Corporations, Earth Community/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 are a remarkable species with an extraordinary drive, as conscious living beings in a complex and evolving universe, to understand ourselves and our place in creation. In search of such understanding, we develop shared cultural narratives or theories that express our shared understanding. These narratives in turn guide us in making the individual and collective choices by which we organize as families, clans, identity groups, and societies—and now as a global species.

The outcomes can be beautifully loving, caring, and fulfilling to both individual and community. They can also be devastatingly destructive. The variety of the outcomes in different times and places throughout our species history give us some sense of the diversity of our human possibilities.

As we come to recognize and understand the variety of those possibilities, we come to recognize the extent to which we have the potential to determine, through our individual and collective choice of story, our collective nature—and thereby our collective future. Tragically, as a now global society, our choices are guided by a dominant narrative that is leading us to fatally self-destructive consequences.

Starting in the latter part of the 20th century, five powerful trends put us on track to become the first species on Earth to choose its own extinction.

  • Life Destructive Technologies. Our nuclear, carbon energy, genetic modification, and artificial intelligence technologies give us the capacity to destroy Earth’s ability to support life. We continue to increase the numbers and power of those technologies, seemingly unmindful of the potential consequences.
  • Consumption Beyond Earth’s Ability to Sustain. We consume at a rate 1.7 times what Earth’s regenerative capacity can sustain. Yet accelerating consumption growth remains our defining economic priority.
  • Corporate Influence on Government and Public Policy. We allow global corporations that seek to maximize profits, with disregard for consequences to life, to shape public policy to advance private interests over public interests.
  • Extreme Inequality. We tolerate a growing wealth gap that reduces ever more people to lives of desperation. A direct consequence of policies driven by corporate interest, the wealth (i.e., control of the means of living) of just eight individuals now exceeds that of the poorest half of humanity—3.8 billion people.
  • Loss of Institutional Legitimacy. We face social breakdown in response to the failing legitimacy of institutions that drive the above trends and have no internal ability to self-correct.

These are all consequences of bad choices that can be traced to limited or flawed narratives regarding our human drives and possibilities. Consequently, humanity now faces an organizational challenge of a scale and complexity beyond anything it has previously faced.

To have a future, we must transform our relationships with one another and Earth to provide all people with material sufficiency in a balanced co-productive relationship with one another and the living Earth that birthed and sustains us. That in turn requires a guiding narrative that draws from our most advanced human understanding to guide us to the realization of our highest human purpose and nature.

This paper proposes a Theory of the Community grounded in our most advanced understanding of the processes by which healthy living systems self-organize. This theory calls us to cultivate and utilize the highest potentials of our nature and to recognize that the institutions of business exist only to serve the community and must be subordinate to the institutions by which the community’s members govern themselves as a community.

Let’s begin with a bit of historical context.

The Anatomy of Crisis

Our now global society features an increasingly intense competition for the resources of a finite and overstressed Earth. The institutions by which we manage ourselves are the residue of a 5,000 years old imperial civilization devoted to securing the power and the affluence of the few at the expense of the many.

For much of the imperial era, humanity’s favored ruling institutions were first city states and then nation states—both defined by territorial boundaries. The relatively recent introduction of representative democracy inserted layers of elected officials into the command and control structures of imperial governments through electoral processes in which the rich retain significant advantage.

As democracy began to infringe on the power of kings, corporations became a favored institution of authoritarian rulers seeking to circumvent the authority of parliaments. Corporations are legal instruments for aggregating virtually unlimited economic power for private gain with limited personal liability and democratic accountability.

Until the late 20th century, corporations were largely subordinate to the nation states that created them. As economies globalized, corporations used their considerable economic and political power to free themselves from the constraints of national borders and government oversight through public guarantees of the free flow of trade and investment. Rather than corporations competing for government favor, governments came to compete for corporate favor.

This process gained public attention with the introduction of a series of international agreements designed to secure corporate rights beyond the reach of national laws and parliaments. In 1994, the North American Free Trade Agreement (NAFTA) linked the Canadian, US, and Mexican economies; and on January 1, 1995 the World Trade Organization (WTO) was launched to serve as a global body in which corporations could write and enforce the rules of global commerce with relative freedom from concern for the interests of nation states and the people whose interests are presumably represented by nation states.

If We the People are to secure a viable future for ourselves and Earth, we must transform the institutions of the imperial era. To succeed, we need a guiding narrative—a new theory to replace the theory the currently guides us.

The Theory of the Firm

The institutional system now driving humanity toward self-extinction is guided and legitimated by a theory, obscure to most people, but embraced as their intellectual holy grail by most economists and teachers of business management. Known as the Theory of the Firm, it assumes that the purpose and responsibility of the firm is to maximize financial returns to individual shareholders. It rests on the foundational premise of neoclassical economics that the well-being of all is maximized by free (unregulated) markets in which individuals and firms (corporations) act to maximize individual financial gain.

This is the frame in which we as a global society now train the politicians, board members, and managers who lead our corporate and government institutions. It guides and legitimates choices that maximize corporate profits, assuring the decision makers that these choices best serve the common good. In so doing, it reduces all human relationships to transactions mediated by a combination of markets, money, and legal contracts. The corporation’s labor costs are minimized, and nature is valued only as a cheap source of resources and waste disposal.

The theory is grounded in the limiting and self-destructive assumption that we humans care only about our individual self-gratification and ignores our human needs for clean air, food, water, and other essentials, as well as our emotional needs that can only be met by relationships based on mutual caring. Personal and collective care for one another and Earth are dismissed as irrelevant. Government is stripped of democratic accountability and its role is reduced to enforcing contracts.

In short, the theory denies all that makes us human, is blind to our dependence on nature, dismisses government’s most essential functions, and places no limits on the financial or political power that an individual person or firm can accumulate.

The Theory of the Firm and the neoliberal theory on which it is based, legitimate exactly those collective choices that currently drive system collapse. Specifically, they legitimate:

  • Making money the primary measure of value and medium of exchange;
  • Celebrating as wealth creation the financial bubbles that enrich speculators who contribute nothing to the production of real value;
  • Giving ever greater control of the creation and allocation of money to ever fewer private-purpose corporations;
  • Allowing control of those corporations to accrue to an ever-shrinking minority of the human population;
  • Detaching these corporations from connection to place; and
  • Giving these corporations dominance over the institutions by which the people in life-serving communities govern themselves.

The embrace of the Theory of the Firm by academics in schools of economics and management results in the training of future leaders of business practice and economic policy analysis to perpetuate, rather than transform, the institutions and practices that threaten our common future.

As we learned from Thomas Kuhn, a solid critique is not sufficient to break the hold of a flawed theory. It must be replaced by a more compelling theory. The Theory of the Firm and the ideology on which it rests must be replaced by a new theory—a Theory of the Community—grounded in the rapidly advancing scientific understanding of life and suited to guiding the transformation of society’s defining institutions and management practices.

Critical Elements of a Theory of the Community

Looking to the life sciences, we see an emerging recognition that life as we know it exists only in community. Communities of organisms self-organize to create and maintain the conditions essential to their individual and collective existence.

Take as an example the human body. Each of us is a community of tens of trillions of individual cells. With the support of complex communications systems that science is only beginning to understand, these cells self-organize to create and maintain the conditions vital to the existence of the body that is the instrument of our highly advanced capacity for self-aware intelligent agency. Yet our conscious mind not only does not control these processes, it is largely unaware of them.

When we extrapolate to Earth, we see an even more vastly complex living organism. Like any multi-celled organism, the living Earth survives only so long as its countless individual organisms self-organize to create and maintain the overall conditions of climate, pure water and air, fertile soil, and all else on which complex life—including humans—depends.

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 to do it in ways that work for ourselves and for Earth, we have much to learn from healthy non-human living communities that meet their needs through continuous exchange between cells, organisms, and Earth with no evident equivalent of money, command and control, or legal contracts. Only rarely is there even an evident immediate quid pro quo. Yet, over periods that may span decades, there is usually some form of mutual benefit.

Lacking any recognition of nature and its vital organizing principles, the Theory of the Firm focuses on solitary human individuals and their relationships mediated by money, legal contracts, free market competition, and individualistic interests. It should come as no surprise that this theory is terminally deficient as a guide to organizing our relationships with one another and Earth. That it has taken our species so long to notice its deficiency, should be cause for serious humility and alarm.

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. The work can benefit immensely from the intellectual leadership of thoughtful members of the academy who recognize the failings of the currently recognized theories that guide our most influential institutions of research and teaching.

Initial Organizing Principles of a Theory of Community

Life’s capacity to achieve its miracle of self-organization and self-evolution is a product of life’s complexity and capacity for distributed intelligent agency. Despite our failings, it appears we humans are so far the most advanced expression of evolution’s creative advance toward an ever-increasing capacity for intelligent, self-aware agency. We have yet, however, to develop the wisdom and skills required to use this capacity in service to the health and well-being of the Earth’s community of life.

The sorely needed Theory of Community will rest on the foundational understanding emerging in the life sciences that:

Complex 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 multi-species living communities.

This explains the deep desire of mentally healthy humans, when their behavior is not distorted by dysfunctional cultural narratives, to be concerned for the welfare of others and Earth and to perform acts of kindness to neighbors, strangers, animals, and even plants, though there may be no immediate personal benefit other than the satisfaction of doing it.

Three foundational organizing principles follow from this premise. All have important implications for how we structure and manage the relationships by which we create and allocate our means of living.

Principle 1: The Defining Value and Unit of Organization: The defining value of both society and the economy must be the health and well-being of place-based living communities and their members. Communities of place, therefore, must be the fundamental units of societal organization.

If we embrace life—its health, resilience, beauty, and creativity—as our purpose and defining value, everything relating to how we organize follows. All living beings that contribute to life’s health and beauty have intrinsic value. The value of the human species resides in our unique capacities and 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 behavior, but none has a material existence outside the human mind. They are of value only to the extent that they serve us and the whole of Earth’s community of life. Specific implications for the firm (and most specifically the chartered corporation) include:

  • The primary unit of organization must be the place-based community that seeks to meet its needs and those of its members within the limits of its locally available resources.
  • The only acceptable purpose of a corporation is to serve the place-based community defined by the territorial jurisdiction of the government that created it.
  • Each corporation must be created for a specific public purpose and accountable to the community that created it for fulfilling that purpose and it will have legal standing only within the jurisdiction of that community that created it.
  • The corporation’s ownership must be stable 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 short-term 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 nested communities (holarchy) in which higher level governance structures support lower level resource control and self-organization (subsidiarity).

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

The governance internal to individual institutions is also at issue. The most effective human teams and organizations are largely self-organizing and self-governing, with people assuming tasks and roles as the situation requires and as consistent with responsibilities and agreements with neighboring communities. The greater the need for creative local 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. Without a deep sense of responsibility for the whole of which we are a part, our capacity for agency makes us a potential threat to ourselves and others.

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

A Theory of the Community will favor creating incentives such that all relationships, both monetized and non-monetized, optimize the health, creativity, and well-being of individuals and the communities they create. Specific implications include:

  • Defining and organizing communities within territorially defined bio-regions;
  • Striving for a level of citizen participation in self-organizing community decision making and self-organization far beyond current structures of representative democracy;
  • Structuring and managing higher level governance institutions to protect and support lower level communities in controlling and self-managing themselves and their ecosystems regeneratively to meet their material needs in ways that are spiritually fulfilling, resilient, and creative without shifting burdens to other communities;
  • Demonetizing 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 available locally. They work with Earth’s geological materials, structures, and processes to continuously regenerate soils, aquifers, streams, and rivers, sequester excess carbons, toxins, and other wastes, purify the air, and 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 the communities through which they traverse. Others forage over modest distances, providing beneficial services along the way.

Overall, however, natural ecosystems meet their needs by adapting to local conditions. The community generally adjusts to keep local populations in balance with local conditions, including the regenerative capacity of local ecosystems. Other than the droppings of migratory birds or nutrients from the bodies of dying salmon, most everything needed is acquired and processed from local resources. So long as each local community is meeting its needs in balance with its local ecosystem resources, the global ecosystem will be in balance.

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

  • Meeting energy needs primarily with local capture of solar and wind energy;
  • Minimizing the transfer of material resources both within and between communities;
  • Maximizing the free exchange of knowledge, information, technology, and culture within and between communities;
  • Organizing material processes around continuous circular flows;
  • Maintaining energy, material and financial balance in exchanges with other communities.

Critical Challenges

We urgently need to replace the Theory of the Firm—and its neoliberal parent—with a theory that better reflects the realities and potentials of humanity and the living Earth to guide us in restructuring our institutions and preparing and supporting our youth to lead a monumental civilizational transformation. A Theory of Community will challenge us to:

  • 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 they do business. This will require significant changes in corporate law and internal corporate organization and management.
  • Take democracy to the next level as a participatory process of community self-organization, not just a voting contest between two or more candidates.
  • 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.
  • Redraw the boundaries of political jurisdictions to align as far as possible with ecosystem boundaries and seek to optimize economic self-reliance within each jurisdiction.
  • Strengthen non-monetized relationships between people and between people and the lands and waters that sustain them.
  • Provide incentives to keep human populations in balance with the regenerative capacities of the bioregions in which they live.
  • Invest in life sciences research advancing understanding of the organizing principles, structures, and processes of healthy living systems.
  • Transform management education to prepare future leaders with the knowledge and skills needed to lead institutional transformation and the creation of resilient self-governing communities.

Providing frameworks for such action will require the creative energies of multitudes of forward-looking scholars possessed of the confidence, discipline, and intellectual curiosity to move beyond the limitations of existing theories and institutional structures. We must together—and with all 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.


David Korten is co-founder and board chair of YES! Magazine, president of the Living Economies Forum, a member of the Club of Rome, and the author of influential books, including When Corporations Rule the World, The Great Turning: From Empire to Earth Community, Agenda for a New Economy: A Declaration of Independence from Wall Street, and Change the Story; Change the Future: A Living Economy for a Living Earth. He holds MBA and PhD degrees from the Stanford Graduate School of Business and is a former Harvard Business School professor. His current work builds on lessons from the 21 years he and his wife, Fran, lived and worked in Africa, Asia, and Latin America on a quest to end global poverty.
Follow him on Twitter @dkorten and Facebook

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. To Fran Korten, Pirson, and Erica Steckler for their critical intellectual and editorial guidance. And to Pirson and Steckler for organizing and facilitating the webinar.

2018-02-20T13:22:46+00:00February 7th, 2018|Categories: Academia, Corporations, Earth Community|
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