Investment

Gar Alperovitz | May 15, 2017

Why is investment in the current system fundamentally undemocratic and unsustainable?

Investment decisions in the current system are driven largely by considerations of maximum financial return, without regard for the externalized consequences of these decisions on communities. While socially responsible investing offers a way for conscientious individuals and well-meaning institutions to screen out the worst corporate actors from their portfolio (for instance, through carbon divestment strategies), the fact remains that a system in which profit maximization serves as the central structural principle to guide and shape investment activity will tend to produce inequitable and unsustainable outcomes in many areas.

The problem facing union pension funds illustrates some of the challenges. These funds, in the US, total $1.6 trillion in assets.1  However, current regulatory principles of risk and what constitutes “prudent” financial governance designed to facilitate private investment and profit-taking from such funds too often mean that this capital is used against the interests of workers themselves. In some cases, union pension funds have even been invested in companies that displace union workers, such as the Los Angeles union pension fund that invested in an Embassy Suites hotel that fought union organizing efforts.2 Subject to effective democratic control such funds could be a powerful force for investing in the creation of good jobs, essential infrastructure, and, critically, democratically-owned firms following Pluralist Commonwealth principles. The potential power of “workers’ capital” in a modern economy is enormous, especially if combined with the power of public funds like state and city deposits, and with the endowments of non-profit entities with public missions like universities and hospitals.

How would a Pluralist Commonwealth democratize investment?

In the Pluralist Commonwealth a key design principle is the development of democratic control over major investment decisions, combined with the creation of effective pipelines for community-based investments and a range of smaller scale and more free-ranging local investment approaches. While MARKET discipline is an important backstop against corruption and inefficiency, three essential conditions must be met. First, the pursuit of returns that allow larger aggregations of capital to grow must be contained within a PLANNING system that prioritizes community-sustaining outcomes. Second, the OWNERSHIP of capital in the pluralist commonwealth must be exercised in ways that insure collective control over investment dollars is not ceded to the corporate and financial sector as it is today. Third, and above all, investment of large scale capital must work to insure local community stability and equity, on the one hand, and ecologically sustainable outcomes on the other.

At the state and local level, public banking can play an important role in general and via the carefully targeted investment of government deposits to support a more localized economy and to help develop democratized and ecologically sustainable enterprises. Providing effective mechanisms that combine fiduciary discipline with creative, values-driven investment in a democratic economy could also help private and public pension funds better use the capital they hold in trust for workers. Similar investment patterns can be established for nonprofit institutions, and compliance with local impact investing minimums can be established through conditions on renewal of tax-exemption status. A $38 billion hedge fund like Harvard University should not get to avoid paying taxes just because it offers a few classes on the side.3

At the national and ultimately regional level, public planning decisions ultimately come down in large part to decisions about how and where national scale capital is invested. The Pluralist Commonwealth model builds steadily in the direction of participatory forms of planning, recognizing the need for experimentation, testing, and new strategies that increasingly meet goals of democracy, equality, and ecological sustainability as transitional steps are made away from the current system and towards the build-up of the key institutions of the new system.

Where is investment managed in more democratic directions today?

Though rarely discussed in the press, in fact, numerous states, including conservative ones like Texas, operate “sovereign wealth funds” which use the revenue from investments (financed, for instance, by profits made from oil and other resources on public lands) to fund education and other public services. The celebrated state owned Bank of North Dakota, noted above and founded nearly a century ago, has consistently demonstrated the role government financial deposits can play as the anchor of a system supportive of farmers, cooperatives, and other small businesses that provide the backbone of local communities. Several states—notably California and Alabama—invest public pension funds partly following criteria that prioritize local economic development and historically underserved markets as opposed to Wall Street financial criteria. 4 The state of Alaska currently guarantees every resident of the state a flow of income from profits generated in the oil sector (a family consisting of two parents and three children received more than $10,000 in 2015, for instance).5

Closer to the community level, hundreds of community development financial institutions (CDFIs) across the country work to leverage federal support and channel private investment into projects benefitting low-income communities. Networks of revolving loan funds like Shared Capital Cooperative (formerly the Northcountry Cooperative Development Fund) and The Working World focus directly on advancing economic democracy. In 2014, Shared Capital Cooperative made $3.1 million in loans to cooperatives in 31 states, with 88 percent of those loans in low-income communities.6 The Working World, meanwhile, has provided “non-extractive finance”–meaning that firms don’t have to go into debt or put down collateral, while their loan repayment amounts are based on their success—to over 210 worker cooperatives with a repayment rate of 98 percent.7

See also:

MARKET, OWNERSHIP, PLANNING

Further reading

David Schweickart, After Capitalism: Second Edition (New York, NY: Bowman & Littlefield Publishers, Inc, 2011).

Tom Malleson, After Occupy: Economic Democracy for the 21st Century (New York, NY: Oxford University Press, 2014).


Principles of a Pluralist Commonwealth

Endnotes   [ + ]

1. Michael McCarthy, “Turning Labor into Capital: Pension Funds and the Corporate Control of Finance,” Politics & Society 42 (2014): 460.
2. Matt Taibbi, “Looting the Pension Funds,” Rolling Stone, September 26, 2013, accessed November 4, 2016.
3. Astra Taylor, “Universities Are Becoming Billion-Dollar Hedge Funds With Schools Attached,” The Nation, March 8, 2016, accessed November 4, 2016.
4. For California, see: “CalPERS Economic Impacts in California,” CalPERS, accessed November 4, 2016; For Alabama, see: M. Keivan Deravi, “The Economics of Retirement Systems of Alabama’s Investments on the State Economy and the RSA,” Auburn University Montgomery, May 2012, accessed November 4, 2016.
5. In 2015, each eligible resident received $2,072. “Annual Dividend Payouts,” Alaska Permanent Fund Corporation, 2016, accessed November 4, 2016.
6.  “What is Shared Capital?,” Shared Capital Cooperative: Building Economic Democracy, accessed November 4, 2016. 
7. “What We Do,” The Working World, accessed November 4, 2016.

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Gar Alperovitz | May 15, 2017