Nearly 15 years ago, John Fullerton left a two-decade career at JP Morgan in pursuit of meaning. Fullerton was disillusioned with the direction of mainstream finance; he saw a once principled culture yielding to the ferocious competition in deregulated capital markets, where economic brawn increasingly trumped civility.
In his search for a new path, Fullerton soon discovered the profundity of interrelated ecological, economic and social crises afflicting the world. His most startling realization, he writes, “was that the modern scheme of economics and finance — what Wall Street ‘geniuses’ (like me) practiced so well — formed the root cause of these systemic crises.”
Fullerton now leads The Capital Institute, a think tank exploring the transformation of finance for a sustainable society. The Institute’s latest whitepaper, released in April, outlines a broad set of principles for “Regenerative Capitalism,” an economic system rooted in biomimicry. As the core Regenerative hypothesis asserts, “we can use the universal principles and patterns underlying stable, healthy, and sustainable living and nonliving systems throughout the real world as a model for economic-system design.”
How does this framework integrate with the chorus of calls to reform capitalism? I spoke with Fullerton about the first steps in realizing the ‘regenerative paradigm,’ repercussions of gross inequality, and how the circulatory system may be a model for vibrant human economies.
JF: I would like to think it incorporates all of them, as opposed to conflicts with any of them. Many attempts at dealing with sustainability respond to the problems as we see them, and they seek to make incremental change. There's a need to step back and think more broadly; rather than try to solve the problems that the current system generates, we need to think more about system design. What would a system look like that didn't create these problems in the first place?
My approach has been to start with the presumption that there are universal principles that explain how the universe works. I think people accept that that's true in the physical world, but generally either don't accept, or haven't really thought about, how that applies to human culture. In my study of the science, that's very clearly what our latest scientific understanding suggests. I'm not a scientist, I'm a student of this, but it's pretty clear to me that we now believe that everything is energy flow, and that includes a rock as much as you and me. It seems clear to me that a human economy is just another example of an energy flow network that those same principles should apply to.
Your recent whitepaper is called, "How Universal Principle Will Shape Our Human Economy." Is the recognition of these regenerative principles inevitable? How do you see the transition to the New Economy unfolding?
JF: It's a prediction. I’m not the only thinking this way; the more extreme these challenges get, the more obvious this approach will become, so it's a prediction. Secondly, I believe that if we don't make this kind of transition the system will collapse, and it will re-gather and reemerge more intelligently next time, just like living systems have done. My hope is that we'll avoid that. I was at a meeting this weekend, and the analogy we were using is that we're flying an airplane and we need to fix the plane while we're flying. Or, we can crash the plane and start over again. And that's what living systems in the natural world have done over the millenniums. Our hope is to figure out how to switch out the engines while we're still in flight.
The paper outlines eight principles underlying Regenerative Capitalism. What are the first steps to evolve from a “reductionist disease care” approach to solving problems, to a “holistic health care”?
JF: I think the first step is the mind-shift. We so naturally revert to reductionist problem-solving that until we really get clear on what it is to think about wholes, and to approach challenges in an integrated way, we're resigned to revert to attacking problems that we think we can solve by working on problems. It’s not that doing that is bad; it's just insufficient. So, for example, we absolutely need to see carbon in the atmosphere as a problem and work like mad to shift our energy system. I'm not critical of that fact; in fact that's the most important thing we can do right now. However, my work is attempting to go further forward and begin to shift the framing around which we think about all these challenges, so that the ultimate vision that we're striving for ends up looking different than simply switching out fossil fuels for solar power. In the short term we need to stop burning fossil fuels, but that doesn’t solve these systemic issues.
**You said the first step is a mind-shift. How do we motivate people towards the objectives of a regenerative paradigm when they have different values and visions? For example, “**balance” is key to Regenerative Capitalism; you write that neither laissez faire economics nor complete reliance on government regulation is desirable. How do we recognize balance when humans disagree on what it means?
JF: Hunter Lovins likes to say that we need to bide time, that the first step is to deal with these immediate crises that are coming in on us — carbon being the most obvious one, but there are others. In terms of the shift in mindset, I think the first step is to learn as a culture and a society - and particularly our business and finance institutions – that we need to actually slow down long enough to think about these questions. And to recognize the kind of assumptions that are implicit in the way we run the economic systems that are at the root of the problem. I think the great challenges is creating the time and space to do that when everyone is so busy.
Where do you observe these conversations happening? Are they occurring in mainstream banks?
JF: I think this conversation is happening a lot; much more than we can see, because it's largely below the radar. I was just in one of these conversations this weekend, hosted by a former finance guy who's going very deep into this thinking. But the key is that he's former, so he's no longer in the day-to-day craziness of P&L responsibilities and all the other challenges. I think these conversations are very hard to have when you're dealing with the intense pressure of running big, global organizations or large piles of money. I think they're happening more than we realize, and gradually they're connecting with people.
I'll give you a tangible example. A woman who works in Morgan Stanley Wealth Management recently approached me. It turns out she and her colleagues are very interested in my work and are interested to talk about it. So it's happening, but it feels very slow to those of us who are fully committed to it. But if you contrast the amount of conversations like this that are happening versus even five years ago, I think it's very high. Bain Capital just hired Deval Patrick to run an impact investment fund. That's a big deal; I wouldn't have predicted that five years ago.
“The whole is only as strong as its weakest link,” you write. You also contend “some inequality is natural.” Do you see a tension between what's best for the aggregate and promoting equality? How do we recognize an 'ideal level' of inequality?
I don't think anyone would debate that on the equality issue that if all of the money was owned and controlled by one person and everyone else on the planet had zero, that doesn't work. At the other extreme, I don't think anyone would argue it’s feasible that every single person on the planet had the same exact amount of financial assets. We know the optimal outcome is somewhere in the middle.
If you look at the way living systems are organized, the food chains in nature — think about the lion, who's the king of the jungle. The lion sits around sleeping most of the time, because through evolution, lions have figured out that if they eat all of their prey, their prey collapse and they also collapse. In many ways, they understand their connection and interrelationship with the food chain that they depend on. And they're not particularly competitive, other than amongst each other. In our current system, the competitive paradigm, if anything, accelerates the more powerful the institutions and individuals get. I don't have any magic ideas on how to change that, but at least recognizing how sustainable systems actually operate, and contrasting them with how our current system operates is, to me, the place to begin.
It’s useful to think of the concept of power laws, the 80/ 20 rule, where systems tend to be organized with lots of diversity at the bottom. Take the way our circulatory system works: a few big arteries, lots of mid-size veins, and thousands and thousands of tiny capillaries. Those are clearly not equal, but the health of our circulatory system is dependent on all of those working in relationship with each other. I like to say, if our toes don't have the ability to access the oxygen in the bloodstream, then the toes atrophy and our feet don't work, and we can't walk and we're not healthy. There's something about the circulation of oxygen to our toes versus our brains that keeps our whole body healthy. And that's a self-regulating system. There's not a regulatory or tax regime at work; our body is in self-regulatory balance, otherwise it wouldn't work.
So, in your metaphor, the toes (smaller entities) must be able to access oxygen in order for the system to function effectively. How do we create an economic system with better circulation?
JF: We know that there are certain small communities that are relatively disempowered, and that this poses a problem for the system as whole. The banking system in the United States is an example. If we accept that circulation of money and credit is essential, the clear trend over the last 50 years has been the consolidation of the banking system. Typically, when small banks are acquired by bigger banks, they're acquired for their deposits. The appealing thing about a small bank in a rural community is that it has deposits (this is a little less true today because interest rates are so low) and generally, deposits mean low cost funding. The big banks at the center use those deposits for the highest short-term return on capital, rather than recycling that money into the communities where the deposits come from. That's exactly opposite of what we need to happen; that's like your arteries sucking the blood out of your toes and using the oxygen to enhance the brain [at the expense of the toes].
We need self-regulatory incentives that encourage the opposite to happen; that encourage the flourishing of small banks in communities as opposed to big banks in the center. And interestingly, there's discussion on this within the regulatory regimes now. There is already an excess capital requirement on too big to fail banks, and there's even a discussion about relieving some of the smaller banks of the onerous capital requirements that resulted from the financial collapse. That's all a step in the correct direction. Whether or not we understand why we're doing that; we intuitively know that's what needs to be done.