In this episode of Economics and Beyond, Rob Johnson and John Fullerton discuss his new book, Regenerative Economics which explores flaws in traditional economic thinking, and the need for a new framework that views the economy as a living system.
They discuss the contradictions in financial theory, the role of chaos and stability, and the importance of self-governance and the commons in creating a sustainable economic future. Fullerton emphasizes the need to learn from life processes and to rethink our approach to economics and finance to align with the principles of regeneration.
Transcript
Rob Johnson:
This is Rob Johnson, President of the Institute for New Economic Thinking. I'm here today with a long time, fascinating friend who I've learned a great deal from and who I've enjoyed watching him as he left the world of derivatives, JP Morgan Banking, and moved on and formulated an extraordinary institution called the Capital Institute. Those who are in the Young Scholars Initiative at INET have taken courses that he's created and heard lectures, and he very much appeals to our culture as a kindred spirit.
I'm here today to explore with him a new book that he's written that's just about to be released, Regenerative Economics.
I think it's one of those books that will be, everybody who has what I call a deep intellectual curiosity, it will be something they've read, and they kept on their shelf and they've given other people references to segments and chapters. It synchronizes so many different things that swirl around what we might call orthodox left brain analytic economics and not only asks the question of whether that's what economics really should be but shows us where the contradictions are and it relates both to his intellect and to his experience working in the world of finance.
So with no further ado, John Fullerton, thanks for joining me here today. And I look forward to learning again why you did this, what you did. So let's start right there. What inspired writing this extraordinary book on regenerative economics?
John Fullerton:
Rob, thank you. Well, first, Rob, thanks for having me here and for your kind words. You know, it's been a long search, really. I left Morgan in 2001, and I knew nothing about any of the things I wrote about. It's not like I left Morgan or Wall Street because I had this idea or because something bad happened or because I was, most people assume that I kind of got a conscious and left because of a consciousness shift. But really, I left on intuition. The merger with Chase made it easy to walk away. But I left really on an intuition that, two things really, one that my time there, my work there was done.
I had lost any sense of real purpose. But secondly, I intuited that something was really messed up with the way the whole thing worked. And I had been part of the creation and growth of derivatives in the 90s. Then I had transferred over into the investment side, the venture capital private equity side and I sort of kept moving to keep my curiosity at bay, but as soon as I got somewhere, I grew restless again. So I just used the opportunity to walk away. And honestly, what I discovered after leaving Wall Street kind of blew my mind. And to fast forward to today, we now call it a polycrisis.
And we've got all of this chaos that is economic, financial, political, social, and it feels like the world has lost its mind, so to speak. I can honestly say that the book is about trying to trace down to the root cause of this and I do see what we now call the polycrisis as a series of symptoms, you know, and I don't want to blame it all on economics or on finance or on economists certainly, but it is rooted in the way we think, is if I could say it as succinctly as I can. That's been a 20-year search, so it's kind of occupied my second career, if you will, crazy how time flies, but that's how the universe decided to put me to work after I decided that working on Wall Street was not what I was meant to do anymore.
Rob Johnson:
Let's take a walk down the path of your learning. Characteristically, you go on a hike or when you come home, you tell people what were the things you saw. Birds, mountains, seashore, what cetera. But in this intellectual realm, what triggered your sense of the contradiction? Between what we might call formal economic analysis and what you sensed and what kind of readings or films would you recommend to young people to, how do say, help them delve in deeper to the places that you've gone.
John Fullerton:
There's this great new book out on Regenerative Economics that I'd recommend.
Rob Johnson:
Yeah, that, I'll second that motion.
John Fullerton:
You know, it's funny. Before we started, we were chatting a little bit about IQ and SAT scores. My wife laughs at me. She said, when I met you, you weren't this smart. And the truth is that this book, the ideas in the book came to me through this idea that is known as synchronicity. My brain was able to synthesize it, but this was not an intellectual pursuit in a traditional academic sense, although I've read a lot of books. But I think what's meaningful to all of us is not one person's intellectual curiosity, but I actually, after I left Wall Street, was extremely frustrated about; Who am I? What am I meant to do? Why did I want to leave Wall Street? Why did I not like what I was doing? I was successful at that. Why didn't I want to do that? And I tried to will an answer to those questions and probably got myself clinically depressed in wrestling with what is my purpose? What am I supposed to do?
One of the most important books I read, to be honest, is a book called Synchronicity by, well, Carl Jung, of course, developed the idea, but there's a book that, I'm blanking on the name, I'll think of it. It's actually part of your MIT. And the idea
Rob Johnson:
We'll come back to that. I was going to say Sting. Sting made an album called, his band made an album, yeah, yeah, Synchronicity. That was the title song of the, yeah.
John Fullerton:
Did he really? I don't remember that. Yeah. I have to go listen to it. that's right. Yeah, yeah, yeah, yeah. All the greats. So, you know, the idea of synchronicity, if people aren't familiar with it, are these coincidences that happen that if you kind of play them out and explore them a bit, turns out are not coincidences, but they're, in a sense, the breadcrumbs left for you to find your purpose. And that sounds a little bit...
It certainly sounds non-analytical and non-intellectual, but the truth is that's how I found this book or found the pathway to this book. As one example, you ask about books I read, E.F. Schumacher is definitely in the canon of the great thinkers who were wrestling with what's wrong with economics as a discipline and what's wrong with how we think about the economy.
And he wrote a book called, Small is Beautiful back in the 70s. Early on in my search somehow found him in that book and I drove up to the Schumacher Society and I ended up being invited to write an essay on the relevance of Schumacher in the 21st century, which I joke was sort of my coming out of the closet paper. It was circulated around the world on the thing we call the internet.
Low and behold, this man in Zimbabwe shoots me an email and says, I'd like to talk to you. That man was Alan Savory and Alan has developed this idea we call holistic planned grazing, which is holistic thinking as opposed to reductionist thinking and holistic decision making as opposed to reductionist decision making applied in the context of large grasslands and that's a story for another day.
To make it a long story short, we became friends. We started a company together to manage ranch land holistically and I have no innate interest in ranching. I'm a sailor as you know, I'm a coastal boy and suddenly I find myself not just working on a ranch or investing in ranching but learning from the man who has applied holistic decision making to this living system we call a ranch.
That was one of the epiphanies that if this idea worked on the living system called the grasslands, what if the economy was understood as a living system? Why wouldn't this work on an economy? Now there's no university on planet earth you're gonna go to and have someone suggest that idea to you. Because we've organized the universities in silos of expertise. And so that was essentially what I've learned since. It's called abductive reasoning. Like taking an idea in one context and expanding it across to a different context. And for some reason that came intuitively to me. But again, you don't learn that from reading books. That's imagination at work, not analytics at work. And I could go through a series of other similar synchronicities that reinforced this central idea that the economy should be understood as a living organism, not as a machine.
Then when I started to go to school on economics, I was an undergrad major in economics, but you don't learn any of this at an undergraduate level. In fact, it surprised me that we don't really teach this at graduate and PhD levels. The discipline of economics, modern economics, neoclassical economics, was built on a foundation of Newtonian physics.
The logic of the machine. And so here I am sort of with this idea that the economy is a living system and the logic of that is that it's a human economy and human beings are living systems and the economy is essentially created by human beings using our tools and technology but it's ultimately it's a system and so the question is do we want it to behave like a living system or a dead system and so I just sort of said well a lot of things aren't working right so what if we imagined it as a living system there's a whole science to understand how living systems work. This word regenerative in a literal sense, the way I use it, is the process that describes how life works, scientifically. That's what regenerative means. I've sort of pulled on that thread and followed it where it would lead. And you come up with a radically different way to think about economics and a radically different way to think about finance.
That's sort of what's happened over the 20 years. Just to get to the key insights from this, with a machine, we design it to optimize performance. But with a living organism, we learn to recognize patterns, and we learn to create conditions for health. Just like we do with our own bodies. And so, so much of the conversation about what's wrong with capitalism and the future of capitalism and how to fix the economy is about, well, we need better goals. Well, yes, of course we need better goals than GDP. This isn't an either or, but different goals do not address the underlying flaw, which is that we think of the economy as a machine, and we try to apply our left brain analytical logic to fixing the machine. If you apply that logic to raising your children and try to fix your children and control the outcome of your children and optimize the outcome of your children, nine times out of 10, something bad is going to happen. And yet, if we allow our children to evolve and emerge into their natural essence what they're meant to be all kinds of good things tend to happen even if they're not what we had planned and desired in our own minds. So I'm really suggesting that that a person, that a family, that a community, that a company, that a sports team can work in this much more organic way which requires us to let go of our desired outcomes in order for the potential of that living organism to emerge. It's much more like thinking like a farmer than thinking like an engineer, which doesn't mean that there isn't a place for the engineers.
The other key distinction is we need to be able to discern between the things that are complicated, technologies, machines that we make. Things that are complex, like life is complex, living organisms are complex. And we've built the entire discipline of economics on the assumption of the economy as a machine, which means we treat it as if it's complicated. And going back to Alan Saver again, one of his insights was that anything that we make is complicated, and this is a broad generalization, but it generally works.
Whereas anything that we try to manage is complex. If we're managing our health, managing our family, managing our community, managing a company, managing the global economy, managing the United Nations, all of these things are things we're not very good at. And that's because ever since the scientific revolution, we've been applying our left brain analytical logic, machine logic, to try to manage what's complex as if it were merely complicated.
Rob Johnson:
What's an interesting, I'll call it a dilemma, when things seem like they're flying out of control. Anxiety goes up and the yearning for certainty rises. Show me what's going on here and put it to bed so I can calm down. But the fact of the matter is from the vision of regenerative economics, false certainty is one of the dangers, not one of the solutions to the challenges we face.
John Fullerton:
Yeah, I mean, you go back to the original theoretical framework. Irving Fisher proudly announced that the economy had reached equilibrium state just before the great crash in 1929. The idea was to bring this thing to a state of equilibrium, right? I mean, you're the one with a PhD in economics, but that's, that was sort of one of, if not the central idea of neoclassical economics. And then the crash happened and then the depression happened. What did we try to do? There must be something wrong with the machine. We need to fix the machine. What did we do? We invented, Keynes came along and he said, there's a part missing. The government can spend money when there's a demand deficit so we can patch the machine and bring back equilibrium. Which was a very different, and of course, Keynes was a genius. I'm not criticizing the guy's intellect, but again, the logic was still built on the logic of a machine. It's just that we didn't have the design quite right, and there was a piece missing and a part missing, and if we just patch it, we would restore the initial logic of the machine.
And by the way, this logic of the machine in my research, I found Irving Fisher literally built a physical machine to replicate the economy. He literally took Newton's laws of physics and assumed they applied to economics. For example, he assumed that particle in physics would translate to the individual in economics. I've got the page from the textbook that shows that. This is not just a metaphor, this is literally how the discipline was built. And that machine logic has now become subconscious.
When Ray Dalio, the hedge fund billionaire, created his little film to explain to people how the economy works a couple years ago, the title of the film is Understanding the Economic Machine, or something essentially to that extent. I don't think that's because Ray Dalio sat around thinking about whether the economy is a machine or better understood as a living organism. It's become subconscious. Just like subconsciously, we still call it a sunrise, even though we now actually understand that the sun is not rising over the earth, but that the earth is rotating around the sun.
It's interesting too, as a parallel, when Copernicus suggested that the earth was not the center of the universe. First of all, he was afraid to say that until virtually his deathbed, knowing that it would be an assault on the powers that be in the church. But secondly, he said that after the astronomers, the scientists in his age, had spent literally a thousand years trying to patch the theory of an earth-centered universe. They would observe that the planets would go around the earth and then they'd reverse course and then they'd keep going. And they developed all these elaborate theories to explain what I'll call the wobbles, which I would argue is very analogous to the economics discipline, developing patches and explanations for the wobbles that were essentially disproving the underlying economic theory.
In a legitimate science, when the reality doesn't match the theory, you throw out the theory and you start over again. But what we've done in economics is we've patched the theory and we've handed out all kinds of Nobel prizes for patches in the theory. But we've never gone back and questioned the underlying assumption. And I'm not at all trying to suggest that I'm Copernicus for economics.
What I've learned is that people have known this for a long, time. They may not have applied it explicitly to economics, but they've known that they've understood the limitations of this reductionist way of thinking, and that it is very useful when dealing with what I'll call complicated things. But it doesn't explain, and it's not useful for dealing with the enormous complexity of the real world and of living systems. So it's more that our culture has decided to listen to the wrong people and ignore the people who understand at our collective peril. And if that statement requires proof, I point to the polycrisis.
Rob Johnson:
Well, it's fascinating when you look at the history of the profession that extraordinary people like a man who was a big mentor to me, Charles Kindleberger, Hyman Minsky, these type of people, Albert Hirschman, they don't win the Nobel Prize in economics. I don't understand that. A lot of people complain that Nick Stern in the realm of externalities and climate crisis was the finest scholar we've ever seen. But he did not win a Nobel Prize. William Nordhaus from Yale University who was an analytically sound economist but my recall when I asked a climate person at the United Nations, had they ever had Nordhaus as a speaker. He said, well, what he basically says is the discount rate's high enough that you don't have to think about problems 20 years from now, and I think we do. I thought it was a funny synopsis there.
John Fullerton:
He was being very polite. Yeah. Your friend was being polite.
Rob Johnson:
But it's fascinating, particularly in a time like now where the scope, breadth, depth, whatever of innovation is taking us, how do I say, out of structures that are stable. And we're in a dynamic transformational state that creates a lot of anxiety. Joseph Schumpeter might have illuminated some of that. But the, what you might call comfort, from thinking that you have a mechanical model, it falls out of line with the challenges we face.
John Fullerton:
Right. I couldn't agree more that we, when things, when the chaos hits the yearning for stability increases. I think that's a pretty good explanation of our current political situation. But the truth is that the chaos or the anxiety, you know, it comes and goes probably in cycles. But it was always there. You know, like we're having this conversation right now when our bodies are existing in what they call far from equilibrium. Like when we return to equilibrium, it's when we're dust and dead and done. And so even when we're humming along in calmness without anxiety, it's extraordinary complex what's keeping that happening.
Like it's a state. It's a frequency that is humming. Perhaps we're unconscious of it, but it's an extraordinary, it's a miracle that we're humming in that stable state. It's not that we're in a stable state. We're in a far from equilibrium state. That's what's actually normal. You know, the only constant in life is change. It's just that the rate of change changes over time, which is another reason why the logic of the machine failed.
Because even if you could figure out the economy as a machine that worked in stability for some period of time in some context, tomorrow the context changes. So whatever worked yesterday doesn't work tomorrow. By the way, going back to Alan Savory, he was ridiculed because the scientific community tried to test his method. Essentially his method is simply you could say was rotational grazing. You use animals to mimic how the buffalo used to roam, which was in dense herds. They aggressively graze and then keep moving because they don't want to sit in their poop and eat their poop. You had this symbiotic relationship between the animals and the grass. And what Alan did was he mimicked that using domesticated animals and electric fences and cowboys.
He'd manage herds in the way that they worked naturally in the natural world. But critically, he was constantly adjusting the plan. Because if the plan assumed that you'd get three inches of rainfall over 12 months or whatever it was, as soon as that changes, you need to adjust the plan. But what the scientists would do is they would set the plan in motion and not adjust the plan when the context changes. Then they quote, prove that Alan was a quack and that the system, the methodology didn't work and would write peer reviewed papers saying it doesn't work. Now, this is serious because when I went to the Paris COP in 2015, I won't mention the name, but one of the most renowned climate scientists was in the room in a small room I was in. And I had an opportunity to ask him, why aren't you looking at natural carbon sequestration, particularly on the grasslands? There was some talk about forestry, but mostly around deforestation, not around reforestation. But in 2015, I said to him, why isn't there any discussion and analysis around the carbon sequestration of the grasslands? The grasslands are two thirds of the land-based planet.
Small changes in the grasslands can have a massive impact in not in carbon emissions, but in the carbon balance, which is what really matters. And he said to me, matter of factly, the science says that it's immaterial. And the science he was reading were these peer-reviewed articles that disproved Alan's work. Yet if you would bother to go out and look on the grasslands or look at some photographs, it's sort of a self-evident truth that we can heal the grasslands with holistic management.
Now, think about what the implication of that is for our economy or for finance. The potential that is sitting unrealized because we manage the economy like a machine, I believe is the source of our future prosperity. Because the gig is up on the endless expansion and extraction of human and natural resources. We need to find, we either need to shrink the economy and share better, which is speaking of people who should have won a Nobel Prize, Herman Daly, the founder of ecological economics, should have won a Nobel Prize.
My guess is he came nowhere close to winning a Nobel Prize in economics because he couldn't even get inside the economics department at a university much like win the Nobel Prize in economics. And so that gets to the question of, what is the Nobel Prize in economics? And it turns out Alfred Nobel didn't see economics as a science. There is no real Nobel Prize in economics, as you know. It's a Swedish central bank prize in honor of Alfred Nobel. And I don't know the politics behind that, but it's extraordinary to me. And I don't want to pick on William Nordhaus, but he won the Nobel Prize for a model that suggests that we shouldn't shoot for anything below three and a half degrees warming because anything lower would cost too much. Now, he understands climate science. He's a smart man. And so how do you reconcile three and a half degrees is our optimal target with a Nobel Prize in economics? It just makes, it's terrifying actually.
Rob Johnson:
When you look at the realm which you practiced, finance, for many years, where do you see the contradictions between financial theory and the things you had to manage?
John Fullerton:
Boy, I have a whole course on this. And in fact, there's not a lot about finance in this book. I'm working on the sequel, which is Regenerative Finance. But maybe I can start at big picture. I've come to see, like, there's lots of books and lots of people critiquing finance. And it always starts, or typically will start, with the ethics and the greed and all that stuff. Yes, there are problems there for sure, but those problems exist in other disciplines.
I like to assume a world where everyone that worked in finance were ethical people and no more greedy than the rest of us. Would the system work as it's currently designed? And my answer to that question is, would, if anything, it would be worse. Because the good thing about the bad ethics, and I'm being a bit facetious, the good thing about the bad ethics and the greed is that it triggers collapses from time to time.
We kind of are forced to recollect ourselves and see if we can do better the next time. But the reactions and responses to these periodic explosions and undoing’s and have consequences in the real economy that are violent and horrible.
Secondly, our reaction is to try to plug the holes, to patch the problems, as opposed to, again, digging to the root issue. And through, you know, sort of collaborating with a number of different colleagues. This idea came from a woman named Jude Kirivan, who's a, I actually tell her to her face and anyone else who will listen. I see her as sort of a modern day, Einstein. I mean, she's brilliant across disciplines. And we were talking about finance and the economic system.
We use the metaphor for the economy that we need a metamorphosis a literal metamorphosis like it needs to change form, not just to patch it and fix it. You know that the form of a living organism is a different thing than the form of a machine, so we need to transform our thinking about it to be aligned with a living organism in order for it to be healthy, but how does a metamorphosis work?
Well, it's kind of interesting. The caterpillar's immune system needs to die in order for the transformation to occur because the role of an immune system is to keep the organism in its current form. It is to keep it healthy, but in reality, what that means is to keep it in its current form.
I wrote a chapter in the book called, The Finance Algorithm because I now see the finance as the algorithm that keeps the economy in its current form. Unfortunately, that current form is, despite all of the progress that the economy has created, two things can be true. It can have generated massive wealth and prosperity and development and progress for many, many people, if not as many as we would like, but it can also be a self-terminating system because the context has changed. There's now 8 billion people, not 1 billion people. There's now too much carbon in the atmosphere.
What worked in a different context doesn't necessarily work in the current context. But getting back to finance, I see now the financial algorithm, which is you could simplify it and say we optimize for money. But as you know, there's all kinds of ways we optimize for net present value embedded in our decision making, in our economic decision making, both in businesses and in government.
If we're going to change the economy, we actually need to disempower the financial algorithm that's keeping the economy in its current form. And the reason why we're struggling so much to change the economy is because we're not wrestling with that underlying issue. We're adding new metrics to track. We're adding new measures to disclose the ESG, we're trying to do impact investing, myself including, which is sort of to try to balance multiple variables as opposed to a single profit maximizing variable. But we're not looking deeply enough. And I think the finance algorithm ultimately is designed to optimize the return of the financial return on capital. And it works perfectly as designed.
So we now are growing financial capital at the expense of, let's call it social and natural capital, just to simplify it. So the whole algorithm is working just as designed. And you can't solve that as a problem. You actually have to redesign the algorithm in order that it operates in service of a living organism, as opposed to optimizing a machine. And I know I can hear myself, this is starting to sound a bit abstract, but it's actually ultimately profoundly practical because...
Rob Johnson:
Well, you're walking in the woods, not down the sidewalk. I think...
John Fullerton:
Yeah, exactly. It's funny you said it was. I have a little painting of a guy in a rowboat rowing out into the fog. That's sort of what I feel like I've been doing for 20 years.
Rob Johnson:
Well, you tell me a story that reminded me of Moby Dick as well about your sailing across, you were sailing to Europe, isn't that right?
John Fullerton:
Yeah, you know, when I left Wall Street have some buddies who knew I had no good excuse to say no, because I was unemployed. So they invited me to join them sailing across the Atlantic on a 50-foot sailboat. For some reason, I still don't know synchronicity, I decided what better time to try to read Moby Dick, which I had probably tried to read in the past, but never succeeded.
So yeah, a week into the journey, thousand miles east of Rhode Island, we got hit hard by a humpback whale and destroyed the rudder. We had to get rescued by the Canadian Coast Guard. It's fascinating, I'm still learning more and am actually as we speak, reading Herman Mevala's biography to learn more about the guy.
Rob Johnson:
Who's the author of the biography that you're reading?
John Fullerton:
That's a great question. I can't remember, but it's led me to have an interest in him. He wrote another short story called Bartleby, Bartleby the Scrivener, which is a story about a law clerk who worked on Wall Street and was asked to do stuff and kept saying, I'd prefer, I'd rather, I prefer not to. And in many ways, my leaving Morgan after the merger was a statement of I'd prefer not to when they asked me to run the combined blah, blah, blah. And in fact, the day I met with my supposedly new boss's boss and all that, I could feel myself getting ill on his couch. And I managed my way through the meeting and got myself to the elevator. And after the meeting, I knew in the meeting I was going to say, no, thank you. I'd prefer not to. But I didn't say it in the meeting. I told them I'd think about it over the weekend. I got to the elevator. The next thing I remember, I woke up on the floor of the elevator, 40 floors down. I had passed out thinking about this decision to keep working in the machine. There was something tugging at me, pulling me away from that world, in a strange way, Moby Dick is definitely a symbolic.
Rob Johnson:
I'm enjoying, how would I say, your navigation of these emotional cross currents, because I had come out to MIT from Michigan where I grew up and I had a mother who had Scottish and German parents who got crushed when they came to Cleveland by the Great Depression when my mother was about four years old. She was always interested in the instability of finance and she was continuously trying to learn. When I went to college, I came across Charles Kimberlberger and he was working on the book, Manias, Panics and Crashes. I took courses with him and he was lovely.
The Boston Symphony used to have rehearsals and he could get us in to see that and he was just a lovely guy. When I went to graduate school in economics, and the other Nobel Laureate Robert Solow were my primary advisors. I met people who were on the edge of uncertainty like Joseph Stiglitz. And then, know, Alan Blinder was very broad-based and very interested in policy. But I was getting tired, if you will, of taking math tests and acting as though those were the things that were the building blocks. And there was a gentleman who was at the Institute for Advanced Studies at that time named Axel Leijonhufvud, he became a mentor to me. He said, “Okay, if you're good at math, you can get through all those things pretty easily. But there's a lot of stuff going on here.” And he said, “I think you should go take a course with a man named David Abraham. It's called The Collapse of the Weimar Republic. And it's all about when people are disoriented, what happens and what do they feel and what do they do and who do they follow.”
And obviously the collapse of Weimar Republic is related to the authoritarian fascism and the growth of Adolf Hitler. Years later I read Tim Snyder's book on similar tyranny. But the way in which Axel Leijonhufvud had helped me was I felt like, okay, if you can do the math. Now there's a bridge to a whole other group of problems that kind of took me back by kindle burger, but took me closer to what you might call the mission that my mother would have hoped I would embark upon given the suffering that she'd gone through.
There are various other people who came across, he started at Princeton just as I was finishing, but Angus Deaton, he's now a Nobel laureate, but he was a very interesting man and he's written books about and studied with people like James Heckman who had graduated from Princeton but was in Chicago and is a brilliant economist and Nobel laureate. They started to study for our Young Scholars Initiative, what kind of articles do you have to write? What themes, what areas to get into the three and five star journals to qualify for tenure and understanding, which we might call the sociology of the economics profession.
Why didn't Nick Stern get a Nobel Prize? He's still alive, I hope he still does, but seeing the value of things, as a of fact, Axel once said to me, you may feel that theory is stale but do econometrics and learn how to use data so you get a sense of proportion and all of these things.
By the way, when we started INET, I brought Axel right to my side to say, how are we going to navigate this? How are we going to meet this challenge? He was just a brilliant, brilliant individual. He'd been at UCLA for years. But I feel like the place that you're going is you're taking people on a healthy journey. Where they don't have to feel like they're evil rebels against the profession, but they can evolve into new challenges that it feels like we need.
As you mentioned periodically through this conversation, what's happening in finance and all the guarantees and all the bailouts, et cetera, and things I used to call the mother of all moral hazards. When the big banks know they get bailed out, there's no risk premium in their funding costs. Then they go take more risk because it's heads they win, tails the taxpayer loses.
Understanding those incentives, understanding how if the Federal Reserve works to buy all kinds of bonds, as David Stockman now talks about, you can get a big debt to GDP ratio that might involve. Default or restructuring because we did an exercise discipline because we could always count on the feds to take out the shovel and buy more bonds and keep them out of the market.
John Fullerton:
Right. Yeah. The two biggest increases in the debt to GDP ratio were the bailout of the financial crisis and the bailout of the pandemic. We wasted a ton of powder on the financial crisis for no good reason. Then I would argue I'd rather have a high debt to GDP ratio than a depression. So the bailout of the pandemic, you know, in hindsight could have been done better, but could have been done a lot worse too. And yet we don't talk about that.
Rob Johnson:
You'd mentioned my former neighbor of many years, about I think 16 years, Ray Dalio, and he is seeing now the contradictions between the debt ratio and being the reserve currency that everyone has confidence in. And how that dynamic is going to unfold, I think is a challenge that's on the horizon. But your way of approaching what you might call what is the integrity of learning and not what you might call hiding in tribal groups but exploring the real problems is, and it may at times be haunting because if you study the real problems you see we can't just close this down and put it in the drawer and say it's safe.
John Fullerton:
Exactly. Plus, I mean, I'm privileged to have the flexibility, a very nurturing and sympathetic partner in life, my wife, as well as the luxury to explore these questions that most people, certainly the next upcoming young economist has to find a way to get employed. You don't get employed asking the questions I'm asking and making the statements I'm making. I'll even, Rob, show you, I mean, I have nothing but the greatest respect for Stern and certainly think he should have won a Nobel Prize ahead of a lot of people. But even the term externality, to me, is a reflection of this flawed way of seeing.
Like that implies that reality is this construct we've created that we call economy, as opposed to reality is the biosphere, life, humanity, if you prefer. And the economy is a subsystem of that. But somehow, we can call something that is potentially an existential crisis, an existential threat to life on this planet, we can reduce that to a term we call externality.
Rather than put our pencil down, rethink the whole thing from the ground up. Because what we're doing is the implication about the externality framework is that if we just put the right price on everything, the machine can get back to its equilibrium, right? We need a price on carbon, we need a price on biodiversity change in the Amazon. We need to adjust the price. But it's all about, we think we can control the machine and deliver an outcome as opposed to honoring the sacredness of how life works and trying to learn how we can participate in that and contribute to that in a healthy way. I mean, both things can be true. It can be true that we need to put a price on externalities because we're so far gone in the wrong direction. And that's a way to steer the ship back in the right direction.
For sure, we should put a price on carbon. But putting a price on carbon is a band-aid on an illness that's much deeper than we don't put prices on externalities. So to me, it's analogous to an essential patch to a flawed way of thinking. Now, my guess is that if Stern didn't win the Nobel Prize, whether he does or he doesn't, it won't have anything to do with what I just said. It will have something to do with the politics of the discipline of economics that is under threat. But it won't cause the deeper questioning in the discipline of economics that I would want to see, which is what I just described. Does that make sense?
Rob Johnson:
I'm a little bit confused by what you're saying, so I want to learn here. Why do you think identifying externalities and therefore creating incentives to stop pollutions, et cetera, isn't at the core of the solution to the problem? What is still missing if you acknowledge the externalities and you put on the kind of policies that Gus Speth or others would prescribe. What's still missing?
John Fullerton:
I appreciate you pushing back on this, because I know, particularly talking quickly, I could be misunderstood. I am 100 % in agreement with the argument that there are all kinds of what we call externalities that we don't price at all or we don't properly price. And carbon is one of many of them. I would argue windfall profits going to individuals is an externality on society that we don't properly price. And so I could make a strong case. This will be controversial to many of my friends, but I can make a very strong case for a 100 % windfall profits tax on wealth above some threshold, or at least an incentive that that wealth be recycled into something, quote, productive.
I think there's all kinds of know, externalities in the system that would be much better off with a price on them, whether it's a tax or a cap and trade system or whatever, than we have right now. The argument I'm trying to make is that that is a band-aid, not a solution. For two reasons. One, it presumes we can actually quantify the externalities to begin with and then continue to adjust them as the context evolves. And we simply don't understand enough to be able to quantify the externalities.
I'm trying to think of an example.
Well, so my mom is aging, she's 96, I'm literally just writing about this now, I've just experienced what happens to an elderly lady who loses her dignity. About the very most basic things required to be alive. Yet there's no statistic, there's no externality to measure for the way this very nice facility helps her do what she needs to do compared to an alternative way that she might have been helped to do what she needs to do that would have helped her retain her dignity or retain her dignity more than she did. And what I'm writing is that that loss of dignity is, in a sense, it's a loss. There's a cost to that that I've now experienced because I've watched her and listened to her crying that I could never possibly quantify and put a price on to fix. Right?
These externalities are everywhere and impossible to quantify. So, yes, we should put a price on carbon emissions, but that doesn't mean we can price externalities our way to the promised land. As an alternative, I'd rather make a bet that if we learn about how this process of this thing we call life works.
Life is not without pain and agony and misery, but life has this incredible track record of continuing to evolve and complexify into greater and greater manifestations of life. As Jeanine Benioff says, “life creates the conditions conducive to life.” So rather than spend our next 20 years and computer power trying to quantify every single externality and come up with a policy to put a price on every single externality.
Meanwhile the context has changed. Whatever was true yesterday is not true tomorrow. I just think it's a it's a game we can't win. And yet the answer for me, sitting right in front of our face, which is to learn about how life works. That's what regeneration is, the process that explains how life works. And so why not learn the patterns and principles of life and align our economy with that? And if we start with those patterns and principles, which I do talk about in the book.
All kinds of things become mind-numbingly obvious that we're doing wrong, that aren't in the realm of externalities. One of them, just to kind of make this current and real, what's happening with Bitcoin, you mean, you know something about speculation. I mean, have you ever seen such a speculative excess on such a scale as the leveraged bets on Bitcoin?
And people, I mean, and now, you know, being executed by including the president of the United States, so he's got a personal billion dollar axe to grind to continue the speculation. I mean, this makes long-term capital seem like, you know, child's play. I mean, it's terrifying. Like the thought that we should turn over the money system to the technologists who have shown their psychopath tendencies is terrifying. But that's what our policy is supporting, at least to some degree. We'll see how much.
Rob Johnson:
Yeah. Well, this, I was going to ask you a question from a little bit earlier that relates to the, it's bridges right to here, which is when you talked about a wealth tax, a lot of people are always concerned about how hedge funds can keep their money offshore or people. other words, in the world of globalization, there is no nation state. But there's another side to that, which is, let's say we did have a wealth tax, who can you trust to deploy those revenues in a way that helps the regenerative economy? In other words, people, I think, are quite cynical about whether it's the military industrial complex or the energy industry or whatever about the manipulation of government or the bailouts in finance.
I sense, you know, having grown up in Michigan and seeing how the Detroit area feels like Michigan was divorced by the United States of America and allowed to go to tatters with NAFTA and other things. But I think there's a tension now, do you stop the innovators with taxes or do the taxes even stop the innovators? But also what happens with the proceeds of the money? Let's say if you're slowing the innovators and you're giving pockets of money to the corrupt, what are we really doing? In other words, how do we create this political economy?
In a way, where the compass of this book is at the core of what we do for everyone. I guess what I'm saying is there's people who are romantic about unfettered free markets, but there are also people who are romantic about the role of the state in repairing things.
John Fullerton:
Amen. So Rob, chapter nine in the book is titled Epiphany, the Missing Institution of the Commons. And it's the longest chapter in the book. And the reason I call it Epiphany is that after learning from Peter Barnes and he's got a he's been he's been developing this idea for 20 years. I've been wrestling with one of the qualities of a living system is that it's self-organizing, self-governing and self-fueling that comes from… drawing a blank, it'll come back to me. So I'd been racking my brains to try to think about, well, how the hell can this thing I want to visualize a regenerative economy, how could it ever be self-organizing? I understand as well as most the limitations of regulation. I've seen that, I've seen regulations well intended and not well intended create more problems than they solve. The remedy is worse than the disease.
I'm not a huge fan of we need all kinds of new regulations and I certainly agree with you on the corruption of government and the thought of expanding the government's involvement in this terrifies me, more so now than ever. But if the vision is correct that the economy needs to be seen as an understood and behave as a living organism, then it will need to self-govern much more than it does, self-organize. And Jane Jacobs was the name I was blanking on, self-fuel. Like it'll need to be like, you know, we figure out how to eat food and keep ourselves going. There's no gas tank. Plugged into our head to keep us going.
How the hell is this going to happen? And it's Peter's work on the institution of the commons that I think holds the key. So let's go back to the post-World War. Bretton Woods agreement. In fact, the first INET conference was at Bretton Woods in New Hampshire. We were sort of celebrating the Bretton Woods agreement as the foundation of the architecture of the modern economy. And yes, there's been some adjustments since then. But basically, we live in a Bretton Woods world -- absent the dollar gold standard.
But the context, again, getting back to thinking about this not as a machine, but as a living organism, the context from 1944 - 2024, 2025 is profoundly different, right? The population is, I don't know, roughly doubled, more than doubled, it's probably tripled. The material throughput of the economy is probably up by a factor of 10.
The European economies have been rebuilt, but the global south has exploded in scale. Everything is different. There's 410 parts per million in the atmosphere. We've developed technology so that we're not talking on landlines and telegrams. We're inventing, “artificial intelligence.”
Everything is radically different, and yet we still have the same, largely the same global architecture, nation states and post Bretton Woods architecture to manage, “manage the global economy.” And I would argue that that's where we need to start. We don't need to figure out better policies or better goals for businesses. We need to begin at the architecture level and the architecture is no longer fit for purpose.
And the key missing piece is that because of the scale of the economy and because of its impact on humanity, both positive and negative, we need to create an institution of the commons.
What I mean by that is let's break it into now reductionist thinking for a second, let's break it into the human made and the natural commons. The natural commons is what most people think of, the forests and the ocean and the atmosphere. Those can't be managed by either the private sector or the public sector because both of them have very short-term incentives that are misaligned with the needs of managing the commons. Therefore, we need an institution of the commons. There are plenty of examples of institutions of the commons that work reasonably well.
Think about how a fishery works. If you want to fish in the fishery, you have to purchase a permit. There's someone that decides how many fish can be taken out of the fishery each year. They monitor it because it's dynamic, it's changing. So next year, it may be lower or maybe higher, depending on all kinds of factors. But there's a scientific way to measure a healthy take from a fishery without destroying and undermining its abundance.
The state of Alaska has essentially a commons. If you're born in the state of Alaska, you get a dividend checked every year for the natural abundance of the oil that's being produced out of Alaska. That's not managed by the government. That money doesn't go into the government. It goes directly to the citizens who have co-inherited the wealth of that oil, just as the fishery should be managed, protected for all of us who have co-inherited the abundance of fisheries on this planet.
So the fees that get paid into these commons, take the fees that the fishermen pay for their license, becomes essentially like we all have a trust fund. We can distribute that money to all of us, not give it to the government to do what they want with it. And if you extrapolate this, in the book I do some very, very rough back of the envelope numbers, I calculated that, if you take the natural commons and the technological commons, I should pause for a second. Think about technology. know, someone born today is born into a world of, let's use more example, a specific concrete example. Jeff Bezos was built his empire only because there existed books, there existed writers, there existed the microchip, there existed the internet. All of those things are examples of the cumulative progress of humanity. But he was able, because he's clever, he was able to organize them and extract from them and keep the co-inherited wealth of all those things in his business model.
But if the internet were managed as a common, he'd have to pay a much bigger fee to use the internet than you and I would because he's extracting much more out of that technology than you and I do. Why shouldn't the stock exchanges be commons? Why should we let a few scoundrels make the financial markets unstable at the expense of the real economy and earn all of the upside along the way without paying a rent and being governed. Their activities being governed in such a way that manages the health of that commons.
This is a big conversation, but to summarize this, I believe if we had institutions of the commons, both the techno-sphere and the biosphere, that were managed for the long-term health and stability of those commons, we would have a source of income that would be measured in trillions, and it would be distributed directly to all of us rather than to governments. You would have in place this self-fueling, self-regulating, self-governing system.
Now, how do we get from here to there? I don't know. But I know that we can't succeed if we think that it's one more policy by a corrupt government that's going to get undone three years later by the next government.
Rob Johnson:
Yeah, yeah. No, you need a North Star here. We're navigating in a storm.
John Fullerton:
Yeah. And we know, yeah, and we've got examples. So we know how to get started. And by the way, there's a lot of movements happening grassroots, bottoms up, to move more land into the commons. I mean, you know, and we can think about the money system as a commons. This is the radical rethink. If we begin to think of the economy as a living organism, all kinds of opportunities will arise. And the arrival of, you know, blockchain technology is an incredible enabling technology. But what we're allowing to happen is the Bitcoin fiasco to essentially be a tidal wave that's going to crush it all. So I don't know if that's helpful. It's a lot.
Rob Johnson:
I think, you know, how would I say from the people like Peter Barnes or Eleanor Ostrom, the people who've been exploring this.
John Fullerton:
Absolutely. Eleanor's done a lot of the groundwork on this. Eleanor's done a lot of the important groundwork on how to think about managing these commons. I would argue the most valuable Nobel laureate in economics there is, is Eleanor Ostrom. But what do I know?
Rob Johnson:
Yes. Yes. Well, that's how they say, I think you know a lot. But the, so I think, how would I say it, you've built this book, it's a beautiful challenge to the consciousness and awareness of people who are trying to envision a future. And I think something that, zooms in on the financial sector, which has had so much power in the period really since about 1985, 86. Yeah, and I think that is important and I think the question of money and politics and the concentration of wealth and whether we are creating a rising tide for all boats or whether we're sinking a bunch of people. Maybe we need Melville to come back and talk to us about what's going on. I mean, how would I say that? A lot of people think of the government as they have. So how we're going to evolve. But I think you're...
The challenge that your book is creating is extraordinary. And I want to thank you for that. I think it's been delightful to talk with you today, but it's also been delightful to talk with you all through what you might call many, many years.
John Fullerton:
Thanks, Rob. Well, you've been a great thought partner along the way, Rob, and I appreciate that very much.
Rob Johnson:
To be continued and I'd like to work with you on setting up a conversation after they see this one with you and the Young Scholars Initiative. So that when we're 96, there'll be people who hold onto the tiller and keep us from capsizing.
John Fullerton:
Yeah, absolutely. Not actually that maybe to end on the good news, Rob, I think the people that have the hardest time getting their head around this are the people who are most successful in the current system. And I find in my course, people are attracted. Somehow there's a theory of attraction at work, right? People that I, the way I describe it is a lot of people already know this. They just haven't quite kind of gotten the balls and the key to click into place.
I get a lot of people saying, you you've connected the dots in a way that is amazing, blah, blah, blah, blah. But really what they're saying is I knew all this. I just couldn't quite articulate it. And I find that's true, particularly of the young people that are attracted to it. Interestingly, it's more true of women than men, which is a lesson.
You know, things change slowly and then quickly, not linearly. I remain quite hopeful that we're in this process of slow and then quick change. Whether the quick change happens in my lifetime, I couldn't say, but I have now no doubt that we're in a process of profound transformation.
The reason is because the pressure's building, getting back to your chaos point, like, it's not because of any books being written or anything any of us are doing, it's because the pressure is forcing the change.
Rob Johnson:
I'll finish with a little note that reminds me of you. The famous boxer Muhammad Ali was asked to give the commencement address at Harvard University. And when he finished, he got off the stage and they said, “Ali! Where's the poem? You're a poet. Where's the poem?” He got back on stage and he said what was in the Guinness Book of World Records for many years as the shortest poem, “Me We.”
And you can view it like a pendulum. Now some have said that the ego side of that pendulum was that Ali has had a wonderful life so he was saying Me W-H-E-E, like he was having fun being a star. But the consciousness in other writings suggests to me that he was seeing that pendulum. And the pendulum has swung towards we with the book that you've just written. Thank you very much.
Rob Johnson:
What is the date this book is released?
John Fullerton:
The 28th, but you can pre-order it now, and some people have gotten it. So it is somewhere, but you can find it in any bookstore, either pre-order or available within days.
Rob Johnson:
Well, this will be a good Thanksgiving and Christmas present.
John Fullerton:
There you go, Buy one for Christmas present while you're at it.
Rob Johnson:
Thanks for your time and thanks for your effort and I look forward to seeing it continue to be elevated and helping our consciousness.
John Fullerton:
Well, thank you, Rob, and thanks for all your good work in the world.