Where will the money come from? Endogenous economic development for the viable economy.

Some supporters would like more information about how a regional viable economy might work and how to make it happen. Mark Burton explores here the theory of endogenous (local) economic development and possibilities for funding a viable economy. These include using local pension funds for local needs, the establishment of locally focussed savings funds, local investment schemes such as crowd-funding, loan-stock and locally focussed share offers alongside a Municipal Green Bond or a Bioregional Bank.

In previous work we have pointed to two things that are usually assumed about the regional economy. The first, that endless growth is a good thing and we’ve done a lot of work explaining why this is neither possible nor desirable. The second is that we have to compete with other economies world-wide. And a key idea within that is that we need to attract external investment in order to develop those sectors of the economy we want to strengthen.

We aren’t against selectively developing some sectors of the economy – especially those sectors that help re-localise production of the things we need (e.g. food, textiles, household goods, etc.) and that help to reduce (e.g. through renewable energy) the material demand of the economy on the ‘resources and sinks’ of the planet . But we question the emphasis on inward external investment to get this going. Instead we have used the term ‘endogenous development’ to identify the alternative approach. In this piece we explore what this means in some more detail.

Some background to the concept.

Endogenous development is a term that has been used before, although not always with the same meaning. Notably, the late President Hugo Chávez of Venezuela suggested it as a key approach for reducing the dependence of their economy. There, though it tended to mean the use of State revenues (largely from oil revenues), to support national industry, both on a large scale and via local co-operatives. There is also a technical term ‘endogenous growth theory’ in mainstream economics  – Gordon Brown was widely mocked for referring to it, but this idea differs from what we are discussing here, emphasising as it does the role of internal factors like government support for human capital to facilitate conventional economic growth.

In the glossary to In Place of Growth, we said:

Endogenous development means development from within – in this case from within the communities of the Manchester-Mersey bioregion. It must be stressed that endogenous development does mean a change of emphasis from global competition to relative regional self-reliance. It means creating, sharing and using wealth locally and not depending on inward investment – the model that became dominant during the height of neoliberal madness.


Where has money for investment come from historically?

This is the key question for understanding endogenous development in a specific economy. For our purposes here, ‘an economy’ means something like the regional economy (which can be defined in various ways, say the North West, or Greater Manchester – we prefer to think in bioregional, or eco-regional terms).

Money for investment can come from four different sources;

  1. Surplus internal to an economy.
    All economies (other than the most basic hunter-gather ones) generate surplus. That is the basis for human settlements and the increasing complexity of society throughout history. Surplus is simply wealth that is stored. However we can distinguish between fair and unfair surplus. As Karl Marx revealed, the theft of surplus value from workers is one basis for accumulation in capitalist systems like ours.

  2. Surplus stolen from other economies.
    This is what David Harvey calls accumulation by dispossession (Marx called it primitive accumulation). Historically the theft of resources from the Americas under colonisation was the source of inward investment that allowed the emergence of Europe from its backwardness and the establishment of the capitalist system itself with the dominance of Europe and North America in the global system. The enclosure of the commons here in the UK was another important phase of this accumulation by dispossession. But there is continued accumulation by dispossession throughout the world as public assets are privatised, and commons (including water, forest, minerals under people’s homes) are enclosed and commodified.

  3. External investment from another economy.
    Capital is footloose, going where it can obtain the greatest return. UK capital has leaked out of the country into property speculation and financial derivatives worldwide, and historically invested in the industrialisation of other countries. At the same time, foreign capital is invested in the UK and it is the drive to obtain some of this action that underpins the obsession of Greater Manchester’s economic elite  with China and trophy projects like Airport City. It is hoped that some wealth will trickle down and be retained in the local economy, but we know that  capital can come it can go, as it is only here to maximise its returns. So the question is, how sensible a strategy is this for the pursuit of true local prosperity?

  4. Fiat money
    Nothing to do with Italian motor cars, fiat money is money created at the stroke of a pen, or electronically. Setting out how such ‘bank money’ functions was perhaps John Maynard Keynes’s biggest contribution to economics. But nevertheless it is real. Government created millions (via the Bank of England) for the bank bailouts and for reflation via ‘Quantitative Easing’ as the Bank of England has explained. Sadly this new money, which could be a vital resource for protecting the welfare system and restructuring the economy on low carbon-low energy lines, has not had many positive social or environmental impacts other than making the recession less severe than it might otherwise have been. The second, and bigger, source of fiat money is that created by the banks – in other words by unaccountable private institutions. Money is created in this way every time a loan is made – for example when you use a credit card or take out a mortgage, or if a business takes out a loan. As Ann Pettifor argues in Just Money, this power to almost magically create money out of thin air is a potentially liberatory social resource, but to be that it needs to be properly regulated and democratically managed, rather than generating costly personal debt that (as our friends at CRESC point out) acts as the feedstock for the speculative global financial industry with its unsustainable bubbles.

So for endogenous development we can rule out 2 and much of 3 – that is surplus stolen from other peoples, and footloose profit-seeking surplus capital from other economies (although this latter can have a positive selective role if robust safeguards can be negotiated such as local 51% controlling stake and reversion of assets to local ownership on exit within a defined time-scale).

But modes 1 and 4, using our own local surplus, and credit created locally, are both options for endogenous development.

One challenge with both of these is that money tends to seep out of the local economy. Connectivity with other economic centres tends to make this more, not less likely, something to bear in mind when developing transport infrastructures. But there are ways of keeping wealth in the local economy, for example through preferential local procurement, through local loyalty schemes and the development of local currencies (especially electronically-based business to business currencies as used successfully in Switzerland).

Ways in which local surplus can be re-invested locally include the use of pension funds for investment in local economic initiatives (the Greater Manchester Pension Fund has done some of this, for example in housing), the establishment of locally focused savings funds, and local investment schemes, for example via crowd-funding, issue of loan-stock and locally focussed share offers (as with some of the successful community energy schemes and alternative food enterprises).

But link these ideas together with the issue of local credit, perhaps along the lines of the Municipal Green Bond (as proposed in In Place of Growth), or a Municipal or Bioregional Bank, and the real power of endogenous development for local economic, social and ecological viability can be imagined.

In investing locally, we need to emphasise the social and ecological yield of the investment. So investment in a fair wage employer with low pay multiples yields more social benefit than investment in one with an inequitable pay structure. It is also likely that less expenditure will be on high energy and exotic goods or invested in speculation such as financial derivatives. Important here is consideration of the ‘stakeholder’ motives of investments: traditional shareholder owned banks and external investment are concerned overwhelmingly with profit maximization,while investment controlled by those with a stake in the local community and its economy has the potential to be directed towards a broader conception of local prosperity. It certainly is a tragedy that so much of the infrastructure of local mutual and municipal financial institutions was destroyed in the carpet-bagging, profit-seeking rush to de-mutualise and privatise over the last 30 years. This is something we need to put right, but by inventing new, ecologically and socially kind vehicles rather than just reverting to older models.

So with these tools, endogenous development is not just a fine idea, but one we can use to build systems locally to strengthen our local economy while ensuring social and ecological viability. What’s stopping us?


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7 Responses to Where will the money come from? Endogenous economic development for the viable economy.

  1. Pingback: Where will the money come from? Endogenous economic development for the viable economy. | Uncommontater

  2. As of the end of December 2013, the Bank of England had committed £375 billion to its quantitative easing and the Federal Reserve in the United States has spent a total of $3.7 trillion over five years on its quantitative easing. Imagine what good could have been done if that money had been spent on socially useful development instead of inflating another stock-market bubble.

    Converting banks into public utilities, under democratic control, is crucial to creating an economy designed for human need rather than private profit.

  3. Brigitte Lechner says:

    I am a member of the Stockport branch of Left Unity. We have regular discussion evenings once a month on issues of interest. I note from your website that you are willing to give talks about Steady State Economics. This would be a topic of great interest. Could you tell me what style talk you give, what sort of equipment you need and what your charge would be? We have two hours and would want to allocate some time to Q & A. Discussions are held on the 4th Tuesday of the month and the next available slot would be in June. With regards, Brigitte Lechner

    >System change 4 climate change<

    Date: Mon, 12 May 2014 20:04:36 +0000 To: brigitte.lechner@hotmail.co.uk

  4. Pingback: I’ve been otherwise engaged. | Uncommontater

  5. Pingback: The Viable Economy serialised – About investment, money, credit and debt. | Steady State Manchester

  6. Pingback: People’s Spatial Framework: A Letter from the Future | Steady State Manchester

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