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We're in a 1920's Economy, an Interview with Paul Hawken

WER: In 1980 and 1981, you seemed to be more pessimistic than optimistic about the economy. On the one hand you predicted that we were going through a healthy economic change, on the other you warned of some type of deflationary crisis or credit collapse. Since then, the economy has gone through two spectacular years in terms of GNP growth and is continuing to grow. Do you still foresee the same kind of danger, or have we outgrown some of those problems?

PH:  I think it is important to state that no one can forecast future economic activity accurately. Neils Bohr said, " you could forecast anything but the future." What fascinates me is human behavior, particularly with respect to the economy, because certain types of behavior do have consequences and these can be at least revealing of our common destiny. I think there are certain times when a large sector of society just "packs it i n " when it comes to common sense, refuses to see the obvious, and determinedly clings to mutually agreed-upon illusions. I think we are in such a time. There are those who would say that this is the human condition, that the present is always this way, but I see it rather differently. I think our collective awareness of our immediate environment, whether it be human, natural, or economic, expands and contracts, widens and narrows, opens up and sometimes pulls back. So, rather than observing or discussing the economy in terms of measurements and indices, I think it is more fruitful and comprehensible to discuss it in terms of behavior, something most of us understand pretty well.

WER: So, how are we behaving?

PH: Oddly. But it is too early to tell whether it is in our long-term best interest. The best parallel to modern economic activity is definitely the1920s. Saying that, it sounds as if I am tipping my hand as to what will happen in the future, but I am not holding any hand at all. In the 1920s, here was a five- or six-year period of frothy economic activity leading up to the crash. It was undergirded by a society that has striking similarities to our own.

WER: Do you refer to speculative behavior?

PH: No, not just that. Speculation was certainly present then as now, but that is too obvious. First, there was a large underground economy. In both periods, illicit “drugs” fed it — in the 1920s it was alcohol, in the 1980s cocaine and marijuana. During both periods, it became fashionable to flaunt the prohibitory laws, especially amongst the rich and famous. Second, during that period, there was tremendous pressure to appear that you were doing very well economically. People got deeply into debt in order to wear the right clothes, drive the right cars, etc. This led to a number of banking and other fiduciary scandals involving "upright" pillar-posts of the community. Charles Stewart Mott's Union Industrial Bank of Flint, Michigan, was embezzled by virtually most of his senior staff. Today, we have Jake Butcher being sentenced to 14 years, and Penn Square, a one-branch bank in an Oklahoma shopping center, coming close to toppling the banking system in this country. Third, while the American economy was supposedly booming, other countries were not faring so well, particularly in Europe. The dollar was very strong and gold was being drained from European treasuries to the U.S. Recent U.S. deficits have been heavily financed by foreign money, making the U.S. a debtor nation for the first time since WWI. Fourth, despite the booming times in the 1920s, tens of thousands of people would flock to Ford's River Rouge plant for work whenever Ford hired. Similarly, there are many jobless now and similar offerings in the Midwest have drawn thousands of applicants during the past few years. Fifth, union membership, then and now, declined. Sixth, in the 1920s, stock "pools" formed to drive the price of a stock up or down in order to make quick short-term profits. Today, we have Boone Pickens practicing greenmail; in the 1920s we had Jesse Livermore swooping down and "raiding" the market, receiving unfavorable publicity, and netting millions. Seventh, sloganeering, the type uttered by President Reagan, was equally popular then: "Be a Bull on America" and "Never Sell the United States Short" were two frequently heard. From the Summer Olympics to Miller Beer ads, you see a similar strident patriotism today. Other examples: scores of "New Age" religious cults sprang up, particularly in California; newsmen were being paid off to tout stocks, as recently occurred at the Wall Street Journal; there were strident cries for protectionism, particularly-in the farm belt as crop prices fell and farmers had difficulty making land payments; bad loans to South American countries were packaged and sold to unwitting investors as bonds (today they are sold off to unwitting banks); and there was a polarization of the rich and poor as has been abetted by President Reagan's tax programs. (In the late twenties the number of people considered under the poverty line was growing just as it has during the past four years.) I could go on and on.

What happened in the 1920s was that the economy went "out of true," to quote Jesse Livermore. The question is whether people went out of true first, thereby allowing the economy to follow, or whether it was the reverse. Whichever is the case; the same can be said about the United States and world economies today. They are strongly out of kilter, on an eccentric orbit if you will, and portend far-reaching effects in the immediate and distant future. The "trueness" that the economy and people have lost is the sense that real economic growth is achieved by effort rather than shrewdness, creativity rather than cleverness. Horizons have shrunk; people do not think out ten or twenty years, but one year at the most. There is not so much a concern for real economic growth as there is for economic gain. Everyone benefits in growth, but gain by itself produces losers. Thus there is a disconnectedness to present economic behavior, a randomness that is soothed by the mellifluousness of our President and other economic "winners."

WER: Are you just like other "liberals" who find it difficult to accept that President Reagan has been the architect of the strongest economic recovery since the war?

PH: Maybe, but what I would like to see happen is to have the economy taken off the liberal/conservative playing field. The recovery since 1982 has to be broken down into at least two segments. First, there is strong economic growth in this country. The 1980-82 recession was ended not by Reagan but by Volcker and the Federal Reserve. Voicker was responding to the default of Mexico on its loans when he greatly loosened the Fed's grip on the money supply in August 1982. He was trying to avoid a worldwide banking disaster and currency crisis. He succeeded, but I doubt he intended to ignite the stock market and send it to record highs. The companies that are truly growing in this economy would have continued to grow regardless of Reagan's tax policy or rhetoric. True growth companies grow because they respond to conditions on the bottom of the economy, not because conditions change in Washington. The other part of the recovery represents the stimulation given to the economy by the massive tax cuts and deficit spending created by Reagan's budgets. The gigantic rise in the deficit, an increase in four years comparable to the first 200 years of the republic, is a gigantic lien on the future, propped up on the short term by a massive influx of foreign capital because of high interest rates. This kind of growth is smoke and mirrors. It is like charging a fur coat on a credit card when you are penniless. The United States is certainly not penniless, but we do not need this second kind of growth because it represents a debt rather than a new asset. In this respect, Reagan can be seen as the most over-achieving Keynesian the government has ever seen. But that would be a slap in Keynes' face because true Keynesian policy would have us balancing the budget during growth in order to create reserves for deficit spending during the next recession. Reagan's economic programs are eating the seed corn, so to speak. From what source will we derive funding for the next recessionary period? No one is asking that question.

WER: Are you concerned about the federal deficit's effect on the future growth of the economy?

PH: Ironically, no. If it was just a federal debt that was around our neck, we could handle it. But the hypocritical enlargement of debt by an administration that vigorously eschewed it has somehow sanctified debt to a degree that has not existed since the "call money" days of the 1920s. It is not federal debt that should concern us, but our own. We started this decade with overly high indebtedness incurred during the inflationary seventies. It made sense to borrow then because interest rates were below inflation rates. You could hardly lose if you were buying hard assets. Today, inflation is nil, but debt is growing at an even faster pace, far outstripping real income. Whether it is leveraged buy-outs, junk-bond financed takeovers, or consumer debt, the drive to achieve short-term satisfaction is lowering the credit rating of the entire country. Such reliance is in fact an attempt to buy what is unaffordable. Junk-bonds, issued at 14 and 15 percent in order to finance takeovers, are sold to savings and loan institutions in California that are trying to cover fixed-rate mortgages on overpriced houses that were unaffordable to begin with. Ted Turner cannot afford to buy CBS any more than Americans can continue to spend 30 to 40 percent of their income on mortgages and installment loans.

WER: Yes, but people are always warning about debt. So what if we owe a lot to each other. Does it make any difference? Those who have warned about high indebtedness in the past sound faint and wrong today.

PH: Debt is only a problem if the underlying assets do not cover principal, and/or if a sharp recession causes debtors to withhold payments to creditors, resulting in sales of assets, reduction in demand of goods, plant closures, and layoffs of employees. If the system is stuffed with too much debt, a correction might go much too far before obligations were met and creditors satisfied. In the period between 1929 and 1933, debts declined only 20 percent. But during that same period, the value of underlying assets and the price of goods fell 75 percent. So after the first four years of the Depression, debt had not been reduced, it had increased by over 40 percent. This is the deflationary trap, something nations and economies want to avoid if at all possible.

My concern is not just whether this will or will not happen. My real concern is that this condition reveals a behavioral milieu in which individual activity, carried out in one's own self-interest, may result in damage to the whole down the road — Hardin's tragedy of the commons on a monetary scale. The tragedy of the commons is not that the sheep feeding thereon become mangy and sickly, or that the meadow's ecosystem is seriously damaged — the real tragedy is that the townsfolk get caught in a behavioral syndrome that prohibits them from perceiving their interconnectedness.

WER: How is "interconnectedness" important here? Most economic behavior seems atomistic at best, if not downright selfish. We are supposedly in the age of the entrepreneur, the person who breaks from the mold to create his or her own identity and fortune.

PH: The twenties were also a time when the entrepreneur blossomed and the self-made millionaire was ogled by the masses and pestered by the media. Regardless of the Depression, the late twenties and early thirties were a time of rapid economic restructuring. New industries and technologies were being introduced in rapid-fire order, and this kind of sudden reshuffling of the economic deck produces entrepreneurs. But here we come to the crux of the matter. The entrepreneur is highly connected. Opportunity comes from confusion and uncertainty. It is when there is a breaking apart of the traditional economic bonds that the entrepreneur flourishes. Entrepreneurs are connected to the dynamics of change, usually ahead of their social peer group. They are anticipatory in their ability to create products and services. Society, on the other hand, becomes disconnected during this same period and acts strangely. The described behavior during the twenties and today has been associated with the "downwave" by those who believe in Kondratieff-type long waves. Those who believe in 50- or 60-year cycles of economic growth and decay all think that we are hitting or are going to hit the trough of this long wave. Remember I said earlier that we were behaving oddly but it was too soon to tell whether it was in our own best interest. In other words, there is a type of coevolution, economically speaking, between the willingness of the society to overspend, take on too much credit, overbuild, participate in "uneconomic" behavior, and the underlying dynamics associated with "structural" changes in the economy. If we had a stable, prudent, fiscally conservative populace that saved diligently, bought cautiously, and paid down their mortgages, there would be a severe crimp in innovation right now. In other words, doing the "wrong" thing economically may be the "right" thing? Well, those are value-laden adjectives. What we are talking about here is the orchestration of change, and what I find fascinating is that we are all, pretty much, in lock-step, playing out different roles in this process of change. It is easy to criticize and judge economic behavior as being speculative, greedy, fear-driven and heedless, as I did earlier in the interview, but at the same time it is difficult to see that we may be crudely trying to create a better economy out of all this, not a worse one as some would have us believe.

WER: Are we going to have a deflationary period similar to the Depression then? And if so, how could anyone possibly consider that period "creative" when so many suffered so much?

PH: Good point. First, I do not think we will have a Depression. We already are having one in many parts of the country. There is great suffering, and one of the unfortunate results of the popularization of economic news such as inflation figures, stock market reports, and GNP rates is that it obscures the unbelievable variety of economic experiences that people are having in this country. From instant wealth to grinding poverty and malnutrition, we have oversimplified events and blotted out so much of our common condition. There is a Panglossian glibness when economics is presented by politicians in power, and a Chicken Little shrillness when the party out of power is talking. Both distort and reduce economic complexity to jargon. So rather than talk about what "might" happen in the future, it would be much more salient to try and describe what is happening today. Fortunately, there are people who do recognize that economic renewal does not spring forth from Congress but from region and locale. Amory and Hunter Lovins are creating programs for economic renewal by looking at local economies from a point of view of being net importers or exporters of capital and resources; Robert Rodale and Medard Gable have started a Regeneration Project with a particular focus on food; William Pilder is doing highly innovative work with displaced steelworkers in Johnstown, Pennsylvania. These are "pre-WPA," and therefore tell me that we will not have a collective Depression because we are already involved with remedies to the prediction.

WER: Do you foresee strong economic growth?

PH: If there are similarities between the twenties and eighties, and I think there are, they abruptly cease when you start projecting what kind of economic growth will come out of this unsettled period. The twenties were the onset of the automobile industry, the airplane and airline industry, the telecommunications industry, and a host of other industries that expanded the scale, scope, and size of individual economic activity. These were industries whose eventual integration into mainstream life would hugely increase the mechanical and physical power at each person's disposal. Once we were through the Depression, these industries expanded tremendously and became the engine of the post-war recovery. In the process, the world increased its consumption of raw materials by factors of 10 to 100, the latter being the increase in oil consumption between 1920 and 1970. This exponential increase in resource consumption can only happen once in a planetary era. This is not "cyclical" behavior. It will simply never be repeated again. And so we come to the irony of future economic growth: in order for a growing world to have more, we, the Western nations, have to have less.

WER: This sounds like the old Club of Rome argument in the '60s.

PH: Yes, except they missed the point. They saw reduced consumption as steady state. In other words, they cautioned that further growth would deplete the world of critical resources. See, there are two ways to have less. One is to become mincing, restrictive, and tight. That would be a depression. We can certainly go that route by default, but it is absurd and unnecessary. The other way is to pursue Buckminster Fuller's dictum of "ephemeralization." In other words, the world does not have an economic problem but a design problem. The growth that came out of the twenties and thirties was too much, too fast. We designed a world too gross, too consumptive, and too resource dependent. And what we are in the process of doing is redesigning it, a type of economic growth that will not require more steel, rubber, or oil. I mention this again, as I have in the past in CQ, because there is still the misconception that we are going into an information age of high-technology. Technology is important, but in itself it is no more than one of the tools with which we will carve the future. Its value is its ability to miniaturize, quicken, and "ephemeralize" existing methods and processes. Peter Drucker, in his new book Innovation and Entrepreneurship (Harper and Row, 1985), points out that only 8 percent of the new employment since 1960 derives from "new" technology. The other 92 percent is due to the "non-technologists" and their/our job is to figure out how to redesign the world. If I was going to school now, I would avoid business school and study design. It is more pertinent to the economy than all the nonsense that supposedly constitutes a business education. In sum, we are going to grow aplenty, but it won't measure up in the way to which we are accustomed.

WER: What does this mean for mainstream manufacturers and industries, ones associated with the "old " economy?

PH: It means, in oil-business parlance, that one has to move downstream. There is tremendous over-capacity worldwide in terms of raw materials — the primary economy — as well as manufactured material such as steel, plastics, chemicals, and textiles — the secondary economy. No amount of tinkering will take this overcapacity away, and it is foolish to try. Intelligent managers will see that their future lies heavily on the design and marketing of products to the end consumer, not the production of raw material. This shift is still not well understood. Look at U.S. Steel buying Marathon Oil. One dinosaur buying another. It will be seen as one of the great stupidities in modern business history. Ditto with Dupont buying Conoco. Dupont made money by taking raw materials, usually hydrocarbon based, and creating unusual value-added processes, many of which were and are proprietary. Instead of differentiating further, and adapting a corporate culture that could touch, breathe, and feel how the marketplace was changing so that it could create new products for it, it took billions of earned dollars and bought raw materials. It was as if Kellogg's went out and bought 100,000 acres of cornfields in Iowa. Dupont's move would have been brilliant in 1972-73. Today, it looks very lame. And it points to another misconception. Old-line economists and financiers like Felix Rohatyn writing in the New York Review bemoan the fact the United States is becoming a service-based economy. And certainly, that is where the employment growth is coming from. But that is the natural and predictable result of an economy that is ephemeralizing. We are moving from the material to the immaterial, so to speak, from the tangibility of a blast furnace to the intangibility of programming.

WER: And the small businessperson? Where does he or she fit in?

PH: The small business is sitting in the catbird's seat becase it is where the rubber hits the road. Individual entrepreneurs and small business people are standing exactly where big companies want to go. While corporations spend hundreds of thousands of dollars trying to figure out what you already know in your gut, you can act on it. A friend who works at a large think-tank recently flew off to the East on a consulting assignment to a very large food company. They wanted to know if the trend towards lighter, healthier foods with less salt, fat, and sugar is for real or merely a fad. I am sure they will finally come to a conclusion, maybe by next year sometime, and they will probably figure it out correctly: "It's true, people really do want to feel better and live longer." And then they can spend a year figuring out what to do about it. They can do this because they have lots of products and a famous brand name that are cash cows for them, buying them lots of time to be frittered away. To my way of thinking, the change in eating and drinking habits in America is the same "ephemeralization" that we are seeing in everything from cars to computers. But to entrepreneurs, such conceptualization is hardly the point. Their stomachs know the answer. They can act. But most people are frozen because they think big companies have the answer, know what is going on, are in the lead, etc., when in fact it is quite the opposite. When going into business, do not be afraid. Fear is numbing and the fact is, large American companies are paper tigers.

WER: You are beginning to sound upbeat.

PH: How can I not be? I doubt if a time will come again in our lifetimes when there is so much opportunity. It is when you feel uncomfortable, uncertain, and unsure — that is the source of innovation and real change. •