Doughnut Economics: Seven Ways to Think Like a 21st-Century Economist
Raworth, Kate. Doughnut Economics: Seven Ways to Think Like a 21st-Century Economist. Random House, 2017. Kindle file.
Who Wants to be an Economist?
In 2000, economics students in Paris had sent an open letter to their professors, rejecting the dogmatic teaching of mainstream theory. ‘We wish to escape from imaginary worlds!’ they wrote, ‘Call to teachers: wake up before it is too late!’
the ingenious twentieth-century inventor Buckminster Fuller once said, ‘You never change things by fighting the existing reality. To change something, build a new model that makes the existing model obsolete.’
The word ‘economics’ was coined by the philosopher Xenophon in Ancient Greece. Combining oikos, meaning household, with nomos, meaning rules or norms, he invented the art of household management, and it could not be more relevant today.
There have been extraordinary strides in human well-being over the past 60 years. The average child born on planet Earth in 1950 could expect to live just 48 years; today
such a child can look forward to 71 years of life. 6 Since 1990 alone, the number of people living in extreme income poverty –on less than $ 1.90 a day –has fallen by more than half. Over two billion people have gained access to safe drinking water and toilets for the first time. All this while the human population has grown by almost 40%. 7
Back in the 1930s, John Maynard Keynes –the Englishman whose ideas would transform post-war economics –was already worrying about the role played by his profession. ‘The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed, the world is ruled by little else,’ he famously wrote. ‘Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.’ 19
Every year, around five million college students in the United States alone graduate with at least one economics course under their belts. A standard introductory course that originated in the USA –and is widely known as Econ 101
the language and mindset of Econ 101 so pervades public debate
that it shapes the way that we all think about the economy:
these citizens of 2050 are being taught an economic mindset that is rooted in the textbooks of
1950, which in turn are rooted in the theories of 1850.
The essence of the Doughnut: a social foundation of well-being that no one should fall below, and an ecological ceiling of planetary pressure that we should not go beyond. Between the two lies a safe and just space for all.
‘Students must learn how to discard old ideas, how and when to replace them … how to learn, unlearn, and relearn,’ wrote the futurist Alvin Toffler.
our brains are wired for visuals. ‘Seeing comes before words. The child looks and recognizes before it speaks,’ wrote the media theorist John Berger in the opening lines of his 1972 classic, Ways of Seeing.
It takes just 150 milliseconds for the brain to recognise an image and a mere 100 milliseconds more to attach a meaning to it.
sociologist Erving Goffmann introduced the concept of ‘framing’ –in the sense that each of us views the world through a mental picture frame –to show that the way we make sense out of our jumble of experience delineates what we can then see.
Pre-analytic vision. Worldview. Paradigm. Frame. These are cousin concepts.
In the deft words of the statistician George Box, ‘All models are wrong, but some are useful.’
So here is a whirlwind tour of the
ideas and images at the heart of Doughnut Economics.
First, change the goal. For over 70 years economics has been fixated on GDP, or national output, as its primary measure of progress. That fixation has been used to justify extreme inequalities of income and wealth coupled with unprecedented destruction of the living world. For the twenty-first century a far bigger goal
is needed: meeting the human rights of every person within the means of our life-giving planet.
Second, see the big picture. Mainstream economics depicts the whole economy with just one, extremely limited image, the Circular Flow diagram.
Third, nurture human nature. At the heart of twentieth-century economics stands the portrait of rational economic
man: he has told us that we are self-interested,
But human nature is far richer than this, as early sketches of our new self-portrait reveal: we are social, interdependent, approximating, fluid in values, and dependent upon the living world.
Fourth, get savvy with systems.
A far smarter starting
point for understanding the economy’s dynamism is systems thinking, summed up by a simple pair of feedback loops.
Fifth, design to distribute.
inequality, it turns out, is not an economic necessity: it is a design failure.
It means going beyond redistributing income to exploring ways of redistributing wealth, particularly the wealth that lies in controlling land, enterprise, technology, knowledge, and the power to create money.
Sixth, create to regenerate.
the Environmental Kuznets Curve, which once again whispered that pollution has to get worse before it can get better, and growth will (eventually) clean it up.
But there is no such law: ecological degradation is simply the result of degenerative
regenerative design in order to create a circular –not linear –economy,
Seventh, be agnostic about growth.
is so dangerous
the long-term path of GDP growth.
Today we have economies that need to grow, whether or not they make us thrive: what we
need are economies that make us thrive, whether or not they grow.
1. Change the Goal
It’s a warning to economics too: lose sight of your goals and something else may well slip into their place.
In the twentieth century, economics lost the desire to articulate its goals: in their absence, the economic nest got hijacked by the cuckoo goal of GDP growth.
Aristotle distinguished economics from chrematistics, the art of acquiring wealth
value is embedded at its heart: it is wrapped up with the idea of utility, which is defined as a person’s satisfaction or happiness gained from consuming a particular bundle of goods. 9 What’s the best way to measure utility?
‘The Big Questions of Macroeconomics’. The top four?
What causes economic output to grow and to fluctuate? What causes unemployment? What causes inflation? How are interest rates determined?
when the US Congress first commissioned economist Simon Kuznets to devise a measure of America’s national income. The calculation he made came to be known
as Gross National Product,
Soon growth was
portrayed as a panacea for many social, economic and political ailments: as a cure for public debt and trade imbalances, a key to national security, a means to defuse class struggle, and a route to tackling poverty without facing the politically charged issue of redistribution.
In the last decades of the twentieth century, the focus shifted from measuring GNP to today’s more familiar GDP,
‘Growth is one of the stupidest purposes ever invented by any culture,’ she declared in the late 1990s; ‘we’ve got to have an enough.’
In response to the constant call for more growth, she argued, we should always ask: ‘growth of what, and why, and for whom, and who pays the cost, and how long can it
last, and what’s the cost to the planet, and how much is enough?’
Back in 1819 the Swiss economist Jean Sismondi sought to define a new approach to political economy with human welfare, not wealth accumulation, as its goal.
E. F. Schumacher –best known for arguing that ‘small is beautiful’ –sought to place ethics and the human scale at the heart of economic thought.
The Doughnut’s inner ring –its social foundation –sets out the basics of life on which no one should be left falling short. These twelve basics include: sufficient food; clean water and decent sanitation; access to energy and clean cooking
facilities; access to education and to healthcare; decent housing; a minimum income and decent work; and access to networks of information and to networks of social support.
It is an economic era that has come to be known
as the Great Acceleration, thanks to its extraordinary surge in human activity. Between 1950 and 2010, the global population almost trebled in size, and real World GDP increased sevenfold. Worldwide, freshwater use more than trebled, energy use increased fourfold, and fertiliser use rose over tenfold.
scientists suggest that, if undisturbed, the Holocene’s benevolent conditions would be likely to continue for another 50,000 years due to the unusually circular orbit that Earth is currently making of the sun
We would have to be crazy to kick ourselves out of the Holocene’s sweet spot, but that
is, of course, exactly what we have been doing. Our growing pressure on the planet has turned us, humanity, into the single biggest driver of planetary change.
it becomes clear that human thriving depends upon planetary thriving.
At this point in human history, the movement that best describes the progress we need is coming into dynamic balance,
from ‘good is forward-and-up’ to ‘good is in-balance’.
The Doughnut provides us with a twenty-first-century compass but what determines whether or not we can actually move into its safe and just space? Five factors certainly play key roles:
population, distribution, aspiration, technology and governance.
responsibility for global greenhouse gas emissions is highly skewed:
the top 10% of emitters –think of them as the global carbonistas living on every continent –generate around 45% of global emissions, while the bottom 50% of people contribute only 13%.
Around 13% of people worldwide are malnourished. How much food would it take to meet
their caloric needs? Just 3% of the global food supply.
Hunger could, in effect, be ended with just 10% of the food that never gets eaten.
whatever people consider necessary for a good life.
Given a fast-growing global middle class, the lifestyles that people aspire to will
have clear ramifications for our collective pressure on planetary boundaries.
Designing governance that is suited to the challenges we face raises deep political issues that confront the long-standing interests and expectations of countries, corporations and communities alike.
2. See the Big Picture
from self-contained market to embedded economy
the most iconic diagram in macroeconomics, the Circular Flow. First drawn by Paul Samuelson,
climate change and financial crash. These global crises have opened up a rare chance to rewrite the entire script and perform
a new economic play.
So what message does this model convey
Centre stage is the
market relationship between households and business.
Households supply their labour and capital in return for wages and profits, and then spend that income buying goods and services from firms. It is this interdependence of production and consumption that creates income’s circular flow.
And that flow would be
uninterrupted if it were not for three outer loops –involving commercial banks, government and trade –
Economics: the twentieth-century neoliberal story (in which we go to the brink of collapse)
THE MARKET, which is efficient –so give it free rein. As Adam Smith famously wrote, ‘It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.’ 8
BUSINESS, which is innovative –so let it lead.
FINANCE, which is infallible –so trust in its ways.
TRADE, which is win–win –so open your borders.
David Ricardo’s nineteenth-century theory
of comparative advantage demonstrates that countries should focus on what they are relatively good at doing and then trade:
THE STATE, which is incompetent –so don’t let it meddle.
If it tries to smooth the business cycle, in classic Keynesian style, its timing will inevitably be off,
Other characters not required on stage:
THE HOUSEHOLD, which is domestic –so leave it to the women.
THE COMMONS, which are tragic –so sell them off.
SOCIETY, which is non-existent –so ignore it.
EARTH, which is inexhaustible –so take all you want.
POWER, which is irrelevant –so don’t mention it.
putting blind faith in markets –while ignoring the living world,
has taken us to the brink of ecological, social and
A new century, a new show
a diagram that I have called The Embedded Economy,
The Embedded Economy, which nests the economy within society and within the living world, while recognising the diverse ways in which it can meet people’s needs and wants.
here is the cast of characters that it calls forth.
Economics: the twenty-first-century story (in which we create a thriving balance)
EARTH, which is life-giving –so respect its
The classical economists,
led by Smith and Ricardo, had recognised labour, land and capital as three distinct factors of production.
But by the late twentieth century, mainstream economics had reduced the focus to just two: labour and capital
It relegates ecological stresses such as climate change, deforestation, and soil degradation to the periphery of economic thought,
In the twenty-first century we have left
behind the era of ‘Empty World’, when the flow
of energy and matter through the global economy was small in relation to the capacity of nature’s
sources and sinks. We live now, says Daly, in ‘Full World’, with an economy that exceeds Earth’s regenerative and absorptive capacity by over-harvesting sources such as fish, and forests, and over-filling sinks such as the atmosphere and oceans. 23
SOCIETY, which is foundational –so nurture
Political theorists such as Robert Putnam use the term ‘social capital’ to describe the wealth of trust and reciprocity
that is created within social groups as a result of their networks of relationships.
writes Putnam; ‘In measurable and well-documented ways … social capital makes us smarter, healthier, safer, richer, and better able to govern
a just and stable democracy.’
THE ECONOMY, which is diverse –so support all of its systems
it is typically made up of four realms of provisioning: the household, the market, the commons and the state,
Households produce ‘core’ goods for their own members; the market produces private goods for those willing and able to pay; the commons produce co-created goods for the communities involved; and the state produces public goods for all the
THE HOUSEHOLD, which is core –so value its contribution
mainstream economic theory is obsessed with the productivity of waged labour
while skipping right over the unpaid work that makes it all possible,
However, as economist Neva Goodwin has pointed out, far from being
secondary, it is actually the ‘core economy’ and it comes first every day, sustaining the essentials of family and social life with the universal human resources of time, knowledge, skill, care, empathy, teaching and reciprocity. 30
Time may be a
universal human resource but it varies hugely in terms of how we each get to experience and use it, how far we control it, and how it is valued.
a 2014 survey of 15,000 mothers in the USA calculated that, if women were paid the going hourly rate for each of their roles
then stay-at-home mums would earn around $ 120,000 each year.
THE MARKET, which is powerful –so
embed it wisely
When the market is unconstrained, it degrades the living world by over-stressing Earth’s sources and sinks.
the market’s power must be wisely embedded
within public regulations, and within the wider economy, in order to define and delimit its terrain.
THE COMMONS, which are creative –so unleash their potential
The commons are shareable resources of nature
or society that people choose to use and govern through self-organising, instead of relying on the state or market for doing so.
The triumph of the commons is certainly evident in the digital commons, which are fast turning into one of the most dynamic arenas of
the global economy.
It is a transformation made possible, argues the economic analyst Jeremy Rifkin, by
‘the zero-marginal-cost revolution’. 39 The result is that a growing range of products and services can be produced abundantly, nearly for free, unleashing potential such as open-source design, free online education, and distributed manufacturing.
THE STATE, which is essential –so make it accountable
the state should be aiming all-out to win Best Supporting Actor at the Oscars
First, by providing public goods
Second, by supporting the core caring role of
Third, by unleashing the dynamism of the commons, with laws and institutions that enable their collaborative potential and protect them from encroachment.
Fourth, by harnessing the power of the market by embedding it in institutions and regulations that promote the common good
The threat of the authoritarian state is very real, but so too is the danger of market fundamentalism. To avoid the tyranny of the state and the tyranny of the market alike, democratic politics are key
FINANCE, which is in service –so make it serve society
Three long-held myths make up the traditional story of finance: that commercial banks work by turning people’s savings into investments; that financial trading smoothes out the economy’s fluctuations; and that, therefore, the financial sector provides a valuable service to the productive economy. All three of these myths were
busted very publicly by the 2008 financial crisis.
BUSINESS, which is innovative –so give it purpose
business can be extraordinarily effective in combining
people, technology, energy, materials and finance to create something new.
Friedman’s narrow view on the business of business has lost credibility: in the face of twenty-first-century challenges, firms need a purpose far more inspiring than merely maximising shareholder value
TRADE, which is double-edged –so make it fair
All of these cross-border flows have the potential to deliver benefits but they carry risks, too.
When it is cheaper to import staple foods
trade can significantly reduce food prices for consumers. At the same time it may undermine domestic food production and leave the country highly vulnerable to international price hikes
As Ha-Joon Chang puts it, however, today’s high-income countries are ‘kicking away the
ladder’ that they once climbed, recommending that low-and middle-income countries open their borders to follow a trade strategy that they strategically avoided themselves.
POWER, which is pervasive –so check its abuse
in the twenty-first-century story, the economy must be designed to be far more distributive not just of income but also of wealth,
in order to counter elite power with citizens’ empowerment.
3. Nurture Human Nature
NATURE from rational economic man to social adaptable humans
There are, most likely, going to be more than ten billion of us by 2100.
If we head
towards that future continuing to imagine, conduct and justify ourselves as Homo economicus –solitary, calculating, competing and insatiable –then we stand little chance of meeting the human rights of all within the means of our living planet.
so it is time to meet ourselves all over again by taking his cartoon depiction out of the economic gallery and painting, in its place, a new portrait of humanity.
economist Charles Stanton Devas coined a now infamous nickname when he derided Mill for ‘dressing up a ridiculous homo oeconomicus’ and examining only the ‘dollar-hunting animal’.
what had started as a model
of man had turned into a model for man. This matters, argues economist Robert Frank, because ‘our beliefs about human nature help shape human nature itself’.
Research by Frank and others has revealed, first, that the discipline of economics tends to attract self-interested people.
five broad shifts in how we can best depict our economic selves.
First, rather than narrowly self-interested we are social and reciprocating. Second, in place of fixed preferences, we have fluid values. Third, instead of isolated we are interdependent. Fourth, rather than calculate,
we usually approximate. And fifth, far from having dominion over nature, we are deeply embedded in the web of life.
From self-interested to socially reciprocating
Over the following two centuries, economic theory came to be founded upon the fundamental assumption that competitive self-interest is not only man’s natural state but also his optimal strategy
for economic success.
that assumption starts to look flimsy.
Along with being self-regarding we are also other-regarding.
Homo sapiens, it turns out, is the most cooperative species on the planet,
That may be because cooperation enhances our own group’s chances of survival.
we are conditional cooperators
but also altruistic punishers
it is the combination of these
two traits that leads to the success of large-scale cooperation in society.
readiness to cooperate and to punish defectors
From fixed preferences to fluid values
From isolated to interdependent
French polymath Henri Poincaré pointed out that it overlooked ‘people’s tendency to act like sheep’.
We follow social norms, typically preferring to do what we expect others will do and, especially if filled with fear or doubt, we tend to go with the crowd.
Participants were recruited –14,000 of them –through a teen website and were invited to listen to a set of 48 songs
the participants preferred songs that they knew others liked.
From calculating to approximating
psychologist Gerd Gigerenzer: we have survived and thrived not despite our cognitive biases but because of them.
Over millennia, the human brain has evolved to rely on quick decision-making tools in a fast-moving and uncertain world and in many contexts those heuristics lead us to make
better decisions than exact calculations would do.
Rather than be passively nudged into acting wisely,
be learn to be risk-savvy with the rule of thumb and so choose to act wisely ourselves.
encouraging a judicious mix of risk-savvy heuristics and behavioural nudges, based on a much-needed understanding of when each approach might work best.
From dominant to dependent
As the American ecologist Aldo Leopold deftly put it, we need to transform the way we see ourselves,
‘from conqueror of the land-community to plain member and citizen of it’.
teach and embody eco-literacy in every school
in the words of the late British MP Jo Cox –we have ‘far more in common with each other than things that divide us’.
Markets and matches: handle with care
‘Using money to motivate people can throw up surprising results,’ says Erik Gómez-Baggethun,
‘we often don’t understand the complex interplay of human values and motivations well enough to
anticipate what will happen, and so that calls for caution.’
Evidence from a wide range of policy initiatives
raises a warning signal around introducing cash incentives in social spaces: their deeper effects are still so little understood and the evidence to date shows that they can so often go wrong. Furthermore, there are other
means of motivating behaviour change
that may cost far less, in both cash and consequences.
Tapping into nudge, networks and
Nudges can have a big effect for a small cost, and digital technology makes smart nudging easier and cheaper than ever before.
Basic nudges can easily be designed into buildings to offset these habits
Network effects also influence social behaviour,
people in whom self-enhancing values and extrinsic motivations have come to predominate
tend to seek wealth, possessions and status. They are also less likely to care about the living world, to make an effort to cut their ecological footprint, to use public transport, or to recycle household waste.
In contrast, people in whom self-transcending values and intrinsic motivations have come to dominate express greater concern about ecological issues and are more motivated to get involved in local action or global movements that proactively engage with
the issues at hand.
Meeting ourselves all over again
how then should we literally draw our new self-portrait?
humanity as a community, as sowers and reapers, and as acrobats.
community reminds us that we are the most social of species, dependent upon each other throughout the cycles of our lives.
The sower-reaper embeds us within the web of life, making clear that our societies co-evolve with the living world on which we depend. And the acrobats exemplify our skill of trusting, reciprocating
and cooperating with each other to achieve things that none of us could alone.
We wasted two hundred years staring at the wrong portrait of ourselves: Homo economicus, that solitary figure
poised with money in his hand, calculator in his head, nature at his feet, and an insatiable appetite in his heart. It is time to redraw ourselves
If we are to bid farewell to the name Homo economicus too, what should take its place? Many new names have been proposed, from Homo
heuristicus and Homo reciprocans to Homo altruisticus and Homo socialis. But it makes no sense to pin ourselves down to just one of these identities: we inhabit them all simultaneously.
4. Get Savvy with Systems
SYSTEMS from mechanical equilibrium to dynamic complexity
If only –just before that apple fell –young Isaac had also marvelled at how it grew:
It might have led him to equally revolutionary insights into the nature of complex systems, thus transforming the history of science.
Today we would be talking not of the market
mechanism but of the market organism –and we’d be so much the wiser for it.
economists then mimicked Newton’s laws of motion in their theories, describing
the economy as if it were a stable, mechanical system. But we now know it is far better understood as a complex adaptive system, made up of interdependent humans in a dynamic living world.
Overcoming our inheritance
general equilibrium theories dominated macroeconomic analysis through the second half of the twentieth century, and all the way up to the 2008 financial crash.
some big-name insiders began to critique the very theories that they had helped to legitimise. Robert Solow,
father of neoclassical economic
became an outspoken critic, first in his 2003 speech bluntly entitled ‘Dumb and Dumber in Macroeconomics’,
The general equilibrium model, he pointed out, in fact depends upon there being just one single, immortal consumer-worker-
owner maximising their utility into an infinite future, with perfect foresight and rational expectations, all the while served by perfectly competitive firms.
in his 1948 article, ‘Science and Complexity’.
clustered together three kinds of problems
problems of simplicity,
involving just one or two variables in linear causality
problems of disordered complexity
involving the random movement of
billions of variables
problems of organised complexity,
which involve a sizeable number of variables that are ‘interrelated
in an organic whole’
despite our instincts, we can all learn, through training and experience, to be better ‘systems thinkers’.
The dance of complexity
At the heart of systems thinking lie three deceptively simple concepts: stocks and flows, feedback loops, and delay.
So what is a system? Simply a set of things that are interconnected in ways that produce
distinct patterns of behaviour
And it is the relationships between the individual parts –shaped by their stocks and flows, feedbacks, and delay –that give rise to their emergent behaviour.
Stocks and flows are the basic elements of any system: things that can get built up or run down
then feedback loops are their interconnections, and in every system there are two kinds: reinforcing (or ‘positive’) feedback loops and balancing (or ‘negative’) ones.
With reinforcing feedback loops, the more you have, the more you get.
They amplify what is happening,
But reinforcing feedback can lead to collapse too: the less you have, the less you get.
If reinforcing feedbacks are what make a system move, then balancing feedbacks are what stop it from exploding or imploding.
Complexity emerges from the way that reinforcing and balancing feedback loops interact with one another:
Feedback loops: the fundamentals of complex systems. Reinforcing feedback (R) amplifies what is happening, while balancing feedback (B) counters it. Their interaction creates complexity.
Many events that first appear to be sudden and external
are far better understood as arising from endogenous change.
Orit Gal, ‘complexity theory teaches us that major events are
the manifestation of maturing and converging underlying trends: they reflect change that has already occurred within the system’.
reported in the news as sudden events but are actually visible tipping points that result from slowly accumulated pressure in the system
Complexity in economics
push equilibrium thinking to one side, and start to think in systems instead.
Bubble, boom, and bust: the dynamics of finance
bubbles in which the price of a stock builds higher and higher before it ultimately bursts. The name of that phenomenon originated with the South Sea Bubble of 1720,
Newton had already bought a few shares in the company and
lost his life savings as a result. ‘I can calculate the movement of stars, but not the madness of men,’ he famously said in the bubble’s
in the wake of the 2008 financial crash,
Queen to ask, ‘Why did no one see it coming?’
the vast majority of economic analysts into paying scant attention to the banking sector
were using macroeconomic models in which private banks played no role at all:
As economist Steve Keen
pithily put it,
‘Trying to analyse capitalism while leaving out banks, debt, and money is like trying to analyse birds while ignoring that they have wings. Good luck.’
When prices eventually don’t keep pace with
expectations, as will inevitably happen, mortgage defaults kick in, assets fall further in value, and
finance goes off the cliff of insolvency, bringing on a crash.
Guess what happens post-crash? Confidence gradually rebuilds and the process begins all over again in a rolling cycle
Success to the successful: the dynamics of inequality
in the disequilibrium world that we inhabit
virtuous cycles of wealth and vicious cycles of poverty can send otherwise similar people spiralling to opposite ends of the income-distribution spectrum. It’s due to what systems experts have come to call the ‘Success
to the Successful’ trap, which kicks off when the winners in one round of a game reap rewards that raise their chances of winning again in the next.
resulting in oligopoly
Two thousand years ago, the notion that ‘the rich get richer and the poor get poorer’ was noted in the Bible and hence came to be known as ‘the Matthew Effect’.
Between 1988 and 2008, the majority of countries worldwide saw rising inequality within their borders,
More than 50% of the total increase in global income over that period was captured by just the richest 5% of the world’s population, while the poorest 50% of people gained only 11% of it.
Water in the tub: the dynamics of
the prevailing direction of global economic development is caught in the twin dynamics of growing social inequality and deepening ecological
we clearly need a transformation and it can be summed up like this: Today’s economy is divisive and degenerative by default. Tomorrow’s economy must be distributive and regenerative by design.
Goodbye spanner, hello secateurs
Say farewell to economy-as-machine and embrace economy-as-organism.
back in the 1970s, Friedrich Hayek
himself suggested that economists should aim to be less like craftsmen shaping their handiwork and more like gardeners tending their plants.
moving from ‘machinebrain’ to ‘gardenbrain’ thinking calls for a simultaneous shift away from believing that things will self-regulate to realising that things need stewarding.
Rather than aiming to predict and control the economy’s behaviour,
economists should ‘think of policy as an adapting portfolio of experiments that helps to shape the evolution of the economy and society over time’.
process of natural selection, often summed up as ‘diversify–select–amplify’. Set up small-scale
policy experiments to test out a variety of interventions, put a stop to the ones that don’t work well, and scale up those that do.
‘When a profession seeks influence over others, it necessarily takes on ethical obligations –whether it recognizes them or not,’ he argues, bluntly adding, ‘I’m aware of no other profession that has been so cavalier regarding its responsibilities.’
Economics is more than two thousand years
behind medicine in honing the ethics of its own profession.
here are four ethical principles for the twenty-first-century economist
First, act in service to human prosperity in a flourishing web of life,
Second, respect autonomy in the communities that you serve by ensuring their engagement and consent,
Third, be prudential in policymaking, seeking to minimise the risk of harm
Lastly, work with humility, by making transparent the assumptions and shortcomings of your models,
5. Design to Distribute
from ‘growth will even it up again’ to distributive by design
Far from being a necessary phase in every nation’s progress, rising inequality is a policy choice.
three quarters of the world’s poorest people now
live in middle-income countries.
Wide inequalities lead to poverty in high-income countries too, where the gap between the rich and the poor is now at its highest level for 30 years,
found, around 80% of national income
was in the hands of just 20% of people, while the remaining 20% of income was spread among 80% of people.
but in 1955 the story took a crucial turn,
When Simon Kuznets
income inequality measured before tax had
been falling at least since the 1920s,
he had uncovered a different law: a social rollercoaster ride on which income inequality first rose, then levelled out, and eventually fell again, all while the economy grew.
he reasoned, inequality should tend to rise over time, not fall
so what was going on?
the process of rural to urban migration.
as workers are drawn into cities,
so inequality increases as industrialisation gets under way.
It was a clever theory but it was wrong,
underlying message –that rising inequality is an inevitable stage on the journey towards economic success for all
‘the Kuznets Curve’.
if you want progress, inequality is inevitable.
It’s got to get worse before it can get better, and growth will make it better.
The Kuznets Curve, which suggests that as countries get richer, inequality must rise before it will eventually fall.
Far from being inevitable, the Kuznets process had turned out to be avoidable: it was indeed possible to achieve growth with equity.
What’s more, starting in the early 1980s, many high-income countries
that believed they had successfully made it over the curve’s hump saw their income distribution begin to widen again, resulting in the infamous rise of the one percent accompanied by flat or falling wages for the majority.
Thomas Piketty’s 2014 long view of the dynamics of
distribution under capitalism that made the underlying story plain to see.
By asking not just who earns what but also who owns what, he distinguished between two kinds of households: those that own capital –such as land, housing, and financial assets which generate rent, dividends and interest –and those households
that own only their labour, which generates only wages.
the returns to capital
have tended to grow faster than the economy as a whole, leading wealth to become ever more concentrated.
Richard Wilkinson and Kate Pickett
2009 book, The Spirit Level,
it is national inequality, not national wealth, that most influences nations’ social welfare.
More unequal countries, they found, tend to have more teenage
pregnancy, mental illness, drug use, obesity, prisoners, school dropouts, and community breakdown, along with lower life expectancy, lower status for women, and lower levels of trust.
More equal societies, be they rich or poor, turn out to be healthier and happier.
Higher levels of national inequality,
also tend to go hand in hand with increased
Contrary to the founding theories of development economics, inequality does not make economies grow
faster: if anything, it slows them down.
a new mindset is emerging.
Don’t wait for economic growth to reduce inequality –because it won’t. Instead, create an economy that is distributive by design.
A network of flows: structuring an economy as a distributed network can more equitably distribute the income and wealth that it generates.
in ways that achieve a fine balance between the system’s efficiency and its resilience. Efficiency occurs when a system streamlines
and simplifies its resource flow
Resilience, however, depends upon diversity and redundancy in the network,
Too much efficiency makes a
while too much resilience makes it stagnant:
In two words: diversity and distribution.
‘Economic development must become more focused on developing human, community, and small-business capital
redistributive policies can be life-changing
But they still may not get to the root of economic inequalities, because they focus on redistributing income, not the wealth that generates it.
Tackling inequality at root calls for democratising the ownership of wealth,
So in addition to redistributing income, the economist’s focus shifts towards redistributing sources of wealth too.
transform the dynamics of wealth ownership. Five opportunities stand out, concerning who controls land, money creation, enterprise, technology and knowledge
Who owns the land?
The trouble is, as populations and economies
grow, the price of land rises, but no more of it can be supplied
‘Buy land,’ he quipped. ‘They’re not making it anymore.’
Many of those communities, in fact, managed their land and its common-pool resources better than markets did, and better than comparable state-run schemes.
This self-organising system worked because the farmers developed their own rules
there is no panacea for managing land and its resources well: neither the market, the commons, nor the state alone can provide an infallible blueprint. Approaches to distributive land
design must fit the people and the place, and may well work best when they combine all three of these approaches to provisioning.
Who makes your money?
is, in essence, a social relationship:
a promise to repay that is based on trust.
In the majority of countries, the privilege of
creating money has been handed to commercial banks, which create money every time they offer loans or credit.
In the UK, for example, 97% of money is created by commercial banks and its character takes the form of debt-based interest-bearing loans.
post-financial-crash experience demonstrated, commercial banks used that extra money to rebuild their own balance sheets instead, buying speculative financial assets like commodities and shares. As a result, the price of commodities such as grain and metals rose, along with the price of fixed assets like land and housing,
but new investments in productive businesses didn’t.
What if, instead, central banks tackled such deep recessions by issuing new money directly to every household as windfall cash to be used specifically for paying down debts –an idea that has come to be known as ‘People’s QE’.
‘Wherever there are unmet needs and spare resources,’ explains financial economist Tony Greenham, ‘we can find new ways of creating money.’
Complementary currencies can clearly enrich and empower communities but game-changing
ones are now emerging, thanks to the invention of Blockchain. Combining database and network technologies, Blockchain is a digital peer-to-peer decentralised platform for tracking all kinds of value exchanged between people.
‘Ethereum is a currency for the modern age,’ says the cryptocurrency expert David Seaman.
Who owns your labour?
Stagnant wages have become a familiar story. Over the past three decades, the majority of workers across high-income countries have seen their wages barely increase, flatline, or even fall while executive pay has ballooned.
At the heart of this inequity lies a simple design question: who owns the enterprise, and so captures the value that workers generate?
what determined each group’s respective share of earnings?
a deep irony to this model. Employees who turn up for work day-in, day-out are essentially cast as outsiders: a production cost to be minimised, an input to be hired and fired as profitability requires. Shareholders, meanwhile, who probably never set foot on the company premises, are treated as the ultimate insiders: their narrow interest of maximising profits
comes before all.
Imagine if labour ceased to be the expendable outsider and became, instead, the ultimate insider, rooted in employee-owned firms.
Employee-owned companies and member-owned cooperatives have long been a cornerstone of distributive enterprise design,
the bottom-up experiment in business redesign is giving rise to a network of enterprise alternatives
‘What’s underway is an ownership revolution,’
Who will own the robots?
two opposing trends
First, the digital revolution has given rise to the network era of near zero-marginal-cost collaboration,
But a parallel process of winner-takes-all dynamics is also in play. Instead of promoting a diversity of web-based enterprises and information providers, the Internet’s strong network effects (with everyone wanting to be on the networks that everyone else is on) have transformed individual providers –like Google, YouTube, Apple, Facebook, eBay, Paypal, and Amazon –into digital monopolies that sit at the heart of the network society.
a second trend of concentration.
many millions of jobs are at risk.
So how could distributive design help to prevent the economic segregation that technology appears to be driving?
starting point is to switch from taxing labour to taxing the
use of non-renewable resources:
invest far more in skilling people up where they beat robots hands-down: in creativity, empathy, insight
and human contact
‘Humans have economic wants that can be satisfied only by other humans,
Far more secure is for every person to have a stake in owning the robot technology itself.
Who owns the ideas?
The rise of patents, followed by copyright and trademarks, created intellectual property regimes
But in the collaborative commons, millions of innovators are defying this received wisdom, co-creating and using free open-source software, known as FOSS,
Open-source design also promises large social benefits and vast cost savings for state-funded institutions in every country,
How can the state start helping the knowledge commons to realise its potential? In five key ways.
First, invest in human ingenuity by teaching social entrepreneurship, problem-solving and collaboration
Second, ensure that all publicly funded research becomes public knowledge,
Third, roll back the excessive reach of corporate intellectual property claims in order to prevent spurious patent and copyright applications
Fourth, publicly fund the set-up of community makerspaces
And lastly, encourage the spread of civic organisations
‘The great task of the twenty-first century,’ writes the ecological thinker Peter Barnes, ‘is to build a new and vital commons sector that can resist enclosure and externalization by the market, protect the planet, and share the fruits of our common inheritances more equitably than is now the case.’ 96 One way of achieving this, he proposes, is to create an array of Commons Trusts,
6. Create to Regenerate
Rather than wait for growth to clean it up –because it won’t –it is far smarter to create economies that are regenerative by design, restoring and renewing the local-to-global cycles of life on which human well-being depends.
The Environmental Kuznets Curve, which suggests that growth will eventually fix the environmental problems that it creates.
‘economic growth helps to undo the damage done in earlier years. If economic growth is good for the environment, policies that stimulate growth (trade liberalisation, economic restructuring, price reform) ought to be good for the environment.’ 4 Yes, ‘no pain, no gain’ economics was back in town,
it’s got to get worse before it gets better –and growth will make it better.
Still, they acknowledged that there was no proof of a direct link between economic growth and environmental clean-up,
these explanations for the curve’s rise then fall don’t stand up to scrutiny.
It’s people power, not economic growth per se, that protects local air and water quality.
From 1990 to 2007, as GDP grew in high-income countries, so did their global material footprints.
Far from the promised rise and fall of the Environmental Kuznets’ Curve, these data point to a disturbing rise and rise.
Economic theory recognises the potentially damaging effects –the ‘negative externalities’ –of such industry, and has its favoured market-based tools for addressing them: quotas and taxes.
impose a tax equivalent to the ‘social cost’ of pollution, and then let the market decide how much pollution it is worth emitting.
Taxes, quotas and tiered pricing can clearly help to ease humanity’s pressure on Earth’s sources and sinks, but here’s the trouble with
believing that they will do the whole job. In practice they fall short because they are rarely set to the level required:
These policies fall short in theory too:
they are low points of
leverage. Far greater leverage comes from changing the paradigm that gives rise to the system’s goals.
When companies first become aware of the scale of pressure that degenerative industrial design puts on Earth’s planetary boundaries, what do they do?
The first and oldest response is simple: do nothing.
the next-step response has become the most common: do what pays, by adopting eco-efficiency measures that cut costs, or boost the brand.
The third response –getting more serious now –is to do our fair share in making the switch to sustainability.
More worryingly, ‘doing our fair share’ can too easily slip into ‘taking our fair share’.
The fourth response –and it is a true step-change in outlook –is to do no harm, an ambition that is also known as ‘mission zero’: designing products, services, buildings and businesses that aim for zero environmental impact.
That’s the essence of the fifth business response: be generous by creating an enterprise that is regenerative by design, giving back to the living systems of which we are a part.
we take nature as our model, measure and mentor.
Industrial manufacturing has begun the metamorphosis from degenerative to regenerative
design through what has come to be known as the ‘circular economy’. It is regenerative by design because it harnesses the endless inflow of the sun’s energy to continually transform materials into useful products and services.
The butterfly economy: regenerative by design.
The key to using them endlessly is to: ensure that they are harvested no faster than nature regenerates them;
In a degenerative industrial economy, value is monetary and it is created by searching for ever-lower costs and ever-greater product sales: the typical result has been intense material throughflow. In a regenerative economy, that material throughflow is transformed into round-flow. But the real transformation comes from a new understanding of value.
Factories and industries can be regenerative by design and so too can urban landscapes.
settlements that nestle within the living world.
By recovering and re-manufacturing key component parts used in their products, the construction equipment company Caterpillar has increased gross profit on those product lines by 50% while cutting water and energy use by around 90%.
The trouble is, they just do not go far enough, and there is a clear reason why. Shaped to fit in with existing corporate interests, circular economy strategies to date have typically been: top down, driven by large corporations;
Regenerative industrial design can only be fully realised if it is underpinned by regenerative economic design.
The glaring gap between the regenerative potential of the circular economy and its narrow efficiency-focused practice by corporations has inspired the launch of an Open Source Circular Economy (OSCE) movement.
aims to follow in the footsteps of open-source software by creating the knowledge commons needed to unleash the full potential of circular manufacturing.
‘The social responsibility of business is to increase its profits,’ said Milton Friedman back in 1970
But Anita Roddick had a different take on that. In 1976,
Meanwhile, company profits went to The Body Shop Foundation, which gave them to social and environmental causes.
In all, a pretty generous enterprise.
‘I want to work for a company that contributes to and is part of the community,’
Today’s most innovative enterprises are inspired by the same idea: that the business of business is to contribute to a thriving world.
The state’s role is key to ending the business-as-usual of degenerative economic design.
refocus industry’s attention away from raising labour productivity and towards raising resource productivity, dramatically reducing the use of new materials and creating jobs at the same time.
it means phasing out the use of ‘red list’ chemicals and polluting production processes, while phasing in the use of life-friendly chemistry only, along with net-zero and net-positive industrial standards. The world’s most progressive enterprises are already aiming to perform to such standards:
The shift to regenerative economic design can be monitored only if it is backed up by metrics that reflect its mission.
The monopoly of monetary metrics is over: it’s time for a panoply of living metrics.
We have inherited degenerative industrial economies: our task now is to transform them into ones that are regenerative by design.
7. Be Agnostic about Growth
from growth addicted to growth agnostic
No country has ever ended human deprivation without a growing economy. And no country has ever ended ecological degradation with one.
If the twenty-first-century goal is to get into
the Doughnut by ending deprivation and degradation at the same time, what are the implications for GDP growth?
creating economies that are agnostic about growth. By agnostic
I mean agnostic in the sense of designing an economy that promotes human prosperity whether GDP is going up, down, or holding steady.
The twentieth century bequeathed to us economies that need to grow, whether or not they make us thrive, and we are now living through the social and ecological fallout of that inheritance.
Twenty-first-century economists, especially those in today’s high-income countries, now face a challenge that their predecessors did not have to contemplate: to create economies that make us thrive, whether or not they grow.
Bartlett warned, ‘The greatest shortcoming of the human race is our inability to understand the exponential function.’
That is because if something grows exponentially
it will get much bigger much faster than we expect.
Walt W. Rostow who, in 1960, published
The Stages of Economic Growth,
Every country, he claimed, must pass through five stages of growth so that it can come to ‘enjoy the blessings and choices opened up by the march of compound interest’.
The traditional society The preconditions for take-off The take-off The drive to maturity
The age of high mass-consumption
agricultural and artisanal techniques place a ceiling on its economic productivity.
preconditions for take-off. ‘The idea spreads,’
‘not merely that economic progress is possible, but that economic progress is a necessary condition for some other purpose, judged to be good:
the take-off stage, in which ‘growth becomes the normal condition’
That pivotal stage leads on to the drive to maturity, a phase in which a wide range of modern industries can be established, regardless of the nation’s resource base.
last stage: the age
delivers enough surplus income for households to start buying durable consumer goods
The S curve of growth. Early economists acknowledged what most of their successors have since ignored: that economic growth must eventually reach a limit.
high-income countries should give up on the pursuit of GDP growth and accept that it might no longer be possible?
Set in this context, the debate over the future of GDP growth in today’s high-income countries is polarised between the ‘keep-on-flying’ advocates of green growth and the ‘prepare-for-landing’ advocates of post-growth economics.
The keep-on-flying passengers: economic growth is still necessary –and so it must be possible. The prepare-for-landing passengers: economic growth is no longer possible –and so it cannot be necessary.
future growth can become green by decoupling GDP from ecological impacts. In other words, while GDP continues to grow over time, its associated resource use
can fall at the same time.
The challenge of decoupling. If GDP is to continue growing in high-income countries, its associated resource use must fall not just relatively or absolutely but sufficiently absolutely to move back within planetary boundaries.
The last two centuries of extraordinary economic growth in high-income countries are largely due to the availability of cheap fossil fuels.
warn Ayres and Warr. ‘In short, future GDP growth is not only not guaranteed, it is more than likely to end within a few decades.’
Jeremy Rifkin believe that today’s emerging
horizontal networks of renewable energy generation and 3D printing are set to amplify this trend.
The sharing economy is also growing, in
which the culture of ownership
is giving way to a culture of access,
The implication of these various trends for GDP growth?
‘The steady decline of GDP in the coming years,’ concludes Rifkin, ‘is going to be increasingly attributable to the change-over to a vibrant new economic paradigm that measures economic value in totally new ways.’
All three of these –finance, business and government –are structured to expect and depend upon a growing monetary income:
if GDP is no longer set to grow even though total economic value may well continue to do so, then those expectations need to change profoundly.
the so-called Easterlin Paradox as evidence that higher incomes do not make us happier anyway.
The US economist Richard Easterlin found that between 1946 and 1974, GDP per capita grew significantly in the US but the population’s self-reported levels of happiness –on a scale of 0 to 10 –remained flat, and even fell in the 1960s.
We have an economy that needs to grow, whether or not it makes us thrive. We need an economy that makes us thrive, whether or not it grows.
W.W. Rostow’s six stages of growth (the twenty-first-century update) 1. The traditional society 2. The preconditions for take-off 3. The take-off 4. The drive to maturity 5. The age of high mass-consumption 5. Preparation for landing 6. Arrival
Let’s start at the heart of the matter: with the financial addiction to growth. Because every decision in the world of finance revolves around one underlying question: what’s the rate of return?
Marx, who described capital as ‘money which begets money’ and ‘has therefore no limits’.
Money accumulates for ever, thanks to interest.
What kind of currency, then, could be aligned with the living world so that it promoted regenerative investments rather than pursuing endless accumulation? One possibility is a currency bearing demurrage, a small fee incurred for holding money, so that it tends to lose rather than gain in value the longer it is held.
The concept was first proposed by Silvio Gessel,
1906 book The Natural Economic Order
introducing a paper currency accompanied by stamps that must be bought and periodically affixed to it to ensure its continued validity. Today the same effect could be achieved far more simply with electronic currency that incurred a charge for being held over time,
Only money that ‘goes out
we must make money worse as a commodity if we wish to make it better as a medium of exchange’.
Imagine, then, if a demurrage-bearing currency could be designed so that, instead of boosting consumption today, it boosted regenerative investments in tomorrow.
how are we socially locked in, addicted to, and stuck on GDP growth? Through the culture of consumerism and the tensions created by inequality, which in turn are rooted in the need for something to aspire to.
some governments, such as in Sweden, Norway and Quebec, have banned advertising to children under 12
There are many views on what really matters to us in life
the New Economics Foundation has distilled the findings down to five simple acts that are proven to promote well-being: connecting to
the people around us, being active in our bodies, taking notice of the world, learning new skills, and giving to others.
We Are All Economists Now
Doughnut Economics sets out an optimistic vision of humanity’s common future: a global economy that creates a thriving balance thanks to its distributive and regenerative design.
One promising way of redefining the meaning of ‘economist’ is to look to those who have gone beyond new economic thinking to new economic doing: the innovators who are evolving the economy one experiment at a time. Their impact is already reflected in the take-off of new business models, in the proven dynamism of the collaborative commons, in the vast potential of digital currencies, and in the inspiring possibilities of regenerative design.
We all have a hand in shaping that evolution
moving our savings to ethical banks; using peer-to-peer complementary currencies; enshrining living purpose in the enterprises that we set up; exercising our rights to parental leave from work; contributing to the knowledge commons; and campaigning with political movements that share our economic vision.