Doughnut Economics: Seven Ways to Think Like a 21st-Century Economist - Kate Raworth.

Doughnut Economics: Seven Ways to Think Like a 21st-Century Economist  Kate Raworth.

Economics is broken. It has failed to predict, let alone prevent, financial crises that have shaken the foundations of our societies. Its outdated theories have permitted a world in which extreme poverty persists while the wealth of the super-rich grows year on year. And its blind spots have led to policies that are degrading the living world on a scale that threatens all of our futures.

Worldwide, one person in nine does not have enough to eat. In 2015 six million children under the age of five died.,

Two billion people live on less than $3 a day and over 70 million young women and men are unable to find work.

As of 2015 the world’s richest 1% now own more wealth than all the other 99% put together.

Around 40% of the world’s agricultural land is now seriously degraded and by 2025 two out of three people worldwide will live in water-stressed regions.

Over 80% of the world’s fisheries are fully or over-exploited. By 2050 there will be more plastic than fish in the sea.

We need a new economic story, a narrative of our shared economic future that is fit for the twenty-first century.

Rethinking economics is not about finding the correct one it’s about choosing or creating one that best serves our purpose.

And without an alternative to offer, there is little chance of entering, let alone winning, the battle of ideas.

The rest of this book proposes seven ways to think like a twenty-first-century economist.

First, change the goal. For over 70 years economics has been fixated on GDP as its primary measure of progress. Instead of pursuing ever-increasing GDP, it is time to discover how to thrive in balance.

Second, see the big picture. Mainstream economics depicts the whole economy with just one, extremely limited image, the Circular Flow diagram. Its limitations have, furthermore, been used to reinforce a neoliberal narrative about the efficiency of the market.

Third, nurture human nature. Third, nurture human nature.man: his portrait has shaped who we have become. But human nature is far richer than this,

Fourth, get savvy with systems. The iconic criss-cross of the market’s supply and demand curves is rooted in misplaced nineteenth-century metaphors of mechanical equilibrium.

Fifth, design to distribute. In the twentieth century, one simple curve whispered a powerful message on inequality: it has to get worse before it can get better. But inequality, it turns out, is not an economic necessity: it is a design failure.

Sixth, create to regenerate. Economic theory has long portrayed a ‘clean’ environment as a luxury good, affordable only for the well-off. But there is no such law: ecological degradation is simply the result of degenerative industrial design.

Seventh, be agnostic about growth. Mainstream economics views endless economic growth as a must, but nothing in nature grows for ever what we need are economies that make us thrive, whether or not they grow.

These seven ways of thinking like a twenty-first-century economist promise no immediate answers.

I am convinced that they are fundamental to the radically different way of thinking about economics that this century demands.

We have barely set out on this adventure in rethinking economics. Join the crew.

***

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?

Today economists and politicians debate with confident ease in the name of economic efficiency, productivity and growth – as if those values were self-explanatory – while hesitating to speak of justice, fairness and rights.

Talking about values and goals is a lost art waiting to be revived.

What enables human beings to thrive? A world in which every person can lead their life with dignity, opportunity and community – and where we can all do so within the means of our life-giving planet.

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.

Worldwide, one person in nine does not have enough to eat. One in four lives on less than $3 a day, and one in eight young people cannot find work. One person in three still has no access to a toilet and one in eleven has no source of safe drinking water. One child in six aged 12–15 is not in school, the vast majority of them girls.

More than half of the world’s population live in countries in which people severely lack political voice.

Since 1970, the number of mammals, birds, reptiles, amphibians and fish worldwide has fallen by half.

This stark picture of humanity and our planetary home at the start of the twenty-first century is a powerful indictment of the path of global economic development that has been pursued to date.

‘We are the first generation to know that we’re undermining the ability of the Earth system to support human development,’

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.
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Much will depend upon the twenty-first century creating far more effective forms of governance, on every scale, than have been seen before.

Today’s economics students could well be the last generation with a chance of achieving our twenty-first-century goal.

***

This chapter reveals the economic story that came to dominate the twentieth century – the one that has pushed us to the brink of collapse.

It has become increasingly clear that the neoliberal economic plot has whipped us into a perfect storm of extreme inequality, climate change and financial crash.

Putting blind faith in markets – while ignoring the living world, society, and the runaway power of banks – has taken us to the brink of ecological, social and financial collapse. It is time for the neoliberal show to leave the stage:

Mainstream economics is still taught today with scant attention paid to the living planet that supports us and the blazing star whose energy we depend upon.

When Adam Smith published The Wealth of Nations in 1776, there were fewer than one billion people alive.

When Paul Samuelson published Economics in 1948 there were not yet three billion people on Earth.

We now live 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.

When Thatcher declared that there is no such thing as society, it came as a surprise to many – not least to society.

Democratic governance of society and the economy rests on the right and capacity of citizens to engage in public debate – hence the importance of ‘political voice’

Economic theory is obsessed with the productivity of waged labour while skipping right over the unpaid work that makes it all possible

When the market is unconstrained, it degrades the living world by over-stressing Earth’s sources and sinks. It also fails to deliver essential public goods on which its own success deeply depends.

Whenever I hear someone praising the ‘free market’, I beg them to take me there, because I’ve never seen it at work in any country that I have visited.

Forget the free market: think embedded market.

That means there is no such thing as deregulation, only reregulation that embeds the market in a different set of political, legal and cultural rules.

The commons can turn out to be a triumph, outperforming both state and market in sustainably stewarding and equitably harvesting Earth’s resources.

Collaborative commons has started to complement, compete with, and even displace the market.

To avoid the tyranny of the state and the tyranny of the market alike, democratic politics are key.

***

Far from simply lending out savings, banks magically create money as credit. Far from promoting stability, financial markets inherently generate flux. And far from providing a valuable service to the productive economy, finance has turned into the tail that wags the dog.

The neoliberal narrative claimed that the market mechanism is what makes firms efficient, and so ignored what goes on inside them.

Power is always at play between a firm’s waged workers and its shareholding owners because of the vast inequalities between them.

Even when businesses operate within the law they can, in many countries, hire workers on insecure, zero-hour contracts.

Firms need a purpose far more inspiring than merely maximising shareholder value.

***

Just as there is no such thing as the free market, it turns out that there is no such thing as free trade.

It requires effective cooperation among governments to make sure that the benefits of cross-border flows are widely shared.

Inequality amongst households and firms alike has soared in many countries in recent decades.

The extreme concentration of income and wealth – in the hands both of billionaires and of corporate boards – rapidly turns into power over how and for whom the economy is run.

Business effectively invests in political candidates and expects a return on that investment in the form of favourable policies.

Private and corporate funding for elections has increased more than twentyfold since 1976.

The economy must be designed to be far more distributive in order to counter elite power with citizens’ empowerment.

***

Rational economic man stands at the heart of mainstream economic theory.

In the 1920s, Chicago-school economist Frank Knight decided to endow economic man with two godlike traits – perfect knowledge and perfect foresight – enabling him to compare all goods and prices across all time.

Milton Friedman reinforced Knight’s justifications in the 1960s.

Rational economic man came to define rationality and turned into ‘a normative model of behaviour for real economic actors to follow’.

What had started as a model of man had turned into a model for man.

Widespread use of the word ‘consumer’ grew steadily in public life, policymaking and the media until it far outstripped the word ‘citizen’.

One important thing unites humanity: none of us resemble that narrow old model of rational economic man.

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.

When it comes to creating deep and lasting social and ecological behaviour change, the most effective approach is precisely to connect with people’s values and identity, not with their pocket and budget.

It is time to redraw ourselves as people who thrive by connecting with each other and with this living home of ours that is not ours alone.

We and our societies flourish best when we display our ‘humanity, justice, generosity and public spirit’.

***

The economy is far better understood as a complex adaptive system, made up of interdependent humans in a dynamic living world.

One thing that is clearly coming to an end is the credibility of general equilibrium economics. It’s just the wrong kind of science.

A growing number of economists are thinking in systems, making complexity economics, network theory, and evolutionary economics among the most dynamic fields of economic research.

We all pay a high price when we don’t understand the dynamic systems on which our lives and livelihoods depend.

‘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.’

Inequality features only as a peripheral concern in the world of equilibrium economics.

But 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.

In the food sector alone, four agribusiness giants control over 75% of the global grain trade.

It is a pattern of concentration that prevails in many other industries too, from media and computing to telecoms and supermarkets.

Between 1988 and 2008, the majority of countries worldwide saw rising inequality within their borders, resulting in a hollowing out of their middle classes.

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.

When a society starts to destroy the resource base on which it depends it is going to be far less adept at changing its ways with a small elite that is quite separate from the masses.

In the early twenty-first century, we have transgressed at least four planetary boundaries. These are ideal conditions for driving ourselves towards collapse.

‘We have never had to deal with problems of the scale facing today’s globally interconnected society. No one knows for sure what will work, so it is important to build a system that can evolve and adapt rapidly.’

Effective systems tend to have three properties – healthy hierarchy, self-organisation and resilience – and so should be stewarded to enable these characteristics to emerge.
Economics now guides the management of nations profoundly influencing the lives of us all. Is it, then, time for economists to get serious about ethics?

Economics is more than two thousand years behind medicine in honing the ethics of its own profession.

If the global economy’s current dynamics continue then we face the very real risk of heading towards collapse.

Rising inequality is a policy choice. It is a widely damaging one at that, with multiple repercussions.

Every human being must have the capabilities needed to lead a life of dignity, opportunity and community. Yet as we know many millions of people still lack the most basic means to do so.

In the US one child in five lives below the federal poverty line, while in the UK food banks have given out over one million packages each year since 2014.

Thomas Piketty’s 2014 long view of the dynamics of distribution under capitalism concluded that Western economies – and others like them – are on track for dangerous levels of inequality.

Inequality may not be inevitable but, in line with the neoliberal script, it was until recently seen as no cause for alarm.

‘Inequality damages the social fabric of the whole society.’

More equal societies, be they rich or poor, turn out to be healthier and happier.

Don’t wait for economic growth to reduce inequality – because it won’t. Instead, create an economy that is distributive by design.

To do so, however, it must alter the distribution not only of income but also of wealth, time and power.

The question, then, is how to design economic networks so that they distribute value – from materials and energy to knowledge and income – in a far more equitable way.

***

Tackling inequality at root calls for democratising the ownership of wealth because ‘political-economic systems are largely defined by the way property is owned and controlled’.

Redistributing land ownership has historically been one of the most direct ways to reduce national inequalities.

For people whose livelihoods and culture depend upon the land, secure land rights are essential.

Since 2000, foreign investors have made over 1,200 large-scale land deals, acquiring more than 43 million hectares of land – an area bigger than Japan.

***

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?

Employees are essentially cast as outsiders: an input to be hired and fired as profitability requires. Shareholders are treated as the ultimate insiders: their narrow interest of maximising profits comes before all.

But this set-up is, of course, just one among many possible enterprise designs. It happens to have dominated the nineteenth and twentieth centuries but that doesn’t mean it has to dominate the twenty-first.

Imagine if labour ceased to be the expendable outsider and became, instead, the ultimate insider, rooted in employee-owned firms.

Imagine, too, if those enterprises raised finance not by issuing shares to outside investors but by issuing bonds, promising their stakeholder-investors not a slice of ownership but a fair fixed return.

The international regime of intellectual property rights has significantly shaped the control and distribution of knowledge.

The intensive overuse and abuse of intellectual property law today is widely acknowledged to be stifling the very innovation that it was originally created to promote.

Despite the importance of tackling national inequalities, global inequalities are still of great concern.

When it comes to delivering a basic income to the world’s poorest people, the question is no longer ‘how on earth?’ but ‘why on earth not?’

Universal basic income is an idea whose time has come.

There are now more than 2,000 billionaires living in 20 countries

An annual wealth tax levied at just 1.5% of their net worth would raise $74 billion each year: that alone would be enough to fill the funding gap to get every child into school and deliver essential health services in all low-income countries.

Given what we now understand about planetary boundaries, the integrity of the living world is clearly and profoundly in the common interest of all: clean air and clean water, a stable climate, and thriving biodiversity are among the most important ‘common pool’ resources for all of humanity.

It needs new forms of open-source licensing too, to ensure that old-style intellectual property claims patents, copyright and trademarks – do not encroach upon the resurgent knowledge commons.

Equitable economies are created by pursuing an intentional pattern of design.

Rather than wait (in vain) for growth to deliver greater equality, twenty-first-century economists will design distributive flow into the very structure of economic interactions from the get-go.

They will also seek to redistribute wealth – be it the power to control land, money creation, enterprise, technology or knowledge – and will harness the market, the commons and the state alike to make it happen.

***

Belief in the political necessity of growth is still shared by many economists and public commentators

‘It is time to re-examine the pursuit of economic growth at all costs,’ ‘we should expect the economic growth rates of the next 100 years to look nothing like those of the last 100 years.’

Such a view of GDP growth – that it is still necessary but no longer possible – is clearly a deeply uncomfortable one to hold.

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.

What would it take to design an economy that can handle GDP growth without hankering after it, deal with it without depending upon it, embrace it without exacting it?

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?

In the mid twentieth century, pursuing national income growth quietly shifted from being a policy option to a political necessity.

Governments are infamously loath to raise taxes. No wonder so many pin their hopes instead on unending GDP growth, tax loopholes, offshore havens, profit shifting, and special exemptions allow many of the world’s richest people to pay negligible tax.

At least $18.5 trillion is hidden by wealthy individuals in tax havens.

Reversing consumerism’s financial and cultural dominance in public and private life is set to be one of the twenty-first century’s most gripping psychological dramas.

Whether growth is seen as the key to redistribution, or the key to forever avoiding it, its social importance is rooted in a basic conviction.

If there is one task that merits the attention of the twenty-first-century economist, it is this: to come up with economic designs that would enable nations coming towards the end of their GDP growth to learn to thrive without it.

Ours is the first generation to properly understand the damage we have been doing to our planetary household, and probably the last generation with the chance to do something transformative about it.

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Replies to This Discussion

Just with regard to the first of the seven ways, talking about GDP as a measure of progress, there are numerous absurdities that arise. For example, a catastrophic oil spill is actually a positive because of the enormous work generated clearing up the mess.  There are also issues around the distinction between paid and unpaid work.  It has always seemed to me a bit bizarre that a paid care worker looking after someone 'counts' for the purposes of GDP but a neighbour who contributes their time freely does not.  There has been a substantial amount of work on alternative economic measures, particularly from feminist economists who have pointed out the value of unpaid work (including, of course, housework, parenting and caring). The value of the non-exchange economy, depending on the model, may easily outweigh the exchange economy.  Others have sought to measure happiness, but on the whole I have found these less useful.

 The Capitalist model seeks to exploit resources to  create wealth. The contradiction is that the money /credit created to exploit the resources  is infinite under the present Central Bank system.

 The planet has finite resources.This leads to debasement of both the environment and the currency.

Result is chaos coming down the pike.

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