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

by Kate Raworth

So what message does this model convey about which actors count and which to ignore when it comes to economic analysis? 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—that divert some income for other uses. The model shows banks siphoning off income as savings and then returning it as investment. Government extracts income as taxes but re-injects it as public spending. Overseas traders need to be paid for the nation’s imports but in turn pay out for its exports. All three of these diversions create leakages from and injections into the market’s circular flow but, taken as a whole, the system is closed and complete—not unlike a circular set of plumbed pipes with water flowing round and round, as Samuelson first depicted it.