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

by Kate Raworth

The economy depends upon Earth as a source—extracting finite resources such as oil, clay, cobalt and copper, and harvesting renewable ones such as timber, crops, fish and fresh water. The economy likewise depends upon Earth as a sink for its wastes—such as greenhouse gas emissions, fertiliser run-off and throwaway plastics. Earth itself, however, is a closed system because almost no matter leaves or arrives on this planet: energy from the sun may flow through it, but materials can only cycle within it.

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.

One basic feature of the economy is rarely pointed out in Econ 101—it is typically made up of four realms of provisioning: the household, the market, the commons and the state, as shown in the Embedded Economy diagram. All four are means of production and distribution, but they go about it in very different ways. 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 populace.

while the Circular Flow diagram identified people primarily as workers, consumers and capital owners, the Embedded Economy diagram invites us to acknowledge our many other social and economic identities. In the household, we may be parents, carers and neighbours. In relation to the state, we are members of the public, using public services and paying taxes in return. In the commons, we are collaborative creators and stewards of shared wealth. In society, we are citizens, voters, activists and volunteers.

THE HOUSEHOLD, which is core—so value its contribution The Circular Flow diagram depicted labour appearing—hey presto!—fresh and ready for work each day at the office or factory door. So who cooked, cleaned up, and cleared away to make that possible? When Adam Smith, extolling the power of the market, noted that ‘it is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner’, he forgot to mention the benevolence of his mother, Margaret Douglas, who had raised her boy alone from birth. Smith never married, so had no wife to rely upon (nor children of his own to raise). At the age of 43, as he began to write his opus, The Wealth of Nations, he moved back in with his cherished old mum, from whom he could expect his dinner every day. But her role in it all never got a mention in his economic theory, and it subsequently remained invisible for centuries.

mainstream economic theory is obsessed with the productivity of waged labour while skipping right over the unpaid work that makes it all possible, as feminist economists have made clear for decades.29 That work is known by many names: unpaid caring work, the reproductive economy, the love economy, the second economy. 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.

since work in the core economy is unpaid, it is routinely undervalued and exploited, generating lifelong inequalities in social standing, job opportunities, income and power between women and men.

Why does it matter that this core economy should be visible in economics? Because the household provision of care is essential for human well-being, and productivity in the paid economy depends directly upon it. It matters because when—in the name of austerity and public sector savings—governments cut budgets for children’s daycare centres, community services, parental leave and youth clubs, the need for care-giving doesn’t disappear: it just gets pushed back into the home. The pressure, particularly on women’s time, can force them out of work and increase social stress and vulnerability.

There is, however, a flip side to the market’s power: it only values what is priced and only delivers to those who can pay. Like fire, it is extremely efficient at what it does, but dangerous if it gets out of control. 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—from education and vaccines to roads and railways—on which its own success deeply depends.

market’s power must be wisely embedded within public regulations, and within the wider economy, in order to define and delimit its terrain.

‘A market looks free only because we so unconditionally accept its underlying restrictions that we fail to see them.’36 From passports to medicines and AK-47s, many things cannot be legally bought or sold without official licence. Trade unions, immigration policies and minimum wage laws all have an effect on a country’s going wage rate. Company reporting requirements, the culture of shareholder primacy and state-funded bailouts all influence the level of corporate profits. Forget the free market: think embedded market. And, strange though it sounds, 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, simply shifting who bears the risks and costs and who reaps the gains of change.37

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. Think of how a village community might manage its only freshwater well and its nearby forest, or how Internet users worldwide collaboratively curate Wikipedia.

Rather than being left as ‘open access’, those successful commons were governed by clearly defined communities with collectively agreed rules and punitive sanctions for those who broke them.

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.

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. In some key sectors, the twenty-first-century collaborative commons has started to complement, compete with, and even displace the market. What’s more, the value generated is enjoyed directly by those who co-create in the commons, and it may never be monetised—with intriguing implications for the future of GDP growth,

the neoliberal script, Milton Friedman was determined to limit the state’s economic role to defending the nation, policing its streets and enforcing its laws. Its legitimate purpose, he believed, was simply to secure private property and legal contracts, which he saw as the prerequisites for smoothly functioning markets.

the state should be aiming all-out to win Best Supporting Actor at the Oscars—starring as the economic partner that supports the household, the commons and the market alike.

First, by providing public goods—ranging from public education and healthcare to roads and street lighting—that deliver for all, not just for those who can pay, so enabling a society and its economy to thrive. Second, by supporting the core caring role of the household, such as with maternal and paternal leave policies that empower both parents, investment in early-years education and care support for seniors. 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—from banning toxic pollutants and insider trading to protecting biodiversity and workers’ rights. Like all best supporting actors, the state may also step centre stage, taking entrepreneurial risks where the market and commons can’t or won’t reach.

the basic research behind every innovation that makes a smart phone ‘smart’—GPS, microchips, touchscreens and the Internet itself—was funded by the US government. The state, not the market, turns out to have been the innovating, risk-taking partner, not ‘crowding out’ but ‘dynamising in’ private enterprise—and

inclusive institutions give many people a say in decision-making, unlike extractive ones that privilege the voice of the few and allow them to exploit and rule over others.44 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—thus reinforcing the foundational role played by society in generating the civic engagement needed for participation and accountability in public and political life.

in the face of twenty-first-century challenges, firms need a purpose far more inspiring than merely maximising shareholder value,

When it is cheaper to import staple foods such as rice and wheat than it is to grow them, 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

When corporations offshore manufacturing, it often delivers cheaper products to consumers and creates new jobs overseas. But it can also result in domestic job losses that decimate whole communities—as

financial inflows may boost an emerging economy’s fledgling stock market, but when international finance exits even faster than it entered, it can induce a near collapse of the currency,

power is at play in myriad places throughout the economy and society: in daily household decisions about who cares for the kids; in boss-versus-worker wage negotiations; in international trade and climate-change talks; and in humanity’s domination over other species on the planet. Wherever people are present, so too are power relations: think of them as running throughout the Embedded Economy diagram, within each of its domains and at the interface between them too.

the power of the wealthy to reshape the economy’s rules in their favour.

Since 2005, the fossil-fuel industry alone has spent $1.7 billion in the United States on lobbying and campaign contributions, which explains their entrenched political support.

drawing the Embedded Economy instead transforms the starting point of economic analysis. It ends the myth of the self-contained, self-sustaining market, replacing it with provisioning by the household, market, commons and state—all embedded within and dependent upon society, which in turn is embedded within the living world. It shifts our attention from merely tracking the flow of income to understanding the many distinct sources of wealth—natural, social, human, physical and financial—on which our well-being depends.

when is each of the four realms of provisioning—household, commons, market and state—best suited to delivering humanity’s diverse wants and needs?

rather than focusing by default on how to increase economic activity, ask how the content and structure of that activity might be shaping society, politics and power. And just how big can the economy become, given Earth’s ecological capacity?

There are, most likely, going to be more than 10 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.

studying Homo economicus can alter us too, reshaping who we think we are and how we should behave.

Change one word and you can subtly but deeply change attitudes and behaviour. Throughout the twentieth century, widespread use of the word ‘consumer’ grew steadily in public life, policymaking and the media until it far outstripped the word ‘citizen’: in English-language books and newspapers, that happened in the mid 1970s.19 Why does it matter? Because, explains the media and cultural analyst Justin Lewis, ‘Unlike the citizen, the consumer’s means of expression is limited: while citizens can address every aspect of cultural, social and economic life . . . consumers find expression only in the market place.’20

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.

we WEIRD ones typically practise what is known as ‘strong reciprocity’: we are conditional cooperators (tending to cooperate so long as others do too) but also altruistic punishers (ready to punish defectors and free riders even if it costs us personally). And it is the combination of these two traits that leads to the success of large-scale cooperation in society.23 No wonder rating and review systems are so popular in the otherwise anonymous online marketplace.

Across diverse cultures, social norms of reciprocity clearly vary according to the structure of the economy, particularly the relative importance of the household, market, commons or state in provisioning for society’s needs.26 People’s sense of reciprocity appears to co-evolve with their economy’s structure: a fascinating finding with important implications for those aiming to rebalance the roles of the household, market, commons and state in any society.

ten clusters of basic personal values that are recognised across cultures: self-direction, stimulation, hedonism, achievement, power, security, conformity, tradition, benevolence and universalism.

each of the values can be ‘engaged’ in us if it is triggered: when reminded of security, for example, we are likely to take fewer risks; when power and achievement are brought to mind, we are less likely to take care of others’ needs.

the relative strength of these different values changes in us not just over the course of a lifetime, but in fact many times in a day, as we switch between social roles and contexts, whether moving from the workplace to the social space, the kitchen table to the conference table, from the commons to the market to the home. And—just like muscles—the more often any one value is engaged, the stronger it becomes.

the ten basic values can be grouped around two key axes, as illustrated in his circumplex. The first axis juxtaposes openness to change (which concerns independence and novelty) with conservation (concerning self-restriction and resistance to change). The second axis juxtaposes self-enhancement (focused on status and personal success) with self-transcendence (having concern for the wellness of all).

What is the implication for economic policy aiming to influence how we behave? Economists have traditionally sought to change people’s behaviour by changing the relative price of things, be it through a tax on sugar or a discount on solar panels. But such price signals often fail to achieve their expected results, Ormerod points out, because they can be drowned out by far stronger network effects, thanks to social norms and expectations of what others in the network are doing.

We (the WEIRD ones, at least) typically exhibit: availability bias—making decisions on the basis of more recent and more accessible information loss aversion—the strong preference to avoid a loss rather than to make an equivalent gain selective cognition—taking on board facts and arguments that fit with our existing frames risk bias—underestimating the likelihood of extreme events, while overestimating our ability to cope with them.

Given the value of fast and frugal heuristics such as this one, perhaps we should think of ourselves not as rational man but as heuristic man and be proud of it too: what first appears to be a failure of rationality might be better thought of as a triumph of evolution.

we can indeed learn to become more risk-savvy, by successfully teaching everyday statistical-reasoning skills to German doctors, American judges and Chinese schoolchildren alike. Rather than be passively nudged into acting wisely, he believes, we can be learn to be risk-savvy with the rule of thumb and so choose to act wisely ourselves.39

one problem with relying upon heuristics won’t go away: they work best in the context for which they evolved. Humanity’s context, however, has changed over the past 10,000 years and particularly dramatically in the last two hundred years.

The smart way forwards, then, for policymakers seeking to promote behaviour change may lie in encouraging a judicious mix of risk-savvy heuristics and behavioural nudges, based on a much-needed understanding of when each approach might work best.

teach and embody eco-literacy in every school so that coming generations develop a worldview based upon understanding the living world’s interdependent systems that make life on Earth possible.

a stray dog has a greater chance of surviving if it is given a name.

the names we choose matter: calling a stray dog Champ rather than Scamp switches just a couple of letters but utterly transforms how he is seen in the world.

talking of ‘natural capital’ and ‘ecosystem services’ is so double-edged: it may give the stray dog a name, but the chosen name simply shifts the living world from being man’s material means to being an asset on his balance sheet.