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

by Kate Raworth

Earth as ‘this home that is ours but not ours alone’.

recognise ourselves as ‘the connected living self in co-creative partnership with the Earth’.

one issue deserves particular attention here: the growing use of monetary incentives in policies aimed at ending human deprivation and ecological degradation. Initial evidence suggests that monetary payments often crowd out existing motivations by activating extrinsic rather than intrinsic values.

Prices certainly do matter. When Malawi, Uganda, Lesotho and Kenya stopped charging fees for children to attend state primary schools in the late 1990s, school enrolments—especially for girls and for children from the poorest families—increased dramatically, taking those countries far closer to the goal of providing education for all. In 2004, the German government introduced a feed-in-tariff for households and institutions generating renewable energy, offering to pay above the retail price of electricity. It helped to trigger transformative national investments in wind, solar, hydro and biomass energy technologies, which were powering the country with 30 percent renewable energy just 10 years later.

while prices matter, getting them ‘right’ is not such a simple solution as it first promises to be: twentieth-century theory has led economists to overestimate the effectiveness of price as a lever and to underestimate the role of values, sense of reciprocity, networks and heuristics.

contrasted the blood donor service in the United States, where people were paid for their contributions, with the far more successful service in the UK, where volunteers gave more and healthier blood for free.49 That contrast prompted a fascinating question: do monetary incentives serve to reinforce and ‘crowd in’ people’s intrinsic motivation to act, or instead crowd it out by replacing it with the extrinsic motivation of money?

the role that money can play in eroding social norms, such as student pride and parental responsibility, by replacing them with market norms, such as payment for effort and reward for compliance.

cash payments can crowd out intrinsic motivations and the values that underpin them.

One online survey asked participants to imagine themselves as one among four households facing a water shortage due to a drought affecting their shared well. Crucially, the survey described the whole scenario in terms of ‘consumers’ to one half of the participants, and in terms of ‘individuals’ to the other half. What difference did that single word change make? Those labelled ‘consumers’ reported feeling less personal responsibility to take action and less trust in others to do the same than did those referred to as ‘individuals’.

Simply thinking like a consumer, it seems, triggers self-regarding behaviour and divides rather than unites groups who are facing a common scarcity. In the context of twenty-first-century pressures on Earth’s sources and sinks—from fresh water and fish to the oceans and atmosphere—that insight could turn out to have pivotally important implications for how we describe ourselves in the challenges that we collectively face. Suddenly the words ‘neighbours’, ‘community members’, ‘community of nations’ and ‘global citizens’ seem incredibly precious for securing a safe and just economic future.

most of the schemes studied were unintentionally crowding out, rather than crowding in, people’s intrinsic motivation to act.57 Instead of engaging existing intrinsic commitments, such as pride in cultural heritage, respect for the living world, and trust in the community, some schemes inadvertently serve to erode those very values and replace them with financial motivation.

Evidence from a wide range of policy initiatives—from school enrolments to forest conservation—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—drawing on reciprocity, values, nudging and networks—that may cost far less, in both cash and consequences.

Environmental nudges can be effective too. ‘We have long showers, leave appliances turned on and throw away rubbish as part of daily routines that involve little thought,’ says Pelle Hansen, chair of the Danish Nudging Network. Basic nudges can easily be designed into buildings to offset these habits—using automated taps, shower timers, and motion-activated lighting—delivering substantial cuts in water and energy use.

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.

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

So if we are to have half a chance of bringing ourselves into the Doughnut, then it is essential to shift the economist’s attention from the apple as it falls to the apple as it grows, from linear mechanics to complex dynamics. Bid farewell to the market as mechanism and discard the engineer’s hard hat: it’s time to don a pair of gardening gloves instead.

‘Dumb and Dumber in Macroeconomics’, then in analyses that mocked the theory’s stringent assumptions.6 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. How on Earth did such absurd models come to be so dominant?

three kinds of problems that science can help us to understand. At one extreme lie problems of simplicity, involving just one or two variables in linear causality—a rolling billiard ball, a falling apple, an orbiting planet—and Newton’s laws of classical mechanics do a great job of explaining these. At the other extreme, he wrote, are problems of disordered complexity involving the random movement of billions of variables—such as the motion of molecules in a gas—and these are best analysed using statistics and probability theory. In between these two branches of science, however, lies a vast and fascinating realm: problems of organised complexity, which involve a sizeable number of variables that are ‘interrelated in an organic whole’ to create a complex but organised system.

most of humanity’s biological, ecological, economic, social and political challenges were questions of organised complexity, the realm that was least understood.

That third great advance got under way in the 1970s when complexity science—which studies how relationships between the many parts of a system shape the behaviour of the whole—began to take off. It has since transformed many fields of research, from the study of ecosystems and computer networks to weather patterns and the spread of disease. And although it is all about complexity, its core concepts are actually quite simple to grasp—meaning that, despite our instincts, we can all learn, through training and experience, to be better ‘systems thinkers’.

most economics teaching and textbooks still introduce the essence of the economic world as linear, mechanical and predictable, summed up by the market’s equilibrating mechanism. It’s a mindset that will leave future economists deeply ill equipped to handle the complexity of the contemporary world.

The Dance of Complexity At the heart of systems thinking lie three deceptively simple concepts: stocks and flows, feedback loops, and delay. They sound straightforward enough, but the mind-boggling business begins when they start to interact.

what is a system? Simply a set of things that are interconnected in ways that produce distinct patterns of behaviour—be they cells in an organism, protestors in a crowd, birds in a flock, members of a family, or banks in a financial network. 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—just like water in a bath, fish in the sea, people on the planet, trust in a community, or money in the bank. A stock’s levels change over time due to the balance between its inflows and outflows.

If stocks and flows are a system’s core elements, 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.

Delays such as this—between inflows and outflows—are common in systems and can have big effects. Sometimes they bring useful stability to a system, allowing stocks to build up and act as buffers or shock absorbers: think energy stored in a battery, food in the cupboard or savings in the bank. But stock–flow delays can produce system stubbornness too: no matter how much effort gets put in, it takes time to, say, reforest a hillside, build trust in a community, or improve a school’s exam grades. And delay can generate big oscillations when systems are slow to respond—as anyone knows who has been scalded then frozen then scalded again while trying to master the taps on an unfamiliar shower. It is out of these interactions of stocks, flows, feedbacks and delays that complex adaptive systems arise: complex due to their unpredictable emergent behaviour, and adaptive because they keep evolving over time.

‘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’.

The realisation that economics needs to embrace dynamic analysis is by no means a recent one. Over the past 150 years, economists of all stripes tried to break away from imitating Newtonian physics, but their efforts were all too often steam-rolled by the dominance of equilibrium theory and its satisfyingly neat equations.

‘There are no side effects—just effects,’ he says, pointing out that the very notion of side effects is just ‘a sign that the boundaries of our mental models are too narrow, our time horizons too short’.22 Due to the scale and interconnectedness of the global economy, many economic effects that were treated as ‘externalities’ in twentieth-century theory have turned into defining social and ecological crises in the twenty-first century. Far from remaining a peripheral concern ‘outside’ of economic activity, addressing these effects is of critical concern for creating an economy that enables us all to thrive.

counter-intuitive though it sounds—when it comes to finance, stability breeds instability. Why? Because of reinforcing feedback loops, of course. During good economic times, banks, firms and borrowers all gain in confidence and start to take on greater risks, which pushes up the price of housing and other assets. This asset price rise, in turn, reinforces borrowers’ and lenders’ confidence along with their expectations that asset values will keep on rising.

in the disequilibrium world that we inhabit—where powerful reinforcing feedbacks are in play—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.

Between 1988 and 2008, the majority of countries worldwide saw rising inequality within their borders, resulting in a hollowing out of their middle classes. Over those same 20 years, global inequality fell slightly overall (mostly thanks to falling poverty rates in China), but it increased significantly at the extremes. More than 50 percent of the total increase in global income over that period was captured by just the richest 5 percent of the world’s population, while the poorest 50 percent of people gained only 11 percent of it.38 Getting into the Doughnut requires reversing these widening gaps of income and wealth, so finding ways to offset and weaken the Success to the Successful feedback loop will be key,

When a society starts to destroy the resource base on which it depends, argues the environmental historian Jared Diamond, it is going to be far less adept at changing its ways if it is also stratified, with a small elite that is quite separate from the masses. And when the short-term interests of that decision-making elite diverge from the long-term interests of society as a whole it is, he warns, ‘a blueprint for trouble’.

Today’s economy is divisive and degenerative by default. Tomorrow’s economy must be distributive and regenerative by design. An economy that is distributive by design is one whose dynamics tend to disperse and circulate value as it is created, rather than concentrating it in ever-fewer hands. An economy that is regenerative by design is one in which people become full participants in regenerating Earth’s life-giving cycles so that we thrive within planetary boundaries. This is our generational design challenge,

Say farewell to economy-as-machine and embrace economy-as-organism.

It is time for economists to make a metaphorical career change too: discard the engineer’s hard hat and wrench, and pick up some gardening gloves and pruning shears instead.

‘Gardeners don’t make plants grow but they do create conditions where plants can thrive and they do make judgments about what should and shouldn’t be in the garden.’46 That is why economic gardeners must throw themselves in, nurturing, selecting, repotting, grafting, pruning and weeding the plants as they grow and mature.

instead of jumping straight in with plans for change, she advised, be humble and try to get the beat of the system, even if it is an ailing economy, a dying forest or a broken community. Watch and understand how it currently works and learn its history. It’s obvious to ask what’s wrong, so also ask: how did we get here, where are we headed, and what is still working well? ‘Don’t be an unthinking intervenor and destroy the system’s own self-maintenance capacities,’ she warned. ‘Before you charge in to make things better, pay attention to the value of what’s already there.’

effective systems tend to have three properties—healthy hierarchy, self-organisation and resilience—and so should be stewarded to enable these characteristics to emerge. First, healthy hierarchy is achieved when nested systems serve the greater whole of which they are a part. Liver cells serve the liver, which in turn serves the human body; if those cells start to multiply rapidly, they become a cancer, no longer serving but destroying the body on which they depend. In economic terms, healthy hierarchy means, for example, ensuring that the financial sector is in service to the productive economy, which in turn is in service to life.50

resilience emerges out of a system’s ability to endure and bounce back from stress, like a jelly that wobbles on a plate without losing its form or a spider’s web that survives a storm. Equilibrium economics became fixated on maximising efficiency and so overlooked the vulnerability that it can bring, as we will see in the next chapter. Building diversity and redundancy into economic structures enhances the economy’s resilience, making it far more effective in adapting to future shocks and pressures.

four ethical principles for the twenty-first-century economist to consider. First, act in service to human prosperity in a flourishing web of life, recognising all that it depends upon. Second, respect autonomy in the communities that you serve by ensuring their engagement and consent, while ever aware of the inequalities and differences that may lie within them. Third, be prudential in policymaking, seeking to minimise the risk of harm—especially to the most vulnerable—in the face of uncertainty. Lastly, work with humility, by making transparent the assumptions and shortcomings of your models, and by recognising alternative economic perspectives and tools.

‘The future can’t be predicted,’ wrote Donella Meadows, ‘but it can be envisioned and brought lovingly into being. Systems can’t be controlled, but they can be designed and redesigned . . . We can listen to what the system tells us, and discover how its properties and our values can work together to bring forth something much better than can ever be produced by our will alone.’

from ‘growth will even it up again’ to distributive by design

The Kuznets Curve, which suggests that as countries get richer, inequality must rise before it will eventually fall.

It was only in the 1990s, when sufficient time-series data were available, that the Kuznets Curve could be thoroughly tested. The result? As a leading economist of the day put it, ‘the pattern is that there is no pattern’.10 As countries moved from low to middle to high income, some saw inequality rise then fall then rise again; others saw it fall then rise; in others still it only rose, or only fell. As far as inequality and growth are concerned—as it turns out—everything is possible. Striking regional events even more deeply debunked the curve’s erroneous law. The East Asian ‘miracle’—from the mid 1960s to 1990—saw countries such as Japan, South Korea, Indonesia and Malaysia combine rapid economic growth with low inequality and falling poverty rates. It was achieved largely thanks to rural land reform that boosted the incomes of smallholder farmers, coupled with strong public investments in health and education, and industrial policies that raised workers’ wages while restraining food prices.

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. That dynamic is then reinforced through political influence—from corporate lobbying to campaign financing—that further promotes the interests of the already wealthy. In Piketty’s words, ‘Capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based.’11

despite evidence to the contrary, ‘the notion of tradeoff between redistribution and growth seems deeply embedded in policymakers’ consciousness’.

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.17 ‘The effects of inequality are not confined to the poor,’ they concluded; ‘inequality damages the social fabric of the whole society.’18 More equal societies, be they rich or poor, turn out to be healthier and happier. Democracy, too, is jeopardised by inequality when it concentrates power in the hands of the few and unleashes a market in political influence. That is probably nowhere more evident than in the United States, which by 2015 was home to more than 500 billionaires. ‘We are now seeing billionaires becoming much more active in trying to influence the election process,’

social pressure to reduce consumption to the community norm was far stronger within communities that considered themselves to be a group of peers.22 Little surprise, then, that a study of all 50 US states found that those states marked out by larger inequalities of power—in terms of income and ethnicity—had weaker environmental policies and suffered greater ecological degradation.23 Furthermore, one study covering 50 countries found that the more unequal a country is, the more likely is the biodiversity of its landscape to be under threat.