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

by Kate Raworth

When she put her questions to her professors, they assured her that insight would come at the next level of study. So she enrolled for the next level – a Master’s degree at the prestigious London School of Economics – and waited for that insight to come. Instead, the abstract theories intensified, the equations multiplied, and Yuan grew more dissatisfied. But with exams on the horizon, she faced a choice. ‘At some point,’ she told me, ‘I realised that I just had to master this material, rather than trying to question everything. And I think that’s a sad moment to have as a student.’ Many students coming to this realisation would have either walked away from economics, or swallowed its theories whole and built a lucrative career out of their qualifications. Not Yuan. She set out to find like-minded student rebels in universities worldwide and quickly discovered that, since the millennium, a growing number had publicly started to question the narrow theoretical framework that they were being taught. In 2000, economics students in Paris had sent an open letter to their professors,

In January 2015, as the American Economic Association’s annual meeting got under way in Boston’s Sheraton Hotel, students from the Kick It Over movement plastered accusatory posters in the hotel’s corridors, elevators and toilets, projected giant subversive messages on to the conference centre’s street facade, and stunned the incredulous conference-goers by occupying their sedate panel discussions and hijacking question time.4 ‘The revolution of economics has begun,’ the students’ manifesto declared. ‘On campus after campus we will chase you old goats out of power. Then in the months and years that follow, we will begin the work of reprogramming the doomsday machine.’

Through all this, I gradually realised the obvious: that I could not simply walk away from economics, because it shapes the world we inhabit and its mindset had certainly shaped me, even if through my rejection of it. So I decided to walk back towards it and flip it on its head. What if we started economics not with its long-established theories, but with humanity’s long-term goals, and then sought out the economic thinking that would enable us to achieve them?

How should progressives respond? Certainly not by arguing ‘against tax relief’ because repeating that phrase merely strengthens the frame (who could be against relief, after all?). But, says Lakoff, progressives too often try to set out their own views on tax with lengthy explanations, precisely because no concise alternative frame has been developed.40 They desperately need an alternative two-word phrase to encapsulate their view and counter the other. In fact the frame of ‘tax justice’ –

Seven ways to think like a twenty-first-century economist Whether you consider yourself an economic veteran or novice, now is the time to uncover the economic graffiti that lingers in all of our minds and, if you don’t like what you find, scrub it out; or, better still, paint it over with new images that far better serve our needs and times.

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. And that goal is encapsulated in the concept of the Doughnut. The challenge now is to create economies – local to global – that help to bring all of humanity into the Doughnut’s safe and just space. Instead of pursuing ever-increasing GDP, it is time to discover how to thrive in balance.

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, the incompetence of the state, the domesticity of the household, and the tragedy of the commons. It is time to draw the economy anew, embedding it within society and within nature, and powered by the sun. This new depiction invites new narratives – about the power of the market, the partnership of the state, the core role of the household, and the creativity of the commons.

Sixth, create to regenerate. Economic theory has long portrayed a ‘clean’ environment as a luxury good, affordable only for the well-off. This view was reinforced by 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 industrial design. This century needs economic thinking that unleashes regenerative design in order to create a circular – not linear – economy, and to restore humans as full participants in Earth’s cyclical processes of life.

Like hoodwinked mother birds, we student-economists faithfully nurtured the goal of GDP growth, poring over the latest competing theories of what makes economic output grow: was it a nation’s adoption of new technologies, its growing stock of machinery and factories, or even its stock of human capital? Yes, these were all fascinating questions, but not once did we seriously stop to ask whether GDP growth was always needed, always desirable or, indeed, always possible.

How had the GDP growth cuckoo so successfully hijacked the economic nest? The answer can be traced back to the mid 1930s – as economists were just settling upon a goalless definition of their discipline –

Eyeing the rise of the Soviet Union, the USA pursued growth for national security through military power, and the two sides became locked in a fierce ideological contest to prove whose economic ideology – the ‘free market’ versus central planning – could ultimately turn out more stuff. Growth appeared to offer an end to unemployment too, according to Arthur Okun, Chairman of President Johnson’s Council of Economic Advisers. His analysis found that an annual 2% growth in US national output corresponded to a 1% fall in unemployment – a correlation which looked so promising that it came to be known as Okun’s Law. 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.

forwards and upwards – charts an individual child’s development, but also echoes the story of progress we tell ourselves as a species. From our lolloping four-legged ancestors evolved Homo erectus – upright at last – who gave rise to Homo sapiens, always depicted mid-stride. As George Lakoff and Mark Johnson vividly illustrate in their 1980 classic Metaphors We Live By, orientational metaphors such as ‘good is up’ and ‘good is forward’ are deeply embedded in Western culture, shaping the way we think and speak.13

One person who was willing to risk political suicide was the visionary systems thinker Donella Meadows – one of the lead authors of the 1972 Limits to Growth report – and she didn’t mince her words. ‘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.’

The English social thinker John Ruskin followed him in the 1860s, railing against the economic thinking of his day, declaring that, ‘There is no wealth but life … That country is the richest which nourishes the greatest numbers of noble and happy human beings.’18 When Mohandas Gandhi discovered Ruskin’s book in the early 1900s, he set out to bring its ideas to life on a collective farm in India, in the name of creating an economy that elevated the moral being.

Nobel-Memorial winner Joseph Stiglitz, to assess the measures of economic and social progress that currently guide policymaking. On surveying the state of indicators in use they came to a blunt conclusion: ‘Those attempting to guide the economy and our societies,’ they wrote, ‘are like pilots trying to steer a course without a reliable compass.’22 None of us want to be passengers on that directionless jet. We urgently need a way to help policymakers, activists, business leaders and citizens alike to steer a wise course through the twenty-first century. So here’s a compass fit for the journey ahead.

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.

Billions of people still fall far short of their most basic needs, but we have already crossed into global ecological danger zones that profoundly risk undermining Earth’s benevolent stability. In this context, what could progress possibly look like?

‘Humanity can affect the functioning of its own life-support systems,’ says the ocean scientist Katherine Richardson. ‘There are tipping points we are pushing on. How does this change our definition of progress?’32 For over 60 years, economic thinking told us that GDP growth was a good enough proxy for progress, and that it looked like an ever-rising line.

In the 1970s, the economist Barbara Ward – a pioneer of sustainable development – called for global action to tackle both the ‘inner limits’ of human needs and rights and the ‘outer limits’ of the environmental stress that Earth can endure:

What might the words for that new vision be? A first suggestion: human prosperity in a flourishing web of life. Yes, that is a mouthful to say – and it’s telling that we lack more concise ways of expressing something so fundamental to our well-being. As for the new picture? The Doughnut, I discovered, has a role to play.

– the task of coming into balance is daunting. ‘We are the first generation to know that we’re undermining the ability of the Earth system to support human development,’ says Johan Rockström. ‘This is a profound new insight and it is potentially very, very scary … It is also an enormous privilege because it means that we are the first generation to know that we now need to navigate a transformation to a globally sustainable future.’

Imagine, then, if ours could be the turnaround generation that started putting humanity on track for that future. What if we each were to mentally map our own lives on to the Doughnut, asking ourselves: how does the way that I shop, eat, travel, earn a living, bank, vote and volunteer affect my personal impact on social and planetary boundaries? What if every company strategised around a Doughnut table, asking itself: is our brand a Doughnut brand, whose core business helps to bring humanity into that safe and just space?

Can we live within the Doughnut? 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.

Thanks to the scale of global income inequality, 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%.43 Food consumption is deeply skewed too. Around 13% of people worldwide are malnourished. How

third factor is aspiration: whatever people consider necessary for a good life. And one of the biggest influences on our aspirations is how and where we live. In 2009, humanity went urban, with over half of us living in cities and towns for the first time in history, and 70% of us are expected to be urbanites by 2050. City living tends to amplify the influence of surrounding crowds and of advertising billboards whose images promise that a better life is just a purchase away, stoking up desire for faster cars and slimmer laptops, for exotic holidays and the latest-craze gadgets. As economist Tim Jackson deftly put it, we are ‘persuaded to spend money we don’t have on things we don’t need to make impressions that won’t last on people we don’t care about’.

The cuckoo goal of GDP growth emerged from an era of economic depression, world war, and cold war rivalry, but it dominated economic thinking for over 70 years. In a few decades’ time we will look back, no doubt, and consider it bizarre that we once attempted to monitor and manage our complex planetary household with a metric so fickle, partial and superficial as GDP.

Samuelson drew up the twentieth-century cast list. But it was his neoliberal rivals Friedrich Hayek and Milton Friedman who – just like Shakespeare’s editors – imbued each part with such telltale traits that the rest of the script almost wrote itself. In their resulting laissez-faire story of who the economy’s actors are and how best to let them work, the plot was loaded from the very start. We are all well versed in its line-up of characters, having been told that the market is efficient, that trade is win–win, and that the commons are a tragedy. Given such a cast, the triumph of the market seems almost inevitable in the unfolding plot. However, we were all also told that finance is infallible – but that part of the story unravelled so publicly during the 2008 financial crash that even the scriptwriters had to admit it rang false. It has become increasingly clear that the neoliberal economic plot – in an ironic echo of The Tempest itself – has whipped us into a perfect storm of extreme inequality, climate change and financial crash.

As the first model of the macroeconomy that every economics student meets, this diagram gets the privileged ‘first lick’ of the beginner’s tabula rasa, as Samuelson so gleefully put it. 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.

Scripting the play In 1947, the year before Samuelson published his iconic Circular Flow diagram, a small laissez-faire band of wannabe economic scriptwriters – including Friedrich Hayek, Milton Friedman, Ludwig von Mises and Frank Knight – gathered in the Swiss resort of Mont Pèlerin to start drafting what they hoped would one day become the dominant economic story. Inspired by the pro-market writings of classical liberals such as Adam Smith and David Ricardo they established what they called a ‘neoliberal’ agenda. Its aim, they said, was to push back hard against the threat of state totalitarianism, which was spreading fast thanks to the growing reach of the Soviet Union. But that aim gradually morphed into a hard push for market fundamentalism, and the meaning of ‘neoliberal’ morphed along with it. What’s more, when Paul Samuelson’s diagram appeared – depicting which actors were at the heart of the economy and which were pushed into the wings – it provided the perfect setting for their play.

Scriptwriting began in the late 1940s with the launch of the Mont Pelerin Society, which lives on to this day.5 But Friedman, Hayek and the other hopeful playwrights knew they might have to wait some decades before their play could be performed. They took the long view: with backing from business and billionaires, they funded university professorships and scholarships, and built an international network of ‘free market’ think tanks, including the American Enterprise Institute and the Cato Institute in Washington, DC, and the Institute of Economic Affairs in London.

Economics: the twentieth-century neoliberal story (in which we go to the brink of collapse) Staging by Paul Samuelson Script by the Mont Pelerin Society Cast, in order of appearance: 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 When the market’s invisible hand is set free to work its magic of allocative efficiency, it harnesses the self-interest of every household and business to provide all the goods and jobs that are wanted.

BUSINESS, which is innovative – so let it lead. ‘The business of business is business’ summed up Milton Friedman’s influential philosophy in the 1970s. Firms bring together labour and capital to produce novel goods and services and to maximise their profits. There is no need to look at what goes on in their factories and farms, so long as they play within the legal rules of the game.

THE COMMONS, which are tragic – so sell them off. In the 1960s, Garrett Hardin described ‘the tragedy of the commons’ in which shared resources – such as grazing land and fish stocks – tend to be over-exploited by individual users and so are depleted for all.12 Managing such resources sustainably therefore calls for government regulation or, better still, private ownership.

SOCIETY, which is non-existent – so ignore it. ‘There is no such thing as society,’ Margaret Thatcher famously declared in the 1980s. ‘There are individual men and women and there are families.’13 And it is, of course, the market that connects them, as workers and as consumers.

EARTH, which is inexhaustible – so take all you want. There will be no shortage of Earth’s resources, claimed the laissez-faire economist Julian Simon in the 1980s, if markets are permitted to do their job. A shortage of, say, copper or oil will raise its price, spurring people to...

Economics: the twenty-first-century story (in which we create a thriving balance) Staging and script: a work in progress by economic re-thinkers everywhere Cast in order of appearance: EARTH, which is life-giving – so respect its boundaries SOCIETY, which is foundational – so nurture its connections THE ECONOMY, which is diverse – so support all of its systems THE HOUSEHOLD, which is core – so value its contribution THE MARKET, which is powerful – so embed it wisely THE COMMONS, which are creative – so unleash their potential THE STATE, which is essential – so make it accountable FINANCE, which is in service – so make it serve society BUSINESS, which is innovative – so give it purpose TRADE, which is double-edged – so make it fair POWER, which is pervasive – so check its abuse

The upshot of all this? 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 – and if ever land did get a mention, it was as just another form of capital, interchangeable with all the rest.20 As a result, 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.21 It relegates ecological stresses such as climate change, deforestation, and soil degradation to the periphery of economic thought, until they become so severe that their damaging economic impacts demand attention.

Redrawing the economy as an open subsystem of the closed Earth system is the major conceptual shift introduced by ecological economists such as Herman Daly in the 1970s. And it’s a paradigm shift that has become increasingly important, given the economy’s ever-growing scale. When Adam Smith published The Wealth of Nations in 1776, there were fewer than one billion people alive and, in dollar terms, the size of the global economy was 300 times smaller than it is today. When Paul Samuelson published Economics in 1948 there were not yet three billion people on Earth and the global economy was still ten times smaller than it is today. 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.

SOCIETY, which is foundational – so nurture its connections When Thatcher declared that there is no such thing as society, it came as a surprise to many – not least to society. 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.

Community connectedness is not just about warm fuzzy tales of civic triumph,’ 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.’

It’s clear that an economy’s vibrancy depends upon the trust, norms and sense of reciprocity nurtured within society – just as every sport depends upon its players abiding by a shared set of rules.

THE MARKET, which is powerful – so embed it wisely Adam Smith’s great insight was to show that the marketplace can mobilise diffuse information about people’s wants and the cost of meeting them, thereby coordinating billions of buyers and sellers through a global system of prices – all without the need for a centralised grand plan. This distributed efficiency of the market is indeed extraordinary, and attempting to run an economy without it typically leads to short supplies and long queues. It was out of recognition of this power that the neoliberal scriptwriters put the market centre stage in their economic play. 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.

its inherent dynamics tend to widen social inequalities and generate economic instability. That is why the market’s power must be wisely embedded within public regulations, and within the wider economy, in order to define and delimit its terrain.

from Thorstein Veblen to Karl Polanyi – have long pointed out that markets (and hence their prices) are strongly shaped by a society’s context of laws, institutions, regulations, policies and culture. As Ha-Joon Chang writes, ‘A market looks free only because we so unconditionally accept its underlying restrictions that we fail to see them.’

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.

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

In the 1970s, the little-known political scientist Elinor Ostrom started seeking out real-life examples of well-managed natural commons to find out what made them work – and she went on to win a Nobel-Memorial prize for what she discovered. Rather than being left ‘open access’, those successful commons were governed by clearly defined communities with collectively agreed rules and punitive sanctions for those who broke them.38 Far from tragic, she realised, the commons can turn out to be a triumph, outperforming both state and market in sustainably stewarding and equitably harvesting Earth’s resources, as Chapters 5 and 6 illustrate.

lead author of 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.40 In effect, he sought to relegate the state to a non-speaking part in the economic play: mentioned in the storyline, seen fleetingly on stage, but permitted little action.

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. 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.

Eugene Fama’s efficient-market hypothesis – that financial markets are inherently efficient – lost credibility and has been countered by Hyman Minsky’s financial-instability hypothesis – that financial markets are inherently volatile – as we will see in Chapter 4.