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

by Kate Raworth

Lastly, far from playing a supporting role to the productive economy, finance has come to dominate it. In many countries, a small financial elite – based in just a handful of banking and financial firms – controls the public good of money creation and profits handsomely from it, while too often destabilising much of the wider economy in the process. It is time to turn this upside-down scenario the right way up and redesign finance so that it flows in service of the economy and society. Such

Friedman’s narrow view on the business of business has lost credibility: in the face of twenty-first-century challenges, firms need a purpose far more inspiring than merely maximising shareholder value and, as Chapter 6 illustrates, a growing number of enterprises are finding ways to give themselves one.

And 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.

In the US, private and corporate funding for elections has increased more than twentyfold since 1976, and it topped $2.5 billion during the 2012 Obama–Romney presidential race.49 Since 2005, the fossil-fuel industry alone has spent $1.7 billion in the USA on lobbying and campaign contributions, which explains their entrenched political support.

How can these four realms most effectively work together – such as the market with the commons, the commons with the state, or the state with the household? Likewise, 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?

is far easier to see some of the big questions that the twenty-first-century economist must tackle. There’s just one thing still missing and that is the play’s protagonist: humanity.

NURTURE HUMAN NATURE from rational economic man to social adaptable humans

Homo economicus may be the smallest unit of analysis in economic theory – equivalent to the atom in Newton’s physics – but, just like an atom, his composition has profound consequences. There are, most likely, going to be more than ten billion of us by 2100.

Where did this infamous character come from? His most intimate early portrait was created by Adam Smith in two major works, his 1759 Theory of Moral Sentiments and his 1776 book known as The Wealth of Nations. Today Smith is best remembered for having noted the human propensity to ‘truck, barter and exchange’ and the role of self-interest in making markets work.2 But although he believed self-interest was, ‘of all virtues that which is most helpful to the individual’, Smith also believed it was far from the most admirable of our traits, knocked off that top spot by our ‘humanity, justice, generosity and public spirit … the qualities most useful to others’. Did he consider humankind to be motivated by self-interest alone? Not at all. ‘How selfish soever man may be supposed,’ he wrote, ‘there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it.’

Alfred Marshall put it most vividly in his influential 1890 text Principles of Economics. ‘Human wants and desires are countless in number and very various in kind,’ he wrote. ‘The uncivilized man indeed has not many more than the brute animal; but every step in his progress upwards increases the variety of his needs … he desires a greater choice of things, and things that will satisfy new wants growing up in him.’8 Thus, by the end of the nineteenth century, the caricature clearly depicted a solitary man, ever calculating his utility, and insatiable in his wants.

Life imitates art Over the course of two centuries – from the 1770s to the 1970s, as economic man’s depiction morphed from a nuanced portrait to a crude cartoon – what had started as a model of man had turned into a model for man. This matters, argues economist Robert Frank, because ‘our beliefs about human nature help shape human nature itself’. Research by Frank and others has revealed, first, that the discipline of economics tends to attract self-interested people. Experimental research in Germany, for example, found that economics students were more likely than other students to be corruptible – willing to give a biased answer – if it led to a personal payout.12 Research in the US likewise found that economics majors were more approving of their own and others’ self-serving behaviour, while economics professors gave significantly less money to charity than their worse-paid colleagues in many other disciplines.13

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.

the vast majority of experimental studies, which have been conducted by academic researchers in North America, Europe, Israel and Australia, have used their own universities’ undergraduate students as their subjects. As a result, between 2003 and 2007, 96% of people studied in such behavioural experiments came from countries that were home to only 12% of the world’s population. That would be no concern if those subjects’ behaviour was representative of people everywhere. But it turns out that it is not. The few cases of research carried out in other countries and cultures reveal that those convenient-to-study university undergraduates actually behave quite differently from most people. That may well be because – unlike the vast majority of humanity – they live in WEIRD societies:

Our readiness to cooperate and to punish defectors has been most famously demonstrated in the Ultimatum Game, which has been played in many societies beyond Western, educated, industrial, rich and democratic ones. Two players – a proposer and responder who are anonymous to each other – are offered a sum of money to share, typically equivalent to two days’ earnings. The proposer suggests how to divide it and, if the responder accepts that division, they each receive their respective shares; if the responder rejects the proposal, however, they both go empty-handed. And they only get to play the game once. If, as mainstream theory assumes, people were purely self-interested then responders would accept any amount offered: to turn it down would be to reject free money. But what happens in practice? Responders typically reject proposals that they think are unfair, even if it means they walk away with no money at all.25 We humans are ready to punish others for their selfishness, even if it costs us.

This story is, of course, far from credible. Adults, like children, are by no means immune to the marketeer’s message, as Sigmund Freud’s nephew, Edward Bernays, realised in the 1920s. ‘We are governed, our minds are molded, our tastes formed, our ideas suggested, largely by men we have never heard of,’ he wrote in his book Propaganda, ‘… It is they who pull the wires which control the public mind.’27 Bernays invented the ‘public relations’ industry and rapidly became America’s master wire-puller, convincing women (on behalf of the American Tobacco Corporation) that cigarettes were their ‘torches of freedom’, while persuading the nation (on behalf of the Beech-Nut Packing Company’s pork department) that bacon and eggs were the ‘hearty’ all-American breakfast.

One telling experiment with the musical tastes of WEIRD teenagers demonstrated just how influential social norms can be. Participants were recruited – 14,000 of them – through a teen website and were invited to listen to a set of 48 songs (all unknown tunes by unknown bands) to give them a rating and then, if they wished, to download their favourites. In a control group, participants were given only the name of each band, the title of the song, and a recording of the music before they gave their ratings. In eight other separate groups, however, participants could also see how many times each tune had already been downloaded by others within their group. The outcome? Across all eight experimental groups, each song’s popularity was partly determined by its quality (as rated independently by those in the control group): the ‘best’ songs rarely did poorly and the ‘worst’ rarely did well. But a good deal of each song’s popularity was also due to social influence: the participants preferred songs that they knew others liked. And the more prominently that other participants’ ratings were displayed on the website, the more likely it was for a ‘smash hit’ to emerge within each group – but, fascinatingly, the harder it became to predict which song the hit would turn out to be.32 This kind of herd behaviour can be highly contagious and highly uncertain. And it explains the unpredictability not only of the next chart-topping song, but also of next summer’s fashion craze – not to menti...

For Veblen, one of the most pernicious effects of such social influence was the rise of what he called ‘conspicuous consumption’: the appeal of buying luxury products and services to signal our status to others in the hope of ‘keeping up with the Joneses’. Joseph Stiglitz points out that this effect is particularly concerning today in the context of high inequality, both within and between countries. There is a ‘well-documented lifestyle effect’, he notes, in which ‘people outside the top 1 percent increasingly live beyond their means. Trickle-down economics may be a chimera, but trickle-down behaviourism is very real.’34

From calculating to approximating Homo sapiens clearly can’t match the infallibility of rational economic man. That much has been agreed upon since the 1950s when Herbert Simon broke rank with his fellow economists and started to study how people actually behaved, finding their rationality to be severely ‘bounded’. His findings, augmented by those of psychologists Daniel Kahneman and Amos Tversky in the 1970s, gave birth to the field now known as behavioural economics, which studies the many kinds of ‘cognitive bias’ that systematically cause humans to deviate from the ideal model of rationality.

What to do in the face of such irrational shortcomings? Introduce nudge policies, say Richard Thaler and Cass Sunstein, which they define as ‘any aspect of the choice architecture that alters people’s behaviour in a predictable way without forbidding any options or significantly changing their economic incentives’.

‘What we need is not just better technology, bigger bureaucracy and stricter laws … but risk-savvy citizens.’ And he has demonstrated that 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 learn to be risk-savvy with the rule of thumb and so choose to act wisely ourselves.39 It’s an appealing and empowering approach, but 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 200 years. Take the devastating effects of climate change, for example: at first they tend to be invisible, delayed, gradual and distant: four characteristics that our heuristic decision tools are infamously bad at handling well.

Rather than presiding at the pinnacle of nature’s pyramid, however, humanity is woven deep into nature’s web. We are embedded in the living world, not separate from or above it: we live within the biosphere, not on the planet.

This shift in perspective – from pyramid to web, from pinnacle to participant – also invites us to move beyond anthropocentric values and to recognise and respect the intrinsic value of the living world. ‘What’s really needed,’ suggests the thinker Otto Scharmer, ‘is a deeper shift in consciousness so that we begin to care and act, not just for ourselves and other stakeholders but in the interests of the entire ecosystem in which economic activities take place.’

‘Markets are not mere mechanisms; they embody certain values. And sometimes, market values crowd out nonmarket norms worth caring about.’

A similar experiment among people living with HIV/AIDS in Kenya found that a weekly text message likewise led to 25% more of them strongly adhering to their course of antiretrovirals.59 No money sent, just a simple text.

Such effects work on a local scale too. Researchers in West Bengal, India found that when women started being appointed to lead village councils for the first time, local teenage girls began to have higher aspirations for their education and themselves, as did their parents. No prices, no payments, just pride.

These small-scale examples of tapping into people’s values are compelling, but some might dismiss their successes as inherently incremental, merely tweaking at the margins of humanity’s grand challenges. Tom Crompton and Tim Kasser, experts in environmental values, attitudes and behaviour, would disagree. They argue that 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.

Their research finds that people in whom self-enhancing values and extrinsic motivations have come to predominate tend to seek wealth, possessions and status. They are also less likely to care about the living world, to make an effort to cut their ecological footprint, to use public transport, or to recycle household waste. Moreover, when faced with environmental threats – such as the prospects of climate change – they are more likely to seek diverting distractions which might further raise the pressure on the planet. In contrast, people in whom self-transcending values and intrinsic motivations have come to dominate express greater concern about ecological issues and are more motivated to get involved in local action or global movements that proactively engage with the issues at hand.65 The challenge now is to discover how lessons from street-level success with sweet wrappers and text messages could be scaled up to nudge and network whole cities, nations, and international negotiations, into the Doughnut.

But, thanks to the lasting influence of Jevons and Walras, 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. In a playful ‘look back from 2050’ the economist David Colander recounts that, by 2020, the majority of scientists – from physicists to biologists – had already realised that complexity thinking was essential for understanding much of the world. Economists, however, were a little slower on the uptake and it was not until 2030 that ‘most economic researchers believed that the economy was a complex system that belonged within complexity science’.

Less fun but almost as frequent are asset bubbles in which the price of a stock builds higher and higher before it ultimately bursts. The name of that phenomenon originated with the South Sea Bubble of 1720, an event that the great Sir Isaac Newton forbade to be mentioned in his presence ever after. In March of that year, the price of shares in the South Sea Company – which had been granted a British monopoly on trading with South American colonies – began to rise fast as false rumours of its successes abroad started to spread. Newton had already bought a few shares in the company and so in April he cashed them in for a large profit. But the South Sea stock price kept on rising fast and so, swept along by the nation’s enthusiasm, Isaac couldn’t resist the market’s lure. He jumped back in at a much higher price in June – just two months before the bubble finally peaked and burst. Newton lost his life savings as a result. ‘I can calculate the movement of stars, but not the madness of men,’ he famously said in the bubble’s aftermath.24 The master of mechanics had been confounded by complexity.

economist Steve Keen – one of the few who did see a crash coming – pithily put it, ‘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.’25

Anyone who has played the board game Monopoly is well versed in the dynamics of Success to the Successful: players who are lucky enough to land on expensive properties early in the game can buy them up, build hotels, and reap vast rents from their fellow players, thus accumulating a winning fortune as they bankrupt the rest. Fascinatingly, however, the game was originally called ‘The Landlord’s Game’ and was designed precisely to reveal the injustice arising out of such concentrated property ownership, not to celebrate it.

ROADS has been highly valuable for running role-plays of international climate negotiations over the past decade, often with real policymakers. Seeking to recreate the power dynamics at play, the C-ROADS team offer those representing powerful countries a literal seat at the table which is loaded with plentiful snacks, whilst leaving least developed country representatives to sit on the floor. So when the President of Micronesia took part in a role-play in 2009, he duly insisted on taking his place on the floor. As the mock negotiations got under way and the major powers made their usual inadequate pledges, the simulated sea level rose by one metre. So the C-ROADS team duly covered up all those on the floor – including the Micronesian President – with a big blue sheet. ‘He was thrilled,’ recounted Sterman, ‘because for the first time people saw what the implications of sea level rise would be.’41 Without understanding or experiencing the effects of stock and flow dynamics, we have little chance of recognising the speed and scale of energy transformation required to bring ourselves back within the planetary boundary for climate change.

That question was most famously explored in the 1972 study Limits to Growth, whose team of authors based at MIT created one of the first dynamic computer models of the global economy, known as World 3.

These are ideal conditions for driving ourselves towards collapse. If we are to avoid such a fate for our global civilisation, we clearly need a transformation and it can be summed up like this: Today’s economy is divisive and degenerative by default. Tomorrow’s economy must be distributive and regenerative by design.

Italian engineer-turned-economist Vilfredo Pareto stepped back from theoretical debate and searched for a pattern in the data. Having gathered income and tax records from England and from German states, from Paris and Italian towns, he plotted them on a graph and saw a curiously striking pattern emerge. In each case, he found, around 80% of national income was in the hands of just 20% of people, while the remaining 20% of income was spread among 80% of people. Pareto was delighted: he appeared to have discovered an economic law, which is still known today as Pareto’s 80–20 rule. What’s more, he argued, the steep ‘social pyramid’ that his data had repeatedly revealed must be a fixed fact of human nature, making attempts at redistribution counterproductive. The way to help the worst off was to expand the economy, he concluded, and the wealthy were best placed to make that happen.

It was, however, the economist 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. He then scoured old tax records from Europe and the US to compare the growth trend of these different sources of income and concluded that Western economies – and others like them – are on track for dangerous levels of inequality. Why? Because 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

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

Imagine, for starters, if central banks were to take back the power to create money and then issue it to commercial banks, while simultaneously requiring them to hold 100% reserves for the loans that they make – meaning that every loan would be backed by someone else’s savings, or the bank’s own capital. It would certainly separate the role of providing money from the role of providing credit, so helping to prevent the build-up of debt-fuelled credit bubbles that burst with such deep social costs.

Complementary currencies are not only for the cash-poor. Take St Gallen, a wealthy Swiss city that introduced time banking in 2012 in order to provide more care for elderly people. Its scheme, Zeitvorsoge, literally meaning ‘time-provision’, invites every citizen over the age of 60 to earn care-time credits by helping a local elderly resident with everyday tasks such as shopping and cooking, while also keeping them company. This makes it an ideal way for senior citizens to build up a ‘time pension’ to cover their own future needs for care and companionship. Zeitvorsoge distributes an initial stock of care-time credits –

Human-niche work for some and a guaranteed income for all would make a smart start to handling the rise of the robots but it would leave low-wage workers and the workless forever lobbying to maintain such high levels of redistribution year on year. Far more secure is for every person to have a stake in owning the robot technology itself. What might that look like? Some advocate a ‘robot dividend’, an idea inspired by the Alaska Permanent Fund, which grants every Alaskan citizen, through a state constitutional amendment, an annual slice of the state’s income arising from the oil and gas industry, a dividend that exceeded $2,000 per resident in 2015.76

Who owns the ideas? The international regime of intellectual property rights has significantly shaped the control and distribution of knowledge for hundreds of years. It’s a story that began innocently enough in the fifteenth century, when Venice started awarding its famed glass-blowers 10-year patents to protect their novel creations from imitators. Show us how you made it, promised the law, and no one is permitted to copy you for a decade. It was a clever way for the city state to reward ingenuity, but as Venetian artisans emigrated, they took their demands for patents with them, so spreading the practice across Europe and across industries.

Marcin Jakubowski, physicist and Missourian farmer, who – frustrated by the extortionate cost of farm machinery that kept breaking down – decided to build his own, while sharing his ever-improving designs online for free. His idea soon grew into the Global Village Construction Set, which aims to demonstrate step-by-step how to build from scratch 50 universally useful machines, from tractors, brick makers and 3D printers to sawmills, bread ovens and wind turbines. The designs have so far been recreated by innovators in India, China, the US, Canada, Guatemala, Nicaragua, Italy and France. Based on these successes, Jakubowski and his collaborators have since launched the Open Building Institute, which aims to make open-source designs for ecological, off-grid, affordable housing available to all.81

Our new concept of scale is about distributing economic power far and wide.’

First, invest in human ingenuity by teaching social entrepreneurship, problem-solving and collaboration in schools and universities worldwide: such skills will equip the next generation to innovate in open-source networks like no generation before them. Second, ensure that all publicly funded research becomes public knowledge, by contractually requiring it to be licensed in the knowledge commons, rather than permitting it to be locked away under patents and copyright for private commercial gain. Third, roll back the excessive reach of corporate intellectual property claims in order to prevent spurious patent and copyright applications from encroaching on the knowledge commons.

Where high-income countries have broken their promise of financial redistribution, global migrants have stepped in. Out of their earnings, the remittances they send to their families back home are now the single largest source of external finance in many low-income countries, outstripping both ODA and foreign direct investment. Those worker remittances constitute around 25% of GDP in countries like Nepal, Lesotho and Moldova, and are a vital source of resilience during domestic economic and humanitarian crises.87 That makes migration one of the most effective ways of reducing global income inequality.

Kenya has been a trailblazer in mobile banking since launching its M-PESA mobile money service in 2007. Within six years, three quarters of all Kenyan adults had used the service, including 70% of those in rural areas, and – astonishingly – over 40% of Kenya’s GDP was passing through M-PESA.88 Worldwide, 5.5 billion people are expected to be using mobile phones by 2018, and mobile banking will come as part of the package.89 In essence, it will soon be feasible to create a phone book of the world’s ‘bottom billion’ and to text digital cash directly to them.

Contrary to concerns that a guaranteed basic income would make people lazy or even reckless, cross-country studies of cash transfer schemes show no such effect: if anything, people tend to work harder and seize more opportunities when they know they have a secure fallback.90 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?’

How could additional funds – on top of 0.7% ODA – be raised in the spirit of global redistribution? Through a global tax on extreme personal wealth, for starters. There are now more than 2,000 billionaires living in 20 countries from the USA, China and Russia to Turkey, Thailand and Indonesia.93 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. ‘The great task of the twenty-first century,’ writes the ecological thinker Peter Barnes, ‘is to build a new and vital commons sector that can resist enclosure and externalization by the market, protect the planet, and share the fruits of our common inheritances more equitably than is now the case.’

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. Instead of focusing on redistributing income alone, 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.