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

by Kate Raworth

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. Crucially, the theory overlooks the fact that some things may be put in jeopardy when they are given a price.

Perhaps what they had accidentally uncovered was 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.

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’.

Consumption is passive. Community is active.

The most comprehensive survey yet of research into the impacts of payments to promote ecological conservation – whether to collect more litter and plant more trees or harvest less timber and catch fewer fish – finds that most of the schemes studied were unintentionally crowding out, rather than crowding in, people’s intrinsic motivation to act.

They then painted green footprints leading up to the rubbish bins and found that littering fell by 46%. No need for fines or rewards to encourage compliance: the little green footprints artfully amplified an existing social norm.

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.

from the study of ecosystems and computer networks to weather patterns and the spread of disease.

People outside economics understand complexity better?

thinkers’. A growing number of economists are thinking in systems too, making complexity economics, network theory, and evolutionary economics among the most dynamic fields of economic research. 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,

In the words of the political economist Orit Gal, ‘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’.

because we have made no provision for them in our economic theories’.21 The systems dynamics expert John Sterman concurs. ‘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’.

many major financial institutions – from the Bank of England and the European Central Bank to the US Federal Reserve – were using macroeconomic models in which private banks played no role at all: an omission that turned out to be a fatal error.

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.’

Prompted by the 2008 crash, new dynamic models of financial markets are being built. Steve Keen has teamed up with computer programmer Russell Standish to develop the first systems-dynamics computer program – aptly named Minsky – which is a disequilibrium model of the economy that takes the feedbacks of banks, debt and money seriously. As Keen told me in his characteristic style, ‘Minsky finally gives wings to the economic bird, so at last we’ll have a chance of understanding how it flies.’

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.

When Sterman first drew the carbon bathtub in 2009, global annual inflows of CO2 were 9 billion tons, compared to outflows of just 5 billion tons: it meant that annual emissions had to fall by half merely to start reducing atmospheric concentrations. If MIT students found that hard to grasp, he realised, then no doubt policymakers did as well and, ‘that means they think it’s easier to stabilize greenhouse gases and stop warming than it is’, he warned.

Instances of collapse are sometimes assumed to be rare aberrations along the path of human progress, but they have been surprisingly common.

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, and its possibilities are explored in Chapters 5 and 6. But what kind of systems-thinking economist can help to make it happen?

Rather than aiming to predict and control the economy’s behaviour, says Eric Beinhocker, a leading thinker in this field, economists should ‘think of policy as an adapting portfolio of experiments that helps to shape the evolution of the economy and society over time’.

Set up small-scale policy experiments to test out a variety of interventions, put a stop to the ones that don’t work well, and scale up those that do.

Yes, but applying systems thinking and chaos, sometimes what works positively on the small scale might be useless or destructive on a large scale. What works at a small scale in a village where everyone knows everyone breaks in the city where winners take all without consequences .

and observing the value of what was already there. In fact, she noted, effective systems tend to have three properties – healthy hierarchy, self-organisation and resilience – and so should be stewarded to enable these characteristics to emerge.

Anti-fragile?

here are 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 remaining 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 motto of no pain no gain clearly still inspires plenty of policymakers today, especially when justifying belt-tightening austerity measures that widen inequalities and hit the poorest hardest. But, as this chapter reveals, as far as the economy is concerned it’s a false belief based not on evidence, but on an erroneous yet deeply influential diagram.

Far from being a necessary phase in every nation’s progress, rising inequality is a policy choice. It is a widely damaging one at that,

While Karl Marx argued that incomes would tend to diverge, with the rich getting richer while workers were kept poor, Alfred Marshall claimed the opposite: that incomes across society would tend to converge as the economy expanded.

In the 1890s, however, the 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,

The Pareto Principle was used to justify wealth inequality because it was a pattern seen across Europe

In the 1970s, both Kuznets and Lewis won the Nobel-Memorial prize in economics for their respective theories on growth and inequality, while the World Bank treated the curve as an economic law and used it to publish projections of how long it would take for poverty levels to start falling in low- and middle-income countries.

Far from being inevitable, the Kuznets process had turned out to be avoidable: it was indeed possible to achieve growth with equity.

2009 book, The Spirit Level, they discovered that 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 erodes social capital – built on community connections, trust and norms – that underpins the collective action needed to demand, enact and enforce environmental legislation.

As I said, small experiments in economics that don't include billionaires may be doomed to succeed.

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.

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.

both eras saw a large increase in the income share of the rich, a fast-growing financial sector, and a large increase in the indebtedness of the rest of the population – culminating in financial and social crisis.

Are billionaires funded by everyone else's debt?

‘More unequal societies have slower and more fragile economic growth,’ writes Jonathan Ostry, the lead economist behind the IMF study. ‘It would thus be a mistake to imagine that we can focus on economic growth and let inequality take care of itself.’

You can't blame all of UK problems on Brexit. Austerity was its handmaiden.

As Goerner and colleagues point out, the fragility generated by such concentration is reviving appreciation for the small, diverse enterprises that make up the bulk of an economy’s network. ‘Because we have over-emphasized large-scale organisations, the best way to restore robustness today would be to revitalize our small-scale fair-enterprise root system,’

Fierce debate rose up over whether higher income taxes discouraged the high-paid from working more,

Watch Drive - the Truth About What Motivates Us, and ponder that above around £50-60k per year, money becomes meaningless as its own reward and starts to become a status symbol. Does anyone really believe that billionaires work 1000 times harder than millionaires?

higher welfare payments trapped the low-paid into not working at all.

Trapped? Only trapped if employers are unable or unwilling to pay a decent wage. Supply and Demand applies to wages too.

maximum wage too, set within each company at around 20 to 50 times its lowest earner’s wage, in order to curb excessive executive pay and ensure that corporate profits are more equitably shared amongst the workforce.

Tackling inequality at root calls for democratising the ownership of wealth, argues the historian and economist Gar Alperovitz, because ‘political-economic systems are largely defined by the way property is owned and controlled’.34

Was the Scottish Land Act that led to numerous comnunity buyouts a lot more radical than itc seemed?

George’s proposal for a land-value tax – an annual levy on underlying land values as a fair means of generating public revenue – echoed John Stuart Mill’s earlier call to tax ‘rentier landlords’ who ‘grow richer, as it were in their sleep, without working, risking, or economising’.

In the majority of cases, those deals were land grabs: signed without the free prior and informed consent of the indigenous and local communities that had inhabited and collectively stewarded that land for generations. In case after case, investors’ promises to create new jobs, enrich community infrastructure and skill-up local farmers have come to nothing:

This self-organising system worked because the farmers developed their own rules for water use, met regularly in meetings and in the fields, set up a monitoring system, and sanctioned those who broke the rules.43

Self organising working for the collective

What if, instead, central banks tackled such deep recessions by issuing new money directly to every household as windfall cash to be used specifically for paying down debts – an idea that has come to be known as ‘People’s QE’.52

Employees who turn up for work day-in, day-out are essentially cast as outsiders: a production cost to be minimised, an input to be hired and fired as profitability requires. Shareholders, meanwhile, who probably never set foot on the company premises, are treated as the ultimate insiders:

‘The digital revolution is far more significant than the invention of writing or even of printing,’ said Douglas Engelbart, the acclaimed American innovator in human–computer interaction. He may well turn out to be right. But the significance of this revolution for work, wages and wealth hinges on how digital technologies are owned and used.

have not come back because they have been replaced by software. Meanwhile, the jobs that have returned post-recession are typically menial, creating an hourglass economy that offers a few high-skill and many low-skill jobs with little in between. Analysts predict that five million jobs across 15 major economies could well be lost to automation by 2020.

the electronics manufacturing giant Foxconn, which employs around a million workers, plans to create a ‘million robot army’ and has already replaced 60,000 workers with robots in one factory alone.

switch from taxing labour to taxing the use of non-renewable resources: it would help to erode the unfair tax advantage currently given to firms investing in machines (a tax-deductible expense) rather than in human beings (a payroll tax expense).

invest far more in skilling people up where they beat robots hands-down: in creativity, empathy, insight and human contact – skills that are essential for many kinds of work,

most workers continue to earn income just from selling their labour alone, they will simply not earn enough.

The future returns to paid employment are on track to create a deeply split labour market with vast inequalities – a prospect that strongly reinforces the rationale behind the many national campaigns demanding a basic income for all.