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

by Kate Raworth

The Austrian economist Friedrich von Hayek, best known as the 1940s father of neoliberalism, disagreed violently with Keynes on almost all questions of theory and policy, but on this matter they concurred. In 1974 when Hayek was awarded that Nobel-Memorial prize, he accepted it with the remark that, had he been consulted on its creation, he would have advised against it. Why? Because, he told the assembled crowd, ‘the Nobel Prize confers on an individual an authority which in economics no man ought to possess’, particularly, he said, because, ‘the influence of the economist that mainly matters is an influence over laymen: politicians, journalists, civil servants and the public generally’.

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.

Though claiming to be value-free, conventional economic theory cannot escape the fact that value is embedded at its heart: it is wrapped up with the idea of utility, which is defined as a person’s satisfaction or happiness gained from consuming a particular bundle of goods.9 What’s the best way to measure utility? Leave aside for a moment the catch that billions of people lack the money needed to express their wants and needs in the marketplace, and that many of the things we most value are not for sale. Economic theory is quick – too quick – in asserting that the price people are willing to pay for a product or service is a good enough marketplace proxy for calculating their utility gained. Add to this the apparently reasonable assumption that consumers always prefer more to less, and it is a short step to concluding that continual income growth (and therefore output growth) is a decent proxy for ever-improving human welfare. And with that, the cuckoo has hatched.

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 – when the US Congress first commissioned economist Simon Kuznets to devise a measure of America’s national income. The calculation he made came to be known as Gross National Product, and was based on the income generated worldwide by the nation’s residents. For the first time, thanks to Kuznets, it became possible to put a dollar value on America’s annual output and hence its income – and to compare it to the year before. That metric proved to be extremely useful, and it fell into welcoming hands. During the Great Depression, it enabled President Roosevelt to monitor the changing state of the US economy and so assess the impact and effectiveness of his New Deal policies. A few years later, as the country prepared to enter the Second World War, the data underlying the GNP accounts proved invaluable for converting its competitive industrial economy into a planned military one, while sustaining enough domestic consumption to keep generating further output.10 Other reasons were soon put forward for pursuing a growing GNP, and similar national accounts were created internationally, so that by the end of the 1950s, output growth had become the overriding policy objective in industrial countries. Eyeing the rise of the Soviet Union, the USA pursued growth for national security th...

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 ‘Why is she so down? Because she faced a setback then hit an all-time low,’ we might say – or, ‘Things are looking up: her life is moving forwards again.’ No wonder we have so willingly accepted that economic success must also lie in an ever-rising national income. It fits with the deep belief, as Paul Samuelson put it in his textbook, that ‘even if more material goods are not themselves most important, nevertheless, a society is happier when it is moving forward.’14 What would this vision of success look like if drawn on the page? Curiously, economists rarely actually draw their adopted goal of economic growth (in Chapter 7, we’ll return to see why that is). But if they did, the image would be an ever-rising line of GDP: an exponential growth curve moving forwards and upwards across the page, chiming perfectly with our favourite metaphor for human and personal progress. Kuznets himself, however, would not have chosen this as the picture of economic progress because he was well aware of the limits of his ingenious calculations from the outset. Emphasising that national income captured only the market value of goods and services produced in an economy, he pointed out that it therefore excluded the enormous value of goods and services pr...

And so over half a century, GDP growth shifted from being a policy option to a political necessity, and the de facto policy goal. To enquire whether further growth was always desirable, necessary, or indeed possible, became irrelevant, or political suicide. 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.’ In response to the constant call for more growth, she argued, we should always ask: ‘growth of what, and why, and for whom, and who pays the cost, and how long can it last, and what’s the cost to the planet, and how much is enough?’16 For decades mainstream economists dismissed her views as foolishly radical, but they actually echo those of Kuznets, the hallowed creator of national income itself. ‘Distinctions must be kept in mind,’ he advised back in the 1960s, ‘between quantity and quality of growth, between its costs and return, and between the short and the long term … Objectives should be explicit: goals for “more” growth should specify more growth of what and for what.’

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. But this century calls for quite a different shape and direction of progress. At this point in human history, the movement that best describes the progress we need is coming into dynamic balance, by moving into the Doughnut’s safe and just space, eliminating both its shortfall and overshoot at the same time. That calls for a profound shift in our metaphors: from ‘good is forward-and-up’ to ‘good is in-balance’. And it shifts the image of economic progress from endless GDP growth to thriving-in-balance in 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.

It is also why, whenever I hear someone praising the ‘free market’, I beg them to take me there, because I’ve never seen it at work in any country that I have visited. Institutional economists – 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.’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

Garrett Hardin’s description of the commons as ‘tragic’ – which fitted so neatly into the neoliberal script – arose from his belief that, if left as open access to all, then pastures, forests and fishing grounds would inevitably be overused and depleted. He was most probably right about that, but ‘open access’ is far from how successful commons are actually governed. 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. 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. It is a transformation made possible, argues the economic analyst Jeremy Rifkin, by the ongoing convergence of networks for digital communications, renewable energy and 3D printing, creating what he has called ‘the collaborative commons’. What makes the convergence of these technologies so powerfully disruptive is their potential...

The extraordinary success of tech companies like Apple is sometimes held up as evidence of the market’s dynamism. But Mariana Mazzucato, an expert in the economics of government-led innovation, points out that 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 this trend holds across other high-tech industries too, such as pharmaceuticals and biotech.42 In the words of Ha-Joon Chang, ‘If we remain blinded by the free market ideology that tells us only winner-picking by the private sector can succeed, we will end up ignoring a huge range of possibilities for economic development through public leadership or public-private joint efforts.’43 Such state leadership is now needed worldwide to catalyse public, private, commons and household investments in a renewable energy future.

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.

Despite their current rhetoric of ‘free trade’, when it comes to trade negotiations almost all of today’s high-income countries – including the UK and the US – took the opposite route to ensure their own industrial success, opting for tariff protection, industrial subsidies and state-owned enterprises when it was nationally advantageous. And today they still keep tight control over their key traded assets such as intellectual property.47

Since the 1980s the social psychologist Shalom Schwartz and colleagues have surveyed people of all ages and backgrounds in over 80 countries, identifying ten clusters of basic personal values that are recognised across cultures: self-direction, stimulation, hedonism, achievement, power, security, conformity, tradition, benevolence and universalism. When it comes to nurturing human nature, three things stand out in their findings. First, all ten basic values are present in us all, and each one of us is motivated by their full array, but to widely differing degrees that vary between cultures and individuals. Power and hedonism, for example, may predominate for some people, while in others benevolence and tradition prevail. Second, 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. Third, and most interestingly, 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.

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 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.35 At the same time, it may be possible to harness such interdependence for behavioural change, as we will see.

But 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. That is especially true when it comes to relationships that we have traditionally managed with our morals. Here’s why. Setting a price is like striking a match: it sparks intense interest but that spark ignites both power and danger. As Chapter 2 suggested, the market – like fire – can be extremely efficient at doing what it does, but it can also be a challenge to contain. And if it becomes all-consuming, it may transform the very ground across which it burns. Richard Titmuss first raised this concern in his 1970 book, The Gift Relationship, which contrasted the blood donor service in the US, 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? This question has only become more pertinent since Titmuss’s study, given the growing international use of cash incent...

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 – 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.’

‘Just as landlords were the archetypal rentiers of their agricultural societies,’ writes economist Michael Hudson, ‘so investors, financiers and bankers are in the largest rentier sector of today’s financialized economies.’

States could also transform the distributive impact of monetary policy measures used during recessions. In mild recessions, central banks normally seek to boost the money supply by cutting interest rates in order to stimulate commercial bank lending and hence money creation. In deep recessions, however, once interest rates have already been cut very low, central banks attempt to further boost the money supply by buying back government bonds from commercial banks – a practice known as quantitative easing, or QE – in the hope that the banks will then seek to invest the extra money in expanding productive businesses. But as post-financial-crash experience demonstrated, commercial banks used that extra money to rebuild their own balance sheets instead, buying speculative financial assets like commodities and shares. As a result, the price of commodities such as grain and metals rose, along with the price of fixed assets like land and housing, but new investments in productive businesses didn’t.51 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 Rather than inflating the price of bonds, which tends to benefit wealthy asset owners, this approach – which resembles a one-off tax rebate for all – would benefit indebted households. Additionally, suggests the tax expert Richard Murphy, central banks could c...

Stagnant wages have become a familiar story. Over the past three decades, the majority of workers across high-income countries have seen their wages barely increase, flatline, or even fall while executive pay has ballooned. In the UK, GDP has grown far faster than the average worker’s wages since 1980, and the wage gap has widened too, resulting in the average worker earning 25% less than they otherwise would have done by 2010.61 In the US, the years 2002–12 have been dubbed ‘the lost decade for wages’: while the economy’s productivity grew by 30%, wages for the bottom 70% of workers were stagnant or in decline.62 Even in Germany – where trade unions have far greater influence over industrial policy – the share of wages in national output fell from 61% of GDP in 2001 to just 55% by 2007, its lowest level in five decades.63 Indeed, across all high-income countries, while workers’ productivity grew by over 5% from 2009 to 2013, their wages rose just 0.4%.64 At the heart of this inequity lies a simple design question: who owns the enterprise, and so captures the value that workers generate? When the founding fathers of economics disagreed over how income would be distributed between labour, landlords and capitalists, they could all agree on one thing: that these were obviously three distinct groups of people. In the midst of the industrial revolution – when industrialists issued shares to wealthy investors while hiring penniless workers at the factory gate – that was a fair a...

One unlikely financial rethinker who is taking on this design task is John Fullerton, a former managing director at JP Morgan. He walked away from Wall Street in early 2001 on an instinct that something was profoundly wrong with the way it worked and he started reading widely. Gradually, he says, ‘I came to the understanding that the economic system is actually the root cause of the ecological crisis, and that finance is what drives the economic system. So as a twenty-year finance veteran hotshot, I had some rethinking to do.’51 Starting with eight key principles that he believes underpin all complex living systems – including: taking a holistic view of wealth; being in ‘right relationship’; and seeking balance – Fullerton began using them to design what he calls ‘regenerative finance’ with the aim of creating finance that is in service to life. When finance is in ‘right relationship’ with the whole economy, he explains, it will no longer be driving it, but rather supporting it by turning savings and credit into productive investments that deliver long-term social and environmental value. That means, first, that the global financial system as we know it needs to shrink, simplify, diversify and deleverage – a transformation that will make it more resilient in the process, rather than ever-prone to speculative bubbles and crashes. Policies for heading in that direction, suggests Fullerton, include: separating customers’ deposit accounts from the speculative activities of sec...

Governments have historically opted to tax what they could, rather than what they should, and it shows. Tax windows and you’ll get dark houses, as Britain discovered in the eighteenth and nineteenth centuries; tax employees and you’ll head for a jobless economy, as many countries are discovering today. It is happening in part thanks to the twentieth century’s legacy of perverse tax policies, which charge firms for hiring humans (through payroll taxes), subsidise them for buying robots (through tax-deductible capital investments), and levy next to nothing on the use of land and non-renewable resources. In 2012, over 50% of tax revenue raised in the EU came from taxing labour; in the United States, the percentage was even higher.55 It’s no surprise that industry’s response has been to focus on increasing labour productivity – output per worker – by replacing as many workers as possible with automatons. The long-advocated switch from taxing labour to taxing non-renewable resources can be boosted by subsidies for renewable energy and resource-efficient investments. Such measures would refocus industry’s attention away from raising labour productivity and towards raising resource productivity, dramatically reducing the use of new materials and creating jobs at the same time. Refurbishing buildings instead of demolishing them and building again from scratch, for example, typically generates more jobs, comparable energy consumption, and far less use of water and new materials.56 ...

The last two centuries of extraordinary economic growth in high-income countries are largely due to the availability of cheap fossil fuels. It makes sense when you break it down: the energy contained in a single gallon of oil is equivalent to 47 days of hard human labour, making current global oil production equivalent to the daily work of billions of invisible slaves.37 What then are the implications for GDP in the post-fossil-fuel future that we must create? ‘We have to anticipate the possibility that economic growth will slow down or even turn negative,’ warn Ayres and Warr. ‘In short, future GDP growth is not only not guaranteed, it is more than likely to end within a few decades.’38 What, though, of the promise of renewable energy? Its price may be falling fast but – like all stocks in a system – solar, wind and hydro capacity take time to install. Many in the prepare-for-landing crowd believe it cannot be installed fast enough to match the economy’s demand for energy, especially if fossil fuels are phased out at the speed required. What’s more, in comparison to the easy-to-access oil, coal and gas reserves of the twentieth century, a far larger proportion of renewable energy that is generated must be used by the energy industry itself simply to generate more – as is the case for energy from sources such as shale gas and tar sands. Some analysts believe the economic implications are stark. ‘It is time to re-examine the pursuit of economic growth at all costs,’ conclud...

A wide array of online products and services like software, music, education and entertainment are already available almost for free because, thanks to the Internet, they can be created and reproduced at near-zero marginal cost. Analysts such as Jeremy Rifkin believe that today’s emerging horizontal networks of renewable energy generation and 3D printing are set to amplify this trend. If they do, it could result in a great deal of economic value that was once sold at a profit in the marketplace being shared for low or no cost in the collaborative commons. The sharing economy is also growing, in which the culture of ownership – with every household equipped with its own washing machine and car – is giving way to a culture of access, with households sharing laundry facilities and renting cars by the hour from a local car club. Rather than go shopping for new clothes, books and children’s toys, a growing number of people are swapping – or ‘swishing’ – them with friends and neighbours.41 In such an economy, plenty of economic value will still be generated through the products and services that people enjoy, but far less of that total value will flow through market transactions. The implication of these various trends for GDP growth? ‘The steady decline of GDP in the coming years,’ concludes Rifkin, ‘is going to be increasingly attributable to the change-over to a vibrant new economic paradigm that measures economic value in totally new ways.’42 It’s an intriguing point, but do...

Let’s revisit that conundrum we find ourselves facing: We have an economy that needs to grow, whether or not it makes us thrive. We need an economy that makes us thrive, whether or not it grows.

Society is also said to be addicted to GDP growth because it eases the tension of wide social inequalities. An ever-growing GDP is often claimed to be essential because it creates a ‘positive sum economy’ in which everyone can become better off.69 When the economic pie is growing, the argument goes, the wealthy are more likely to accept redistributive taxes that invest in public services because it can be done without cutting into their take-home income. Others, however, believe continual GDP growth is essential for the very opposite reason: because it serves to permanently defer the need for redistribution. In the words of Henry Wallich, governor of the US Federal Reserve in the 1970s, ‘Growth is a substitute for equality of income. So long as there is growth there is hope, and that makes large income differentials tolerable.’70

If Bernays were here and willing to help try creating or recovering a similar sense of material sufficiency in WEIRD societies, which deep human values would he attempt to trigger? What might we aspire to instead, if not more possessions? ‘Wherever and whenever we are excessive in our lives it is the sign of an as yet unknown deprivation,’ argues the psychoanalyst Adam Phillips. ‘Our excesses are the best clue we have to our own poverty, and our best way of concealing it from ourselves.’72 When it comes to consumerism, perhaps the poverty that we aim to conceal lies in our neglected relationships with each other and with the living world. The psychotherapist Sue Gerhardt would certainly agree. ‘Although we have relative material abundance, we do not in fact have emotional abundance,’ she writes in her book, The Selfish Society. ‘Many people are deprived of what really matters.’

There are many views on what really matters to us in life – from using our talents and helping others, to standing up for what we believe in. Drawing on a wide array of psychological research, the New Economics Foundation has distilled the findings down to five simple acts that are proven to promote well-being: connecting to the people around us, being active in our bodies, taking notice of the world, learning new skills, and giving to others.74 Perhaps these are first steps towards the kind of moral and social progress that Mill was imagining as he looked forward to a time when people who were no longer engrossed in the art of getting on would aspire instead to the art of living.

The twenty-first-century task is clear: to create economies that promote human prosperity in a flourishing web of life, so that we can thrive in balance within the Doughnut’s safe and just space. It starts with recognising that every economy – local to global – is embedded within society and within the living world. It also means recognising that the household, the commons, the market and the state can all be effective means of provisioning for our many needs and wants, and they tend to work best when they work together. By deepening our understanding of human nature we can create institutions and incentives that reinforce our social reciprocity and other-regarding values, rather than undermine them. Once we accept the economy’s inherent complexity, we can shape its ever-evolving dynamics through smart stewardship. That opens up the possibility of turning today’s divisive and degenerative economies into ones that are distributive and regenerative by design. And it invites us to become agnostic about growth, creating economies that enable us to thrive, whether or not they are growing.