Doughnut Economics

In the early pages of Doughnut Economics, the author (Kate Raworth) quotes esteemed 20th century statistician George Box: “All models are wrong, but some of them are useful.” She then goes on to explain the application of the quote by saying:

Rethinking economics is not about finding one (a model) because it doesn’t exist; it’s about choosing or creating one that best serves our purpose - reflecting the context we face, the values we hold and the aims we have. As humanity’s values, context and aims continually evolve, so too should the way we envision the economy.

The term economics can be traced back to the ancient Greek philosopher Xenophon who defined it as the practice of household management. It wasn’t for another 2000 years or so, that the scientific element would be added to the context of the word. Just 40 years after the death of Issac Newton, as the world raced to apply scientific logic to all aspects of everyday life, Scottish lawyer John Stuart first proposed the idea of a “political economy” and defined it as:

The principle object of this science is to secure a certain fund of subsistence for all the inhabitants, to obviate every circumstance which may render it precarious; to provide everything necessary for supplying the wants of society, and employing the inhabitants (the free ones) in such a manner as naturally to create reciprocal relations and dependencies between them; so as to make their several interests lead them to supply one another with reciprocal wants.

In the decades to follow, economic philosophers of the 18th and 19th centuries like Adam Smith and John Stuart Mill would go on to define the parameters of the political economy we know today. Their complex theories were simplified for the masses through the works of economists and educators such as Paul Samuelson; who broke down the science behind economics and made it fascinatingly simple for any mind to understand through the use of visual aides like charts and graphs. His 1948 textbook Economics, made for MIT engineering students after WWII went on to be one of the most successful text books of all time. It framed the concepts for so many young minds that Samuelson was known to relish the opportunity to mold young minds. “The first lick is the privileged one, impinging on the beginner’s tabula rasa at it’s most impressionable state.” If you’ve taken an introductory economics class, chances are you’ve used some iteration of Mr. Samuelson's textbook.

Paul’s textbook and all of those to follow were invaluable to the expansion of economic theory; his brilliant use of visual framing to illustrate the laws of economics was a game changer. But did this framing ultimately have a negative impact? Visual framing is powerful because is easy for everyone to understand, but what if the frames are wrong? What if our understanding of the economy is based on outdated information? When we look at the disgraceful inequality of wealth, the decimation of our natural environment, a billion people that don’t have enough food - maybe it’s time to take an honest look at those questions, and look at options for a better way to move forward. That’s exactly what Kate’s book does for us; with 7 ways to think like a 21st century economist.

Change the Goal: From GDP to the Doughnut

Gross Domestic Product has been the primary metric of progress and success in our economy for the better part of 7 decades. But our tunnel vision on GDP growth has caused us to lose sight of the economy’s true purpose and potential. While there are many correlations between quality of life and economic growth - even Simon Kuznets himself, creator of the measure of national income warned “the welfare of a nation can scarcely be inferred from a measure of national income.” Growth has its limits, as a mantra for the distribution of resources and in terms of how long it can go on before we cross a threshold from which we cannot return. A more sustainable and encompassing guide to economic success starts by asking the question: what enables human beings to thrive? The answers are found within the doughnut. The doughnut is way to transition from growth for the sake of growth to providing for every person’s needs while protecting the planet we call home. “Below the doughnuts social foundations lie shortfalls in human well-being, faced by those who lack life’s essentials such as food, education and housing. Beyond the ecological ceiling lies an overshoot of pressure on Earth’s life-giving systems such as climate change, ocean acidification and chemical pollution. But between these two sets of boundaries lies a sweet spot - shaped unmistakably like a doughnut - that is both an ecologically safe and socially just space for humanity." (pg 39)

The Doughnut

See the Big Picture: From Self Contained Market to Embedded Economy

Mainstream economics depicts the whole economy in a single image - the circular flow diagram. To its credit, the diagram was the first attempt to view the economy as a whole. But while it accurately depicts the flow of goods & services, labor & capital, wages & profit and consumer spending between households and business; it fails to address the energy and materials on which the economy depends and the social context in which it exists. The neoliberal script of the mid to late 20th century gave free rein to the market, business, finance and trade while it marginalized things like the state, the household, energy, the commons (society) and the well-being of the planet. Instead of viewing the economy as a unilateral entity with domain over all, it must be thought of as a tool that’s embedded within nature, partnered with the state, fueled by trade, serviced by finance and exists to improve society in general. If the 21st century economy were to be viewed as a play, the cast should look something like this:

  • Earth; which is living, so respect its boundaries

  • Society; which is fundamental 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

  • Trade; which is double-edged, so make it fair

  • Power; which is pervasive, so check its abuse

Nurture Human Nature: From “rational economic man” to social adaptable humans

Scientific disciplines such as physics and chemistry have been so successful in helping to understand the ways of the universe partly because of their ability to accurately identify variable components of reality in mathematical representations. When economic minds of the early 20th century applied the same logic to the economy, they came up with the “rational economic man.” A self-interested, isolated, calculating, fixed in taste and dominant over nature portrait of human beings became the centerpiece of economic theory was painted in an effort to simplify complex equations and predict behavior. The problem is, this rational economic man is far from an accurate description of what humans are really like. 21st century humans are social, interdependent, approximating, fluid in values and dependent upon nature. While the monotonous rational economic man may create more symmetrical economic equations, it is not a fair representation of our economic realities. It's time to redraw the entity at the heart of economic theory (humans) as people who thrive by connecting with each other; and within the living planet we call home.

Get Savvy With Systems: From mechanical equilibrium to dynamic complexity

“Say farewell to economy-as-machine and embrace economy-as-organism. Let go of the imaginary controls that promised to pull markets into equilibrium and instead, get a pulse of the feedback loops that keep them continually evolving.” (pg 133-134) The economy is not a stable, mechanical system populated by a “rational economic man” that can be controlled with simple levers like adjusting interest rates or printing more money. It’s a complex, adaptive system that’s made up of irrational humans who are dependent on the dynamic, living planet we call home. We need to embrace the always-evolving system that is our economy and understand that we can’t control what happens, but we can design (and redesign) the parameters that define it. “We can listen to what the system tells us, and discover how its properties and or values can work together to bring forth something much better than can ever be produced by our will alone.” Donella Meadows

Design to Distribute: From ‘growth will even it up’ to distributive by design

The Kuznets Curve

The iconic Kuznets Curve offers a powerful message on inequality: it has to get worse before it gets better; but growth will eventually make it all better (the idea that “growth will fix it” is applied to several economic problems, maybe most egregiously so to financial inequality). But it turns out this long held belief might not be true. In 2014, economists at the IMF begrudgingly noted that despite evidence to the contrary, “the notion of trade off between redistribution and growth seems deeply embedded in policy makers’ consciousness.” Why does inequality matter? The 2009 book, The Spirit Level, points out that countries with higher inequality have higher levels of teenage pregnancy, mental illness, drug use, obesity, prisoners and high school dropouts; and lower levels of community, life expectancy, trust and status for women. Starving portions of the population of the money and resources they need to lead full lives not only amplifies the strain on social welfare programs, but dampens those people’s ability to be productive members of an economy. “Rather than wait for growth to deliver greater equality, 21st century economists will design distributive flow into the very structure of economic interactions from the get-go.” (pg 173)

Create to Regenerate: From ‘growth will clean it up’ to regenerative by design

Once again classical economic thinking has bestowed upon us the eternal knowledge that growth will fix everything. In this case, the environmental Kuznets Curve indicates that after an initial phase of deterioration, growth will eventually lead to cleaner economic development. But once again, this no pain no gain mentality is wrong. The time has come to relinquish the search for economic laws that paint a picture of the results we desire; and rather find real solutions that deliver the results we need. To do so, we must re-frame our understanding of the word value. “Economic value lies not in the through-flow of products and services but in the wealth that is their recurring source.” (pg 189) Protecting that source of economic value means weaving regenerative design into corporate ecology and replacing linear material flows with circular systems of resource management; cradle to cradle over cradle to grave. It’s time for economists to join the architects, industrial ecologists and designers that are spearheading the regenerative design revolution; and “design the economic policies and institutional innovations -for enterprise and finance, for the commons and the state - that will unleash the extraordinary potential of the circular economy and regenerative design.” (pg 205)

Be Agnostic About Growth: From growth addicted to growth agnostic

The status quo of mainstream economic theory is that never ending growth is a must. But this is an unrealistic concept, nothing natural grows forever. When growth is the primary metric by which we gauge economic progress we lose sight of why we created an economy in the first place - human prosperity. But giving up on growth is easier said than done because we’re addicted to it.

“The mechanism which the motive gain set in motion, was comparable in effectiveness only to the most violent outburst of religious fervor in history. Within a generation, the whole human world was subjected to its undiluted influence”

said economist Karl Polanyi in the 1940’s as he eloquently points out that the pursuit of gain opened the door to endless accumulation. The idea of gain is built into our culture, our politics and of course our economics, it can’t just be yanked out of planning without disastrous consequences. That’s why we need to be agnostic about it; “by agnostic I do not mean simply not caring whether GDP growth is coming or not, nor do I mean refusing to measure whether its happening or not. I mean agnostic in the sense of designing an economy that promotes human prosperity whether GDP is going up, down or holding steady.” (pg 209)

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