Modern economics
Economics is stupid, remember? It is modeled on ridiculous assumptions like perfectly rational egotistical actors, or efficient and fully transparent markets. It exists in an intellectual bubble where even the most relevant developments made in other fields are dismissed as mere “externalities” unworthy of recognition within economic theory. And it simply does not work, because it provides economists with almost no capability to predict the future development of a market or society, to calculate the effect of a new policy, or to prevent the next crisis. Fortunately, economists start to see it the same way. Doughnut Economics by Kate Raworth pictures a way towards a modern, sensible economic theory.
I may be a bit unfair, and there certainly is more to economics than stupid ways to put a price on things. Nevertheless, one central question has always been how to measure or evaluate alternatives, be it on individual or governmental level. And regardless of the particular method of measurement, the “better” choice is defined as the one that yields “more”. More money, more GDP, more status. Economics expects, even demands, not only growth, but ever increasing growth rates. Growth of the growth, if you will. And that can get quite gross.
The shortfalls of Growth
Resources are finite. Exponential growth is not sustainable. Noone can deny the trith of the first statement, until they make those Star Trek replicators. The second statement should be a simple logical consequence, yet many clever people try to find ways to create infinite growth with finite resources. The GDP has to rise forever with increasing rates, otherwise we have a recession. If the GDP does not grow exponentially, then the central banks will lower interest rates (just happened in Europe) and governments will start investing mor to rekindle the flame of growth. And yet, few economists and fewer politicians dare to picture the end game of growth.
If we assume infinite growth with a rate of 2% per year, then in 1000 years the GDP should be nearly 400 million times higher than today. Is that possible, does it even make sense? But if growth is finite, why should we assume that the peak or plateau will be reached in the distant future? Why should we not believe that the next recession actually is just the mellowing out of the growth rate at the natural point of maximum resource utilization? The classic economic dogma of “growth in the foreseeable future, then maybe something else” is ripe for an update.
The economic Doughnut
Growth may be unsustainable, but still is the only measurement of economic development. So how could a more sensible, sustainable future economy look like? The answer is “like a doughnut”. Actually, as I like to nitpick, I’ll say “like a fuzzy doughnut”. Raworth uses rich imagery to visualize her statements (Doughnut Economics has a full chapter on the use of diagrams), and when you imagine the economy on a plane, you have a central core area where too little economic activity does not suffice to support human prosperity, and an outer region where too much economic activity depletes resources and harms the environment. In between is the doughnut-shaped area of sane, safe and just economics.
The doughnut-shaped middle ground of sustainable economy.
Seven ways towards the Doughnut
The subtitle promises seven ways to think like a 21st-century economist:
1. Change the goal
Growth GDP of GDP is imperative, because we have systems in place that will stop working otherwise. Growth is necessary. But growth probably is limited, and some systems already stopped working anyway. So maybe a dynamically stable doughnut-shaped economy is a better goal after all?
2. See the Big Picture
The standard model of circular flow of capital between consumers and companies in a set of isolated markets does not accurately describe a modern economy. A modern view must take all actors, private, corporate and governmental, and the flows of money, energy, and matter into account.
3. Nurture human nature
The fully rational, self-centered economic human has always been a stupid concept. We came to that conclusion before. Humans are social beings with complex motives for their actions, and modern economic theory has to account for that to be taken seriously.
4. Get savvy with systems
It is easy to draw a supply curve and a demand curve and call the point where the curves touch the “market equilibrium”. And because it is easy, it does not do anything useful. Economy is not about tweaking a machinery that reacts in a mechanical, predictable way to changes. It is about nurturing an ever-increasing and hardly predictable network of interconnected systems.
5. Design to distribute
So far, growth has failed to even up the wealth distribution, and recently the wealth gap between rich and poor people within most countries grew faster. Maybe we should create an economy for better participation of everyone.
6. Create to regenerate
Growth also failed to reach the proposed tipping point from where it would suddenly reduce the consumption of resources and even replenish what has been depleted previously. Maybe we should create an economy that preserves natural resources by design.
7. Be agnostic about growth
In Raworth’s Doughnut, growth is not forbidden, neither is anything associated with growth. But in the doughnut, growth is not necessary. And if there is an objective, natural limit beyond which growth is not sustainably possible, then we can accept to not have growth.
Is it any good?
Is the doughnut a sound economic theory? Probably. I should stress what it is not, though, as some readers may feel the reflex to reject prior to understanding what Raworth is saying. Despite empowering the commons and promoting a distributive design, the Doughnut is not a socialist theory. It welcomes private gains and investments, with an emphasis but not a limitation to private-public partnerships. But Doughnut Economics makes it crystal clear that businesses that operate outside of the doughnut (by overusing resources or producing too little public value) cannot have a future. Is your company within the doughnut?
I should also mention that Doughnut Economics is only the simplified version of the economic theory, suitable for children, laypersons, and CEOs. It is also only one example of growth-agnostic theories gaining traction, possibly the one with the biggest movement behind it. Maybe, after all, it is time to rethink economics. And you may have reasons to reject the doughnut, but you should give it a thought, too. Buy this book.
And even if you don’t believe for a second that Doughnut Economics contains the economic theory that will govern our future, the chapter on the persuasive power of good visualizations makes it worth your while, so buy it anyway.
Key Points
- There is a “safe and just” zone of economic activity between social and environmental boundaries, where the economy can be forever sustainable
- Previous economic theories focused on growth (usually measured by a country’s GDP), which is not sustainable and so far failed to deliver the promised solutions to the problems it created.
- While many indicators show an improvement of mean standard of living, environmental destruction, the income/wealth gaps and other factors have increased progressively.
- It is time to rethink economics.
Author Affiliation
Kate Raworth is a British economist, teaching at the Universities of Oxford and Cambridge. She has previous experiences at intergovernmental and charitable organisations, but I could not find many recent scientific publications by her.
Review Copy
copy bought
ISBN-10: 1847941397
ISBN-13: 978-1847941398
Random House Business; Feb. 22., 2018)
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Economic forecasting
Random House Business Books
February 22, 2018
372
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