Every economist in the world is taught the Circular Flow of Goods and Money theory. According to Oxford Economist, Kate Raworth, this diagram is at the heart of macroeconomic analysis and is the basis for measuring economic growth. But there is a problem with growth economics.
Basically, the concept goes something like this:
- Households give labor and capital to firms.
- Firms, in turn, pay wages and dividends to households.
- Households then make decisions about where to spend.
- Firms sell goods and services to households.
- And the cycle repeats.
What’s Wrong with this Picture
Raworth argues that this diagram is fundamentally flawed. Outside of the fact that it disregards the wild speculation and creation of money by the financial sector, it also fails to consider taxes and austerity represented by government regulation. This economic model has 4 fundamental flaws.
- Ignores the environment completely, even though the economy is deeply embedded in the environment. It draws resources and energy from the sun and planet, and spits out waste and pollution.
- Ignores unpaid work. This includes many parents who are raising the next generation of workers. The necessary non-monetized activities within the household are not taken into account at all.
- Ignores collaboration and the trading of services that are not monetized. Beyond trading favors with friends, the power of the collaborative commons and open source platforms is one of the most dynamic and disruptive forces of today’s economy.
- Ignores the accumulation of wealth by the few, which rapidly turns into power over the economy itself.
Most of us think of the economy as something inaccessible, disconnected and separate from us. Raworth believes that it absolutely isn’t. In fact, we are all economists and we have more power than we think we do. Since we can’t run away from economics, Raworth challenges us to run towards it. What if we could re-imagine these long-held concepts, and mold them into something new?
What if the economic model did not start with money, but with human well-being?
While much of the responsibility for human well-being lies with humans themselves, human well-being is inextricable from the well-being of the planet. The planet is completely ignored in the traditional map of economics. And it shouldn’t be. So what kind of economics does the 21st Century need? Raworth encourages us to search for answers to that question by suggesting 7 Ways to Think Like a 21st Century Economist in her book Doughnut Economics.
1. Change The Goal
The current economic theory does not address whether an economy could grow forever or should grow forever. Clearly, it’s natural to grow, but anything that is organic grows, matures and dies. If our aim is to design economies that are distributive and regenerative, what does that mean for growth? We need to overcome these addictions to growth and create an economy that can “meet the needs of all within the means of this planet.”
Anything that grows forever becomes a cancer and destroys the very system upon which it depends.
2. Change The Narrative
What are the stories we tell? What language do we use when we discuss the economy? One powerful way to change the narrative is to speak the narrative you believe in. The more people who speak about “prosperity” rather than “growth,” who talk about “distributive and regenerative design” rather than “GDP,” the quicker journalists and politicians will pick up on this language. Language is a very powerful leverage point for change. Current economic understanding shapes the language that everyone is using and, currently, we all feel that we are serving finance. Finance should serve humans, not the other way around.
It’s time to ditch this outdated neo-liberal script. We need a new economic story that’s fit for the tale of the 21st century.
3. Change How We View Ourselves
Who does the economy tell us we are? To fit humans into their theories, economists developed “rational economic man,” or Homo-economicus, a somewhat isolated, selfish, and materialistic pioneer who plunders nature for his own self-interest. He wants the most luxuries for the least amount of labor or expense. It’s time for a new sketch of humanity at the core of economics which does not disregard our propensity for empathy, cooperation, caring and mutual aid. We also need to admit that humans are far from being dominant over nature, but are rather critically dependent upon her.
Far from being dominant over nature, we are deeply dependent on her.
4. Get Savvy With Systems
In the 1850s, a bunch of economists wanted to make economics as beautiful as physics. Inspired by Newton’s laws of motion, they searched for economic laws that could describe the movement of markets. But by trying to turn their theories into math, they ended up with models based on equilibrium. The 2008 crash proved that equilibrium is not a very good way of describing markets. Rather than envying the equilibrium of physics, we should embrace the complexity and messiness of economics. Instead of trying to engineer economics, we should observe it through a systems-thinking lens, and behave more like gardeners who tend to it and shape it as it evolves.
Rather than trying to engineer economics, we should approach their dynamic complexity like gardeners who tend to them and shape them as they evolve.
5. Design To Distribute
There is this erroneous belief that inequality has to rise before it falls, that things need to get worse before they get better, and that growth will solve all once things “trickle down.” Rising inequality is not a phase in a country’s progress, but a policy choice. It is a failure of economic design. We shouldn’t wait for economic growth to even things out because it will never happen. We need to design an economy to be distributive by design because things don’t trickle down. Inequality spirals. We need to think about the distributive ownership of wealth, (not just income.) For example, employee-owned companies, community-owned renewable energy projects, and ideas in the creative commons rather than held copyrights.
Rising inequality is not a mere “phase” in a country’s progress, but a policy choice.
6. Move From Degenerative to Regenerative Design
For two centuries our industrial activity has been based on degenerative design. We take from the earth, make a thing, use it for a bit and then toss it, damaging earth’s life support systems on which we all depend. Current economic theory tells us not to worry because more growth will allow nations to clean things up. But this is false. Just look at what is happening to our oceans and ecosystems. Growth won’t clean things up. Creating economies that are regenerative by design rather than degenerative by default is where we should focus.
We need to design an economy where things are never used up, but are rather used again and again.
7. Move From Growth Addicted to Growth Agnostic
GDP growth became the primary overriding policy in the 20th century. Growth at any and all costs became the primary focus of government, business, and the financial markets. And they all depended upon it never ceasing. Politicians create their mantras around all types of growth, framing economies that need to grow whether or not they allow us to thrive. Conversely, we need economies that allow us to thrive whether or not they grow. Economies need to be able to flex as the GDP changes – sometimes up, sometimes down.
Economies need to work with, not against, the cycles of the living world.
The Big Picture
The etymology of the word “economy” can be traced back to the ancient Greek word “oikonomos” for “household management.” Later, the term evolved to refer to the management of a town. Then a city-state. Over 2000 years later, a country. It’s now time to move the term one step further. We need to think about the economy of the planet. For the planet is our household. If we do not take the steps necessary to manage our household, we will lose her.
The Doughnut of Social and Planetary Boundaries
The outer circumference of Kate Raworth’s Doughnut represents the ecological ceiling of 9 planetary boundaries originally laid out by Rockstrom et al. Should humanity push past these boundaries, we will degrade the earth’s systems. These 9 planetary boundaries are on the outside of the doughnut and represent an ecological ceiling that we must not breach.
The inner circumference of the Doughnut represents the social foundation of humanity. Within this circumference lie 12 dimensions of the social foundation derived from the 17 Sustainable Development Goals (SDGs) agreed upon by the world’s governments and set by the UN in 2015.
Between social and planetary boundaries lies an environmentally safe and socially just space in which humanity can thrive.
Raworth does not presume that the Doughnut itself is a solution. While it “sets a vision for an equitable and sustainable future, it is silent on the possible pathways for getting there, and so the doughnut acts as a convening space for debating alternative pathways forward.”
We are all affected by, and inextricably a part of, the economy. Raworth admits that her doughnut theory is constantly evolving, and debate is necessary to develop a new paradigm of economic theory for all. Her research is “focused on exploring what planetary and social boundaries imply for rethinking the concept of economic development. Is it growth or post-growth? How should we measure economic progress?” She invites us all to join the discussion.
This article was derived from an interview with Kate Raworth, researcher at Oxford, Oxfam, Senior Associate of Cambridge Institute for Sustainable Leadership, and author of the book Doughnut Economics. For more interviews like this and other videos, check out the Prosperity Roadmap.