Book - Doughnut Economics by Kate Raworth
- Funny how in econ school they don’t even make us read Adam Smith. They just select quotes to confirm what they want to communicate
- really shows how dangerous it is forgetting that our models are only models (gdp, human nature etc.. Math becomes misleading as it gives the illusion of accuracy
Summary of some policy suggestions:
- mix of nudges and encouraging of risk-savvy heuristics
- do not let the market take over all areas of life - there are areas for which it is not suited
- teach eco-literacy in schools
- ethical principles for economists
- [[ experimental attitude . diversify–select–amplify ]]
- Focus on prosperity not growth
- Issue of military power being linked to economic growth
- Focus on prosperity not growth
- global tax on extreme personal wealth (e.g. 1.5% for billionaires)
- close tax loopholes and tax havens
- taxes on damaging industries
- financial transactions (curb speculation)
- [[ carbon tax ]]
- tiered pricing for essential scarce resources (e.g. water)
- the more that people use, the more they pay
- metrics that recognise and reward regenerative success
- True circularity must be open source:
- modularity - open standards - open source - open data
- Alternative currencies that incentivize regenerative behavior
- Demurrage for money (money that goes out of date)
- would involve many problems to be addressed (inflation, investments vs. consumption, exchange rates etc…)
- Demurrage for money (money that goes out of date)
Doughnut Economics: Seven Ways to Think Like a 21st-Century Economist
Problems with Market Economy
What is it ignoring?
▪ In the words of the systems thinker John Sterman, ‘The most important assumptions of a model are not in the equations, but what’s not in them; not in the documentation, but unstated; not in the variables on the computer screen, but in the blank spaces around them.’4 - [[ what is the model ignoring ]]?
▪ flip side to the market’s power: it only values what is priced and only delivers to those who can pay. Like fire, it is extremely efficient at what it does, but dangerous if it gets out of control. When the market is unconstrained, it degrades the living world by over-stressing Earth’s sources and sinks. It also fails to deliver essential public goods – from education and vaccines to roads and railways – on which its own success deeply depends. At the same time, as Chapter 4 will show, its inherent dynamics tend to widen social inequalities and generate economic instability - [[ market failure ]]
Core Economy - Housework, Health, Care
▪ Why does it matter that this core economy should be visible in economics? Because the household provision of care is essential for human well-being, and productivity in the paid economy depends directly upon it. It matters because when – in the name of austerity and public-sector savings – governments cut budgets for children’s daycare centres, community services, parental leave and youth clubs, the need for care-giving doesn’t disappear: it just gets pushed back into the home. The pressure, particularly on women’s time, can force them out of work and increase social stress and vulnerability. That undermines both well-being and women’s empowerment, with multiple knock-on effects for society and the economy alike
Relies on Flawed models and assumptions
Market is never free - Embedded Market
▪ 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
[[ General equilibrium theory is flawed ]] ▪ The mathematical techniques did not yet exist for Walras to prove his hunch but his agenda was later picked up by Kenneth Arrow and Gerard Debreu, who set out its equations in their 1954 model of general equilibrium. It appeared to be a landmark proof, giving microeconomic underpinning to macroeconomic analysis, launching a seemingly unified economic theory and laying the foundations of what has been known ever since as ‘modern macro’.4 The theory looks complete, sounds impressively like physics, and is set out in authoritative equations. But it is deeply flawed. Thanks to the interdependence of markets within an economy, it is just not possible to add up all individuals’ demand curves to get a reliable downward-sloping demand curve for the economy as a whole. And without that, there is no promise of equilibrium. This is not news to economists, or at least it shouldn’t be: in the 1970s several smart theorists realised (to their own horror) that the foundations of equilibrium theory didn’t hold up. But the implications of their insight (catchily known as the Sonnenschein–Mantel–Debreu conditions) were so devastating for the rest of the theory that the disproof seems to have been hidden, ignored or brushed aside in the textbooks and the teaching, leaving students ever since unaware that anything was fundamentally out of whack with the equilibrating pulleys and pendulum of the market mechanism.5 As a result, general equilibrium theories dominated macroeconomic analysis through the second half of the twentieth century, and all the way up to the 2008 financial crash.
Win-Win Trade’s Wrong Assumptions
▪ Ricardo’s influential theory of win–win trade was based on products like wine and cloth, and assumed that the factors of production – land, labour and capital – were immovable behind national borders. Today, everything but land moves,
▪ First, rather than narrowly self-interested we are social and reciprocating. Second, in place of fixed preferences, we have fluid values. Third, instead of isolated we are interdependent. Fourth, rather than calculate, we usually approximate. And fifth, far from having dominion over nature, we are deeply embedded in the web of li (Real humans)
Basic personal values ▪ 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.
▪ We follow [[ social norms ]], typically preferring to do what we expect others will do and, especially if filled with fear or doubt, we tend to go with the crowd.
Corruption - Market players affect policies
▪ Business effectively invests in political candidates and expects a return on that investment in the form of favourable policies. ‘To discover who rules, follow the gold,’ he advises: trace the finance backing any major political campaign and you’ll see what drives its policies.
Maybe the market isn’t best suited for everything?
▪ Instead of immediately focusing on making markets work more efficiently, we can start by considering: when is each of the four realms of provisioning – household, commons, market and state – best suited to delivering humanity’s diverse wants and needs?
▪ As our emerging self-portrait makes clear, we are motivated by far more than cost and price. So instead of turning first to markets to mediate our social and ecological relationships, the twenty-first-century economist would be wise to start by asking what social dynamics are already in play. What are the values, heuristics, norms and networks that currently shape human behaviour – and how could they be nurtured or nudged, rather than ignored and eroded?
( [[ markets are not best suited for serving all our needs ]])
▪ talking of ‘ [[ natural capital ]]’ and ‘ecosystem services’ is so double-edged: it may give the stray dog a name but the chosen name simply shifts the living world from being man’s material means to being an asset on his balance sheet.
Not the God of Innovation
▪ 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 (markets may not be the best structure for disruptive innovation)
Monetary incentives crowd out intrinsic motivation
▪ Initial evidence suggests that monetary payments often crowd out existing motivations by activating extrinsic rather than intrinsic values. As the case studies described below reveal, there may be far wiser ways – drawing on what we now know about values, nudges, networks and reciprocity – to nurture human nature towards the Doughnut’s safe and just space. (Crowding out intrinsic motivation)
▪ 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.
▪ As markets reach into spheres of life traditionally governed by nonmarket norms, the notion that markets don’t touch or taint the goods they exchange becomes increasingly implausible,’ warns Sandel. ‘Markets are not mere mechanisms; they embody certain values. And sometimes, market values crowd out nonmarket norms worth caring about.’53
Policy - Both Nudging and Increasing Risk Savyness
[[ there is no such thing as no nudging - either intentional or not - either constructive or exploitative ]] ▪ brands and retailers have been nudging us for almost a century in the implicit messaging of advertisements, in the placements of products in shops and TV shows, and in the psychology of sales. But public policy can be designed to nudge us too
▪ The power of such heuristics led Gigerenzer to disagree with the prescriptions of behavioural economists who, he says, ‘think that people are basically hopeless when it comes to understanding risk, and we need to nudge them into behaviour from birth to death’. Rather than overriding our rules of thumb with a nudge, he argues, we should nurture those heuristic abilities while bolstering them with basic skills in assessing risk. ‘We live in the 21st century, surrounded by complex technology, and there are things that we will not be able to anticipate,’ argues Gigerenzer. ‘What we need is not just better technology, bigger bureaucracy and stricter laws … but risk-savvy citizens
▪ The smart way forward, then, for policymakers seeking to promote behaviour change may lie in encouraging a judicious mix of risk-savvy heuristics and behavioural nudges, based on a much-needed understanding of when each approach might work best. (Both nudges and heuristics)
We are Conditioned into a Modernist Worldview
▪ Let the human race recover that right over nature which belongs to it by divine bequest,’ wrote the seventeenth-century philosopher Francis Bacon.40 That perspective was echoed by W. Arthur Lewis, founder of development economics, in his 1949 book Economics: Man and His Material Means, which set out to study ‘the ways in which mankind tries to wrest a living from the Earth’ by making ‘the most efficient use of scarce resources’. ( [[ Modernism ]] & the illusion of separation)
A different View and the need for Ecoliteracy
▪ What you call resources we call our relatives,’ he explained. ‘If you can think in terms of relationships, you are going to treat them better, aren’t you? … Get back to the relationship because that is your foundation for survival.’45
▪ in the US, for example, children growing up in urban centres today have a far more simplistic and anthropomorphic understanding of the living world than do children raised in rural Native American communities.43 One practical way to address this would be to teach and embody eco-literacy in every school so that coming generations develop a worldview based upon understanding the living world’s interdependent systems that make life on Earth possible (Teaching eco literacy as a way to improve self knowledge)
4. Get Savvy with Systems
▪ 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’.22 Due to the scale and interconnectedness of the global economy, many economic effects that were treated as ‘externalities’ in twentieth-century theory have turned into defining social and ecological crises in the twenty-first century.
Stability Breeds Instability
▪ Minsky had realised that – counter-intuitive though it sounds – when it comes to finance, stability breeds instability. Why? Because of [[ reinforcing Feedback Loops ]], of course. During good economic times, banks, firms and borrowers all gain in confidence and start to take on greater risks, which pushes up the price of housing and other assets. This asset price rise, in turn, reinforces borrowers’ and lenders’ confidence along with their expectations that asset values will keep on rising. In Minsky’s own words, ‘The tendency to transform doing well into a speculative investment boom is the basic instability in a capitalist economy.’2
Rich get richer
▪ Given that markets are efficient at rewarding people, goes the theory, then those with broadly similar talents, preferences, and initial endowments will end up equally rewarded: any remaining differences must be due to differences in effort, and that provides a spur for innovation and hard work. But in the disequilibrium world that we inhabit – where powerful reinforcing feedbacks are in play – virtuous cycles of wealth and vicious cycles of poverty can send otherwise similar people spiralling to opposite ends of the income-distribution spectrum. It’s due to what systems experts have come to call the ‘Success to the Successful’ trap, which kicks off when the winners in one round of a game reap rewards that raise their chances of winning again in the next.
Economists as gardeners
In their book The Gardens of Democracy, Eric Liu and Nick Hanauer argue that moving from ‘machinebrain’ to ‘gardenbrain’ thinking calls for a simultaneous shift away from believing that things will self-regulate to realising that things need stewarding. ‘To be a gardener is not to let nature take its course; it is to tend,’ they write, ‘Gardeners don’t make plants grow but they do create conditions where plants can thrive and they do make judgments about what should and shouldn’t be in the garden.’46 That is why economic gardeners must get stuck in, nurturing, selecting, repotting, grafting, pruning and weeding the plants as they grow
[[ experimental attitude . diversify–select–amplify ]] ▪ One approach to economic gardening is to embrace evolution. 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’. It’s an approach that aims to mimic the process of natural selection, often summed up as ‘diversify–select–amplify’. 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.47 This kind of adaptive policymaking is crucial in the face of today’s ecological and social challenges because, as Elinor Ostrom put it, ‘We have never had to deal with problems of the scale facing today’s globally interconnected society. No one knows for sure what will work, so it is important to build a system that can evolve and adapt rapidly.’48
▪ This has empowering implications: if complex systems evolve through their innovations and deviations then that gives added importance to novel initiatives, from new business models to complementary currencies and open-source design. Far from being mere fringe activities, these experiments are at the cutting edge – or rather, the evolving edge – of economic transformation towards the distributive and regenerative dynamics that we need.
Ethical Principles for Economists
▪ There 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. Principles such as these may one day be included in an Economist’s Oath, to be recited by aspiring professionals upon graduation. But with or without the ceremony, what matters most is to bring such ethical principles to life in every economics student’s training and every policymaker’s practice. ‘The future can’t be predicted,’ wrote Donella Meadows, ‘b
5. Design to Distribute - Tax Proposals
[[ do intellectual property rights promote innovation ]]
▪ Through a global tax on extreme personal wealth, for starters. There are now more than 2,000 billionaires living in 20 countries from the USA, China and Russia to Turkey, Thailand and Indonesia.93 An annual wealth tax levied at just 1.5% of their net worth would raise $74 billion each year: that alone would be enough to fill the funding gap to get every child into school and deliver essential health services in all low-income countries. Match that with a global corporate tax system that treats multinational corporations as single, unified firms, and closes tax loopholes and tax havens, so boosting public revenue for public purposes worldwide.95 Supplement these with taxes on destabilising and damaging industries, such as a global financial transactions tax to curb speculative trading, and a global carbon tax levied on all oil, coal and gas production. Yes, some of these tax proposals sound unfeasible now, but so many once-unfeasible ideas – abolishing slavery, gaining the vote for women, ending apartheid, securing gay rights – turn out to be inevitable. In the century of the planetary household, global taxes will too.
6. Create to Regenerate
Environmental Stewardship linked not to economic growth or a single variable, but several factors
▪ Across a wide range of countries – and particularly in low-income ones – they found that environmental quality is higher where income is more equitably distributed, where more people are literate, and where civil and political rights are better respected.5 It’s people power, not economic growth per se, that protects local air and water quality. Likewise it is citizen pressure on governments and companies for more stringent standards, not the mere increase in revenue, that compels industries to switch to cleaner technologies.
Tiered Pricing for water and other essentials
▪ Tiered pricing is growing in use too, ensuring that the more that people use, the more they pay. From Santa Fe, California to water-stressed cities across China, tiered pricing is used to ration water use between households of widely differing incomes. Every household pays a low rate for its initial daily supply, intended for essentials such as drinking, bathing, and washing dishes and clothes. Beyond that – whether it is for cleaning cars, irrigating lawns or filling swimming pools – further water use is charged at three or four times higher rates. As water market expert Roger Glennon explains, ‘The beauty of tiered pricing is that it doesn’t prevent people from using water, and it doesn’t rely on government regulations. But it insists you pay more for extra water for your lawn than for basic human needs
Moloch Will Continue to fight
▪ Taxes, quotas and tiered pricing can clearly help to ease humanity’s pressure on Earth’s sources and sinks, but here’s the trouble with believing that they will do the whole job. In practice they fall short because they are rarely set to the level required: corporations lobby hard to delay their introduction, to lower the tax rate, to increase the quota, and to get permits given for free, not auctioned. Governments, in return, too often concede, fearing that their nation will lose competitiveness – and that their political parties will lose corporate backing
Not enough to look for overlap between profits and planet
▪ While regenerative designers now ask themselves, ‘how many diverse benefits can we layer into this?’, mainstream business still asks itself, ‘how much financial value can we extract from this?’ Of course there may be some overlap of those two ambitions – since being regenerative can sometimes be highly profitable – but if that area of overlap is all that business is interested in pursuing then regenerative design will fall very far short of its potential
Circular economy promoted by companies only is not enough
▪ The trouble is, they just do not go far enough, and there is a clear reason why. Shaped to fit in with existing corporate interests, circular economy strategies to date have typically been: top down, driven by large corporations; in-house, with companies seeking to establish control over their used products; opaque, thanks to patented materials and proprietary technologies; and fragmented into disconnected parts, within and across industries. That is by no means a strong foundation for building a regenerative, let alone distributive, industrial ecosystem
▪ Regenerative industrial design can only be fully realised if it is underpinned by regenerative economic design
▪ Making it happen calls for rebalancing the roles of the market, the commons and the state. It calls for redefining the purpose of business and the functions of finance. And it calls for metrics that recognise and reward regenerative success. Taking on this redesign task is surely one of the most exciting opportunities for twenty-first-century economists. And – as you would expect in a complex, evolving economy – it is a redesign process that will emerge not from textbook theories, but from the innovative experiments of those who are trying to bring it about.
▪ if every tractor, refrigerator and laptop manufacturer attempts to recover, refurbish and resell all and only its own-brand products within proprietary cycles of material flow, the system-wide regenerative potential will never be achieved.38 Sam Muirhead, one of the instigators of the Open Source Circular Economy movement, believes that circular manufacturing must ultimately be open source because the principles behind [[ open source ]] design are the strongest fit for the circular economy’s needs. These principles include: modularity (making products with parts that are easy to assemble, disassemble and rearrange), open standards (designing components to a common shape and size); open source (full information on the composition of materials and how to use them); and open data (documenting the location and availability of materials). In all this, transparency is key.
▪ So a five-hectare derelict factory site was soon converted into allotments available for rent, which was payable only in a new currency, Torekes, meaning ‘little towers’, named after the district’s ubiquitous tower blocks. And they can be earned by volunteering to collect litter, replant public gardens, and repair public buildings, or by using the car pool and switching to green electricity. Along with paying the allotment rent, Torekes can be spent on bus travel and cinema tickets, or used in local shops to buy fresh produce and energy-efficient light bulbs, so boosting their uptake. But their social value has reached even further. ‘When people see that immigrants, who tend to be blamed as polluters themselves, are helping to clean up the neighbourhood, then that is a positive signal to anyone,’ notes Guy Reynebeau, head of Health and Welfare in the district. ‘Such actions can’t be priced, not in Euros or Torekes.’54 (Giorgio’s note: really good example of creating [[ incentives for public good ]], especially by the exclusivity of the rent of those areas)
Imagine taking this concept to the next level by integrating complementary currencies at the very design stage of a generous city. Just as blood flowing throughout the human body keeps all of its organs healthy, so complementary currencies could be designed to harness the flow of human activity in ways that keep the city’s infrastructure thriving. They could reward residents and enterprises for a wide range of regenerative behaviour – from collecting, sorting and recycling waste to maintaining the living walls of the city’s buildings – all the while encouraging the community to shop locally and travel publicly (Good example of complementary currency use)
Taxes Have a big Impact on how Society Organizes
▪ 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
7. Be Agnostic about Growth
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 grow
Everything is set assuming the System to continue growing
▪ But whether or not economic value gets monetised through the market does matter a good deal to finance, to business, and to government. Financiers only make a return – by extracting interest, rent or dividends – on economic value that has a market value. Business can only capture value as revenue and profit when that value has been monetised in sales. And governments find it far easier to levy taxes for public revenue on economic value that is exchanged through the market. All three of these – finance, business and government – are structured to expect and depend upon a growing monetary income: if GDP is no longer set to grow even though total economic value may well continue to do so, then those expectations need to change profoundly.
Prosperity Not Growth
This chapter takes on that challenge and makes the case for creating economies that are agnostic about growth. By agnostic I do not mean simply not caring whether GDP growth is coming or not, nor do I mean refusing to measure whether it is 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.
The Unrealistic Idea of Endless Growth
▪ In early 2016, Mark Carney, governor of the Bank of England, warned that the global economy risked being trapped in a ‘low growth, low inflation, low interest rate equilibrium’.21 The Bank for International Settlements – effectively the central banks’ central bank – concurred, noting that ‘the global economy seems unable to return to sustainable and balanced growth … the road ahead is quite narrow’.22 The IMF meanwhile advised that, ‘our projections continue to be progressively less optimistic over time … policymakers should not ignore the need to prepare for possible adverse outcomes’.23 The OECD itself agreed that the world was in a ‘low-growth trap’ with growth ‘flat’ in high-income countries.24 And the influential US economist Larry Summers declared that we have entered ‘the age of secular stagnation’.25 It sounds suspiciously as if some economies might be approaching the top of their S curves.
Can growth decouple from resource extraction?
It’s important to note, however, that the decoupling required would not be a one-off phase: if GDP were to keep on growing, then the rate of decoupling would have to more than keep pace with it, year on year on year.
Demurrage - Solutions
▪ Only money that ‘goes out of date like a newspaper, rots like potatoes, rusts like iron’ would be willingly handed over for objects that similarly decay, argued Gessel: ‘… we must make money worse as a commodity if we wish to make it better as a medium of exchange (In favor of demurrage. If all. Commodities go bad but money increases we all want to hold on the money)
▪ Of course the idea of designing demurrage into currency raises many challenging questions for a financial system, such as its implications for inflation and exchange rates, for capital flows and pension funds, and its balance between stimulating consumption and boosting investment. But these are just the kinds of question that are now well worth exploring in the process of reinventing finance so that it is in service to thriving – rather than ever-growing – economies
GDP Gives Military Power
▪ GDP brings both global market power and global military power. This geopolitical lock-in demands far more strategic attention. ‘An economic race for global power is certainly an understandable rationale for focusing on long-term growth,’ argues Kenneth Rogoff, ‘but if such competition is really a central justification for this focus, then we need to re-examine standard macroeconomic models, which ignore this issue entirely
Here are all the notes in this garden, along with their links, visualized as a graph.