Doughnut Economics | Kate Raworth

Summary of: Doughnut Economics: Seven Ways to Think Like a 21st-Century Economist
By: Kate Raworth

Introduction

Welcome to Doughnut Economics – a groundbreaking concept designed to help humanity reframe economics for the 21st century. Kate Raworth presents a new, revolutionary way of thinking about a balanced and sustainable world where humans can thrive both socially and ecologically. In this book summary, you’ll discover the Doughnut’s social foundation which encompasses everything we need to live, and the ecological ceiling which outlines the boundaries we must respect to ensure the Earth’s survival. Learn how outdated economic models have blinded us to the reality of our world, and uncover a new path forward through better design and innovative strategies that will help us embrace a sustainable, circular economy.

The Doughnut Economics Solution

Economics, the common language of the world, requires a change in mindset to address the flaws in its basic assumptions and confront the challenges of the twenty-first century. Enter the Doughnut concept by Kate Raworth, a model where all human needs can be met without overburdening the planet. Envision a doughnut with its two circles representing the social foundation and ecological ceiling, between which lies the ideal balanced habitat for humanity. The social foundation includes not just the essentials, but also key abstract components for a complete and satisfying human life like a sense of community and political representation. The ecological ceiling, on the other hand, acts as a guardrail, protecting the nine planetary processes crucial to our survival. However, time is running out, as we have already breached this guardrail four times leading to environmental crises. Now, humanity must adopt the Doughnut paradigm and break free from a growth-oriented mindset to restore balance and avert catastrophe.

Beyond GDP: Redefining Wealth

The ancient Greeks viewed economics as the art of managing a household with limited resources. This began to change in the mid-eighteenth century when economists started to redefine their field as a science, shifting its focus from managing resources to studying general economic laws. A void emerged in the discipline, leading to an obsession with growth. By the end of the twentieth century, the metric of measuring economic performance – GDP – became widely accepted, though it does not accurately capture a nation’s total wealth. GDP ignores the value of goods and services produced outside the market sector, such as those from households, society, or the state. The 1960s saw American economist Simon Kuznets, tasked with devising a method for measuring national income, criticize GDP for its shortcomings and urge for a more comprehensive metric for growth.

In the ancient world, economics focused on managing households and making the most of scarce resources. However, as the field transformed into a scientific discipline in the 18th and 19th centuries, a new focus on understanding general laws of economic life took center stage.

This shift left economics without a clear sense of purpose, leading to an obsession with growth. The metric used to assess growth and economic performance, gross domestic product (GDP), became the primary focus, despite its limitations. Developed by American economist Simon Kuznets in the 1930s, GDP measures a nation’s wealth production but fails to account for essential aspects of its total wealth.

By the 1960s, Kuznets himself grew skeptical of GDP, pointing out that it only considered the market sector and ignored crucial contributions from households, society, and the state. He argued that a more accurate measurement should reflect a broader perspective on growth, specifying “more growth of what and for what.”

Unfortunately, Kuznets’ progressive outlook has been largely overlooked, leaving the field of economics still grappling with an incomplete understanding of true wealth and growth. As we move forward, it is crucial to rethink the conventional approach to measuring economic health and embrace a more comprehensive view of prosperity.

Beyond the Circular Flow

The conventional circular flow model of the economy, which portrays the economy as a closed system with income passing between businesses and households, is flawed. It overlooks critical factors such as the role of unpaid labor within households, the value created by the state, and shared resources. Furthermore, it disregards the economy as an open subsystem that depends on the inputs from the earth and the sun. As our world is pushed to its limits, it is crucial that we adopt a new perspective on what truly drives and sustains economic life.

The circular flow diagram has long been the prevailing representation of our economy. This model depicts an economy as a closed system where income moves between businesses and households, while banks, governments, and trade act as intermediaries. Despite its lasting impact on how we perceive the economy, the diagram is fundamentally flawed.

First and foremost, the market alone doesn’t create value. The state and shared resources also significantly contribute to economic life. For instance, the state provides the means necessary to build infrastructure and educate children, and shared resources like public land or Wikipedia prove indispensable.

Even more overlooked, individual households play a vital role in the economy. The well-known Scottish economist Adam Smith is an excellent example. While living with his mother, he wrote his magnum opus, The Wealth of Nations, which celebrates markets for harnessing individual self-interest for the common good. However, Smith’s work relied on the unpaid labor of his mother, who provided him the time and space necessary to concentrate on writing. Despite this, he never acknowledged the critical role of unpaid household labor. Similarly, contemporary economic theory has yet to address this glaring oversight.

Another fundamental flaw of the circular flow model is its failure to recognize the economy as an open subsystem reliant upon the earth’s resources. Economic activities depend on the energy and raw materials derived from the sun and our planet. Ecological economists like Herman Daly have emphasized that the economy is an open subsystem within the earth’s closed system.

When we extract more resources from the earth than it can replenish and generate more waste than it can absorb, we create a “full world.” According to Daly, we are already living in such a world, as the earth is incapable of restoring vital resources as fast as we deplete them. This stark reality highlights the urgent need to rethink how we conceptualize the economy. By acknowledging the roles of unpaid labor, state contributions, shared resources, and environmental limitations, we can develop a more holistic and sustainable economic framework.

Debunking Rational Economic Man

The Rational Economic Man, a theoretical model of the individual consumer, has evolved from a nuanced representation of human behavior in the eighteenth century to a caricature marked by selfishness, isolation, and constant calculation. Despite its implausibility, this oversimplified portrayal has influenced the real world, molding public opinion and altering the way we talk about our roles in society. However, experiments like the Ultimatum Game reveal that human behavior is not as uniformly selfish as the model suggests, proving that fairness can sometimes override self-interest.

Once upon a time, the Rational Economic Man walked among us — at least, as a theoretical model for the individual consumer. Born in the eighteenth century, he represented a complex picture of human behavior. But by the 1970s, this character had transformed into a grotesque caricature: selfish, isolated, and perpetually calculating.

Even early commentators like John Stuart Mill, who contributed to the character’s development in 1844, acknowledged its absurdity. Mill criticized the Rational Economic Man for his aversion to work and love of luxury, deeming him “an arbitrary definition of man.” Nonetheless, the character’s enduring influence has had tangible consequences.

American economist Robert Frank argued that our beliefs about human nature directly impact human nature itself. Studies in Germany, Israel, and the US confirmed this notion, revealing that economics students — who became intimately acquainted with this rational, selfish character — were more approving of selfish behavior than their peers. Moreover, they acted selfishly and expected others to follow suit.

The rise of the Rational Economic Man also altered the nature of our discussions about society. Once prominently featured in English-language newspapers and books, the term “citizen” began to fade from the vernacular after the 1970s, replaced by the more commercial label of “consumer.”

This shift presents a challenge for modern economics, which must refocus on accurately representing real-world human behavior. Reality diverges significantly from the obsessive self-interest portrayed by the Rational Economic Man.

The Ultimatum Game demonstrates the discrepancy between the caricature and human conduct. In this game, two strangers engage in a simple exchange: the first player offers the second a share of a certain amount of money. If the second player rejects the proposal, both participants walk away with nothing. Based on the Rational Economic Man model, the second player should always accept any proposed amount since free money is always welcome. However, individuals often reject deals perceived as unfair—even when it costs them. North American college students, for instance, frequently refuse offers lower than 20% of the total amount, favoring fairness over self-interest.

The Rational Economic Man may be a convenient model for economic theory, but it is far removed from the complexities of human behavior. To forge more effective economic policies, we must consider the intricate balance of self-interest and fairness that truly governs our actions.

Rethinking Economic Equilibrium

The classic concept of supply and demand is rooted in the idea of market equilibrium, where buyers and sellers strike the right balance in pricing. However, real-world markets are far more complex than these simplified models. To better understand how economies function, we need to shift our focus towards systemic thinking, analyzing interconnected variables and feedback loops.

In the world of economics, supply and demand is a fundamental concept, predicated on the belief that an equilibrium point exists where prices align perfectly with consumer willingness to pay. This equilibrium, akin to the natural laws governing a pendulum, supposedly keeps markets in check. Unfortunately, this assumption tends to oversimplify the complexities of real-world markets.

Economists often fall into the trap of modeling their theories based on disciplines like physics, trying to present clean and straightforward explanations that work perfectly on paper. However, by confining themselves to these simplified models, they gloss over the intricacies and messiness of the actual world. One example of this oversimplification is the assumption that consumers react predictably to market events, neglecting the unpredictable boom-and-bust cycles that economies experience.

The 2008 financial crisis is a prime example of the real-world consequences of such oversimplifications. Mainstream economists, under the belief that markets are self-stabilizing, chose to overlook the many warning signs surrounding the banking sector. This included the US Federal Reserve’s decision to exclude private banks from their economic models. As a result, these experts were blindsided when the crisis occurred, having relied on incomplete and reductionist theories.

To safeguard against future economic disasters, economists must adapt their approach to acknowledge the intricate nature of markets. Instead of relying on outdated mechanical metaphors, economists should treat economies as highly complex systems comprised of countless interconnected variables. In such systems, equilibrium is unlikely. Rather, individual components impact and influence one another.

Implementing systems thinking can aid us in unveiling these complex relationships. By analyzing feedback loops – either positive, which promote an aspect of the system, or balancing, which discourage it – we can gain a clearer insight into the market’s inner workings. For instance, considering the interconnected factors that affect a population of chickens near a road can provide insights into the reinforcing and balancing loops that govern their numbers.

Ultimately, embracing systemic thinking and feedback loops offers a more realistic and attainable perspective on how economies function. By shedding our blind faith in market equilibrium, we can develop a more nuanced understanding of economic behavior and hopefully prevent major catastrophes in the future.

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