Features Editor Rajan Soni discusses the challenges facing economic theory in the 21st century with the author of the Sunday Times Bestseller, Doughnut Economics
Growth. It has become a byword for prosperity, a synonym for success – a yardstick by which the strength of government is measured above all else. But is so-called ‘sustained’ economic growth really all that sustainable?
Kate Raworth, Senior Visiting Research Associate at Oxford University, is sceptical. In her book, Doughnut Economics: Seven Ways to Think Like a 21st Century Economist, she passionately outlines the changes that economics must embrace in order to tackle the challenges of the modern world. The ‘Doughnut’ that the title of Raworth’s book refers consists of two concentric circles, the inner boundary representing that which society is required to produce for human sustenance, and the outer beyond which is the productive overshoot, a threat to the welfare of the planet. It is the space in-between, this ‘Doughnut’, where the economic sweet-spot lies.
But despite her harsh words directed towards out-dated economic modelling, Raworth does not by any means come across as a cynic. On the contrary, she is adamant in her belief in economics to make a difference, describing it as the “mother tongue of public policy”. It is the complacency of economists and of politicians that frustrates her, and that she feels has diminished the credibility of the economic profession in the eyes of the public.
“I think this ‘econo-scepticism’ began with the financial crash of 2008” she tells me. “From the mid-1980s, when we had the big bang of financial markets, the politicians told us that this was a very wise form of information management; that we should trust markets, and that they understood all of this. We had the Great Moderation – Gordon Brown and Greenspan and others saying that we’ve figured out macroeconomics, that we’re now in the ‘stabilised period’.”
“Then it all crashed down. And the economy turned around; whether it’s Greenspan saying the models ‘didn’t work’ or the Queen asking “why didn’t anybody see this coming?” – nobody had an answer. That was a very public dressing down for economic theory and practice, and I think it deserved one.”
As it happens, Gordon Brown was welcomed to the LSE two weeks ago, where he delivered a passionate critique of neoliberalism and its failure to address the financial crash. This is in stark contrast to his bold assertion in 2007 that the country had “put an end to boom and bust”. Raworth’s frustration, she expresses, was with this acceptance that the models of the past are and will always be fit for the needs of the future.
“If we really want the public not to be cynical about economic expertise, then economics needs to be rewritten, because it is out of touch with the reality of the world. It did not foresee the financial crash because, as Steve Keen would say, we’ve had a generation of macroeconomic modelling that ignored banks and money. How do you understand a bird if you ignore the fact it has wings?”
In many ways, it is entirely reasonable for the public to feel alienated from economics as a discipline. It makes little effort to promote inclusion; the mass of equations and technical vocabulary that encode it are understandably off-putting for the general population. I suggest to Raworth that, if we expect people to fulfil their duty as citizens in a democratic society, surely there should be a greater push towards making the so-called “mother tongue of public policy” more accessible to the wider public?
“Absolutely,” Raworth responds enthusiastically. “As Ha Joon [Chang] says, ‘economics is too important to be left to the economists’. When I was writing my book, I was talking to some mums and dads in the playground, and when they asked, ‘What are you doing at the moment’, I said ‘Oh, I’m writing a book on rethinking economics’. And the first thing people do is draw back, and they say ‘Oh, I was never very good at maths at school’. So I say, ‘The only numbers in my book are the page numbers.’”
“Maths is an important tool, but it strips out so many people who don’t feel that they are driven to understand the world through a predominantly mathematical lens. It strips out many people who have a very political drive, and I think the mathematical tool has become far too much of a monoculture in economic thinking. As I was arguing in my lecture: if you don’t get the drawing right in the first place, and you don’t show that the economy exists within the living world, I don’t care how many equations you write for me.”
This balance between the living world and human production is something that appears to underpin the core of Raworth’s philosophy, and something I get the impression she is keen to highlight throughout our conversation. The models on which our economic thinking is based, she argues, ignore the fact that for everything that is produced, resources are ultimately depleted. “Energy is what makes the economy work, and if you leave it outside your model you leave out the system on which it depends”.
“Getting systems thinking into our mind helps us see this. Any good systems thinker will say, ‘If you want to understand the system, always look one level above it, and one level below’. When you ignore that, you destroy the very life-base on which everything is dependent.”
Of all the challenges facing economics in the 21st century, none are so prevalent as the prospect of automation. On Wednesday, Chancellor of the Exchequer Philip Hammond spoke of the need to embrace innovation, announcing a substantial into driverless cars in the annual Budget. But how can technological progress, such as driverless cars, thrive in the Doughnut model and achieve sustainability without being abused for profitable gain?
“Technological innovation is always disruptive of the system we have, and for any disruptive innovation you can ask yourself: is it going to get harnessed by the old way of doing things, or can it be harnessed by the new? Is it going to enable us to live with and within the cycles of the living world?”
“So, driverless cars are electric cars. Electric cars: absolutely! Let’s invest in an electric car infrastructure so that we have the batteries to ensure people can actually go far enough, so it becomes convenient in electric recharging; so we have an ecosystem of electric cars which will very quickly phase out the massive polluting ecosystem of fossil fuel recharging.”
“But then the key question is: is this just a case of everybody has a driverless car, and it’s replacing the car I drive myself? Or can we massively reduce the number of cars that are on the owned and on the road, now that we are sharing cars that are driverless? So there are possibilities, and it could go either of those ways.”
Of course, there remains the question of how automation will impact on jobs – there are many millions of people around the world who make their living from jobs like driving. Does the Doughnut offer answers to their problems? “Driving is just a huge drop in the ocean of automation that we’re being told is coming down the road, but it’s a good example” Raworth ponders. “Economic theory has focused on raising labour productivity, and this goes back to the founding fathers who originally had land, labour and capital as their three productive factors. But land very quickly dropped out of the story, because [David] Ricardo believed that actually colonial expansion overseas meant that there wasn’t going to be a scarcity of land: there was going to be a shortage of labour. And so what needed to be focused on was labour productivity. And still, today, when our politicians talk about the productivity of the economy, they’re talking about labour productivity, as if what we want to do is minimise the number of people in work.”
“I think we need to shift away from a focus on labour productivity, because labour is not scarce, it’s actually abundant. It’s too abundant – there are people without jobs. What we don’t have is resources – we should be focusing massively on resource productivity, and shift from taxing labour to taxing resources. At the moment, there’s a bizarre setup where firms are taxed for employing people, and they’re often subsided for buying machinery through a capital investment subsidy. It’s an absurd situation! We should switch it the other way around, so that every firm is incentivised to be efficient in its resource use, and it may end up employing more people.”
“This technological drive towards the automation of everything is not working with the mindset that we live on a finite living world, and that we need to respect its systems. And if we put in place a circularity of resource use, I wouldn’t be surprised if it actually ends up generating more jobs than are expected to be lost through automation.”
Alongside technological development, one of the most pressing issues of the near future is how the global economy is going to sustain an ever-growing population. According to United Nations projections, the total population of the world is expected to surpass 10 billion by 2060. But in her book, Raworth argues that the rate of population growth globally is, in fact, slowing down due to the gradual development of women’s reproductive rights across the globe, as she expresses to me. “The best form of population control is girls’ education; investment in child health so that babies don’t die under the age of five; women’s’ reproductive rights and women’s’ empowerment. That is proven again and again to be the most effective way, so that women can choose to have fewer children and so that the aggregate population growth rate stabilises.”
But I press her on whether an increasing population will perhaps always justify GDP growth as the ‘cuckoo’ of the economic nest. Even if the rate is slowing, the fact remains that the population is still increasing, with more and more people to provide for on a planet with diminishing resources. Isn’t endless GDP growth ultimately a necessity?
Raworth doesn’t seem fazed by the prospect. “In countries that have a growing population, one can understand why it might be assumed that therefore we need to have growing number goods and services through the market.”
“But while the global population may be growing, it’s concentrated in just a few countries. Some countries already have a near zero population growth: Japan, France, Italy – they all have projections for a declining population. So the first thing that governments are doing is that they’re trying to stimulate population growth because they need a larger population to sustain the growing economy. We’re locked into growth cycles for population and GDP, so already some countries have reached the point where their population has stabilised or is even projected to decline. Already they need a new kind of economic model that enables them to have an economy that allows that population to thrive without endlessly growing.”
This idea of endless production to satisfy human needs is supported by our conception of human nature in economics, Raworth asserts, through the ‘rational economic man’. Selfish, unsatisfied and fixed in his preferences, humans are assumed to always prefer more to less, whatever the circumstances.
Whilst researching for her book, Raworth discovered that studying the model of the rational economic man has in fact caused us to mirror it. “The work of people like Robert Frank has documented how students respond to this, and it’s extraordinary – you can actually damage a student’s mind by teaching them this false model of who we apparently are.” The research she refers to found that second and third-year economics students were more likely to perceive human nature as selfish and rational compared to first year students. “We tell stories of greed, and in economics we tell a really mean story of ourselves”.
Given that this conception is now so deeply ingrained in our mindset, then, what will it realistically take to try and reverse the process? “The transition is long and it’s hard, but in terms of the mindset of who we believe we are, there’s some fantastic work going on. There’s Homo Deus [by Yuval Noah Harari], and it’s a bestselling book – people are reading this book about Homo sapiens.”
“So there’s this real fascination about it – we’ve all grown up watching David Attenborough films about nature and I think now everyone’s thinking, ‘I want to know about us’. And behavioural economics is at last stopping us saying, ‘we have this model of humanity, and we model him thus’. It’s saying let’s go out and collect data and understand how people behave. And it’s fascinating!”
“Also, if you look around you in the world, people don’t behave like the ‘rational economic man’. We help each other; we care for others; we hold doors open for each other; people actually risk their lives for others. And when you draw on that rich experience that we live in, we can very quickly make sense of a much, much richer picture of our nature.”
“It’s not that we’re all altruistic and compassionate – we have both. I like this quote from David Hume: “there lies in each of us something of the serpent and something of the dove”. I have 9-year-old twins; when they were very little, the daily role of parenting was really to try and bring out the dove and teach them to share. But the serpent is there, the competition – it’s in all of us. And it’s useful, so let’s not pretend that we don’t have this competitive drive. We do, and we can harness that, but also bring back the cooperative element of us which is so clear.”