Dear friend—
When I began graduate school, I was excited to start learning about economics. It was becoming increasingly clear to me that the entire world runs on the field. I understood that wuestions like “How much does this cost?” “How much are people willing to pay?” “What is the return on investment?” are fundamental to crafting policy or any change in our current political systems.
My logic: if I could learn about economics as practiced by economic advisers and policymakers, then I could learn how to leverage it in ways that would create a ~better world~. I thought about it as learning the system to change the system. I still believe this, to a certain degree. I think there are some problems so urgent that working within the system we’ve got is an essential first step.
However, over the course of my studies, I became increasingly convinced that the kind of economics I was learning—the bedrock of a lot of politics, especially American politics—is not what we need for crises like extreme poverty, labor issues, class inequality, climate change, racial injustice, etc.
My ~awakening~ has been part of a larger awakening, I think. Change is in the air. more people are recognizing that the past several decades of economic thinking and policy have not served us. In academia, in politics, in daily conversations, there is a sense that something is not right, and working inside our current paradigms won’t meaningfully fix it.
Doughnut Economics by Kate Raworth (she/her) is a prime example of this shift. An economist by trade, she uses this book to propose a new kind of economics—one that, as the subtitle suggests, is fit for the twenty-first century and its attendant challenges.
The key of her argument is this: today’s dominant theories of economics (1) do not serve us, (2) do not represent how humans—or science—actually work, and (3) ignore the very real, material limits of our planet.
That's where the idea of the doughnut comes in. Raworth proposes that our economy should operate within the rings of a doughnut. The outer limits represent the limits on the planet (how much of any resource we can use before it can no longer support us) and the inner limits are the most essential things we must deliver for everyone, like food and shelter.
In practice, that requires us to shift our goals—our ideas of “What are economics, money, and commerce for?”
Take, for example, growth. For decades, economists and state leaders have positioned economic growth as the ultimate goal of policy. They ride and die on GDP, gross domestic product, and God forbid if GDP is not rising—and not just rising consistently, but rising more and more every year.
It’s like GDP is a shark; it must keep moving or it’ll perish. Only instead of gliding through the sea, the shark must swim higher and higher and then into the air and then into the stratosphere forever and ever or else we will never be whole and happy.
Like the idea of flying sharks, Raworth argues that the goal of infinite GDP growth is both bad for us (the metaphorical shark) and scientifically impossible.
(Raworth does discuss decoupling; for example, between GDP and fossil fuel consumption. For decades, growing fossil fuel extraction and use were directly linked to GDP growth; you could not have one without the other. But now, with the rise of renewables, it seems we will break that link. Several countries already have. Reports of decoupling often seem to suggest that this means we can have growth without the bad sides, like ruining the planet. But I do think that Raworth doubts the expectation of infinite growth. It just doesn’t make sense in our finite world; our world of natural decay, entropy, cycles. Something’s got to give.)
In this way, much of modern, mainstream economics totally ignores the real facts of our world. It has been shoving a square peg through a round hole for decades, if not centuries.
A few tenants of economics and their attendant failures:
(There are surely other vital components to classical economics; these are just the three that I have the biggest bone to pick with.)
FAILURE #1: EQUILIBRIUM.
Equilibrium is the “sweet spot” at which the supply of a thing equals the demand for it.
At this equilibrium point (usually represented by the price of the thing), there is exactly enough of the thing for all the people who want to buy it (and afford to buy it).
Much of running a company is about manipulating and responding to the supply, price, and demand for a thing.
For (a very simplified) example, let’s say there is a shortage of iPhones. Apple cannot make enough iPhones to keep up with all the people who want one. So it raises the price, ensuring that an estimated number of people won’t want to buy an iPhone for $100 more. Success! Sales go down a bit. Apple does not have to worry about anything going out of stock. Instead of 10 million people buying iPhones at $800, there are 9 million buying at $900. Supply shortage is no longer a problem. Equilibrium returns.
Under this model, economic policy is about reaching that sweet spot, where prices are exactly as high as people are willing to pay to ensure that supply equals demand.
However, Raworth points out that economic systems are much more complex than simple equilibrium models. People don’t buy an iPhone in a vacuum. This purchase is hardly their only consideration in any given moment.
Moreover, and more fundamentally, the thinking behind this model posits balance as the natural order of things. It assumes that there is some set point, some perfect price that the market will naturally gravitate toward. But for many parts of the economy, the opposite is true.
Like biological systems, economic systems often experience feedback loops—reinforcing drives toward the extremes. That’s why, once you become poor in an economy like the United States’, it is far more likely that you get poorer than return to your previous life. Poverty compounds. The lost job turns into lost income which makes you unable to afford a car which means you struggle to find another job which means you lose your home so on and so forth.
Balance is not as natural as the equilibrium model would have us believe.
FAILURE #2: RATIONAL ACTORS.
Much of our economic models rely on the parameter that humans are “rational actors,” which means they will do the thing that benefits them. Moreover, the “rational actor” is only relevant if (1) it is widely applicable and (2) if the rational actor’s behavior is consistent and predictable for everyone.
Shockingly, not everyone has the same motives. Most people, if not all people, act against their own immediate interests toward other ends: for example, themselves in the far future, their family’s future, their communities, or strangers halfway around the world.
And, Raworth points out, much of the research that aims to paint a portrait of the rational actor is done in (Western, Educated, Industrialized, Rich, Democratic) WEIRD countries, on WEIRD people.
WEIRD economics inflicts much of its ideas onto other countries through trade, diplomatic relations, and foreign aid (which often comes with strings attached: “We only give you money if you enact X policy”). But WEIRD economics fundamentally operates on assumptions about behaviors, desires, and motivations that simply do not hold for the majority of the world, or even the majority of its people.
FAILURE #3: EXTERNALITIES.
With the equilibrium model comes externalities: the things that happen outside of the actors and factors in the model. The things that no actor in the economy properly accounts for, and so the benefits or costs throw the equilibrium off balance.
For example, pollution. Pollution exacts costs on us all—for instance, through healthcare costs—but it operates outside of the equilibrium model because it’s unpriced. For the most part, no one pays the costs of pollution. Companies, and even smaller actors like people littering or small farmers with their manure, pollute the air and water without paying the costs to everyone who suffers because of it.
But Raworth argues that this framing of externalities is not suitable for how systems actually work. It narrows the view of “what matters,” so that the major challenges and phenomena of our time—climate change, public health crises, extreme inequality—are pushed to the margins. They are “aberrations” in the system, rather than integral drivers and consequences of the system.
Right now, the policy antidotes to externalities are often:
(1) the government wholesale bans or provides the externality so the economy better accounts for its costs and benefits. For example: lead paint. In economist-speak, lead paint created the negative externalities of high healthcare costs and lost productivity due to the developmental and neurological harms it inflicted. Government banned lead paint and lowered the externality costs it created.
(2) the government assigns the responsibility for the externality to someone, so that they might better account for its costs and benefits. That can be done legally, through private property rights, or through prices: for example, a carbon tax, which makes companies pay for their climate pollution.
Oftentimes these do work, at least in the short term. However, they often lack the flexibility or nuance to respond to changing times, or they are bandaids masking a larger problem, or they are presented as the perfect remedy when others may be better.
For example, the carbon tax. As Raworth writes, such a tax is based on the “pay to pollute” model—alternatively, she suggests, what if we just decided as a society that we just had a legal/social/moral standard for polluting as little as possible?
We’ve done it before for dangerous substances like mercury. We agree that there’s no safe limit—that none of the benefits could possibly outweigh the major risks and harms to health. Who says we can’t societally agree that climate pollution, toxic chemical pollution, etc., are so dangerous as to minimize as much as possible? Or at least to specific, enforced levels? (I am of course simplifying here, but I think to say “There’s no way that could exist in our modern world” is short-sighted.)
Most notably, most policies aimed at addressing externalities fail to address what may be the core failing of this line of economic thinking—that the costs and benefits of some things simply cannot be quantified and plugged into an equation. The world is often bigger and better and more complex than what a number can hold.
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And what is so frustrating about learning all this is that dissenters and even the economists who came up with the theories themselves have said they’ve gotten it wrong for decades! But much of the field refuses to consider them!
Intro to economics classes still teach the supply and demand curves and the equilibrium model as foundational, instead of just a very limited model that starts to break down once you apply it to our very messy, complex, complicated world.
I remember learning supply and demand in policy school, and over and over again the professor would remind us that the models were only applicable under a very strict set of assumptions, like that (1) markets are perfectly competitive (funny, that almost every industry in this country is concentrated amongst a handful of mega-corporations), or (2) everyone, buyer and seller alike, has perfect knowledge of the products at hand and so will make the best choice to meet their demands.
Yet, despite all these strict requirements that every corner of our economy fails to meet, my economics class didn’t really explore alternatives or even how to apply this model to the thorniest, most inconvenient problems of the real world (perhaps because that is impossible?).
And still yet, these theories inform the models that policymakers use, which has material consequences for the rest of us. As Nick Hanauer in The American Prospect points out, these models reflect bunk theory and perfect, imagined conditions instead of the real-world experiments that have proven otherwise, and also, you know, reality.
And here lies the great conceit of economics: it plays at being a hard science, with laws as inevitable as those of motion, while stubbornly ignoring the squishiness of it all—the whims, the emotions, the passions, the politics, the needs and desires of human beings and all the other living things that we share the planet with.
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I was watching a video by Damon Dominique the other day, a YouTuber who has gained an audience through his many travels. And he often says that social norms and laws are totally made up.
Nothing is written in stone and things that are unacceptable in one place are totally cool in other places—evidence that we put so many unnecessary restrictions on ourselves and each other.
Personally, I think Damon’s phrasing comes across as un-nuanced with a touch of privilege, but I agree with the crux of what he’s saying—that nothing is immutable, everything can change (including and especially culture), and perhaps the world would be better if we acted like it. And so I think it goes with economics.
As many academics have written, money is a story we tell ourselves. We made up a collective, mass hallucination that a specific piece of paper could be exchanged for a refrigerator. Who’s to say we can’t rewrite the story?
That’s what Kate Raworth advocates for, in the end. She gives examples of alternative currencies, and they seem to me like alternative systems of trust. Ultimately, that’s what currency is about—ensuring that the labor we do for others can be traded for resources/services/goods for ourselves. Money enables us to trust our neighbors and strangers that this exchange happens in good faith.
Much of Doughnut Economics is Raworth explaining several other alternative ways of organizing our economies: how we could do finance in ways that are equitable, how we could incentivize maintenance over growth, how we could reframe our thinking to address things like wealth inequality and the biological diversity crisis.
But the requisite step for this all to work is a paradigm shift in economics as a field, and in how economic ideas are wielded in policy, politics, social relations; the whole shebang.
While not a perfect book, Doughnut Economics was super invigorating and helped me form and frame some Thoughts I’ve been having. I heartily recommend it.
Take care, chat soon,
—mia xx
S/o to Mica for invaluable edits <3