Doughnut Economics - critical summary review

“Doughnut Economics” by Oxford academic Kate Raworth deconstructs the character of the rational economic man. The book also challenges the necessity for never-ending economic growth by identifying seven critical ways in which mainstream economics has misled us while sketching out an alternative plan on how we can satisfy humanity’s needs without overshooting Earth’s ecological ceiling.

So, get ready to learn what are the seven ways in which mainstream economics is fundamentally wrong about the world – and, of course, which are the seven things we should start doing if we want to get back on track!

No. 1. Change the goal: from gross domestic product  (GDP) to the doughnut

Regardless of where you live, there’s a good chance that your government’s main economic – and even political – goal is the country’s GDP growth. Interestingly enough, it wasn’t always like that.

In fact, for most of history, economics wasn’t interested in continual growth but in ways to properly manage the household (which is what the word “economics” actually means in ancient Greek). Consequently, nobody considered economics a scientific discipline for millennia: it was an art form, more akin to literature than to mathematics. Sure, there are some rules you should follow, but there are many impractical goals to achieve as well.

The scenario changed after people like Adam Smith, John Stuart Mill, and Milton Friedman started rationally deducing the laws that supposedly govern our economic lives. Too bad none of them really cared (or even knew) about the laws that govern our human nature, creating a void for centuries: despite being originally founded with its goal in mind – properly managing the household –  suddenly nobody knew what economics was supposed to achieve. 

The result was a somewhat invented objective: GDP growth. The problem with it is quite simple: quantity (economic growth) doesn’t always translate into quality (of life). To quote none other than Simon Kuznets – the hallowed creator of national income – “distinctions must be kept in mind between quantity and quality of growth, between its costs and return, and between the short and the long term… Objectives should be explicit: goals for ‘more’ growth should specify more growth of what and for what.”

And this is where the doughnut comes in. Put simply, the doughnut is a torus-shaped framework for sustainable development, a “radically new compass for guiding humanity” toward the future. Its inner circle is “a social foundation of well-being that no one should fall below;” its outer circle is “an ecological ceiling of planetary pressure that we should not go beyond.” Going below the doughnut’s social foundation means leaving people without clean water and decent sanitation; going beyond its ecological ceiling, on the other hand, means putting pressure on Earth’s finite resources through climate change, ocean acidification, and chemical pollution.

“But between these two sets of boundaries lies a sweet spot that is both an ecologically safe and socially just space for humanity,” writes Raworth. “The 21st-century task is an unprecedented one: to bring all of humanity into that safe and just space.“

No. 2. See the big picture: from self-contained market to embedded economy

The first image in almost every economics textbook is the Circular Flow diagram, one of the simplest models of how the macroeconomy works. The problem with it? It is utterly and completely wrong – for two very important reasons.

The first one: the market isn’t self-contained, and it isn’t the only economic sector that creates value. Too libertarian to believe that? Well, allow Raworth to ask you an important question: who cooked Adam Smith’s dinner? When the father of economics, extolling the power of the market, noted that, “it is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner,” he forgot to mention the benevolence of his mother, Margaret Douglas, who had raised her boy alone from birth. Unpaid household labor creates a lot of value; otherwise, you won’t have things like Wikipedia. And yet, it rarely gets a mention in economic theory.

The second problem of the Circular Flow diagram should have been quite self-evident from the start, but we’re only realizing it now: the economy, just like any other human system, isn’t a closed structure by definition. It is – as Herman Daly first suggested – “an open subsystem of the closed Earth system.” In other words, an economy that constantly grows will one day be brought to a halt when it inevitably overshoots Earth’s regenerative capacities. And that day, unfortunately, might have already arrived.

No. 3. Nurture human nature: from rational economic man to social adaptable humans

According to Raworth, the most influential portrait in the history of civilization isn’t Leonardo da Vinci’s “Mona Lisa,” but the “equally enigmatic yet utterly different character… of the rational economic man.” Despite being “the smallest unit of analysis in economic theory,” this Homo economicus is such an exaggerated and distorted version of Homo sapiens that it’s basically a caricature, if not a cartoon.

You know it well: it is the “solitary, calculating, competing and insatiable” creature, a Swiftian Yahoo who – to paraphrase John Stuart Mill – desires to possess wealth and luxuries, but deeply disdains work. Although Mill deemed this description “arbitrary” and based on “premises which might be totally without foundation,” his Homo economicus became the nuclear foundation of subsequent economic study – and still is, despite abundant evidence that the portrait is not only simplified but utterly wrong. For example, both the public goods and the ultimatum game prove that most humans value fairness far above selfishness and are habitually willing to lose things if they see injustice in winning them. 

So, it’s time to update the smallest unit of economic analysis and replace Homo economicus with someone else. “Many new names have been proposed” for the update, writes Raworth, “from Homo heuristicus and Homo reciprocans to Homo altruisticus and Homo socialis. But it makes no sense to pin ourselves down to just one of these identities: we inhabit them all simultaneously.”

No. 4. Get savvy with systems: from mechanical equilibrium to dynamic complexity

Now, if humans are so complex, then how do they market-balance themselves without external interventions? The simplest truth is: they don’t. They never have. If the opposite was true, then things such as financial manias should have never happened.

In other words, if you believe in the “equilibrium point” and think that the market is all about “supply and demand,” then you should really think again: this is the stuff bubble-boom-bust cycles are made of. In reality, economic systems are much more dynamic and much more complex. 

To understand them better, imagine chickens living by the road and laying eggs. More eggs mean more chickens, and more chickens mean more eggs. This is how a reinforcing loop works: it amplifies what is happening. However, there’s always a balancing loop as well. It works like this: more chickens → more road crossings → more deaths → fewer chickens. The balancing loop counters the reinforcing one.

But how can you discover how many chickens would cross the road or how many cars would break at the last point? Can you guess when the chickens would realize that it is not smart to cross the road when there are cars? There are just too many variables to pin them down in a single “supply and demand” graph. 

“It is out of these interactions of stocks, flows, feedbacks and delays,” concludes Raworth, “that complex adaptive systems arise: complex due to their unpredictable emergent behavior, and adaptive because they keep evolving over time.”

No. 5. Design to distribute: from ‘growth will even it up again’ to distributive by design

Around half a century ago, Nobel-Prize winning economist Simon Kuznets introduced the world to what is now known as the Kuznets curve. In essence, it suggests that as countries get richer, inequality must rise first before it eventually drops off. Translation: if you want economic success, then you better accept economic inequality for a while because that’s an inevitable stage of it; equality should come a bit later. 

So, in the words of another Nobel Prize winner by the name of W. Arthur Lewis, “development must be inegalitarian,” and “poor countries should concentrate income in the hands of the wealthy since only they would save and invest enough of it to kick-start GDP growth.” Great news for the rich; bad news for just about everyone else.

Even worse – if you consider that the Kuznets curve is fictional. Even though it’s still taught at universities around the world, Kuznets himself admitted that there’s “no evidence whatsoever” of it being right. It was, as he wrote, “5% empirical information and 95% speculation, some of it possibly tainted by wishful thinking.” Wishful thinking indeed: when Thomas Piketty tested Kuznets’ theory empirically, he found out that it bears no relation to reality at all.

It’s time we stop thinking in terms of “growth will even things up” and started devising economic systems that are distributive by design! Why shouldn’t we be able to devise a society whose development will be deliberately egalitarian? We have the tools. We just need the will.

No. 6. Create to regenerate: from ‘growth will clean it up again’ to regenerative by design

Another thing mainstream economists are pretty sure will sort itself out with growth? Earth. And once again, the problems are created by the very people who try to solve them by discovering some law.

In this case, American economists Gene Grossman and Alan Krueger did a study in the 1990s and supposedly noticed that pollution decreases with growth – after increasing for a while. Since it’s basically the same idea that Kuznets had as far as inequality is concerned, Grossman and Krueger’s theory summed up in the so-called Environmental Kuznets Curve.

The problem with it? Well, for one, that even its authors realized it was wrong. Unfortunately, by then, it was too late to convince the rich people in power that growth might mean serious environmental problems. “Of course it does,” they’d say. “But they’ll sort themselves out in the end.” Although the logic may be sound on paper – technological advancements create environmental problems but also devise solutions for them in time – the data doesn’t support this. On the contrary: it seems we may already be near the last return point. And maybe we should try to do something before it’s too late.

And that something is quite obvious: transform our linear, caterpillar economy into a circular, butterfly one, shifting from a present filled with disposable products to a future of reusable goods. True, we’ve already started doing this. But we need to do even more.

No. 7. Be agnostic about growth: from growth addicted to growth agnostic

Studies and empirical data have demonstrated that, at least so far, “no country has ever ended human deprivation without a growing economy. And no country has ever ended ecological degradation with one.” Put simply, if we want a better quality of life for more people, then it’s only smart to devise ways for our economy to grow; however, if we don’t want to destroy the resources that allow it to grow, then we must hinder its growth.

The compromise is the doughnut: finding the right balance. And that starts with an almost counterintuitive notion: after a certain limit, economic growth is probably not a smart objective anymore. So, there should be indeed such thing as “enough money.” With this in mind, Raworth proposes rebuilding our system so that we are constantly reminded that hoarding – especially of money – is not only selfish but, in the long run, detrimental to everybody, including the hoarder.

An Argentinian German businessman by the name of Silvio Gesell – who lived in the turn of the  20th century – proposed a solution for this: “we must make money worse as a commodity if we wish to make it better as a medium of exchange.” Unlike most commodities – be they potatoes or smartphones – money ages quite well: it actually appreciates with time. A good way to inspire people not to hoard money? Introduce demurrage currency – that is, money that loses value the longer it is held. That way, people will need to spend it, and this will move the economy.

Too sci-fi-y to ever work? Well, it already has – in the Austrian town of Wörgl in 1933 during the Depression. Why shouldn’t we try this once again?

Final Notes

A book by an economist for people who are not interested in the economy, “Doughnut Economics” is practically everything an economics book for the 21st century should be: comprehensible, environmentally-friendly, aware of the challenges that lie ahead, and immensely interested in solutions that favor humanity as a whole, and not merely a certain group of people.

And unlike most other economic books, it is also honest, out-of-the-box enlightening, and prefers images to equations. 

Kate Raworth – thank you. The rest of you – please read the book.

12min Tip

The economy shouldn’t be about growth, but about proper management. And nobody should be left behind: especially not by design.