The Pictures Matter

[mtvessel]

Dec 2021
Doughnut Economics - Kate Raworth – Random House Business Books, 2017
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It is evident from the subtitle - "how to think like a twenty-first century economist" - that this is an attempt to update the Dismal Science for the concerns and priorities of the new century. It is something of a mixed success. As an iconoclastic attack on the scientistic models and assumptions that underlie traditional economics it is generally brilliant, with well-argued and evidence-supported lines of reasoning that should give even its most ardent proponents pause for thought. The proposed alternatives, however, have a certain element of woo, and seem to me to be based on ideas that are, at best, unproven.

The first of Raworth's targets is the pictures and graphs found in economics textbooks, in particular the circular flow diagram of income with its presentation of the economy as a flow of water through a closed system of pipes (an image apparently chosen by Samuelson because he was writing for an audience of engineering students), and its later spectacular implementation as Bill Philips' MONIAC hydrocomputer. This, says Raworth, framed the thinking of late twentieth century economists, politicians and journalists to model the economy as a closed system driven by circulating money. But it isn't. MONIAC did not run on its own - it required a power source for the water pump that drove it behind the scenes. The energy supplied to that pump, and the emissions produced by it (directly in the form of waste heat and indirectly in the form of carbon dioxide produced as a byproduct of electricity generation), represent the two major factors that the circular flow model ignores - the energy and raw materials needed to enable economic production and the waste and pollutants that manufacturing processes produce. In classical economics these are environmental externalities and largely ignored, other than with some anodyne handwaving whereby the market, if allowed to operate without restriction, will magically replace scarce raw materials with cheaper alternatives, even where this is physically impossible, and "price in" the effects of pollution. But in the twenty-first century, we know that ignoring the effects of pollution and energy generation will result in a dangerously unstable climate. We must incorporate the planetary environment in which all human economies are embedded into our economic models.

The next question is how best to do this. Raworth starts by critiquing the traditional view that growth, measured as an increase in Gross Domestic Product (GDP), is essential for human welfare to improve, which she describes as an economic cuckoo in the nest that arose as a result of the attempts of early- and mid- twentieth century economists to frame economics as a set of eternal truths enshrined in laws, similar to those of physics and similarly value-free. But economics, unlike physics, is an expression of human activity, and as such it is driven by human values and goals. It is not value-free and should not be modelled that way. Raworth points out that since the economic crash of 2008, politicians and economists of all political stripes have promised a growth sandwich with a variety of adjectival fillings - "sustained growth" (Angela Merkel), "balanced growth" (David Cameron), "inclusive green growth (the World Bank), "long-term, lasting growth" (Barrack Obama) (like the Model T Ford, you can have any type of economic activity you like, so long as it's growth). The fact that there are so many qualifications to the notion of growth implies that it is a highly inadequate measure of what a thriving, successful society should look like.

Raworth's own formulation is the Doughnut, a "compass" for economic development that starts from the Planetary Boundaries model of Rockström et al.. This defines nine measures that, if overshot, will cause dangerous instabilities in the earth's ecosystem. They form a ring of hard limits that any environmentally sustainable economic system must work within. Within this, Raworth adds a ring of 12 "social foundations" inspired by the sustainable development goals defined by the United Nations. These are social boundaries and undershooting them means that the basic needs of at least some groups of humans are not being met. A fair and sustainable economic system, Raworth says, must lie in the doughnut in the middle.

The remainder of the book addresses various techniques and ways of thinking that may help to lead to this brave new economic world. Like Daniel Kahneman, Raworth lays into the idea of Homo Economicus, or "rational economic man", the hopelessly simplistic caricature of individual human agents as solely self-interested and also all-knowing that lies at the heart of neoclassical economics. As she points out, policies based on simplistic assumptions of economic self-interest can rapidly fall foul of real human behaviour. She cites a study in Haifa, Israel, in which ten children's day nurseries instituted a fine on parents for being more than ten minutes late in collecting their children. The aim was to encourage parents to be more prompt, but it had the opposite effect - they regarded the fine as the going rate for additional childcare and twice as many started arriving late. When the fines were later removed, the late attendance rate rose higher still because the social contract between the parents and the school had, in effect, been erased. Market mechanisms create a narrowly contractual mindset; if we want to harness the human qualities of altruism and good will to achieve desired social ends, we should be really careful about the areas of social activity in which we let them operate.

Another area of concern is systems thinking. Classical economics was modelled on static Newtonian models, and theories such as the law of supply and demand assumed that negative feedback will cause any market system to drift back to a perceived natural point of stability. But there are three sorts of scientific models - "simple" systems such as an isolated pendulum or a moving billiard ball that can be modelled by linear differential equations; disordered complex systems such as gases that can be studied by statistical and probabilistic modelling of random agents; and an intermediate area, which can be called organised complex systems, where large numbers of objects interrelate in complicated but predictable ways, and which can be modelled as stocks, flows, feedback loops and delays using non-linear differential equations. An economy is self-evidently an organised complex system, so modelling it as a set of static equilibria is clearly a mistake. In particular, organised complex systems show what are often transient patterns of self-reinforcing feedback loops with particular metrics rising in value until a tipping point is reached and they crash to a low level. This is exactly the behaviour that is seen with speculative investment booms in housing or cryptocurrencies. Far from being equilibria with occasional perturbations, markets are intrinsically unstable, with built-in feedback loops that will make them rise and fall. That applies to income inequality as well. Success breeds success; over time, wealth becomes increasingly concentrated in the hands of people who have capital to start with, until, presumably, the perceived inherent injustice leads to social unrest and societal collapse. For democracies with meritocratic intentions, that's a threat.

Raworth's answer to this, perhaps unsurprisingly, is the traditional liberal-left one of localism. Networks of branching fractals, she notes, are nature's way of distributing resources evenly - veins and arteries in a body, branches of a tree, tributaries of a delta. Such systems have a fine balance between efficiency and reliability, with enough large nodes to allow significant volumes to be transferred quickly and enough small ones to ensure that there are multiple paths, providing resilience. Our most effective information distribution system, the Internet, is organised on exactly this principle. So, create distributed systems for sharing resources that are the sources of wealth: land, water, raw materials. Even money - local currencies stop wealth concentrating in multinational banks.

It's here that I started to become uneasy about some of Raworth's prescriptions. She approvingly mentions Ethereum, a community-based cryptocurrency, without noting the huge energy costs of bitmining (and at time of writing it has recently lost a fifth of its value overnight, so it is clearly even more unstable than the national currencies it seeks to replace). She also likes free and open-source software (FOSS) and hardware (FOSH - essentially blueprints for 3D printing) as a means of distributing intellectual property, but fails to explain how the people contributing to these undoubtedly worthy endeavours will be able to put food on their tables. I like free stuff as much as anyone (and indeed use FOSS - with suitable attribution - in my day job), but if something that you value is being offered to you for free, then the chances are that someone somewhere is getting exploited.

Similarly with migrant workers. Raworth claims that they are one of the most effective ways of reducing global income inequality on the basis that around 25% of the GDP of countries such as Lesotho, Nepal and Moldova come from remittances sent home by them, but given the current hostility to immigration manifest in almost all comfortably-off countries, it doesn't seem a very practical solution to scale. She also doesn't address the chilling effect that the extensive use of migrant labour can have on local wages, which reduces costs for companies and so concentrates wealth in the hands of their shareholders.

Then there is recycling. Like David Attenbrough, Raworth decries the linear take-make-use-lose approach of industrial process design, and the ineffectiveness of the carbon caps, quotas and tiered pricing models that have been tried as a means of mitigating its polluting effects, but her alternative proposal of regenerative and restorative cyclic processes is going to come up against some hard physical constraints. Reversing entropy, which is what regeneration entails, is difficult, takes vast amounts of energy, and will never be perfect. Raworth acknowledges the latter point, arguing that we should be focusing on the productivity of resources rather than of labour, but seems rather anodyne about the first two. Raworth is in general a fan of Kahneman-style nudge policies, but the changes she advocates are going to take much more than a nudge to achieve.

Finally, because the pictures do indeed matter, it's worth considering whether the Doughnut model is a realistic one. The planetary boundaries framework is fairly well established, albeit with some arguments over non-falsifiable claims and doubts about its usefulness as a policy tool, but the social foundations, could, I think, do with stronger evidence to justify their inclusion. They include concerns like political voice and gender equality which, while clearly desirable to liberal westerners, are not obvious pre-requisites for a thriving economy (or society - China, for example, seems to get along just fine without them). A traditional economist, would, I think, harrumph that trying to measure such nebulous concepts, let alone implementing them in macroeconomic policy, is chasing a unicorn. Economics may not be a science, but it is the study of a complex organised system with recognisable features, so there should be evidence in the form of well-attested studies that such factors contribute strongly to a successful economy. And maybe there are, but if so, Raworth does not discuss them. Which does leave her open to the criticism that the Doughnut model is motivated more by an attempt to give intellectual weight to the obsessions of the green and liberal left political classes in western democracies than by a desire to replace the economic models of the twentieth century with more reliable alternatives. I don't think this is true, by the way – at the very least, the Doughnut model is a spur to more creative modelling than traditional economics allows - but it’s a shame that this book does not do more to prove its case.