Old economics is based on false ‘laws of physics’

Inequality is the biggest threat to the global economy – and it’s getting worse  Oxfam’s statistics are beyond belief; eight men own more than 3.6 billion people do: our economics is broken. By Mark Goldring, in The Guardian.  So what to do about it, says George Monbiot?  Kate Raworth says that the aim of economic activity  should be “meeting the needs of all within the means of the planet”. Instead of economies that need to grow, whether or not they make us thrive, we need economies that “make us thrive, whether or not they grow”. This means changing our picture of what the economy is and how it works. 

A properly functioning economy requires our companies to see themselves as vital contributors to society, rather than a means of extracting wealth from it. It demands that governments set the rules in a way that reward, rather than penalise, them for good behaviour. It requires us to better balance the important incentives for people to save, invest and create jobs with an approach to sharing the benefits that will allow countries to run the public services that all citizens need, the poor far more than the rich; that allows people to earn a real living; and that supports the most vulnerable.

Today, eight people have the same wealth as the poorest half of the world’s population.

Stop and think about this. It is a mind-boggling concept.  Last year we said we would have needed a double-decker bus to transport the 62 people we thought owned the same as the poorest 3.6 billion on the planet. In 2017, thanks to more accurate data, we find that in fact this group would fit in a single golf buggy.

Today nearly 800 million people – one in nine – across the world will go to bed hungry or undernourished. The adults will wake up uncertain when they will next eat, whether they will have work, fearful for their health and the costs that illness in the family might bring. The eight men – yes, they’re all men – and their fellow billionaires will wake up having slept rather better, and their wealth, invested across the world, will have increased by countless millions even as they slept.

It would be easy to vilify the eight, to make each individual a poster boy of the growing chasm between the richest and the rest. But painting these individuals as the villains would be unfair. The eight include some of the world’s largest philanthropists and those, such as Warren Buffett and Bill Gates, who have spoken out against the shocking scale of inequality in the world. These eight men are not themselves the cause of the poverty so many still live in. But they are the most powerful representatives and beneficiaries of an economic system in which wealth accrues more wealth; where wealth means power and influence, which in turn leads to laws and practices that help the rich get richer.

So this is not an exposé of eight people, but of a broken economics. Narrowing the gap between the richest and the rest requires us to take on a more challenging task than asking eight men to change their behaviour. It requires us to create a more human economy; one that does not result in 1% of the world’s population owning the same wealth as the other 99%. One that encourages and rewards enterprise and innovation, yes, but one that also offers everyone, regardless of background, a fair chance in life and ensures when individuals and businesses succeed, they do so for the benefit, rather than at the expense, of others.

Too often today, our economy rewards rather than discourages bad behaviour. Tax avoidance costs poor countries more than $100bn annually that could be used to provide clean water, lifesaving medicines or education. Rich countries, including the UK, lose countless billions more. Yet governments, anxious to defend their own corporate sectors and perceived national interests, have failed to adequately respond to companies’ use of tax loopholes, corporate power and new technology to avoid paying their fair share. Small, taxpaying businesses are forced to operate at a competitive disadvantage against multinationals, encouraging them to find their own dodges in a desperate effort to level the playing field.

Nowhere is the old proverb “money begets money” more apparent than in how companies seem determined to stuff the pay packets of their top executives, whatever the economic weather. Here in the UK, a FTSE 100 director can expect to pocket about £5.5m a year. A leading UK CEO now earns almost 130 times the wage of their average employee, up from just 10 or 20 times as recently as the 1980s.

Meanwhile, those without economic power feel the pain: the producer in a developing country, the low-paid UK worker, the woman juggling work and childcare, are squeezed until their pips squeak, all in the name of returning as much money as possible to predominantly wealthy shareholders. Last autumn, the Institute for Fiscal Studies warned that their fellow Britons were in the midst of decade of lost wage growth, the worst for 70 years. Justifying such a growing divide in terms of merit will be hard. A recent study by CFA, the global association of investment professionals, found the link between the pay and performance of 350 top executives to be negligible.

In a survey of 700 experts, published ahead of its annual gathering in Davos this week, the World Economic Forum pinpointed inequality as the number one threat to the global economy during the year ahead. It also cited it as a key factor in continuing extreme poverty, political instability, violence and the polarisation of societies. Yet there appears little hope of substantive change being proposed by leaders at WEF. In the short-term at least, GDP growth will remain their answer to all ills.  We have made huge progress in reducing global poverty, and wealth creation has played a major part. But the real incomes of the world’s very poorest have gone up by just $3 a year over the last 25 years. We need to recognise that economic growth and wealth creation are not in themselves enough to ensure decency and dignity for all.

A properly functioning economy requires our companies to see themselves as vital contributors to society, rather than a means of extracting wealth from it. It demands that governments set the rules in a way that reward, rather than penalise, them for good behaviour. It requires us to better balance the important incentives for people to save, invest and create jobs with an approach to sharing the benefits that will allow countries to run the public services that all citizens need, the poor far more than the rich; that allows people to earn a real living; and that supports the most vulnerable.

Moving towards a more human economy also means looking seriously at different approaches to corporate ownership – such as cooperatives and other forms of wider involvement – and how they can help in giving a greater number of people a greater stake in both the national and global economies. There are individuals and companies that are already trying to do it right but they are the exception not the norm.

Responsible and responsive leadership – the theme of this year’s Davos conference – requires governments and companies to really step up if we are to eradicate extreme poverty as the world committed to so bravely in the sustainable development goals just 16 months ago.

 

By George Monbiot, in The Guardian, 13 April 2017

So what are we going to do about it? This is the only question worth asking. But the answers appear elusive. Faced with a multifaceted crisis – the capture of governments by billionaires and their lobbyists, extreme inequality, the rise of demagogues, above all the collapse of the living world – those to whom we look for leadership appear stunned, voiceless, clueless. Even if they had the courage to act, they have no idea what to do.

The most they tend to offer is more economic growth: the fairy dust supposed to make all the bad stuff disappear. Never mind that it drives ecological destruction; that it has failed to relieve structural unemployment or soaring inequality; that, in some recent years, almost all the increment in incomes has been harvested by the top 1%. As values, principles and moral purpose are lost, the promise of growth is all that’s left.

You can see the effects in a leaked memo from the UK’s Foreign Office: “Trade and growth are now priorities for all posts … work like climate change and illegal wildlife trade will be scaled down.” All that counts is the rate at which we turn natural wealth into cash. If this destroys our prosperity and the wonders that surround us, who cares?

We cannot hope to address our predicament without a new worldview. We cannot use the models that caused our crises to solve them. We need to reframe the problem. This is what the most inspiring book published so far this year has done.

In Doughnut Economics: Seven Ways to Think Like a 21st-Century Economist, Kate Raworth of Oxford University’s Environmental Change Institute reminds us that economic growth was not, at first, intended to signify wellbeing. Simon Kuznets, who standardised the measurement of growth, warned: “The welfare of a nation can scarcely be inferred from a measure of national income.” Economic growth, he pointed out, measured only annual flow, rather than stocks of wealth and their distribution.

Raworth points out that economics in the 20th century “lost the desire to articulate its goals”. It aspired to be a science of human behaviour: a science based on a deeply flawed portrait of humanity. The dominant model – “rational economic man”, self-interested, isolated, calculating – says more about the nature of economists than it does about other humans. The loss of an explicit objective allowed the discipline to be captured by a proxy goal: endless growth.

The aim of economic activity, she argues, should be “meeting the needs of all within the means of the planet”. Instead of economies that need to grow, whether or not they make us thrive, we need economies that “make us thrive, whether or not they grow”. This means changing our picture of what the economy is and how it works.

The central image in mainstream economics is the circular flow diagram. It depicts a closed flow of income cycling between households, businesses, banks, government and trade, operating in a social and ecological vacuum. Energy, materials, the natural world, human society, power, the wealth we hold in common … all are missing from the model. The unpaid work of carers – principally women – is ignored, though no economy could function without them. Like rational economic man, this representation of economic activity bears little relationship to reality.

So Raworth begins by redrawing the economy. She embeds it in the Earth’s systems and in society, showing how it depends on the flow of materials and energy, and reminding us that we are more than just workers, consumers and owners of capital.

This recognition of inconvenient realities then leads to her breakthrough: a graphic representation of the world we want to create. Like all the best ideas, her doughnut model seems so simple and obvious that you wonder why you didn’t think of it yourself. But achieving this clarity and concision requires years of thought: a great decluttering of the myths and misrepresentations in which we have been schooled.

The diagram consists of two rings. The inner ring of the doughnut represents a sufficiency of the resources we need to lead a good life: food, clean water, housing, sanitation, energy, education, healthcare, democracy. Anyone living within that ring, in the hole in the middle of the doughnut, is in a state of deprivation. The outer ring of the doughnut consists of the Earth’s environmental limits, beyond which we inflict dangerous levels of climate change, ozone depletion, water pollution, loss of species and other assaults on the living world.

The area between the two rings – the doughnut itself – is the “ecologically safe and socially just space” in which humanity should strive to live. The purpose of economics should be to help us enter that space and stay there.

As well as describing a better world, this model allows us to see, in immediate and comprehensible terms, the state in which we now find ourselves. At the moment we transgress both lines. Billions of people still live in the hole in the middle. We have breached the outer boundary in several places.

  • An economics that helps us to live within the doughnut would seek to reduce inequalities in wealth and income.
  • Wealth arising from the gifts of nature would be widely shared.
  • Money, markets, taxation and public investment would be designed to conserve and regenerate resources rather than squander them.
  • State-owned banks would invest in projects that transform our relationship with the living world, such as zero-carbon public transport and community energy schemes.
  • New metrics would measure genuine prosperity, rather than the speed with which we degrade our long-term prospects.

Such proposals are familiar; but without a new framework of thought, piecemeal solutions are unlikely to succeed. By rethinking economics from first principles, Raworth allows us to integrate our specific propositions into a coherent programme, and then to measure the extent to which it is realised.

I see her as the John Maynard Keynes of the 21st century: by reframing the economy, she allows us to change our view of who we are, where we stand, and what we want to be.

Now we need to turn her ideas into policy. Read her book, then demand that those who wield power start working towards its objectives: human prosperity within a thriving living world.

Doughnut Economics by Kate Raworth (Random House Business Books, £20). To order a copy for £17, go to bookshop.theguardian.com or call 0330 333 6846. Free UK p&p over £10, online orders only. Phone orders min. p&p of £1.99.

Old economics is based on false ‘laws of physics’ – new economics can save us

It is time to ditch the belief that economies obey rigid mechanical rules, which has widened inequality and polluted our planet. Economics is evolving

Economists are shifting from working with “laws of physics” to taking a more organic approach
Economists are shifting from working with “laws of physics” to taking a more organic approach Illustration: Sarah Walsh

Things are not going well in the world’s richest economies. Most OECD countries are facing their highest levels of income inequality in 30 years, while generating ecological footprints of a size that would require four, five or six planet Earths if every country were to follow suit. These economies have, in essence, become divisive and degenerative by default. Mainstream economic theory long promised that the solution starts with growth – but why does that theory seem so ill-equipped to deal with the social and ecological fallout of its own prescriptions? The answer can be traced back to a severe case of physics envy.

In the 1870s, a handful of aspiring economists hoped to make economics a science as reputable as physics. Awed by Newton’s insights on the physical laws of motion – laws that so elegantly describe the trajectory of falling apples and orbiting moons – they sought to create an economic theory that matched his legacy. And so pioneering economists such as William Stanley Jevons and Léon Walras drew their diagrams in clear imitation of Newton’s style and, inspired by the way that gravity pulls a falling object to rest, wrote enthusiastically of the role played by market forces and mechanisms in pulling an economy into equilibrium.

Their mechanical metaphor sounds authoritative, but it was ill-chosen from the start – a fact that has been widely acknowledged since the astonishing fragility and contagion of global financial markets was exposed by the 2008 crash.

The most pernicious legacy of this fake physics has been to entice generations of economists into a misguided search for economic laws of motion that dictate the path of development. People and money are not as obedient as gravity, so no such laws exist. Yet their false discoveries have been used to justify growth-first policymaking.

In 1955, the economist Simon Kuznets thought he had found such a law of motion, one that determined the path of income inequality in a growing economy. The scant data that he could gather together seemed to suggest that, as a nation’s GDP grows, inequality first rises, then levels off, and ultimately starts to fall. Despite Kuznets’ explicit warnings that his work was 5% empirical, 95% speculation and “some of it possibly tainted by wishful thinking”, his findings were soon touted as an economic law of motion, immortalized as “the Kuznets Curve”– resembling an upside-down U on the page – and has been taught to every economics student for the past half century.

As for the curve’s message? When it comes to inequality, it has to get worse before it can get better, and more growth will make it better. And so the Kuznets Curve became a perfect justification for trickle-down economics and for enduring austerity today in the pursuit of making everyone better off some day.

Forty years later, in the 1990s, economists Gene Grossman and Alan Krueger thought they too had found an economic law of motion, this time about pollution. And it appeared to follow the very same trajectory as Kuznets’ curve on inequality: first rising then falling as the economy grows. Despite the familiar caveats that the data were incomplete, and available for local air and water pollutants only, their findings were quickly labeled the “Environmental Kuznets Curve”. And the message? When it comes to pollution, it has to get worse before it can get better and – guess what – more growth will make it better. Like a well-trained child, growth will apparently clean up after itself.

Except it doesn’t. If we have learned one thing from the emergent crises of recent decades – from the tipping points of climate change and the rise of the 1% to the near-collapse of financial markets – it is that it’s time for economics to ditch the fake physics. Thanks to more and better data, it has become clear that such economic laws of motion simply don’t exist. Far from being a necessary phase of development, extreme inequality and environmental degradation are the result of policy choices, and these choices can be changed. In the place of laws to be obeyed, there are design decisions to be made.

Pinterest
From physics to gardening in just a minute: a Doughnut Economics animation by Ainslie Henderson in collaboration with Kate Raworth

So if the economy is not best thought of as a mechanism that returns to equilibrium and follows fixed laws of motion, how should we think of it? Like the living world: it’s complex, dynamic and ever-evolving. And for economists, that means it’s time for a metaphorical career change: from engineer to gardener. Let’s take off the hard hat and give up on reaching for the economy’s control levers because they simply don’t exist. Instead, put on some gardening gloves, pick up a pair of secateurs, and start to steward the economic garden. And if you think that sounds laissez faire, then you’ve never done a hard day’s work in the garden: it calls for getting stuck in, digging, pruning, weeding and watering the plants as they grow and mature.

How can economic gardeners help to create a thriving economy, one that is inclusive and sustainable and will help to achieve the sustainable development goals? By following two core principles: make it regenerative and distributive by design.

Follow the laws of nature, not the laws of physics

Regenerative economic design ensures that instead of using up Earth’s resources, we use them again and again and again. We learn to work with, not against, the cyclical processes of life, including those for carbon, water and nutrients. Thanks to innovations in the circular economy and cradle-to-cradle design we can start turning last century’s degenerative economy into this century’s regenerative one.

Distributive economic design, in turn, ensures that value created is spread far more equitably among those who helped to generate it. Think employee-owned companies – such as the John Lewis Partnership and Unipart – that reward committed employees rather than short-term shareholders. Think community-owned renewable-energy systems that generate electricity along with income for community purpose. Think creative commons licensing that enables valuable innovations, like those of the Open Building Institute, to be shared, improved and used without end. Thanks to the rise of digital networks, there’s more opportunity than ever to turn last century’s divisive economy into this century’s distributive one.

So how can economic policymakers be more like gardeners in their approach? They should think of policy as an adapting portfolio of experiments, says Eric Beinhocker, a leading thinker in the field of evolutionary economics. We should mimic nature’s process of natural selection, which can be summed up as diversify-select-amplify: set up small-scale policy experiments to test out a variety of interventions, put a stop to the ones that don’t work and scale-up those that do. Nobel-prize-winning political scientist Elinor Ostrom agreed. “We have never had to deal with problems of the scale facing today’s globally interconnected society,” she wrote. “No one knows for sure what will work, so it is important to build a system that can evolve and adapt rapidly.”

Realising that the economy is ever-evolving is an empowering insight. If complex systems evolve through their innovations and deviations, then this gives added importance to novel initiatives – from complementary currencies to open-source design – that are at the leading edge of new economic design.

Better still, every one of us can have a hand in shaping the economy’s evolution. Not just in how we shop, eat and travel, but in how we volunteer, invest and protest. In how we set up new businesses, save for our pensions, license our inventions, and power our homes. Who knows, we could just turn out to be butterflies that stir up powerful winds of change.

Doughnut Economics: Seven Ways to Think Like a 21st-Century Economist by Kate Raworth is out now, published by Penguin Random House. To pitch an idea for our Optimistic thinking for 2017 series, email [email protected].



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