Economics Needs a Rethink

And donuts are delicious.

Photo by Isabella Fischer on Unsplash

I want to spend the next couple of essays talking about economics. I should preface this by saying I am not an economist. So, walk away now if you please.

I know enough economics to be dangerous. I studied it, I passed tests on it in business school, and I could draw you a nice supply and demand curve. I know who Adam Smith, Ricardo, Marx, Malthus, Keynes, and a couple of modern economists are and what they've said.

But I am not an economist. I count that as a positive.

Just full disclosure as I'm going to be talking about economics a lot over the next week. I'm not an expert, but I know enough to know that the models that we've had for hundreds of years aren't working out very well. From the people I know in the field who are experts that I listen to, the field of economics could do with a little imagination, to imagine ourselves finding a way out of the mess we're in.

So, let's take a look at one such idea.

We have blown past the guardrails.

A quick look at the current state of our planetary boundaries tells us all we need to know about our current global economic system. It isn't fit for purpose.

We've blown past six of the nine planetary boundaries that tell us whether or not we're living within the means that nature has provided. We are far beyond those boundaries in some cases. A study just published in Toxicological Sciences by researchers at the University of New Mexico found plastics in EVERY placenta they tested in their study. Sixty-two placentas were tested, and sixty-two cases of plastics in the placenta. I’m going to go out on a limb and guess that there is not supposed to be plastic in a placenta.

The plastics problem is just one (novel entities) of the planetary boundaries we have crossed. We have also crossed climate change, biosphere integrity (too many extinctions), land system changes, freshwater change, and biochemical flows (too much nitrogen and phosphorus).

The classical economics that most of us learn has no room for nature and for negative externalities. I’ll write more on that next week. (I’m coming for your production function – get your affairs in order)!

But I want to start at a high level and think about a way to put together an economic system that takes into account the natural world.

Donut Economics

I’m not going to try to sell you Donut Economics as the solution to all of your problems. It’s not. I haven’t met Kate Raworth, who came up with the idea. I’ve seen her speak. She seems nice.

But donut economics is a way to frame economics in a new way so that we understand the implicit limits they have – which we ignore at our peril.

Many of you have probably seen this graphic before, but if you haven’t, here is a picture of what I am talking about:

The inner blue circle is a space of human deprivations (lack of water, food, education, etc.). If any of these things are in shortfall, we can and should aim to find ways to move people up into the “safe and just space for humanity”. For example, a nation would be in an energy shortfall if a significant portion of its citizens don’t have safe access to electricity.

The overshoot areas outside the donut line up with the planetary boundaries, and when we are in overshoot, we are in the danger zone. If a system stays in overshoot (climate change, for example), we will expect to experience increasing deleterious effects for humanity. Better to get back into the safe zone.

I encourage you to read Kate’s book and to visit other resources on donut economics for more details on donut economics. I encourage you to read critiques of donut economics as well and make up your own mind.  

A man’s got to know his limitations.

Women too, but it’s usually us men who have this problem.

The concept of donut economics points out a flaw in economics that economists don’t talk about very much but should.

There is a point in the course of human events where … more … is not only not needed, but detrimental.

The economics that I learned, and that most people in the world learned doesn’t ever consider that the axiom “too much of a good thing” may apply to the human experience.

Economists are the ultimate permissive parents who believe in just letting the kids (markets) run free and see what happens.

Children need boundaries, or they grow up to be assholes.

Economies need boundaries, or they grow up to be assholes.

We aren’t talking Soviet Style planned economies here. We are talking guardrails, so we don’t take a corner at an unsafe speed.  (Just a side note, planned economies can work. Amazon and Walmart are both planned economies – but that is an essay for another day).

If we want to, we can put guardrails on our economy. What would this look like? It would look like a carbon price. It would look like strict regulation on most plastic production and winding plastic use down where natural substitutes, or glass or metal can do the job. It would mean measuring the health of our land, water, and air with the fervor that we currently measure gross domestic product.

Think about that. Elections are won and lost, and captains of industry are hired and fired on whether they can deliver growth.

How many elections are won and lost based on whether a politician can deliver clean air, water and land? Not many. But that will change. And soon.

Read your The Economist.

I’ve been reading the Economist magazine for decades now. I find it informative, and it helps me stay on top of what is going on in the financial world. You don’t have to agree with The Economist's point of view, but I recommend reading it to better understand what the financial world is thinking about.

But I have a problem with the Economist. If you turn to the back of the Economist, on the inside back cover is a list of “Economic & Financial Indicators”. You can find this on the website and app as well.

The indicators you find there are: GDP, consumer prices, unemployment rate, current account balance, interest rates, and currency exchange rates. This is interesting information, but where is the data on CO2 ppm, ocean acidification, or plastic pollution in our land, water, and air? Where is the information on species extinctions? Where is the information on literacy? Where is the information on infant mortality? Where is the information on life expectancy? Where is the information on those living without food, water, and shelter on a country-by-country basis?

You may say that The Economist isn’t that kind of magazine.

It should be.

All of those things that I listed are issues where we want to be inside the “donut” in the “safe and just space for humanity”. We should have the pre-eminent economics magazine in the world reporting on them every week. If we are operating outside the safe and just space for humanity, the “economic and financial indicators” are just frivolous data.

If you agree with me, write to The Economist and politely ask them to include the “safe and just space for humanity” information, because it is more important to the survival of humanity than economic and financial indicators.

I just did.