A great podcast with Kate Raworth discussing the need for new economic models for the 21st century and a proposed approach: doughnut economics.
Matthew Taylor interviewed Kate Raworth for the Intelligence Squared podcast series, discussing her book Doughnut Economics: Seven Ways to Think Like a 21st-Century Economist. It was a great podcast and well worth a listen. The full talk is embedded below, followed by some sound bites.
We are in an era that is simultaneously in a shortfall and overshooting on a global scale.
The concept of doughnut economics is to think of the doughnut as systems designed to meet the needs of all people within the means of the planet. The hole in the middle represents the shortfall, that occurs when there are people who don’t have access to sufficient resources to survive and thrive. The outer edge represents planetary boundaries, the life support systems of the planet. Pushing beyond those boundaries will lead to climate and social breakdown. We are in an era that is simultaneously in a shortfall and overshooting on a global scale.
Models and Metaphors
We can’t study the world in its entirety, it is too complex. So we need models. And when you make a model, you are choosing to put something at the centre of your vision, and to leave things out. You have to do that. But we have to be really aware, whenever anyone presents us with a model, about what has been put at the centre of the picture, and what has been left invisible.
Economics gives incredibly low regard to the question of energy, the source of energy, and energy efficiency. Traditional economic models put markets and prices at the centre, starting with the classic supply and demand curve. Anything that falls outside of prices is treated as an externality. And then you say to an economist, “well how are you going to explain the breakdown of the environment?” And they will say, “that’s an externality.” Well it is only called that because someone decided in economics on day one to start with the market and put price at the centre of our vision. Are we going to talk about the planet’s climate as an [economic] externality in the 21st century? That alone is an alarm bell that says a model is out of date.
A danger with models is when they create a heuristic that moves from being an explanatory tool to being a description of the world. One example of this has been ‘rational actor’ of classic economic models. This became the assumed optimal approach to decision making in the real world and that emotions interfere and lead to poor decision making. By the 1990s, neuroscientists proved the opposite, that emotions are essential to decision making (Damasio, 1994). They are just incredibly difficult to model.
Nothing in nature has succeeded in finding a way to grow forever. It always results in breakdown. Why would we think that our economies are the one thing that are going to succeed by growing endlessly?
A classic metaphor is that moving forwards and up is good, moving backwards and down is bad. Growth is a healthy sign of life. But nothing in nature has succeeded in finding a way to grow forever. It always results in breakdown. We call it cancer when it occurs in our bodies. Why would we think that our economies are the one thing that are going to succeed by growing endlessly? We have created Peter Pan economies, that believe they must just keep growing and growing. Heuristics really matter.
When it comes to really hard questions – how to level up, how to pay for social care, how to tackle regional disparities… we need to step back from the belief that economic growth is the only solution.
Look at the economic inequalities of land ownership in the UK. It’s extreme. We say we need growth because our pensions are invested in the stock market. Yet only 3% of stocks and shares in the UK are owned by pension funds. The rest are owned privately. Things cannot grow endlessly. At some point, we need to say, ‘we need to thrive within this’. That then forces us to look at the question of distribution. Who owns the land and the houses. Who owns the enterprises. Who owns the ideas? That’s a really uncomfortable question for politics and so we don’t look at it. Growth becomes a wonderful distraction from looking at the much harder questions. We need to look at them.
In the past decade, we have started to see new approaches to economics gain recognition, incorporating complexity, and moving from static to dynamic models that can incorporate energy and entropy, that more closely represent the real world.
There are two acid tests to whether or not a new approach is taking hold. First, open up the economics text book for first-year students and what do you encounter? It’s still all about supply and demand, and the flow of money. But we are now starting to see doughnut economics being mentioned. That means it is entering the curriculum. Second, (UK specific) is what is happening in the Treasury green book – it’s the rule book for what does or does not get counted as economic value, what gets invested in or not. There is no doughnut yet in the green book…
In practice, we are starting to see cities look into doughnut economics. Amsterdam was the first. In April 2020, published the first doughnut portrait of the city. Adopted the doughnut because wanted to create a strategy for transforming the carbon impact of the city, to introduce a circular economy and to do it with social justice at the centre. The doughnut helped frame objectives. Amsterdam’s mission is to be a 100% circular economy by 2050, to be 50% circular by 2030, and for 10% of materials procured in 2022 to be circular. This gives a loud signal to business that circular is happening now and creates motion. Architects are looking at how to design circular housing. Restaurants are looking at reusing organic food waste. How to use textiles in a circular way…? Within 6 weeks, Copenhagen voted to explore using the doughnut as an economic plan. Brussels has adopted it. Barbados is exploring it… (cities copy and share ideas – see related post: Global Mayors and Smart Cities)
Policies drive the behaviour of businesses. Businesses will need to transform their products into something that belongs in a circular economy if they want to be able to sell the products in Amsterdam in the future. Products need to become regenerative by design. They also need to become distributive if we are to thrive within a circular economy, to create economies that don’t capture and put value in the hands of the few but instead share the value with those who co-create it. We need companies to be regenerative and distributed by design.
(Side note: structural challenge – when the wealthiest businesses and individuals are able to influence the policies that drive their behaviour…)
The five design traits of an enterprise that determines its behaviour and values: purpose, networks, governance, ownership, and finance.
What about the design of the enterprise itself? From the analyst Marjorie Kelly, there are five key design traits of an enterprise: Purpose, Networks, Governance, Ownership, and Finance.
First, what is your purpose – why do you exist, what are you here to serve? For example, a car seller. 20th Century purpose may have been to grow to be the biggest 4×4 seller. 21st Century: make mobility available to all. It’s a bigger vision, a bigger purpose. And it is needed.
Second, what are you networks? How do you relate to your customers, your employees, the community in which you are based, your suppliers? How do you build your values in them, or are you pulled away?
Third, how are you governed? Who has a voice in the decision making what are the metrics used? What incentives are paid to middle managers, and how do they match up against your stated purpose?
Fourth, how is this enterprise owned? By its employees, by the state, by family, by a founding entrepreneur, by venture capital, by shareholders…? These very different ownership models profoundly shape the fifth design trait…
Fifth, finance. What finance is expecting and demanding from investing in this company, and therefore how profits are going to be distributed.
If you want to understand the potential of what a business can be and do in the world, ownership and finance are the quickest indicators as to the feasibility of a transformation.
The last two design traits of ownership and finance are the most important. If you want to understand the potential of what a business can be and do in the world, whether it can become regenerative and distributive, ownership and finance are the quickest indicators as to the feasibility of a transformation.
Big shareholder-owned businesses are caught in short quarterly loops. We have seen it recently with large enterprises like Unilever and Danone. Both had CEOs leaning towards a transformative design. The stock market pulled back, and both were ousted. There is only so far you can go with a business that is owned and financed by the mainstream stock market.
(Addition by Matthew Taylor:) A really big challenge has been the financialisation of the company. Increasingly, people who own and run things are not connected at all to the process of production. Al they are concerned with is assets, the movement of raw money as it were. Spoke with a chief executive of a large company who said, “I don’t spend much time thinking about what I produce. I spend most of my time financial engineering.” (E.g. stock buy-backs) And he was miserable about it.
Instead of looking at how to improve the product, the share price has become the ultimate product, and the ultimate market to which the enterprise is performing. It’s the tail wagging the dog. The financial markets control the CEOs and if they don’t perform, they are moved on.
We have to change the way businesses are owned and financed, and the regulatory environment in which they operate, if there is any chance of business being part of the solution rather than being part of the problem.
Somebody once said, “don’t talk about shareholders because they don’t hold on, they are selling. Talk about share traders.” Evidence shows that holdings used to be for months, years. Now it comes down to nanoseconds. How do we redesign finance so that finance actually becomes a financial service again. Finance in service to the real economy, in service to life, serving humanity within the means of the living planet. Does that sound naive or essential? I think its essential. It’s a completely different financial system to the one we have got, and its definitely not half as powerful. It does not get away with being the tail that wags the dog, the situation that we currently have.
What to do next?
The Doughnut Economics Action Lab has been setup to help turn ideas into action – it is experimental, all about design thinking. This is the decade for ideas to move fast. Everything at the lab is being shared. Anyone can join.
Take these ideas to your town council. A mayor will inspire a mayor. Check out what is going on with rethinking and exploring economics. Doughnut economics is just one of the ideas.
Closing note: it was a fantastic and inspiring podcast. Highly recommended! Links are provided below.
References and Further Reading
- Descartes’ Error: Emotion, Reason and the Human Brain, by Antonio R. Damasio, first published 1994
- Global Mayors and Smart Cities
- Doughnut Economics Action Lab
- Online recording on Acast
- Intelligence Squared website
- Kate Raworth’s website
- Marjorie Kelly’s website
Header image – author’s own photo. Walking near St Ursanne whilst listening to the podcast, May 2021.