Design to Distribute

Conventional economic wisdom is that austerity and inequality are necessary pains of growth. Data show, on the contrary, that to benefit all people the economy must first be designed this way.

At the time when Doughnut Economics was written in 2016, three-quarters of the world’s poorest people lived in middle-income countries, while the gap between rich and poor was at its highest level in over 30 years in high-income countries¹. In the United States, for instance, growing inequality means that today one child in five lives below the federal poverty line. Consequently, “the new geography of deprivation puts tackling national inequalities high on the agenda of ending poverty for all.” But to do that, there needs to be a clear understanding of how austerity—which hits the poorest hardest—and the social pain of high inequality came to appear as necessary steps toward a more equitable society for all.

This chapter aims to show that “Rather than accept growing inequality as a law of economic development, an inevitability that must be endured, twenty-first-century economists will regard it as a failure of economic design and will seek to make economies far more distributive of the value that they generate. Instead of focusing primarily on redistributing income earned, they will aim to redistribute wealth too—especially the wealth that comes from controlling land, money creation, enterprise, technology and knowledge. And instead of focusing on market and state solutions alone, they will also harness the power of the commons. It’s a fundamental shift in perspective, and it is well under way.”

The Economic Rollercoaster Ride

In the 1890s, the Italian engineer-turned-economist Vilfredo Pareto discovered that the data he had gathered systematically showed that around 80 percent of national income was in the hands of just 20 percent of people, while the remaining 20 percent of income was spread among 80 percent of people. Kate Raworth comments, “Pareto was delighted: he appeared to have discovered an economic law, which is still known today as Pareto’s 80–20 rule. What’s more, he argued, the steep ‘social pyramid’ that his data had repeatedly revealed must be a fixed fact of human nature, making attempts at redistribution counterproductive. The way to help the worst off was to expand the economy, he concluded, and the wealthy were best placed to make that happen.”

In 1955, Simon Kuznets, the father of national income accounting, found that in the three countries he had specifically studied—the United States, the UK, and Germany—income inequality had been falling at least since the 1920s, and even possibly before WWI. Contrary to Pareto’s static social pyramid, it seemed that there was a social rollercoaster ride at play, “on which,” says Kate Raworth, “income inequality first rose, then levelled out, and eventually fell again, all while the economy grew.” To his credit, Kuznets was careful to note that “the ‘scant’ data he drew on were specific to a particular historical context and should not be used for making ‘unwarranted dogmatic generalisations.’ He openly admitted that his explanations came ‘perilously close to pure guesswork,’ thus making his conclusion, ‘5 per cent empirical information and 95 per cent speculation, some of it possibly tainted by wishful thinking.’”²

But, adds Kate Raworth, “His underlying message—that rising inequality is an inevitable stage on the journey towards economic success for all—was too good a story to doubt. The image that Kuznets had already sketched in every economist’s mind was soon drawn onto the economist’s page and named ‘the Kuznets Curve.’ With income per person on the x-axis and a measure of national income inequality on the y-axis, the curve—shaped like an upside-down U—appeared to present an economic law of motion. And it whispered a powerful message: if you want progress, inequality is inevitable. It’s got to get worse before it can get better, and growth will make it better.”

In the 1990s, when sufficient time-series data were eventually available, the Kuznets Curve was thoroughly tested… to show that “the pattern is that there is no pattern.”³ “As countries moved from low to middle to high income,” says the author, “some saw inequality rise then fall then rise again; others saw it fall then rise; in others still it only rose, or only fell.” Moreover, “Striking regional events even more deeply debunked the curve’s erroneous law. The East Asian ‘miracle’—from the mid 1960s to 1990—saw countries such as Japan, South Korea, Indonesia and Malaysia combine rapid economic growth with low inequality and falling poverty rates.” It was indeed possible, data showed, to achieve growth with equity. On the other hand, many high-income countries have seen “their income distribution widen again since the early 1980s, resulting in the infamous rise of the 1% accompanied by flat or falling wages for the majority.”

She continues, “It was, however, the economist Thomas Piketty’s 2014 long view of the dynamics of distribution under capitalism that made the underlying story plain to see. By asking not just who earns what but also who owns what, he distinguished between two kinds of households: those that own capital—such as land, housing, and financial assets which generate rent, dividends and interest—and those households that own only their labour, which generates only wages.” Scouring old tax records from Europe and the United States to compare the growth trend of these different sources of income, he concluded that Western economies—and others like them—are on a path toward dangerous levels of inequality. In Piketty’s words, “Capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based.”⁴

“The Kuznets Curve may have been debunked, along with the claim that inequality is necessary for progress. But, like all powerful pictures, its memory lingers on, lending credence to the myth of trickle-down economics. In 2014, even economists at the International Monetary Fund (IMF) noted with frustration that, despite evidence to the contrary, ‘the notion of tradeoff between redistribution and growth seems deeply embedded in policymakers’ consciousness.’”⁵

Why Inequality Matters

“Societies can be deeply undermined by income inequality. When epidemiologists Richard Wilkinson and Kate Pickett studied a range of high-income countries in their 2009 book, The Spirit Level, they discovered that it is national inequality, not national wealth, that most influences nations’ social welfare. More unequal countries, they found, tend to have more teenage pregnancy, mental illness, drug use, obesity, prisoners, school dropouts and community breakdown, along with lower life expectancy, lower status for women and lower levels of trust. ‘The effects of inequality are not confined to the poor,’ they concluded; ‘inequality damages the social fabric of the whole society.’⁶ More equal societies, be they rich or poor, turn out to be healthier and happier.”

As alluded to by Thomas Picketty, democracy itself is jeopardized by income inequality. Among other things, a market of political influence is mechanically put in motion by the concentration of power in the hands of a few. This legal bribery is nowhere more blatant than in the United States: “We are now seeing billionaires becoming much more active in trying to influence the election process,” observes political analyst Darrell West,⁷ adding “They’re spending tens or hundreds of millions of dollars pursuing their own partisan interests, often in secret from the American public.” The US former vice-president Al Gore concurs, saying, “American democracy has been hacked, and the hack is campaign finance.”⁸ Coupled with the lack of decent basic public services, the reign of oligarchs erodes the trust in the institutions and the social capital built on community connections and norms. With no clear collective landmarks of economic and social justice to rely on anymore, many get morally and intellectually lost, falling prey to the most reactive forms of demagoguery.

If high-income inequality entails many damaging effects in wealthy countries, it does not help growth in any way in low-income countries. “When the poorest families in society have no money to pay for their essential needs, the poorest workers in society can get no work in supplying them, and so among those who need its dynamism most, the market stagnates. Such intuitive reasoning is backed by analysis: economists at the IMF have found strong evidence that, across a wide range of countries, inequality undercuts GDP growth.⁹ ‘More unequal societies have slower and more fragile economic growth,’ writes Jonathan Ostry, the lead economist behind the IMF study. ‘It would thus be a mistake to imagine that we can focus on economic growth and let inequality take care of itself.’”¹⁰

Get with the Network

Altering the distribution of income, wealth, time, and power to bring everyone above the Doughnut’s social foundation is a tall order but “many possibilities emerge,” says the author, “if we set out with a systems thinker‘s mindset.”

Here is what this frame of thinking comes down to: “Nature’s networks are structured by branching fractals, ranging from a few larger ones to many medium-sized ones and then myriad smaller ones, just like tributaries in a river delta, branches in a tree, blood vessels in a body or veins in a leaf. Resources such as energy, matter and information can flow through these networks in ways that achieve a fine balance between the system’s efficiency and its resilience. Efficiency occurs when a system streamlines and simplifies its resource flow to achieve its aims, say by channelling resources directly between the larger nodes. Resilience, however, depends upon diversity and redundancy in the network, which means that there are ample alternative connections and options in times of shock or change. Too much efficiency makes a system vulnerable (as global financial regulators realised too late in 2008) while too much resilience makes it stagnant: vitality and robustness lie in a balance between the two.”¹¹

Nature teaches us diversity and distribution; our current economic model, on the contrary, operates through the domination of large-scale actors squeezing out the number and diversity of small and medium players. No wonder it all results in a highly unequal and brittle economy with mammoth corporations deemed too big to fail.

Redistributing, in other words, does not mean arbitrarily taking from one to give to the other, but designing a system that can sustain itself for the benefit of one and all. Five distinct fields are particularly concerned, according to Kate Raworth: land ownership, the power to create money, enterprise, technology, and knowledge.

1. Cingano, F. (2014) Trends in Income Inequality and Its Impact on Economic Growth, OECD Social, Employment and Migration Working Papers, no. 163, OECD publishing
2. Kuznets, S. (1955) Economic growth and income inequality, American Economic Review 45: 1, pp. 1–28.
3. Krueger, A. (2002) Economic scene: when it comes to income inequality, more than just market forces are at work, New York Times 4 April 2002
4. Piketty, T. (2014) Capital in the Twenty-First Century. Cambridge, MA: Harvard University Press.
5. Ostry, J.D. et al. (2014) Redistribution, inequality and growth. IMF Staff discussion note, February 2014, p. 5.
6. Wilkinson, R. and Pickett, K. (2014) The Spirit Level authors: why society is more unequal than ever, The Guardian 9 March 2014
7. West, D. (2014) Billionaires: Darrell West’s reflections on the upper crust
8. Gore, A. (31 October 2013). The future: six drivers of global change. Lecture given at the Oxford Martin School.
9. Ostry, J.D. et al. (2014) Redistribution, inequality and growth. IMF Staff discussion note, February 2014. p. 5.
10. Ostry, J. (2014) We do not have to live with the scourge of inequality, Financial Times 3 March 2014
11. About the balance between efficiency and resiliency in economics, see Goerner, S. et al. (2009) Quantifying economic sustainability: implications for free-enterprise theory, policy and practice. See also on this website Why Regenerative Economics is the Future.