Conventional economic wisdom is that austerity and inequality are necessary pains of growth. But on the contrary, data show that to benefit all people the economy must first be designed this way.
|This post belongs to a reading series of Doughnut Economics by Kate Raworth. For quick access to all chapters, please click here.|
Disclaimer: This chapter summary is personal work and an invitation to read the book itself for a detailed view of all the author’s ideas.
The Economic Rollercoaster Ride
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.
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. “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, 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 “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 on to 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.”
“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 unleashed 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. “American democracy has been hacked,” he says, “and the hack is campaign finance.”8 The reign of oligarchs coupled with the lack of decent basic public services for the many erodes, in turn, 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 entirely lost and fall prey to the most reactive forms of demagoguery.
If high-income inequality entails many damaging effects in wealthy countries, in low-income countries it does not help growth in any way. “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. The next question to answer is how to design economic networks so that they distribute value—”from materials and energy to knowledge and income,” says Kate Raworth—in a more equitable way? Five distinct fields are particularly concerned: land ownership, the power to create money, enterprise, technology, and knowledge.
Redistributing Income—and Redistributing Wealth
Who owns the land?
“Buy land. They’re not making it anymore,” quipped Mark Twain, merely noticing that the price of land constantly rises, thus generating ever-higher rents for landowners. His contemporary Henry George was struck by the inequity inherent in this setup. Rather than simply suggesting buying land, he thought it should also be taxed. Why? Because much of land’s financial value comes not from cultivating it but from what is beneath its surface or from the surrounding commodities put in place by the community, such as local schools, roads, or hospitals.
Henry George’s proposal was echoing John Stuart Mill’s earlier call to tax the landlords who “grow richer, as it were, in their sleep, without working, risking, or economizing.”12 But taxation was to George a substitute for a more systemic fix: the common ownership of land. “The equal right of all men to the use of land,” he wrote, “is as clear as their equal right to breathe the air.”13 There is, indeed, a centuries-long global trend of both the state and the market encroaching on common land, leaving those who used to know best how to take advantage of the natural world with no other recourse than to sell their workforce to the landlords.
This is not any different today: “Since 2000, foreign investors have made over 1,200 large-scale land deals in low- and middle-income countries, acquiring more than 43 million hectares of land—an area bigger than Japan. In the majority of cases, those deals were land grabs: signed without the free, prior and informed consent of the indigenous and local communities that had inhabited and collectively stewarded that land for generations. In case after case, investors’ promises to create new jobs, enrich community infrastructure and skill-up local farmers have come to nothing: instead many communities have found themselves dispossessed, dispersed and impoverished.”14
The market cannot do everything. As demonstrated by Elinor Ostrom, there is an equally powerful alternative of self-organizing in the commons. “Gathering a rich array of case studies of ‘common-pool’ resource users, from Southern India to Southern California, she and her colleagues analysed how diverse communities had, sometimes for generations, successfully collaborated in harvesting, stewarding and sustaining forests, fishing grounds and waterways.15 Many of those communities, in fact, managed their land and its common-pool resources better than markets did, and better than comparable state-run schemes.”
The conclusion about land ownership and management can only be, therefore, that there is not one single way to go: “There are clearly many ways to more equitably share the wealth that lies beneath our feet. Ostrom was quick to point out, however, that there is no panacea for managing land and its resources well: neither the market, the commons nor the state alone can provide an infallible blueprint. Approaches to distributive land design must fit the people and the place, and may well work best when they combine all three of these approaches to provisioning.”16 (Id. p. 155)
Who makes your money?
Let us first remind ourselves that money “is not merely a metal disc, piece of paper or electronic digit. It is, in essence, a social relationship: a promise to repay that is based on trust.”17
What are, more specifically, the mechanisms of money in the present-day financial system? “In the majority of countries, the privilege of creating money has been handed to commercial banks, which create money every time they offer loans or credit. As a result, more money is made available only by their issuing more interest-bearing debt, and that debt is increasingly being channelled into activities—such as buying houses, land or stocks and shares. Investments such as these do not create new wealth that generates additional income with which to pay the interest, but instead earn a return simply by pushing up the price of existing assets.18 . . . When such debt increases, a growing share of a nation’s income is siphoned off as payments to those with interest-earning investments and as profit for the banking sector, leaving less income available for spending on products and services made by people working in the productive economy. ‘Just as landlords were the archetypal rentiers of their agricultural societies,’ writes economist Michael Hudson, ‘so investors, financiers and bankers are in the largest rentier sector of today’s financialized economies.’”19 (Ibid.)
This is one way to go; there could be others. For the sake of creating a truly resilient financial ecosystem, the state, the commons, and the market could be involved together at different degrees. One thing for sure, resiliency is not a forte of the current monetary monoculture, even though it would not take that much to provide adequate solutions to its shortcomings. Kate Raworth speaks in the light of the 2008 crisis. Still, her words sound as loudly in that of the Covid-19 pandemic: “In deep recessions, however, once interest rates have already been cut very low, central banks attempt to further boost the money supply by buying back government bonds from commercial banks—a practice known as quantitative easing, or QE—in the hope that the banks will then seek to invest the extra money in expanding productive businesses. But as post-financial-crash experience demonstrated, commercial banks used that extra money to rebuild their own balance sheets instead, buying speculative financial assets such as commodities and shares. As a result, the price of commodities such as grain and metals rose, along with the price of fixed assets such as land and housing, but new investments in productive businesses didn’t.”
Rather than giving banks the upper hand in quantitative easing—which only leads to more imbalance in the economic system—the solution could come from directing quantitative easing toward households. “What if, instead, central banks tackled such deep recessions by issuing new money directly to every household as windfall cash to be used specifically for paying down debts—an idea that has come to be known as ‘People’s QE.’ Rather than inflating the price of bonds, which tends to benefit wealthy asset owners, this approach—which resembles a one-off tax rebate for all—would benefit indebted households. Additionally, suggests the tax expert Richard Murphy, central banks could channel new money into national investment banks for ‘green’ and social infrastructural projects, such as community-based renewable energy systems, as part of the long-term infrastructural transformation that is urgently needed—an idea now known as ‘Green QE.’”20
Who owns your labour?
For the last four decades, stagnant wages have been the norm for workers in high-income countries, while executives have seen their income steadily increase during the same period. Obviously, this cannot be attributed to the relative productivity of each group but, rather, to their relative power. Only those who own the shares of a company benefit from its activity.
There are alternatives to this model, however. According to the analyst Marjorie Kelly, for an enterprise to be inherently distributive of the value it creates, two particular design principles are key: rooted membership and stakeholder finance. The first one means that instead of being the expendable outsider, the labor force becomes the ultimate insider, rooted in employee-owned firms. The second principle is that enterprises could issue bonds instead of issuing shares to outside investors as a slice of ownership, promising their stakeholder-investors a fair fixed return. There are already many examples of companies that have flipped the ownership model on its head this way.
“‘What’s underway is an ownership revolution,’ says Todd Johnson, one of the innovative US lawyers rewriting corporate charters. ‘It’s about broadening economic power from the few to the many and about changing the mindset from social indifference to social benefit.’”21
Who will own the robots?
IT technologies and the internet could be considered the essence of distributive design. They blur the divide between producers and consumers, allowing everyone to become both a maker and a user in a peer-to-peer economy. But a parallel process of winner-takes-all is also at play. Google, YouTube, Apple, Facebook, eBay, Paypal, and Amazon have become digital monopolies in their respective field, sitting at the heart of the network society. For emerging start-ups to have a chance to bring even more creativity and innovation and benefit society at large, the reactivation of anti-trust laws might be in order. On top of this purely economic reason, the current dystopia of a few companies hoarding all of our personal data to sell them to the highest bidder or hand them out to an increasingly surveilling state should also give pause to policymakers.
Another challenge specific to the development of IT is the replacement of humans by robots in many industrial and service sectors. Even though quite recent, the phenomenon is likely to be accelerating far too quickly for jobs creation to keep up in new areas of activity. To which Kate Raworth answers: “So how could distributive design help to prevent the economic segregation that technology appears to be driving? An obvious starting point is to switch from taxing labour to taxing the use of non-renewable resources: it would help to erode the unfair tax advantage currently given to firms investing in machines (a tax-deductible expense) rather than in human beings (a payroll tax expense). At the same time, invest far more in skilling people up where they beat robots hands-down: in creativity, empathy, insight and human contact—skills that are essential for many kinds of work, from primary school teachers and artistic directors to psychotherapists, social workers and political commentators.”
Beyond this starting point, the deeply split labor market that is expected to emerge from now on strongly advocates for a basic income for all. This solution has its own limits, the main one being that it would leave low-wage workers and workless people to rely on its perpetuation year after year. “Far more secure, says Kate Raworth, is for every person to have a stake in owning the robot technology itself. What might that look like? Some advocate a ‘robot dividend,’ an idea inspired by the Alaska Permanent Fund, which grants every Alaskan citizen, through a state constitutional amendment, an annual slice of the state’s income arising from the oil and gas industry, a dividend that exceeded $2,000 per resident in 2015.” After all, “when the state takes a risk, it deserves a return, which could be collected through royalties from co-owned public-private patents or through state banks owning significant equity in businesses that use robot technologies based on publicly funded research.”22
Who owns the ideas?
“With great irony, the intensive overuse and abuse of intellectual property law today is widely acknowledged to be stifling the very innovation that it was originally created to promote. Patents now last 20 years and are granted for a wide array of spurious inventions—ranging from Amazon’s US patent on ‘one-click’ purchasing to the medical firm Myriad Genetics’ patents on cancer-related genes. And in many high-tech industries, patents are frequently acquired tactically with the specific aim of blocking or suing competitors. ‘We have designed an expensive and unfair intellectual property regime,’ writes economist Joseph Stiglitz, ‘that works more to the advantage of patent lawyers and large corporations than to the advancement of science and small innovators.’”23 (Id. p. 166)
Kate Raworth sees the expansion of the commons as a solution for getting out of the misuse of patents: “First, invest in human ingenuity by teaching social entrepreneurship, problem-solving and collaboration in schools and universities worldwide: such skills will equip the next generation to innovate in open-source networks like no generation before them. Second, ensure that all publicly funded research becomes public knowledge by contractually requiring it to be licensed in the knowledge commons, rather than permitting it to be locked away under patents and copyright for private commercial gain. Third, roll back the excessive reach of corporate intellectual property claims in order to prevent spurious patent and copyright applications from encroaching on the knowledge commons. Fourth, publicly fund the set-up of community makerspaces—places where innovators can meet and experiment with shared use of 3D printers and essential tools for hardware construction. And lastly, encourage the spread of civic organisations—from cooperative societies and student groups to innovation clubs and neighbourhood associations—because their interconnections turn into the very nodes that bring such peer-to-peer networks alive.”
The reflection about economic redistribution would not be complete without addressing its international aspect. There again—even if these are long quotes—it seems best to refer to the author’s own words.
“The traditional tool for international redistribution has been overseas development assistance (ODA), but the history of its rich-to-poor transfers is nothing short of a myopic failure in global action. In a 1970 UN resolution, high-income countries pledged to contribute 0.7 percent of their annual income to ODA and to do so by 1980 at the latest. But by 2013—over 30 years beyond that deadline—the total stood at just 0.3 percent, less than half of what was promised each year. Well spent, that missing finance could have delivered decades of progress in maternal health, child nutrition and girls’ education in the world’s poorest communities: it would have empowered women, transformed livelihoods, boosted national prosperity and helped to stabilise the global population at the same time. . . . How could additional funds—on top of 0.7 percent ODA—be raised in the spirit of global redistribution? Through a global tax on extreme personal wealth, for starters. There are now more than 2,000 billionaires living in 20 countries from the United States, China and Russia to Turkey, Thailand and Indonesia. An annual wealth tax levied at just 1.5 percent of their net worth would raise $74 billion each year: that alone would be enough to fill the funding gap to get every child into school and deliver essential health services in all low-income countries. Match that with a global corporate tax system that treats multinational corporations as single, unified firms and closes tax loopholes and tax havens, so boosting public revenue for public purposes worldwide. Supplement these with taxes on destabilising and damaging industries, such as a global financial transactions tax to curb speculative trading, and a global carbon tax levied on all oil, coal and gas production. Yes, some of these tax proposals sound unfeasible now, but so many once-unfeasible ideas—abolishing slavery, gaining the vote for women, ending apartheid, securing gay rights—turn out to be inevitable. In the century of the planetary household, global taxes will too.”
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- Cingano, F. (2014) Trends in Income Inequality and Its Impact on Economic Growth, OECD Social, Employment and Migration Working Papers, no. 163, OECD publishing
- Kuznets, S. (1955) Economic growth and income inequality, American Economic Review 45: 1, pp. 1–28.
- 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
- Piketty, T. (2014) Capital in the Twenty-First Century. Cambridge, MA: Harvard University Press.
- Ostry, J.D. et al. (2014) Redistribution, inequality and growth. IMF Staff discussion note, February 2014, p. 5.
- Wilkinson, R. and Pickett, K. (2014) The Spirit Level authors: why society is more unequal than ever, The Guardian 9 March 2014
- West, D. (2014) Billionaires: Darrell West’s reflections on the upper crust
- Gore, A. (31 October 2013). The future: six drivers of global change. Lecture given at the Oxford Martin School.
- Ostry, J.D. et al. (2014) Redistribution, inequality and growth. IMF Staff discussion note, February 2014. p. 5.
- Ostry, J. (2014) We do not have to live with the scourge of inequality, Financial Times 3 March 2014
- 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.
- Mill JS, Principles of Political Economy 1848, book V, chapter 2
- George, H. (1879) Progress and Poverty, New York: Modern Library, Book VII, Chapter 1.
- Pearce, F. (2016) Common Ground: securing land rights and safeguarding the Earth. Oxford: Oxfam International.
- Ostrom, E. (2009) A general framework for analyzing sustainability of social-ecological systems, Science 325, p. 419.
- Ostrom, E., Janssen, M. and Anderies, J. (2007) Going beyond panaceas, Proceedings of the National Academy of Sciences 104: 39, pp. 15176–15178.
- See Greenham, T. (2012) Money is a social relationship TEDx Leiden, 29 November 2012
- Ryan-Collins, J. et al. (2012) Where Does Money Come From? London: New Economics Foundation.
- See Hudson, M. and Bezemer, D. (2012) Incorporating the rentier sectors into a financial model, World Economic Review 1, p. 6.
- Murphy, R. and Hines, C. (2010) Green quantitative easing: paying for the economy we need, Norfolk: Finance for the Future
- Cited in Kelly, M. (2012) Owning Our Future: the emerging ownership revolution. San Francisco: Berrett-Koehler, p. 12.
- See Mazzucato, M. (2013) The Entrepreneurial State. London: Anthem Press, pp. 188–91.
- Stiglitz, J. (2012) The Price of Inequality. London: Allen Lane, p. 202.