From GDP to the Doughnut

Trade is as vital to the economy as chemical exchanges are to a physical body. No one contests that. Which is why the question of the economic goal has all the more to be asked: growth or health?

Join our “Book Club”! This post is part of a reading series of Doughnut Economics by Kate Raworth. You are kindly invited to add to this chapter summary by answering the question(s) in the comment section.

Ch. 1: Change the goal – From GDP to the Doughnut

As illustrated by a widely used contemporary textbook, economics is taught as “the study of how society manages its scarce resources.” (Mankiw NG. Principles of Economics, 2012) The focus is, therefore, on evaluating and monitoring conditions of production regardless of what should ultimately guide the economic activity as a whole.

Unsurprisingly, this absence of an explicit goal to economics has long been filled by an implicit one: growth. Since the 1950s and under the seemingly reasonable assumption that we all prefer more to less, growth has indeed been presented as the panacea for all economic and social ailments. Psychologically, moreover, “The idea of ever-growing output fits snugly with the widely used metaphor of progress being a movement forwards and upwards.” (Kate Raworth. Doughnut Economics: Seven Ways to Think Like a 21st-Century Economist (p. 33). Kindle Edition.)

The idea of economic growth equating human progress is now increasingly questioned in regard to its social and environmental consequences. But how did economic growth become the paradigm of contemporary economics in the first place?

Simon Kuznets (April 30, 1901 – July 8, 1985)

In the mid-1930s, the U.S. Congress commissioned economist Simon Kuznets to devise a measure of America’s national income. That came to be the Gross National Product (GNP), defined as the value of all finished goods and services produced in a country in one year by its nationals. This proved to be an extremely useful tool in monitoring the changing state of the American economy in the first years of the New Deal. It also greatly helped in converting the U.S. industry into a planned military economy during WW II, specifically by maintaining enough domestic consumption to keep generating further economic output.

Simon Kuznets himself, however, was well aware of the limits of the GNP as a measuring tool. The first of them being that the income value of all finished goods and services produced in a country does not include the enormous other economic value of goods and services produced by and for households, as well as by society at large, in the course of regular daily life. Secondly, the GNP (later labeled GDP) gave no indication of how income and consumption are actually distributed between households. Lastly, national income is a flow measure that only records the amount of income generated each year and Kuznets saw that “it needed to be complemented by a stock measure, accounting for the wealth from which it was generated, and its distribution.” (Id. p. 34) In his own words, consequently, “The welfare of a nation can scarcely be inferred from a measure of national income.” (Kuznets, S. (1934) National Income 1929–1932, 73rd US Congress, 2nd session, Senate document no. 124)

But the appeal of a single, year-to-year indicator for measuring economic progress proved to be too strong for politicians and economists alike. Virtually no one followed-up on Kuznets reservations, even though he was adamant that “Distinctions must be kept in mind between quantity and quality of growth, between its costs and return, and between the short and the long term… Objectives should be explicit: goals for “more” growth should specify more growth of what and for what.” (Kuznets, S. (1962) How to judge quality, in Croly, H. (ed.), The New Republic, 147: 16, p. 29.) Disregarding the qualitative reflection that he was calling for, the world of economics has inherited what is then its logical goal by default. But growth is a goal that makes no sense.

Donella Meadows - The limits to Growth
Donella Meadows (March 13, 1941 – February 20, 2001)

As the systems thinker Donella Meadow puts it in her 1972 book The Limits to Growth, “Growth is one of the stupidest purposes ever invented by any culture.” Simply put, it would come to no one’s mind to ask their physician to help them weighing three tons. This, however, is exactly what we are supposed to ask from the economy. Ignoring the organic view of things—which is the only valid one when it comes to systems health—, conventional economics has embraced the self-contradicting and abstract imagery of a production system that can: 1/ provide outputs to infinity; 2/ do it regardless of the broader conditions its own processes ultimately depend upon.

In a real, practical, and interconnected world, as Donella Meadow and the rest of us happen to live in, we should always ask “Growth of what, and why, and for whom, and who pays the cost, and how long can it last, and what’s the cost for the planet, and how much is enough?” (Meadows, D. (1999) Sustainable systems. Lecture at the University of Michigan, 18 March 1999) 1 For decades these common sense questions have been entirely ignored, obfuscated by what has become akin to a dogma regarding GDP as the major economic compass to refer to. But the GDP is not a compass; it is a measure of financial value that says nothing about which way to go.

The finality of our economic activity can only be given by answering a simple but fundamental question: What enables human beings to thrive? If you ponder your answer as an actual human being and not just as a production unit, it becomes self-obvious that we need a world in which every person can lead their life with dignity, opportunity, and community—all within the boundaries of our life-giving planet. Achieving this basic goal is exactly what Doughnut Economics is about.

Amartya Sen - Indian economist and philosopher
Amartya Sen

The purpose is not to dismiss growth or wealth accumulation as such but to acknowledge what we are ultimately striving for. The alternative, as stated by the Indian economist and philosopher Amartya Kumar Sen 2 is not between having a financially rich economy or a poor one, but between “advancing the richness of human life, rather than the richness of the economy in which human beings live.” In other words, the alternative is between valuing life or valuing money, and, contrary to what growth fundamentalists shaping most economic policies in the world today would have us believe, being growth agnostic is nothing to be afraid of. No one is seriously thinking to ban trade or profits; the issue is, rather, to place the economy back in the broader social and environmental frame it belongs to. This is why we need to define its goal or help to push in doing so.

Giving the economy a goal corresponding to what we expect as a human community is more than morally legitimate and necessary; it has now become a practical emergency. The unprecedented progress in human well-being during the nineteenth and twentieth centuries may very well, otherwise, come to an end in the twenty-first, along with the collapse of human civilization as we know it. Too far fetched? Ask yourself, then, what your idea of human resilience is based upon. That the parts of carbon dioxide in the atmosphere has increased from 350 ppm (part per million) before the industrial era to more than 440 ppm today is not politics, it’s physics. The planet has transitioned from the Holocene, a period of exceptional stability that started roughly 12,000 years ago, to the Anthropocene, where humanity has become a planetary-scale geological force. Nine critical environmental processes have been identified that, together, maintain the Holocene-like conditions that made possible for great civilizations to appear3. Four of nine planetary boundaries have been crossed: climate change, loss of biosphere integrity, land-system change, altered biogeochemical cycles (phosphorus and nitrogen).

What’s your take? “We are persuaded to spend money we don’t have on things we don’t need to make impressions that won’t last on people we don’t care about.” (Jackson, T. (2010) An economic reality check).4 Do you think that the economic activity should have a goal other than the sole creation of wealth? Is that even possible? Share your thoughts below.

Footnotes

  1. See video at: https://www.youtube.com/watch?v=HMmChiLZZHg
  2. Shaikh, N. (2004) Amartya Sen: a more human theory of development. Asia Society, available at http://asiasociety.org/amartya-sen-more-human-theory-development
  3. Stockholm Resilience Centre – Planetary Boundaries – an update. About the biogeophysical feedbacks for climate change alone, see Trajectories of the Earth System in the Anthropocene.
  4. TED Talk, available at https://www.ted.com/talks/tim_jackson_s_economic_reality_check

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