“All the world’s a stage,” said Shakespeare. Along with a new role for Market and State, new characters such as Household, Commons, Society, and Earth are required on stage in the 21st-century economics’ play.
| This post is part of a reading series on Doughnut Economics by Kate Raworth. To quickly access 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. |
Setting the Stage
The conventional economics’ play has its key characters tacitly named “through the most iconic diagram in macroeconomics, the Circular Flow,” says Kate Raworth. This diagram was given to the world by Paul Samuelson in Economics, a college manual published in 1948 (the latest edition is from November 2010). Originally devised to simply illustrate how money flows in the economy, the Circular Flow soon came to define the economy itself, thus “determining which economic actors were placed centre stage and which were shunted to the wings.”
The play broadly unfolds this way: “Centre stage is the market relationship between households and business. Households supply their labour and capital in return for wages and profits, and then spend that income buying goods and services from firms. It is this interdependence of production and consumption that creates income’s circular flow.” The Circular Flow system is consequently closed and complete. To its inventor’s credit, it has proved to be a useful base for figuring out different ways of measuring national income and for making visible various macroeconomic ideas. But this diagram’s limitation is, precisely, that it only illustrates the flow of income, thus leaving out of the picture key elements embedded in the real economy—notably the energy and materials on which economic activity depends, or the society within which those activities take place.
Economics: The Twentieth-Century Neoliberal Story
As per what would become the dominant economic story over the world, the cast of the play has its different roles distributed as follows:
Market: “When the market’s invisible hand is set free to work its magic of allocative efficiency, it harnesses the self-interest of households and business to provide all the goods and jobs that are wanted.”
Business: “Firms bring together labour and capital to produce novel goods and services and to maximise their profits. There is no need to look at what goes on in their factories and farms, so long as they play within the legal rules of the game.”
Finance: “Banks take people’s savings and dutifully turn them into profitable investments. Furthermore, according to Eugene Fama’s influential ‘efficient-market hypothesis’ of 1970, the price of financial assets always fully reflects all relevant information.1 Hence, financial markets are ever adjusting but always ‘right’—and their smooth operation should not be distorted by regulation.”
Trade: “David Ricardo’s nineteenth-century theory of comparative advantage demonstrates that countries should focus on what they are relatively good at doing and then trade: both parties will gain from it, no matter how unequal they are.”
State: “Beyond defending the nation’s borders and its citizens’ private property, it is quite simply best for the state to leave it to the market.”
A New Century, a New Show
Footnotes
- Eugene F. Fama: Efficient Capital Markets: A Review of Theory and Empirical Work