The influential academic speaks to AIQ about the flaws in traditional economic thinking and how her revolutionary “Doughnut” offers a fresh approach to solving the world’s greatest problems.
Read this article to understand:
- The thinking behind Doughnut Economics
- The problems with GDP
- How redesigning companies can promote sustainability
As a teenager in Britain in the 1980s, Kate Raworth watched television pictures of crisis and catastrophe – the famine in Ethiopia, the Bhopal gas disaster, the Exxon Valdez oil spill – and resolved to spend her life working to end poverty and environmental destruction.
She arrived at Oxford University to study economics, but soon realised the syllabus had little relevance to these real-world challenges. Working in international development, first at the United Nations and then Oxfam, she saw first-hand how unfair trade arrangements and climate change affect the world’s poorest.
Armed with this knowledge, she returned to economics determined to transform it. In a 2012, report she set out a new way of thinking about the discipline, not as a set of iron laws but as a toolkit to achieve humanity’s long-term goals. She drew a picture to convey her ideas and it looked like a doughnut: a pair of concentric circles denoting social and environmental objectives. Between the rings was a “safe and just space” where humanity can exist without falling short on human rights or breaching the planet’s environmental limits (see Figure 1). The phenomenon of Doughnut Economics was born.
Figure 1: The Doughnut of social and planetary boundaries
Source: Doughnut Economics Action Lab, September 2022
Later developed in a bestselling book,1 Raworth’s ideas have proved hugely influential. Pope Francis commended the Doughnut in his book Let Us Dream; Sir David Attenborough has cited it as a “compass” for the human journey.2 And Doughnut principles are being put into action by policymakers and grassroots campaigners worldwide. Working with Raworth’s Doughnut Economics Action Lab (DEAL), Amsterdam has pledged to bring all its residents “inside the Doughnut” and achieve a fully circular economy by 2050. Other cities in Europe, the US and New Zealand have set similar targets.3
Now a senior associate at Oxford University’s Environmental Change Institute and Professor of Practice at Amsterdam University of Applied Sciences, Raworth says further progress is needed to put the world on a more sustainable path. In this interview, she sets out the flaws in mainstream economics, the benefits of systems thinking and how the design of companies needs to change to address pressing social and environmental challenges.
Doughnut Economics argues economies should stop fixating on GDP growth and instead target the Doughnut’s “safe and just space”. What are the key flaws with GDP and how can the Doughnut help us move beyond them?
GDP is an entirely monetary metric; it merely reflects the price given to the goods and services produced in an economy in a year. It doesn’t tell you what you really need to know for humanity to thrive on this planet in the 21st century. GDP doesn’t reflect household care and other unpaid work, and it ignores what has been destroyed in order to produce goods to sell. In the classic line, it tells you the price of timber; it doesn’t tell you the value of the forest you’ve lost.
Too often, economics starts with market supply and demand. That puts price at the centre of our attention and makes us think of success in terms of increasing the value of bought and sold goods.
By contrast, Doughnut Economics starts with the life-supporting systems of our planetary home and the wellbeing of every person. By taking into account the fundamental social and natural metrics of life, the Doughnut asks how we can design an economy compatible with meeting the needs of all people, within the means of the living planet. The idea that ever-rising GDP is going to meet those needs, within those means, is a complete fallacy. So it’s time to replace GDP in the realm of policymaking with a dashboard of social and natural metrics that can far better reflect the essentials of a thriving economy.
You have written about the “heroically simplifying assumptions” in economics that derive from its emulation of Newtonian physics. What are key problems that result from this?
When 19th century economists were desirous to make economics appear to be science – and the science of the day was Newtonian physics – they went down that route and inadvertently led us into all sorts of problems. We ended up with economic analysis that is predominantly static. As John Maynard Keynes pointed out, economists set themselves too easy a task if they can merely tell us that after a storm the ocean will be flat: what matters are the storms and waves that hit us along the way.
The idea economies are best determined by the movement of markets is utterly wrong
One of the dangers of this way of thinking is the idea there is such a thing as an equilibrium; that markets will come to a natural point of balance in the same way a ball will roll to the bottom of a bowl. In the 1970s, Eugene Fama’s efficient market hypothesis claimed the actions of financial markets take on board all available information, bringing about an equilibrium. But the idea economies are best determined by the movement of markets, apparently bringing things into balance, is utterly wrong.
Hyman Minsky’s work addressed this fallacy. He brought in systems thinking to reveal that there is an inherent instability in financial markets because they incorporate expectations which create inherent cycles. This has been borne out in analyses of financial crises, and it makes sense more widely, because life occurs in cycles: like all living beings, we are born, we grow, we may mature and thrive, we die. So too for whole communities, societies and civilisations. Equilibrium analysis does not reflect the dynamic reality of the living world. We tend to destroy the fragile and delicate balance of the Earth’s life-supporting systems when we use an analytical framework which in no way reflects this fact. That is why systems thinking is such an important starting point for creating economies that enable life to thrive on this planet.
What other advantages does systems thinking offer over mainstream economic analysis?
There is a quote I live by, from the statistician George Box: “All models are wrong, but some are useful.” Let’s recognise that systems thinking is itself a model. So while it is not ‘true’ or correct, I believe it is a far more useful heuristic device for understanding the world than traditional economic analysis.
Systems thinking interprets the world through the lens of feedback loops
Systems thinking interprets the world through the lens of feedback loops. There are reinforcing feedback loops that spiral up or down – the more you have, the more you get, or the less you have, the less you get – leading to virtuous or vicious cycles. There are also balancing or dampening feedbacks that hold things in balance – the more you have, the less you get.
My epiphany came when I read Donella Meadows’s book Thinking in Systems.4 It transformed the way I saw the world. It also made me incredibly frustrated. When I thought back to my economics education, I realised we had barely broached systems thinking. It only came up as the advanced concept of hysteresis, or path-dependency. But this should really be a starting point for Economics 101 if we want students to understand economic realities. As Meadows writes, “Let’s face it, the universe is messy. It is nonlinear, turbulent and chaotic… it self-organises and evolves…that’s what makes the world interesting, that’s what makes it beautiful, and that’s what makes it work.”
How can systems thinking help solve the key issues of our time: climate change, social inequality, financial crises?
Thankfully, due to systems thinking, we now know far more about the dangers of tipping points in Earth’s climate and ecological systems. But since we have a generation of policymakers whose education didn’t include systems thinking, it is rarely translated into policy and practice. Amid the daily cut-and-thrust of politics and events, it’s a challenge to get the media, general public and politicians to respond at speed to the irreversible climate tipping-point effects we are on the verge of causing.5
Many social systems are dominated by reinforcing feedback loops
This is also an issue when it comes to addressing social inequalities. It is now clear many social systems are dominated by reinforcing feedback loops. The more you have, the more you get, whether in terms of privilege, income, opportunity, networks. Such reinforcing feedbacks tend to drive wider social inequalities; governments need to take a systems-thinking approach to design and intervene effectively with policies that serve to rebalance those dynamics.
More systems thinking is also needed in finance. Policymakers such as Gordon Brown and Ben Bernanke admitted they thought economies had entered a “great moderation” before 2008. They and the regulators did not see significant risks within any particular bank; the problem – they later realised – was they weren’t looking at the risky connections between the banks. The resulting financial crisis brought greater recognition of Minsky’s work and introduced systems thinking into the heart of financial regulation, thanks to analysts such as Andy Haldane at the Bank of England. But the financial system still hasn't been reformed sufficiently.
Drawing on Meadows’s work, you have argued stewardship focused on “leverage points” is important in managing complex systems. How could financial markets be stewarded in a more sustainable direction, and where might the leverage points be?
We need to develop what’s known as “right relationship”. In the simplest terms, we need a financial system that, by design and ethos, is in service of an effective economy, which in turn is compatible with reproducing the conditions conducive to life on Earth.
The financial system still wields influence and power in service of itself
What does that look like? Not the system we’ve got. The financial system still wields influence and power in service of itself. It is designed to pursue endless returns; there is no sense in which it will ever mature. As Meadows would say, if there is a subsystem that seeks to optimise itself by growing endlessly, it poses a threat to the health of the whole. We know what that looks like in biological systems: we call it cancer.
One of the highest leverage points Meadows names is to address the purpose or goal of the system. At the moment, the goal of the financial system is to maximise its own returns. Instead, we need finance to support an economy that meets the needs of all on a thriving planet. How we do that is a big question – I don’t have the answer, but it certainly goes far beyond today’s environmental, social and governance (ESG) discourse.
There has been a lot of talk among major corporations of moving towards a more sustainable, multi-stakeholder, purpose-led model, but little evidence of this in action. Why is this?
A lot of people talk about corporate purpose and leadership, but that is just the surface layer of what needs to change. For a deeper redesign of enterprise, you also need to ask how a company is networked; to examine its relationships with suppliers, industry associations, customers and employees. Do these networks strengthen or undermine its purpose? Which alliances are holding the company back? Likewise, ask how the company is governed: who has a voice in decision-making, what are the rules and norms at work, and what are its metrics of success?
The nature of a company's ownership will profoundly shape how it operates
You also need to look at ownership. Because the nature of ownership – whether a company is owned by a family or by its employees, its founding entrepreneur, or by shareholders, by venture capital or by the state – will profoundly shape how it operates. And how the company is financed, and what that finance expects or demands, extracts or reinvests, is in turn strongly determined by how that company is owned and governed.
We have seen two very powerful stories from the markets in recent years that illustrate this point. Under its former CEO Paul Polman, Unilever set out an ambitious vision for the future of the company. But in February 2017, the firm faced a hostile takeover bid by Kraft-Heinz, and from that point the markets began to pull Polman back from that stakeholder-focused direction [Polman stepped down as CEO in November 2018]. Similarly, Danone CEO Emmanuel Faber was removed in March 2021 after taking innovative steps towards making the company a mission-led enterprise that acted on climate change.
These companies were seen at the time as advertisements for the possibility of major corporate transformation. In both cases, the markets showed they would not tolerate significant change. That really throws down the gauntlet to proponents of the mainstream shareholder-owned model: where are the examples of major publicly traded companies that are becoming regenerative and distributive by design? Until such examples exist, there is little reason to believe that today’s dominant models of corporate ownership and financing can support the kind of regenerative and distributive enterprises that the future needs.
How can businesses be structured in a way that is more conducive to a distributive and regenerative economic system?
There is no single solution. Whether it is through steward ownership, employee ownership, cooperative ownership or other designs, we need alternative forms of enterprise design that attract financing aligned with, and in service to, the purpose of the company, as opposed to disrupting, diverting and undermining it.
The enterprise designs that the 21st century economy needs are only just being invented
The aim is to have an ecosystem of enterprise design, which will include a range of different kinds of business structures, appropriate to different kinds of companies. DEAL is now working with organisations like Purpose Economy that are supporting people interested in setting up steward-owned companies.6 Likewise, in the US, where many founder-owned firms soon face the CEO’s retirement, the Fifty By Fifty movement aims to work with them to grow the number of employee owners in the nation from ten million to 50 million by 2050.7 Initiatives such as these demonstrate, we believe, that the enterprise designs that the 21st century economy needs are only just being invented. It will take innovations in finance to serve them.
The Ukraine-Russia war has highlighted the fragility of global supply chains and the limitations of our continued reliance on fossil fuels. What are the prospects these shocks could be catalysts for positive change over the longer term?
The energy crisis many countries face is clearly a huge source of near-term stress and suffering for households and businesses. But as the economist Milton Friedman said: “Only a crisis – actual or perceived – produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around.”
Far-sighted countries will accelerate their move away from dependence on fossil fuels
In the face of this crisis, far-sighted countries will accelerate their move away from dependence on fossil fuels and invest faster in renewables and energy-demand reduction, such as through insulation. That route makes sense both now and for the long term. But other countries may simply double-down on producing fossil fuels. The new UK government, for example, has signalled its intention to restart fracking and develop new North Sea oil and gas fields, ignoring the climate emergency and the fact that, in a global market, additional UK gas production is not going to reduce prices for British consumers. I’m appalled at the direction the UK is now taking: once again, it speaks to a failure to see and respond to the bigger systemic challenges.
It's long been clear that high-income countries have the greatest responsibility to move first and fastest on climate change. A crisis like this is reason to redouble investment in the energy transition, not backtrack to outdated fossil-fuel generation. That path would be devastating to us all.