The old economy is based on false “laws of physics” – the new economy can save us | Kate raworth


Tthe economies are not doing well in the richest economies in the world. Most OECD countries face their highest levels of income inequality in 30 years, while generating ecological footprints of a size that would require four, five or six planet Earths if each country did the same. These economies have, for the most part, become divisive and degenerative by default. Mainstream economic theory has long promised that the solution begins with growth – but why does this theory seem so ill-equipped to deal with the social and ecological fallout of its own prescriptions? The answer can be attributed to a severe case of physical envy.

In the 1870s, a handful of budding economists hoped to make economics as famous a science as physics. Impressed by Newton’s ideas about the physical laws of motion – laws that so elegantly describe the trajectory of falling apples and orbiting moons – they sought to create an economic theory that matched his heritage. This is how pioneering economists such as William Stanley Jevons and Leon Walras drew their diagrams in a clear imitation of Newton’s style and, inspired by the way gravity pulls a falling object at rest, enthusiastically wrote about the role played by market forces and mechanisms in pulling an economy into equilibrium.

Their mechanical metaphor sounds overbearing, but it was poorly chosen from the start – a fact widely recognized since the astonishing fragility and contagion of global financial markets were exposed by the crash of 2008.

The most pernicious legacy of this phony physics has been to entice generations of economists into a flawed research into the economic laws of motion that dictate the path of development. People and money are not as obedient as gravity, so such laws do not exist. Yet their false findings have been used to justify the development of growth-oriented policies.

In 1955, economist Simon Kuznets believed he had found such a law of motion, one that determined the path of income inequality in a growing economy. The sparse data he was able to pull together seems to suggest that, as a country’s GDP grows, inequality first increases, then stabilizes, and eventually decreases. Despite Kuznets’ explicit warnings that his work was 5% empirical, 95% speculative, and “partly perhaps tainted with wishful thinking”, his findings were quickly touted as an economic law of motion, immortalized as “the Kuznets curve– looking like an upside down U on the page – and has been taught to all economics students for half a century.

As for the message of the curve? When it comes to inequalities, they have to get worse before they get better, and more growth will make it better. And so the Kuznets curve has become a perfect justification for the trickle down economy and for supporting austerity today in the pursuit of making everyone a better place one day.

Forty years later, in the 1990s, economists Gene Grossman and Alan Krueger believed they too had found an economic law of motion, this time on pollution. And it seemed to follow the same trajectory as the Kuznets curve on inequalities: first up and then down as the economy grows. Despite the usual caveats that data was incomplete and available only for local air and water pollutants, their findings were quickly called “Environmental Kuznets curve“. And the message? When it comes to pollution, it has to get worse before it gets better and – guess what – increased growth will make it better. Like a well-trained child, the growth will apparently cleanse itself after itself.

Except that’s not the case. If we’ve learned one thing from the emerging crises of the past few decades – from the tipping points of climate change and the 1% hike to the near collapse of financial markets – it’s time for the economy to give up the falsehood. physical. With more and better data, it has become clear that such economic laws of motion simply do not exist. Far from being a necessary phase of development, extreme inequalities and environmental degradation are the result of political choices, and those choices can be changed. Instead of laws to obey, there are design decisions to be made.

From Physics to Gardening in One Minute: A Donut Economics Animation by Ainslie Henderson in collaboration with Kate Raworth

So if the economy is not best conceived of as a mechanism that returns to equilibrium and follows fixed laws of motion, how should we think about it? Like the living world: it is complex, dynamic and constantly changing. And for economists, that means it’s time for a metaphorical career change: from engineer to gardener. Let’s take the helmet off and let go of the levers of control of the economy because they just don’t exist. Instead, put on gardening gloves, grab a pair of pruning shears, and start managing the garden economically. And if you think that sounds like a let-in, then you’ve never had a hard day’s work in the garden – it requires getting stuck, digging, pruning, weeding, and watering the plants as you go. ‘they grow and mature.

How can economic gardeners help create a thriving, inclusive and sustainable economy that will help achieve the Sustainable Development Goals? By following two fundamental principles: to make it regenerative and distributive by design.

Follow the laws of nature, not the laws of physics

The regenerative economic design ensures that instead of depleting the Earth’s resources, we use them over and over again. We learn to work with, not against, the cyclical processes of life, including those of carbon, water and nutrients. Thanks to innovations in the circular economy and cradle to cradle design we can begin to transform the degenerative economy of the last century into the regenerative economy of this century.

The distributive economic design, in turn, ensures that the value created is distributed much more equitably among those who helped generate it. Think of employee-owned businesses, such as John Lewis Partnership and Unipart – which reward committed employees rather than short-term shareholders. Think of community-owned renewable energy systems that generate electricity with income for community use. Think of Creative Commons licenses that enable valuable innovations, like those of the Open building institute, to share, improve and use endlessly. Thanks to the rise of digital networks, there are more opportunities than ever to transform the divisive economy of the last century into the distributive economy of this century.

So how can business decision-makers be more like gardeners in their approach? They should view politics as an adaptive portfolio of experiences, says Eric Beinhocker, a leading thinker in the field of evolutionary economics. We should emulate nature’s process of natural selection, which can be boiled down to diversify-select-amplify: set up small-scale policy experiments to test a variety of interventions, put an end to those that don’t work, and At scale. those who do. Nobel Prize-winning political scientist Elinor Ostrom agreed. “We have never had to deal with problems of the magnitude facing today’s globally interconnected society,” she wrote. “No one knows for sure what will work, so it’s important to create a system that can scale and adapt quickly.”

Realizing that the economy is constantly changing is a stimulating idea. If complex systems evolve through their innovations and deviations, it gives added importance to new initiatives – complementary currencies to open-source design – which are at the forefront of new economic design.

Best of all, each of us can help shape the way the economy evolves. Not just in the way we shop, eat and travel, but also in the way we volunteer, invest and protest. In the way we create new businesses, save for our pensions, empower our inventions, and power our homes. Who knows, we might just become butterflies that stir up mighty winds of change.

Donut Economics: Seven Ways to Think Like a 21st Century Economist by Kate Raworth is now available, published by Penguin Random House.

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