Matthew Hemmins examines the use of GDP in economics and introduces the Doughnut Model: a 21st century approach to 21st century problems.
Over the past 50 years, for better or worse, GDP has become the headline figure for the subject of economics. It has become the miracle that, given enough time, will surely solve all of our problems. And it has been drilled into the minds of all economics students that the world cannot possibly get enough of it. In fact, I’m no stranger to this: having studied economics for four years now, I am one of the students who has been exposed to the word of ‘Econ 101’ and indoctrinated into the cult of ‘forever growing GDP.’
The world of ‘Econ 101’ is in fact nicely captured by one textbook: Economics by Paul Samuelson and William Nordhaus. This is the book that has gone through nineteen different editions and been taught to countless students the world over, having been first published in 1948 and most recently in 2009.
Now if one was to read a textbook such as this as an outsider for the first time then it would be easy to see how you could come away with the impression that simply growing GDP is the perfect policy solution for anything that ails a country. Living standards? GDP. Inequality? GDP. Unemployment? GDP. This is the world that our next generation of economists – and as such, policy makers – has grown up in and been shaped by.
Ultimately, the discipline of economics has decided that GDP growth is an objectively good thing and that policy should be geared towards it as an end goal. However, it is now time for that to change. Indeed, a society facing twenty-first century problems needs a twenty-first century solution and unfortunately, GDP is simply lacking in crucial areas. This is evident in nowhere more so than the environment and its sustainability (or current lack thereof).
Recently, politicians it seems have become acutely aware that GDP as a metric is insufficient, and yet instead of abandoning it for a new, more inclusive system they have instead decided to add superficial prefixes instead. Indeed, Kate Raworth summed it up best in Doughnut Economics by saying “Perhaps you’d like it to be equitable, good, greener, low-carbon, responsible or strong. You choose – just so long as you choose growth.”
Raworth instead proposed (as the title might suggest), a doughnut model where humanity should strive to exist in a “safe and just space for humanity,” sat below an ecological ceiling that if overshot would lead to critical planetary degradation, and above a social foundation, which, if fallen through would lead to critical human degradation.
This model is beautiful for its relative simplicity at face value and yet it provides a much more complete picture of where any one country, or indeed, the world is at any given time. To further illustrate this point, let us consider GDP per capita, the last bastion of defence for stalwarts of the old system. To be sure, the inherent flaw of this measurement is inequality above all else. In line with this, a recent press release from Oxfam International found that “the richest 1% bagged 82% of wealth created last year – poorest half of humanity got nothing.” It does not take a statistical genius to see that if one divides the wealth created, by the population that created it, the results will be far from representative of the true state of economic development.
It is then, that we return to the doughnut and ask more specifically, what would a world economy geared to this idea of a “safe and just space for humanity” look like compared to the current one geared towards never-ending growth? The answer can be summarized in a single word: Sustainable.
GDP growth by its very nature is not sustainable, the planet and its natural resources have their finite limits and economists should know this, they design production possibility frontiers (PPFs) to demonstrate that exact fact. Now granted, technology and thus productivity can improve and it has done throughout history. But this cannot last forever so we must ask: What happens when we can no longer shift the PPF to the right and we reach our natural limit?
In reality, countries can only keep innovating and pushing their productivity so far until they reach a natural limit and realize that ‘onwards and upwards’ cannot last forever and in fact, it should not. This constant drive towards growth above all else is destroying the planet. Even if one just takes the nine variables shown above the ecological ceiling in the Doughnut model, Raworth has found that we are already overshooting the boundary required for a “safe and just space” in at least four of them (see Doughnut Economics) and without any real impetus to change things will only worsen.
Logically, then, you may be asking at this point “what can we do about this?” And the answer, unfortunately, is far from straightforward. See, economists are a very stubborn bunch and it will take a lot of work, protest, scholarship and refinement before the discipline itself accepts the need to abandon its antiquated systems.
However, in the short run at least, a complete overhaul of the discipline is not necessary, as a good proportion of ‘Doughnut Economists’ already exist. In fact, the last 15 years or so has seen a massive growth in the number of budding economists rebelling and protesting the systems and assumptions taught to them through higher education. Quite recently the International Student Initiative for Pluralist Economics (ISIPE) has seen students from 19 countries around the world join together in denouncing mainstream economics as unfit for twenty-first century problems.
Moreover, in a 2013 article for The Guardian entitled “Post-Keynesians are staging a comeback”, professors and doctors from universities throughout England denounced modern economic teaching as ‘dogmatic’ and ‘against intellectual diversity.’
So it seems that there are plenty of students and professors that agree we need a change. The challenge is now further spreading the word, reaching all of those students who have been sleepwalking into the world of ‘Econ 101’ and broadening their horizons beyond their Economics textbook. Moreover, the challenge is now to bring the somewhat more ‘radical’ ideas into the mainstream and to make sure that the twentieth edition of Economics has a lot more revisions than the nineteenth.
Clearly, therefore, the system we have in place to measure ideas such as “success,” “growth” and “development” is broken and unfit for purpose, indeed, it has lead to the current mess we are in. So, fundamentally, it comes back to the theme I began this article with, that we need twenty-first century solutions to twenty-first century problems. In reality, most of the issues discussed here are relatively new phenomena, and as such it is fair to assume that the great economists of previous centuries, such as Keynes, Friedman and Hayek had more pressing issues to resolve and theorize over than climate change, biodiversity loss or ocean acidification. But this only further strengthens the point that we can no longer rely on their indicators for our modern world if we truly want a sustainable planet.
Economic theory must therefore evolve and politicians must accept that for their campaigning to be truly effective in the modern age it must delve deeper than superficial talk of GDP growth, it must get to the heart of rampant inequality, worsening climate change and potentially irreversible environmental damage. If we are to escape this race to the last drop of oil in search for growth then the days of GDP dominating the economic landscape must be numbered, indeed, it is now time for the doughnut to take centre stage.
About the Author: Matthew Hemmins is currently in second year studying for a joint honours in History and Economics. Matt is particularly interested in politics and looking at ways to improve and revise traditional economic theory. His Twitter is @HistoryMatters7.