The first of Kate Raworth’s “Seven Ways to Think Like a 21st-Century Economist” is to “Change the Goal”: we should ditch Gross Domestic Product (GDP) and develop alternatives that do justice to the defining environmental and development issues of our time. Raworth’s alternative, the Doughnut, consists of two types of indicators: a range of human well-being indicators that should all be above some minimum, and a range of environmental indicators that should all stay within some planetary boundary. The chapter argues that economists have focused too much on GDP as a key indicator of success in economic policy, and even worse, that economists strive for perpetual growth in GDP. Chapter 7 deals entirely with economic growth, so I’ll focus on her criticism of GDP here.
GDP: A poor measure, but whose fault is that?
The first question that came to my mind is: who is Raworth addressing when she argues against blind faith in GDP? At least the economists that I know are fully aware that GDP measures not happiness, but productivity. And even for productivity it is a poor indicator as it does not measure a host of productive activities, such as household work, volunteer work, and ‘free’ services (the latter of which have become ubiquitous in this age of Facebook and Twitter). Moreover, it does not include depreciation of capital. environmental degradation, and resource depletion; worst, expenses to clean up the environment are counted as productive exercises just like farming. So yes, GDP is a poor indicator of happiness, or life satisfaction, but I have never met an economist, or come across an economics textbook, that would argue otherwise.
So if economists caution against using GDP as a welfare indicator, who does Raworth have in mind? The chapter opens with a reference to a recent G20 pledge to “grow […] economies by 2.1%”. This is a pledge made by policy makers, not economists. And yes, policy makers love simple metrics, but they tend to forget where the metrics come from – something with sausage and laws. By the same token we can blame economic journalists, who spell doom whenever growth numbers are low and bliss when they are high. Granted, many of the may indeed have had an economics education – but then again, I wonder who has taught them that GDP is a measure of how happy we are with our lives.
In fact economists have developed alternative metrics of economic welfare that do take into account environmental degradation and resource depletion, such as genuine savings or the UN’s satellite accounts. Economists and ecologists are working together to develop methods to include decline in natural capital stocks in national accounting systems. The problem is that such metrics are a lot more difficult to produce than GDP, and particularly for natural capital accounting the methodology is still being developed. And whatever these indicators measure, they will always be poor indicators of something as personal and multidimensional as human well-being.
So yes, there is a lot wrong with GDP, but don’t blame economists for this: blame the politicians who don’t care to use the alternatives, and the journalists who fail to check what it represents.
Question the goal
This does not mean that economists (or rather economics textbooks) walk out free. In one of the better pieces of the chapter, Raworth laments how modern economics seems to have forgotten the struggles of classical economists with defining the goal of economic policy. People like James Steuart and Adam Smith have thought long and hard about what should be the goal of what was then called political economy. As Raworth argues modern economics has simplified this to “how society manages its scarce resources,” or even worse, “what economists do.” This is not entirely fair: contemporary economists like Amartya Sen and Bruno Frey have written scores of books and papers about such issue as social justice and happiness. But open a first-year BSc economics textbook and one objective dominates, whether the analysis deals with taxation, monopolies, environmental pollution, or public goods: maximize the sum of all ‘utility’, or “willingness to pay”. (To be precise, there is a host of related measures to operationalise these concepts, but that is a bit of a technical matter.) But this is only one of many conceivable policy objectives. For example, why the sum of all utility? Why not maximize the utility of the worst-off citizen, like John Rawls argued? Or a weighted sum, so that we pay attention to all but we prioritise the worst-off? For an economics student, however, the maximization of the sum of all utility (whether expressed as willingness to pay, or consumer surplus, or utility as such) is so omnipresent that seeing it for what it is, namely one of many possible policy objectives, is as difficult as it is for a fish to develop a concept of water. Our textbooks hardly challenge our students to question the underlying assumptions, for example that satisfaction of wants is what makes people happy (Buddhist philosophy and modern psychology argue it doesn’t), that willingness to pay is a good indicator of utility (we all know it isn’t, but try repeating that every time you discuss market failures or travel cost method), and that aggregate welfare is all we need to consider in policy assessments (“maximize the cake’s size and let politicians deal with distribution” – but transfers are expensive and people live by more than bread alone). So while I disagree with Raworth’s charge that economists have some starry-eyed reverence for GDP as a welfare indicator, let alone a policy goal, she has a point that students should be familiarised with a wider range of normative frameworks and policy goals than the maximization of aggregate utility.
Now to the Doughnut
Raworth admits that the Doughnut is not extremely original: it builds on a concept developed earlier by Johan Rockström of the Stockholm Resilience Centre. Rockström identifies a set of planetary boundaries that define what he calls a “safe operating space” for humanity: not that things will surely blow up when we cross those lines, but we do know that things stayed okay for millennia when we didn’t cross them. To this upper bound to environmental pressure, Raworth adds a lower bound that represents what we minimally need. Her addition serves as a worthy reminder to environmentalists that people have needs too. However, like maximizing aggregate willingness to pay, it is also one of many possible economic goals: make sure that everybody is above the lower bound. In other words: it is a normative choice, just like maximizing aggregate utility. The essential issue is not to take any economic goal for granted.
What I take away from this is that we should question the goal of economic policy in class, over and over again. Utilitarian welfare economics is an extremely valuable tool for normative analysis – it might be the only set of assumptions that allows for quantitative analysis, from demand and supply curves on a blackboard to applied social cost-benefit analysis and natural capital accounting. Raworth’s Doughnut is another such quantification of objectives. But both approaches derive their usefulness from their very restrictive assumptions, and we must inspire our students to look beyond those assumptions.
- Doughnut Economics (3): Choose your big picture