The fifth of Kate Raworth’s “Seven Ways to Think Like a 21-st Century Economist” is to forget the idea that economies must become highly unequal before they can truly spread wealth, and to start designing ways to spread that wealth now.
The central theme of the chapter is what economists call the Kuznets curve. Economist Simon Kuznets found a pattern in macroeconomic data that suggested that as they grow, many economies go through a phase where inequality rises only to fall later on. Raworth criticizes how the concept has been interpreted and used by economists.
I am no macroeconomist, and therefore I’m not overly familiar with this topic, but I have always understood that to Simon Kuznets (a statistician as well as an economist), this pattern he found was no more than that: a pattern in the data for which an explanation was needed. According to Raworth, however, economists have taken the Kuznets curve to be more than a pattern: rather, they turned it into an economic law of nature as well as a policy prescription. I would not go that far. The sheer volume of literature on the Kuznets curve suggests that many economists are trying to identify the mechanisms behind this pattern, rather than treat it as a law unto itself. She especially overstates her case when she suggests that belief in some sort of Kuznets law inspired institutions such as the IMF to impose austerity upon debt-ridden countries such as Greece and Argentina. In order for these countries to grow, the IMF is said to believe, this ‘Kuznets law’ demands that they must first go through some magical cleansing procedure that involves much economic pain and inequality. As far as I’ve understood it (but I admit I’m going out on a limb here), the austerity measures recommended to, or imposed on, Greece and Argentina were necessary to pay off these countries’ mountains of debt. And yes, paying off such amounts of debt means going through the pain of repaying it before you’re free of it. That has little to do with Kuznetsian magic, but everything with accounting.
Distribution, equality, income
Raworth’s recommendations in this chapter are a mix of fairly classical redistribution policies (land taxes, for example) and a few more radical ideas, the latter of which I find unconvincing. Complementary currencies have been around for some 20-30 years and although they may have been helpful for some communities, I don’t see how they would transform our current monetary system for the better. As far as blockchain currencies such as Bitcoin have not been overhyped, they have in any case proven a boon for tax evaders, ransomware-designers, and other cybercriminals.
Neither do I share her expectations from open source as a viable alternative for intellectual property rights. Open source works very well for software, which is easy to distribute and has a host of tech-savvy users who are willing to develop and share an extension that they happen to find useful. However, you cannot expect the same model to work for innovations that require much heavier and riskier investments in research and testing, such as pharmaceuticals.
A more general concern, however, is that she may be making the same mistake as the economists that she criticizes: oversimplifying distributional concerns. First, we should not conflate inequality and poverty. An unequal society is not necessarily poor in the absolute sense: it could be that everybody earns enough to make a decent living and a few people are very, very rich. Likewise, a society can be very equal and poor at the same time. These issues are more complicated than simply about redistribution of income. Would you rather be poor amongst other poor people, or earn a modest living while everybody around you is very rich? And is income all that matters in this regard, or do other considerations matter at least as much, such as access to healthy food and clean water, the ability to take part in society, or the freedom to make your own decisions? The literature on economic justice provides many sensible and interesting ways of looking at these questions. I have been reading a lot lately on the capability approach, which emphasises the agency that people have over their own lives. I find it an appealing approach to economic justice. But, admittedly, our economics education pays too little attention to the wide variety of ideas and philosophies of economic justice. Besides utilitarianism (maximise the total amount of happiness in society) we should also introduce students to the ideas of thinkers such as John Rawls, Robert Nozick, Amartya Sen, and Martha Nussbaum.
Oh, and I take issue with the word “design” in the title, but that is better addressed in the next blog post.
- Doughnut Economics (1): Where I come from
- Doughnut Economics (2): Question the goal
- Doughnut Economics (3): Choose your big picture
- Doughnut Economics (4): Beware Nietzsche’s abyss
- Doughnut Economics (5): Understand emergent behaviour
- Doughnut Economics (7): Understand before you design
- Doughnut Economics (8): Be agnostic about growth