Doughnut Economics (2): Question the goal

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.

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Doughnut Economics (1)

Kate Raworth’s book Doughnut Economics has caused a fair amount of controversy, not least among Dutch economists. This piece is a good illustration: Bas Jacobs (Erasmus University, Rotterdam) explicitly warns against reading it, accusing Raworth of attacking strawmen, while Ewald Engelen (University of Amsterdam) hails the book as “the book of 2017.” I find the sheer polarization and vitriol in such debates fascinating: what makes people disagree so fundamentally with each other on issues each finds self-evident?

And then fellow-tweeps Anthony Rogers and Ngaio Hotte suggested to read it as some sort of resource economics Twitter book club so I decided to buy it. I’ll write my impressions in a series of blog posts, but first I want to say a few things about where I come from, and with what state of mind I started reading the book. In the meantime this might already explain some of the extremely hostile responses by economists.

Where I come from

In an elevator I would introduce myself as a natural resource economist, but actually my academic background is a bit more complicated. At highschool I had only about two years of economics – I hated it and dropped it as soon as I could. After highschool I studied Environmental Studies at a Dutch polytechnic institute (Hogeschool in Dutch, comparable to the German Hochschule). Only somewhere in the fourth and last year of this education programme I developed an interest in the economics of the environment. Sure we want a clean environment, but how clean? When is it clean enough, and how much health care, wealth, and other goodies are we willing to forgo to reach that quality? I also felt my education so far had been inadequate: I knew a little of everything, but I was an expert in nothing.

So I came to Wageningen University to follow a study programme called, back then, Agricultural and Environmental Economics. I became fascinated with the combination of economics and ecology: I wrote a minor thesis on fisheries economics, and in my PhD thesis I combined metapopulation ecology with spatial-economic land use models. More recently I got bored with bioeconomic modelling so I am now exploring the boundaries between my field and other social sciences, such as psychology, sociology, and anthropology. Even though I first felt my environmental studies were too broad, I now think it enabled me to understand and communicate with other sciences – the horizontal bar in the T-shaped model that Wageningen University likes to champion. The vertical bar is my economics education.

So where am I now? I’m no Bas Jacobs, nor am I Ewald Engelen. If you want me to list my top five economics books of the year you’ll have to wait at least five years before I have read enough of them. (Note that this post appears more than a year after I started reading Doughnut Economics – so much to read, so little time.) I’m your average associate professor on the tenure track, struggling to find time to keep up with the literature between the teaching, supervising PhD candidates, writing proposals, and joining committee meetings. What I’m trying to say is: I cannot pretend to speak for the entire field of economics. The field is too broad for anyone to oversee anyway, so my perspective is only one of many possible perspectives and probably a very limited one at that. All I can and will do is draw from my own experiences in class, conference rooms, and coffee breaks with colleagues. I might avoid topics I know nothing of, and I’m sure I won’t be able to avoid saying a few silly things.

My mindset reading Doughnut Economics

I started reading the book with a fair dose of skepticism, and it is important to understand where that skepticism came from, not least because it may explain why economists’ responses have been so downright hostile. As a natural resource economist I work a lot with other disciplines, notably ecology, sociology, and environmental science. Here are just a few responses I usually get after telling people I’m an economist:

  • “You look more like a leftie to me!” (If only you knew.)
  • “What I think is really stupid of you economists is that you think the economy can keep growing forever…” (We don’t)
  • “You economists ignore the environment. You call it an externality, as if it does not matter!” (That’s not what an externality is)
  • “Economics is not really a science, is it? After all you did not see the crisis coming” (Neither can climate scientists predict specific hurricanes.)

I can relate to climate scientists who have to debunk the same old nonsense time and again (“You don’t take into account the sun’s influence!” “The climate has not warmed in 16 years!”). The difference is, unfortunately, that climate contrarians usually do not get the starry-eyed media attention that anti-economics writers tend to get.

Don’t get me wrong here – I think there is a lot in my field that can be improved and criticism is vital. The tragedy is that a lot of the criticism comes from people who don’t know what they are  talking about, who have their own dogmas, prejudices, and political bias, and, most tragically, whose prejudice and poor understanding of the field prevents them from seeing the problems that do deserve attention.

My experience with Economics of Good and Evil by Tomas Sedlacek is a good illustration of this. Sedlacek takes a very original approach to economics, drawing from philosophy and ancient mythology to reflect on how the field deals with moral questions. I gave up on the book when I read how Sedlacek interprets the concept of utility:

…it is clear that any sentence on the maximalization (sic) of such utility is naturally valid. We gain a tautology: Utility is gained by an individual through activities that increase utility. And because each person has utility from something else, we get: An individual does what he wants to. We can see that this sentence is vacuous – and for this reason it can be constantly “valid” because it says that A=A. […] If an individual maximizes utility, which everyone defines themselves, Popper would immediately ask: How would an individual have to act in order not to maximize their utility? In other words: Can one go in an opposite direction to their optimization function? If it is not possible to present a thinkable example, then the theory is not falsifiable and is de facto pointless. (Tomas Sedlacek, Economics of Good and Evil, Oxford University Press, 2011, pages 224-226)

Despite having been the Czech president’s economic advisor, Sedlacek does not seem to understand that utility functions were never meant to be a testable hypothesis any more than the Gordon-Schaefer growth function is supposed to hypothesize how populations grow. Both utility functions and biological growth functions are mere models, i.e. abstractions of much more complicated processes. In the case of utility functions this complicated process is how people decide what they want. Such a simplified model helps us understand the choices that people make and how their choices play out at an aggregate level in the overall economy. Utility functions are nothing but preference orderings: indeed, an individual does what he wants to do, but what he wants, how he acts upon what he wants, and how his choices interact with those of others, that is the object of investigation in economics.

The biggest tragedy, however, is that Sedlacek apparently has not read enough economics books to pinpoint the restrictive properties underlying utility functions. Utility functions need to have particular properties in order to be rational, i.e. consistent, so that they can be used in the kind of formal analyses that economists like to do. These properties can be tested, they have been tested, and some have been shown to be false in at least some situations and individuals. For example, utility functions (to be more precise, preference orderings) have to be transitive in order to be rational. This means that if you prefer A over B, and B over C, you must prefer A over C. This property can be tested in a simple laboratory setting, so many psychologists and behavioural economists have done so. Rather unsurprisingly, they found it is often violated.

Perhaps I should have checked who Tomas Sedlacek is before I read the book, because a search on Scopus yields two publications in Czech-language journals and one interview, where in the latter he repeats the tired old slur that “economics is a religion”. With all due respect to the Czech, publishing only in your local language is not exactly convincing of your awareness of the state of the art in your field. Nobody should take my opinion on economics seriously if my publication list featured nothing more than two publications in Economische en Statistische Berichten.

You might respond that in a field so fundamentally stuck in its own dogmas it takes an outsider to shake it up. But then I have to refer to climate science again. Suppose somebody who has never published in climate science, or only in a handful rather obscure journals, writes a book that purports to revolutionize climate science. Would you read it? Now add another feature: suppose that a casual browsing through the book reveals that it regurgitates all the nonsense that climate scientists have been debunking for years: that the so-called climate pause invalidates all of climate science, that climate scientists ignore the sun’s influence, that climate variation on geological scales suggests that current changes are nothing to worry about, and so on. Would you take it seriously – at all?

I hate to say this, but in that light I had every reason to be skeptical of Doughnut Economics. In Scopus I can find a whopping three peer-reviewed publications by Kate Raworth – none in economics journals. What’s more, see what Ewald Engelen wrote in his review of Doughnut Economics:

Take “externalities” – as if environmental pollution, depletion of resources, immeasurable animal suffering, declining species richness, carbon dioxide emissions are ‘external’ to our economic production, and not an intrinsic part of it.

I don’t know what I would find more shocking: that a best-selling book by somebody hailed as the new Keynes (granted, coming from George Monbiot you might not take this as a compliment) perpetuates the Suzuki Fallacy, or that somebody considered a celebrity economist in The Netherlands repeats this faux pas in his review.

So no, I did not expect much when I started reading Doughnut Economics.

Is it any good?

So now that I’ve read it, what do I think of the book? It’s certainly not as bad as Sedlacek’s – but that’s quite a low bar. Raworth makes an honest effort to construct an economics that is fit for the problems of the twenty-first century (global environmental change and dwindling resources combined with grinding poverty and repulsive inequality), where she believes that the economic approach has so far been inadequate. Not all is new, indeed, and while some economists accuse her of attacking strawmen, she actually cites a fair number of big names in economics who look beyond the standard neoclassical model, such as Elinor Ostrom, Richard Thaler, and Daniel Kahneman. She makes a number of very good observations, but also some statements that range from problematic to simply untrue – yes, she repeats the Suzuki Fallacy. My note book has a couple of “Spot on!!” notes as well as some “Nonsense!!” ones. Her recommendations are a mix of classical environmental-economic solutions, radical but interesting ideas, and poorly thought-through, hopelessly naive pies-in-the-sky.

So would I recommend it to my students? The short answer is: perhaps my MSc students, but definitely not my BSc students. For them there is simply too much in there that is simply not true (I want them to get the definition of externalities right, for example). The long answer is in the following blog posts.

Coming up next:

Why cost-benefit analysis is a much better context for ecosystem service valuation than natural capital accounts

Help! I just discovered I agree with George Monbiot!

Well, sort of. He makes a number of sensible points against natural capital accounting that are worth considering:

Natural capital accounting suggests substitutability. Prices are substitutions. In a market money is best understood as a numeraire good, a good that has no immediate value of its own but that acts as an intermediary and a yardstick for the value (read: relative scarcity) of all the other commodities. I know natural capital adherents who try to estimate the monetary value of ecosystems, but flinch at any suggestion of it being a “price tag”: ecosystems cannot be substituted, they say. If a commodity cannot be substituted it has an infinite price. Attach a finite number to it, and it becomes substitutable. Period. This means two things. First, as Monbiot rightly argues, a price is meaningless without the suggestion of a transaction. Indeed, much non-market valuation aims at finding the compensating variation of a public good: how much money people should pay (receive) to make them just as happy as if they had not seen the public good reduced (improved). But these are incremental changes, whereas natural capital accounting regards the value of total stocks of capital. Second, if you value the total area of forest at some price (usually the per-hectare value times the area in hectares) you suggest we would be happy if we sold all our forest at that price (plus, say, one euro). But the per-hectare value reflects the marginal value of the first hectare you would cut; by the time you’re done cutting all the forest the last tree will be worth astronomic sums of money.

Pricing something crowds out intrinsic motivations to preserve it. A growing body of social-psychological research demonstrates that this is indeed a risk. A now-classic study demonstrated that when parents were fined for being late to pick up their kids at a day-care centre, they were more likely to be late – paying the fine absolved them of the moral obligation to be on time. Another study demonstrates that when being informed on the economic value of a park, people are less likely to donate money to its conservation.

I don’t think monetary valuation is entirely useless, but I do admit I’m getting more skeptical of natural capital accounting. Originally non-market valuation was developed to be included in cost-benefit analysis, and I think it should stay there. For three reasons:

Cost-benefit analysis has a null option. A properly done CBA compares at least two alternatives: adopting the policy and not adopting the policy. Both alternatives should be defined carefully, so they can be compared on their positive and negative effects on human well-being. NCA has no such null option. Suppose the government wants to build a highway straight through a forest. A CBA would compare two alternatives: one where we keep the forest and accept the traffic jams, and one where we lose the forest but win travel time. Comparing the economic costs and benefits of both alternatives gives us the incremental costs and benefits of building the highway. Now, I know that NCA was never meant to be used in such decisions (which raises for me the question what it is being used for), but the example demonstrates the problem with its lack of a null option: if we lose the forest, what do we have left? There is no proper definition of “no forest”: is it barren land, a hole in the soil, a graveyard of trees? The worst case of valuation-without-context is replacement cost pricing, where the forest is valued by the costs you would make to rebuild it elsewhere if it disappears. In a CBA such rebuilding efforts could be part of your policy alternative, and the CBA will inform you on the merits of that choice. In NCA, however, you would have to assume that the forest would be rebuilt no matter what.

Cost-benefit analysis is done in incremental terms. As rightly pointed out by Monbiot (and, actually, many economists), it is silly to assume that the total value of a biome is equal to its marginal value times its area. In fact, economists developing methods to value natural capital are aware of this, so what they do is to account for the value of natural capital in a way that is consistent with how we calculate GDP. Nevertheless, the very act of valuing all forest in a country yields numbers that are very difficult to interpret, and therefore prone to misinterpretation. In a CBA, both alternatives are defined by a proper storyline and a delineation.

Cost-benefit analysis has a context. CBA is usually done to inform a concrete policy decision, and most of the time it is an input into a wider decision-making process that involves multiple stakeholders. Also, in this process many other values are considered besides economic value, such as social impacts, aesthetics, ethical considerations. Non-market valuation of ecosystem services can be part of this, but one can also choose not to monetize those values, and leave them to a wider debate that can also include other considerations. (I’m currently reading up on taboo trade-offs and the IPBES theoretical framework – exciting stuff!) At best, the valuations done within NCA are included in satellite accounts that also list biophysical parameters such as species richness, forest cover, and air quality. But the wide range of considerations that will feature in the public debate will still be reduced to a set of statistics.

Bumfights transactions

In 2002 a Las Vegas film maker came up with a hideous business model: pay homeless people a few dollars or a six pack of beer to conduct dangerous stunts, or to engage in fistfights with other homeless people, and film them. The movies, marketed under the insensitive brand name Bumfights, caused a storm of criticism, especially from advocacy organisations for homeless people, who argued the movies legitimized violence against homeless people, and were demeaning and dehumanizing to the people who participated.

The film makers responded that all homeless featured in the movies participated voluntarily. Surely they can make their own decisions? To which a professor responded

“Even if the homeless aren’t forced to perform, it’s inaccurate to describe people without adequate shelter, food or clothing as having choices.”

I hear the same argument in debates on international trade, Payments for Environmental Services, and other transactions between highly unequal parties: once an African lady reacted angrily to the concept of REDD+, arguing “it’s not a free choice!” I believe it points towards a moral flaw in economic theory that many of my colleagues either do not see, do not want to see, or just don’t care about. I call these transactions Bumfights transactions, after the movie series.

Forgive me for getting a bit theoretical here. Consider Rufus, the homeless man who featured prominently in Bumfights. Back then, Rufus had no home, no job, and he lived by what little he could earn by collecting empty cans. Let’s call the situation he lived in A. Say the film maker offered Rufus $5 if he would ride a shopping cart down a flight of steps. In other words, the film maker offered Rufus a new situation B, which you could define as A + $5 + S, where S is the humiliation and risk of serious injury that goes with the stunt. If Rufus preferred B to A (AB in mathematical notation), he would participate in the movie; if AB he would not. Obviously the film maker preferred AB: for only $5 he would have a lot of fun filming Rufus putting his life at risk, and he would make a big buck selling the video. So they could move from A (no transaction) to B (after the transaction), which they both preferred to A. What’s not to like? In economic terms this is called a Pareto improvement: a change that makes at least one person better off, and none worse off.

The objection to this logic is that Rufus “had no choice”, but an economist would point out that he did: he could choose to refuse participation and stick with collecting cans for a living. No matter how bad this situation was (I surely don’t envy him), obviously participating in Bumfights was better than not participating: after all, he participated, right? Not offering the choice would have left him in A, which is worse than B. The problem is not the transaction; the problem is poverty.

The flaw in this logic is that this may work in the sterile, utilitarian world of microeconomics, but in the real world the film maker also had a choice. He could have paid Rufus $100; he could have offered orange juice instead of alcohol (offering alcohol to somebody with a drinking problem is particularly nasty); he could have refrained from the transaction altogether and donate his $5 to the Salvation Army.

Another issue is that this line of reasoning only works if you care only about the consequences of an act: in other words, it follows a consequentialist ethic, where one could also follow a deontological ethic, or a virtues ethic. Many people consider making money in this way unethical, regardless of the consequences, just for its abusive nature.

Collecting up to 80 kg of sulphur in
a cloud of toxic volcanic fumes and
carrying it down the slope of
Mount Ijen, East Java: hey, it beats
starving to death!

Nevertheless, the line between an “equitable” transaction and a Bumfights transaction is blurry. To take the example of REDD+ again, many developing countries have come round to this idea, after initial opposition; it seems Costa Rica and Indonesia are quite keen on it. And how many people have jobs that are dangerous, or just mind-numbingly boring, just because the only alternative is starvation?

So next time you buy your clothes in a cheap clothes store, ask yourself: am I helping a poor Bangladeshi earn an income or am I taking advantage of his poverty? The question is more difficult than you might think.