Doughnut Economics

By Terence Jeyaretnam

The term economics comes from the Ancient Greek οἰκονομία (oikonomia, "management of a household, administration") fromοἶκος (oikos, "house") and νόμος (nomos, "custom" or "law"), hence "rules of the house(hold for good management)".  The Economist's Dictionary of Economics defines economics as "the study of the production, distribution and consumption of wealth in human society."  Economics has also been described as a science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.  Scarcity in this context typically relates to inputs to production such as human and financial capital.

 This classical ‘capitalist’ model of economics has always had its critics.  One aspect of its criticism focuses on the ‘production’ side of the equation questioning whether production can continue indefinitely within a planet with limits. The key emerging theory is planetary boundaries – which is the central concept in an Earth system framework, proposed by a group of scientists, including Will Steffen from our own Australian National University, designed to define a “safe operating space for humanity”.  The group identified nine planetary life support systems – climate change, land use, biodiversity loss, freshwater use, phosphorus cycle, nitrogen cycle, ozone depletion and ocean acidification.   The scientists assert that once human activity has passed certain thresholds or tipping points, defined as “planetary boundaries”, there is a risk of “irreversible and abrupt environmental change”.  This is one part of the scarcity equation, which fundamentally hasn’t been built into the study of economics – that unless scarcity of a particular resource or a limit to pollution is understood, studied, quantified, and factored into the production end of the theory, that human ingenuity will mean that production will continue without accounting for these limits resulting in ‘market failures’.  This work continues that of the 1972 Club of Rome study Limits to Growth by questioning economics as a discipline being dominated by the notion of an unlimited world with unlimited resources.

Another criticism focusing on the other side of the equation of ‘distribution and consumption’ queries the inequality associated with the neoclassical definition of economics.  In a world where 85 individuals today own as much as the poorest 3.5 billion (and in Australian the top 1% now own as much as the bottom 60%), clearly the economic model is letting the majority of the economic actors down and is fundamentally flawed.  Enter Kate Raworth, who plugged into the concept of planetary boundaries the social aspect, which is to note that the “safe operating space” may protect the environment, but it may leave millions of people facing extreme poverty and inequality.  According to Kate, we cannot hope to achieve global sustainability unless we simultaneously pursue far greater global equity. So how about adding the concept of social boundaries to the picture? Just as there is an environmental ceiling of resource use, above which lies unacceptable environmental degradation, so too there is a social foundation of resource use, below which lie unacceptable human deprivation.  So, Kate added aspects of the United Nations’ sustainable development goals such as poverty alleviation, availability of fresh water and human rights to invent a doughnut, with planetary boundaries lying outside the edge of the doughnut, and human goals for development inside the edge – with the doughnut depicting the space economics must focus on to achieve sustainable developed as defined by the Brundtland Commission - “Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs.”

Kate notes that inclusive and sustainable economic development requires three main shifts in focus in economics:

-          From monitoring monetized goods and services, to goods and services provided outside the monetary economy, too—such as ecosystem services, and work performed in the unpaid care economy.

-          From a focus on the flow of goods and services to studying changes in the level of wealth, too—including human, natural, social, physical and financial forms of capital.

-          From a focus on aggregate or average measures in the economy, to placing far more importance on the distribution of economic benefits across households.

This doughnut could reshape our thinking about economics and oikonomia in order to meet all co-inhabitants of our oikos through greater equity in distribution and consumption using the planet’s limited resources using efficiency as a tool in production.

Terence Jeyaretnam is a Director of Net Balance. Terence is based in Melbourne.