The Huge Hole in the Standard Economic Model



Kate Raworth, a senior research associate at Oxford University and senior associate at the Cambridge Institute for Sustainability Leadership, wants to challenge the old ways of thinking about economics and develop sustainable new patterns for economic growth. In her book, Doughnut Economics: Seven Ways to Think Like a 21st-Century Economist, Raworth encourages careful consideration of measurements beyond the standard gross domestic product metric. Thoughtful economic planning, in her view, should include health and well-being, the environment and other factors important to quality of life. She spoke with Knowledge@Wharton about her “doughnut” view of more holistic economic distribution, and why it holds so much benefit for the future.

An edited transcript of the conversation follows.


Knowledge@Wharton: In the modern world, it seems there are new ideas on so many topics every day, so what is the problem when we’re thinking about economies and growth?

Kate Raworth: You say there are new ideas on each and every thing every day, and there are, especially in technology and biology and so many fields that are evolving so fast. But if you’re a student going to university to study economics today, you are going to be one of the policy leaders, one of the thinkers of the 21st century shaping this world in 2050. But I believe students today are still being taught economics that come out of the textbooks of 1950, based on the theories of 1850. Given the challenges of the 21st century, from climate change to extreme inequality to repeated financial crises, this is shaping up to be a disaster.

Knowledge@Wharton: Your book offers this mountaintop view of the world. One central idea is that gross domestic product is an ineffective way to measure an economy because it’s only one-dimensional. Could you talk about that?

Raworth: I feel so sorry for Simon Kuznets because back in the 1930s he was asked by Congress to come up with a measure of national income. He did a fantastic job and came up with this measure, which we now know as GDP. But at the time when he created it, he gave us a caveat.

He said, “This measure should in no way be mistaken for the measure of a nation’s welfare.”

Did we listen? No. Kuznets said “It doesn’t include all the incredible valuable unpaid caring work of parents, all that cooking, washing, sweeping, cleaning, raising the kids that’s done every day. It doesn’t include the value of communities and the things that communities produce and do for each other that doesn’t show up in the national economy. It’s just a flow measure. We’ve got to also look at the stocks, what’s happening to the underlying financial capital, but also natural and social and human capital.”

He saw this was a very thin measure and gave us a caveat. It got ignored because there’s nothing like the temptation of a single number for policymakers to latch onto. When you can measure one country’s growth over years, but also compare it to other countries, then you’re in some sort of competition that we’ve not been able to let go of for over 80 years. It’s just too narrow a measure. And I think we’ve become addicted over those 80 years to this Peter Pan idea that an economy is doing better if it’s always growing.

“Students today are still being taught economics that come out of the textbooks of 1950, based on the theories of 1850.”

We need to ask ourselves three questions. Growth from what? Is the economy growing because we’re making a huge investment in a transition to renewable energies, like China investing $360 billion by 2020 in solar energy capacity? That’s a great reason for GDP in China’s growth. Or is it growing because we’ve got massive consumer debt spending on mortgages we can’t afford and cars we don’t need? That is not a great reason for GDP growth.

Second, growth for whom? Is GDP growing because the top 1% are reaping the returns as they have been doing in recent years? Or is GDP growing because income is going to people who live below the poverty line, enabling them for the first time to meet life’s essentials?

And thirdly, growth until when? If GDP is growing for good reasons, then at what point will it have reached its optimal size so that we grow into thriving balance like everything in nature does? How much solar energy capacity do we need until we can make the most of what the sunshine offers us? How much should we be investing in, say, expanding schools and investing in teachers so that every kid has a good start in life? In nature, everything grows until it reaches its optimal size. We should ask those same kinds of questions in our economies, too.

Knowledge@Wharton: An example I’ve heard is that if you picture someone stuck in traffic for an hour, they’re burning up gasoline. This causes GDP to go up. But there’s no measure taken of the person’s time lost in traffic or of the pollutants being released, which cause health care costs to go up and worsen climate change. We’re not taking into account the costs. It seems like that’s the balance that you’re going for.

Raworth: Right. GDP essentially only measures things that carry a price, so all those other things that you described are called externality in economics because they fall outside of the market transaction. Well, if you’re going to call impact from the living world and the health of people an externality, you’ve already told me how important you think it isn’t. That’s a fundamental problem with the way economics has been framed. If you don’t bring the living world and communities into how we understand managing our household in the 21st century, because that’s what economics means, we don’t give ourselves a chance for thriving.

Even when people do try to take these things into account, they sometimes come up with a statistic that says, for example, if people are dying 10 years younger because of pollution, how much of their working life is lost? Sometimes they’ll even say we’re losing their contribution to GDP. It’s this topsy-turvy world in which we sometimes try and justify the most valuable things in life, like health and well-being, in terms of a lost ability to contribute to the economy. We’ve got a situation where human well-being is apparently in service to the economy, where we need to turn that around. The economy, and certainly the financial sector, should be in service to life.

We need to reframe it. I think that’s partly why we need new statistics, new data, new metrics that take away this concentration on everything being expressed in terms of money and what it does for our economy. We need to measure it in their own terms — life expectancy, people’s well-being, the stability of the climate, the health of the soil, the health of the oceans — not monetizing everything.

Knowledge@Wharton: You think that the recession could have been more of a wakeup call for thinking about economies and growth around the world, correct?

Raworth: Yes. Of course, it shook the global economy. But it also shook the confidence of economists. Certainly in the U.K., where I come from, the queen asked economists at the London School of Economics why did nobody see it coming. And everybody ran scampering, frantic to be able to answer the queen.

They didn’t see it coming because it wasn’t written into the models. The inherent instability wasn’t reflected in the models. Even the Bank of England and all students were being taught a model of economics that didn’t reflect accurately where money comes from. It didn’t reflect accurately the interconnection and, therefore, the vulnerability of the banking networks. So, they weren’t taking a systems view or a complexity view of the economy. This did shake up economics.

My concern is, it just shook up economics to respond to the financial problems. We have lots of people saying it’s time for new economics. But I worry that too much of that has been concerned about needing new economic thinking so that we get finance right.

What about bringing in the living world? What about bringing in human well-being? We need just not a rethinking of financial economics, we’ve got to bring in ecological and feminist and behavioral and complexity economics. The wonderful thing is that when you bring in these other perspectives, it gets so much more interesting. It gets so much more grounded in reality. Young people who’ve signed up to study economics, their eyes light up because they say, “Now I feel I’m actually studying the world around me. This makes sense to me. I feel like I’m getting an education that will equip me for the future that I can see is coming.”

“There’s nothing like the temptation of a single number for policymakers to latch onto.”

Knowledge@Wharton: You still have the hurdle of trying to get it moved through. I think it gets blocked by politics in this country and other places around the world.

Raworth: When you bring in a new language and a new framing of the world, of course you run into barriers. Then we get into the really interesting places, the political resistance to paradigm change. When Copernicus realized that universe did not move around an unmoving earth, when he realized that the sun was at the center of our solar system, the Catholic church spent centuries refusing to listen to what he said. Paradigm change is very, very threatening for those who are benefiting from the current state of the way things are. It’s politicians, and I think particularly companies and financial power, who benefit from excluding the living world from our concerns, excluding people’s health and leaving these things as externalities.

I think as citizens and as people who are smart to the challenges ahead of us, it’s our responsibility to start speaking a new language and to reframe the economy in a way that actually takes care of 21st century concerns. That’s what so many students around the world are doing. The great irony is that economics has managed to rile its very student body. The people who signed up with debt and years of their lives to study theories of economics are turning around and critiquing what they’re being taught because they know it’s not equipping them for the future. We’ve got to transform the teaching of economics in universities and schools, but also create a language that politicians can feel comfortable with. It is a responsibility on those of us advocating new economics to help put it in a language that makes sense to public and that politicians can start to use.

Knowledge@Wharton: What would it look like to make major changes in the way that you suggest? You mentioned in your book “strong contractions of industries such as mining, oil and gas, industrial livestock production, demolition and landfill, and speculative finance.” It’s a tall order that would devastate a lot of livelihoods. There would have to be a big transition period, and there would be winners and losers. How would all that work?

Raworth: That’s absolutely right. There are winners and loser in the economy every day, and there are winners and losers from the massive technological shifts that are going on right now. All the time, the economy is evolving. We just need to ask ourselves, what is the purpose of the economy and what direction do we want it to evolve in?

I think there are two principles that we need to put at the heart of the 21st century economy that actually has a chance of meeting the needs of all within the means of the planet. The first is to create an economy that’s distributive by design. By that I mean an economy in which value that’s created, and the benefits of that value are shared far more equitably with everyone who helped to create it. Think employee-owned companies, where the profits created by the company are shared amongst all those who helped create that value, rather than a shareholder-run company where the profits go off to fickle and often distant shareholders who never even set foot on the premises. We need economies that are distributive by design.

But they also need to be regenerative by design. By which I mean we need to think about our relationship to the living world on which we depend. We need to create industries that use resources again and again rather than using them up. We shouldn’t be landfilling plastic. We should recognize it’s an extraordinarily rare and valuable resource that we need to be smart and innovative in using again and again.

As we go on that path to making economies that are distributive and regenerative by design, that creates so many jobs. In the U.S., there are four times more jobs in renewable industries than there are in the mining industry. We need to look to that future, find ways of creating jobs there, and you have to look for those who are losing in transition and work with them.

Knowledge@Wharton: Your example about plastic is an interesting one. In the U.S., we’re working to make progress on that. Those kind of changes tend to lead to finding cheaper ways to do things. It can increase profits if you can find a way to cut costs. How could the political and lobbying efforts that would be lodged against these kinds of moves be challenged? Or what might work to help move things along in the direction you’d like to see it go?

Raworth: Let’s stick with the plastics example. Some governments around the world, particularly countries that have a tourist sector and are famed for their beautiful beaches and villages, are realizing that by allows plastics to accumulate they have destroyed the very assets for which people have come to visit their country. The government smartly said, “We ban the use of plastic bags. We ban the use of single plastics.” What you need is smart governmental regulation that gives a legal and a loud signal to industry, saying within five or 10 years this is going to be banned. Industrialists know well in advance, and they can start planning for it right now.

The beautiful thing is that once that message is in place — surprise, surprise — industry just adapts because the incentive is clear, the change in marketplace is clear. Over time, they just move to work with it. Sometimes it comes top down from the government. But sometimes it comes bottom up from people, the citizens saying, “We’ve just discussed it and we’ve had enough.” They refuse plastic bags in a shop, and it comes from a citizens’ pressure.

We need those two things to work together because the power of lobbying to resist either of those, the lobby power of companies putting money in government pocket to prevent them from making changes, is so strong that we need to get that corporate money out of politics, return it to the democratic space, but also enable people and governments to shift the economy in the right direction.

“I think we’ve become addicted to this Peter Pan idea that an economy is doing better if it’s always growing.”

There are many companies also desperately trying to move in that right direction because there are many good people working with a progressive vision who want to make companies be part of the progressive future. We need to work with those progressive companies and help them convince governments that they should move forward with the progressives, rather than being held back by the money of those who are benefiting from the situation as it is.

Knowledge@Wharton: Do you think as millennials and Generation Z get older and take more leadership positions, not only in corporations but in government, we’ll be able to see a lot of this change?

Raworth: I hope we will. But I really worry because they are still being taught economics out of the 1950s textbooks. Let me give you an example. If you say to an economist, “Show me the biggest picture you have of the economy.” Economics means household management. So show me the household, show me the whole thing. The picture they can show you was drawn by Paul Samuelson in 1948, and economists call it the Circular Flow Diagram. It shows how money goes around and around the economy between households and business, flows through government, flows through the finance sector and goes through trade. There’s absolutely no mention of the living world. No mention of unpaid worker parents. No mention of the commons. Students are still having that mindset, that image of what the economy is, put in their heads by the textbook.

If we don’t equip them with a mental imagery, a language and a framework that help them see the whole 21st century, we are massively undermining future leaders. I’m really concerned that they are not getting this education yet.

Knowledge@Wharton: You’d like to replace it with the picture of a doughnut, is that right?

Raworth: The doughnut has a purpose. The hole in the middle is the space where people are falling short on life’s essentials, be it food and water, health care, political voice. We’ve got to get everybody out of that hole in the doughnut. But we mustn’t go over the outer crust because there we’re overshooting pressure on the planet, causing climate change, biodiversity loss, acidifying the ocean. Our well-being lies in personal health, but also planetary health, the space within the doughnut itself. No one falling short and we’re not overshooting.

If I could shape what’s the first picture you’d ever show a brand-new student of economics, I’d show them a diagram that’s in my book that I call the embedded economy. It shows the economy embedded in society, embedded in the living world.

“Paradigm change is very, very threatening for those who are benefiting from the current state of the way things are.”

We already recognize economy is a dependent subsystem of society and the world, but also that the economy has four essential provisioning sectors. Yes, it’s got the market and the state. They dominated some kind of 20th century ideological boxing match. And in that domination, they’ve squeezed out the household, the space of unpaid caring work where we all begin every day, but also the commons. Every economic student learns about that. Economist Elinor Ostrom had made clear that under the right conditions and governance, you can have a triumph of the commons.

I think every student should learn there are four fundamental forms of provisioning: through market exchange, through the state providing public goods, through household unpaid care and households and communities, and the self-organizing without market or state in the commons. Almost any good that you care to think of can be provided in any one of those four ways. Then you’ve got a much more interesting start, saying when is each of these provisioning systems actually the best way? How can they work together, the commons and the market? The commons and the state? The market and the state? Give these economic students that start, and they will come up with such better innovations for this century.

Knowledge@Wharton: Is there anywhere in the world where that kind of system is working? Or maybe it’s an industry or a company?

Raworth: Great question. What excites me is when I get contacted by companies and cities that say, “We love this doughnut because it gives us a blueprint for where we want to get to.” I was contacted by some urban developers in Stockholm who are developing a new district. They said, “We want to create the world’s most livable city district. How do we meet the needs of all the residents for food and water and health care and transport and energy within the means of the planet, respecting the ecosystem within which it’s nested?”

I also got contacted by people in KwaZulu-Natal, the fastest-growing area in South Africa, saying “We’ve used this to re-envision the future for our town.” The youth in the city say, “We want to add in fun, too. It’s got to be fun transforming your economy. Companies from Mars to Patagonia have said to me, “We are using this to rethink our strategy. We know we’re not in the doughnut yet, but at least it gives us a compass for asking ourselves how do we ensure that the way that we do business and make profit is helping humanity move into that safe and just space, rather than pushing us out of it.”

I can’t name a country yet. I’ve only just launched this book, and I’m only just beginning these conversations. I wouldn’t want to name a country before I could give it the doughnut stamp of approval. But I can see there’s interest because governments are struggling to find a vision of the future that actually makes sense to public. The growth horse, I think, has been beaten to a flank. We need a new vision of a regenerative economy.

A Different Ever Closer Union

George Friedman

U.S. military vehicles make their way on an army training camp near Brueck, northeastern Germany, on January 11, 2017. About 40 soldiers spent the night at the camp before continuing their way to Poland as part of the Operation Atlantic Resolve in response to Russia’s actions in Ukraine. RALF HIRSCHBERGER/AFP/Getty Images

Republicans Craft the Next Great Healthcare Failure

By: Peter Schiff


Those who claim that the Senate Republican proposal to replace Obamacare will kick millions of people out from health insurance coverage are dead wrong. Yes, it will cause the number of insured people to decline, but that will happen because millions of healthy individuals will be incentivized to voluntarily opt-out of traditional health insurance. For those people, the law will make traditional insurance a sucker bet. Instead of buying comprehensive health insurance policies, as they are currently known, they will either go without insurance for as long as possible or purchase a new type of low-cost insurance that the new proposals will likely create if they become law.


Let’s be clear. No one really wants to buy health insurance. When you do, you are effectively making a bet with your insurance company that you will get sick while they are betting you don’t. If you do get sick, you get a potential payoff. If you don’t, the insurance company keeps your premium. The same is true with all insurance. No one wants to buy auto or fire insurance, but we do in case we get into a car accident or our house burns down. But if the laws were changed so that fire insurance claims could be made after the fact, then consumer behavior would change significantly. People would simply opt-out, and then put in claims when and if they have a fire. But the only reason insurance companies can afford to rebuild houses is because so many of their customers pay premiums but never file claims. So if fire insurance companies could not discriminate against people with pre-existing fire conditions, they would cease to exist as businesses.


The architects of Obamacare saw this problem in advance and attempted to solve it by imposing financial penalties on those who made the rational decision not to buy. The Law’s fatal flaw was that the penalties were not stiff enough to stop people from opting-out. (If they were that high the law would have likely been declared unconstitutional). When the healthy individuals left the system, many insurance companies experienced huge losses, forcing them to either exit markets completely or to raise premiums steeply on those who remained.


Amazingly, despite the many clear warning signs that too many people were dropping out, the original version of the Senate bill did even less than Obamacare to encourage healthy people to stay. That version allowed such individuals to forgo insurance when they didn’t need it, but guaranteed that they could buy, without penalty, when they did. This would have exacerbated the huge losses that insurance companies are already seeing under Obamacare and would have forced the government to step in and transfer those losses to taxpayers. But, on Monday, the Senate belatedly recognized what they should have realized from the start, and came up with what purports to be a solution to prevent people from gaming the system. But like the veiled attempt made by the House, the Senate version falls well short of the mark.


The House attempts to keep healthy people in the system by imposing a 30% surcharge on insurance for one year after a person with lapsed coverage (of 63 days or more) came back into the system. In fact, it was this provision that prompted Present Trump to call the plan “mean.” But the 30% one year bump is a small price to pay for those who may go years, or even decades, paying nothing at all.


Once the Senate realized that they needed some kind of penalty, they devised something that is even “meaner” by Trump’s standards. They now propose a 6-month waiting period on people with a 63 day lapse in coverage. This means those hoping to get a free ride will risk exposing themselves to six months of bills if they get injured or sick. On paper at least, that could be a steep incentive to keep coverage current. But, already, Democrats have jumped on the proposal as unfair.


But like every far-reaching regulatory proposal, this plan does not anticipate the changes in the market that it may itself create. It is likely that insurance companies will respond to this provision by offering “waiting period insurance” that will pay medical bills only between the time a real health insurance policy is purchased and the waiting period for that policy ends. To submit a claim under such a policy, the insured would only need to provide proof that he had already purchased an actual health insurance policy. Only then would the "waiting period policy" actually kick in to pay claims during the interim.


Since these waiting period policies would only provide coverage for a short time period, the risk to insurance companies would be relatively low. That means that the costs to consumers would be considerably lower than long-term plans. Some consumers could maintain such policies for years, and save lots of money in the process. To further reduce costs, buyers could opt for waiting period policies with higher deductibles, or that exclude coverage for things like pregnancy. The Senate bill makes the cost even lower by providing that premiums on traditional policies do not kick in until the waiting period ends, meaning consumers will never be on the hook for paying both waiting period and longer term health insurance premiums at the same time. To guard against people waiting until they are sick to buy waiting period policies, those selling those policies can also impose a 6-month waiting period of their own on people with pre-existing conditions. This will ensure that only healthy people buy these policies, keeping premiums as low as possible for buyers, while maintaining profitability for sellers.


People would not opt to buy real health insurance policies until after they were sick enough to need one. But such policies would no longer constitute insurance at all in the traditional sense, as buyers would know the outcome in advance of placing their bets. Since they would only place winning bets, the insurance companies would be guaranteed to lose money on every policy sold. This will create a vicious cycle of rising premiums, more dropouts, and ever-greater government bailouts until taxpayers were responsible for everything.


While many Republicans originally and correctly opposed Obamacare, their concerns seem to have evaporated in the face of political gamesmanship. In order to achieve some kind of victory they are now promising the impossible. Trump is the leading figure on this bandwagon. He doesn’t seem to care in the slightest what is actually in the law or what it will do to health care. He just wants something to pass so that he can take credit for the victory. But another layer of regulation surely won’t help.


Over the past half-century, U.S. health care costs have risen sharply because of a raft of government policies and tax incentives that have shifted routine health care payments from individuals to insurance companies. Believe it or not, before the 1960s a very large percentage of Americans paid for medical care out of pocket, according to a 1963 study by the Social Security Administration called Survey of the Aged. At that point, health care as a percentage of Gross Domestic Product hovered around five per cent.(1) Today that figure is more than three times that at around seventeen per cent.(1) Despite the huge increase in costs, health outcomes are not radically different from what you would have expected in light of the medical breakthroughs, technological improvements and the decline of smoking.


As it turns out, insurance is a very inefficient way to pay for many of the health care services we use, the vast majority of which are actually highly predictable. Our current insurance system incentivizes consumers to over utilize health care without any regard for its cost and removes any market based restraints on prices charged by hospitals, doctors, and pharmaceutical companies. As a result, health care costs have risen considerably faster than the rate of inflation.


The advocates of greater government involvement have always said that health care is too important to be left to the free markets. But you could make the same claims about food, clothing and shelter as well. The free market is perfectly capable of delivering those necessities at costs that fit all budgets. In fact, the relative costs of all three of those things have stayed the same, or come down, over the years. But health care, distorted by regulations, subsidies and tax incentives, has seen costs spiral out of control.


Republicans are now presented with a rare opportunity to make the radical departure that they promised when they did not control the White House. The best approach would be to seek to eliminate the entire insurance apparatus, reduce regulation, increase free market choice, legalize interstate and international competition, and clamp down on malpractice lawsuits. The money currently being over spent on health and malpractice insurance, excess paperwork and unnecessary defensive medicine, could then be used to fund the kind of charity hospitals that once served as the backbone of our health care system.


But since Republicans do not have the guts to stand up for the free market principles they pretend to stand for, they should not make the fatal political mistake of affixing their brand to a sinking ship. Better to let the S.S. Obamacare sink, and then come up with a free market system that will actually float.


1. SOURCE: Centers for Medicare & Medicaid Services, Office of the Actuary, National Health Statistics Group; U.S. Department of Commerce, Bureau of Economic Analysis; and U.S. Bureau of the Census.

What Future for Global Leadership?

Harold James
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