The Wrong Direction Humankind is Heading to
Back in the 1930s, economist Simon Kuznets was given the task to create a metric to measure how the United States’ economy was doing. He then came up with a measurement named gross national product (GNP) that calculated the market value of all the final goods and services produced by a country’s residents in a given period. This metric was immediately adopted to evaluate the efficiency of Roosevelt’s New Deal during the Great Depression. Later on, it gained international popularity as the indicator to assess the ferocious competition between the United States’ free market and the Soviet Union’s centralized-command ideology in the Cold War.
During Johnson’s presidential era, Johnson’s economic adviser Arthur Okun found that a 2% growth in the US GNP corresponded to a 1% fall in unemployment. This finding galvanized the glorification of economic growth as a panacea for all kinds of problems that humankind was facing and the widespread use of GNP, or later on GDP, as the divine indicator of countries’ prosperity. This concept was enshrined in Gregory Mankiw’s infamous introductory economics textbook that proposed the dependence of a country’s living standard on its production as one of his ten principles of economics. Now, this lesson that stems from a concept introduced more than 75 years ago is still taught to students studying economics all around the world.
For so long, humans have stuck to the belief that high capability to produce goods and services always equals high prosperity. But just by taking a glance at the world around us today, we know that the promise made by economic growth is not one that can be kept.
We can’t disregard the fact that humans have made significant progress in several key aspects. Back in 1990, 36% of the world’s population lived below the international poverty line. In 2015, the number has dropped to 10% (World Bank, 2015). While this is an impressive headway, there are still a lot of unsolved matters. Although the long-term trend of global undernourished people has been decreasing since 1991, the number right now is on the rise. In 2015, there were about 784 million undernourished people. In 2018, the number hiked to a staggering 821 million (United Nations, 2018).
In addition to the incessant problems, the roadmap that humankind followed to achieve the current level of welfare came with an unexpectedly high cost — the planet earth. Anthropogenic impact on the planet has become more striking than ever due to the ever increasing production activities, with most of them not paying even the slightest attention to the environment. Nine of the 10 warmest years have occurred since 2005 (Lindsey & Dahlman, 2020). And if humankind keeps going at the current rate of greenhouse gas generation, we will surpass the 2°C global temperature threshold by 2036 (Mann, M.E., 2014). At that point, 7–10% of rangeland livestock will be lost and 37% of the earth’s population will face at least one severe heatwave every 5 years. Ocean warming along with intense acidification will completely banish coral reefs, impacting around a half billion people worldwide who depend on coral reefs for livelihoods (Carbon Brief). The damage will be irreversible.
Humankind is facing an unprecedented problem. A novel one that has become more pressing in the 21st century. Yet right now, policymakers that are mostly guided by economics are still using the economic roadmap from decades ago. We are en route to a climate disaster — and economics seems to be one of the reasons why.
The Story of Oikos Nomos and the Mighty Homo Economicus
“Then money is to be kept at a distance, Critobulus, if one doesn’t know how to use it, and not to be included in wealth.” — Socrates in Xenophon’s Oikonomikos
The Athenian philosopher Xenophon introduced the term “Oikos nomos” which means “the rule of household” or “the management of household”. This became the provenance of the term “economics”, which according to its original raison d’etre, is a discipline that studies how to manage resources for the sake of society’s well-being. This discipline is to be differentiated with chrematistics, which is a discipline that studies the art of accumulating wealth. But for most governments, the distinction between the two disciplines has blurred-out as they’ve been focusing on creating wealth without putting enough attention on the management of the said wealth so that it can elevate society’s welfare.
Aside from straying away from its initial field of study, economics that is supposed to thrive for the prosperity of humankind has put another subject as its central focus. Let me introduce you to the ever-rational, self-interested, and dominant-over-nature homo economicus which has been the figure of economic study. Rather than studying the emotional, reciprocal, and dependent-upon-nature creature that is human beings, economics picked homo economicus that has no resemblance to what a real human being is as its actor. While we can’t deny the role of self-interest in allowing individuals to survive (Darwin, 1859), we are much more than that. As explained by books on evolutionary origins, such as Jonathan Haidt’s “The Righteous Mind”, human beings are also groupish. We are shaped by reciprocal altruism that drives us to work with other people towards common goals. We are much richer than one dimensional creatures whose aim is only to pursue material wellbeing. Starting from charity, blood donation, to even an action as simple as thinking about whether or not people are hurt by your action — all these show that human beings are born for things bigger than themselves. Indoctrinating people with the notion that human beings, as a rational economic man, are inherently selfish only mold them to be so and enable the selfish to justify their actions.
Most economists chose to negate the rich human nature in their model so that human behavior can be simplified and treated conveniently within their mathematical equations. And on top of that, the neoliberal movement has tried to convince the world that free-market driven by self-interested individuals is impeccable, although it surely has some flaws. Refusal to embrace human nature is dangerous because history has shown us from time to time how this refusal has led to the Great Depression, the Global Financial Crisis, and many other economic disasters that economists failed to anticipate. And this time, the glorification of the so-called rational economic man that gives grounds for big corporations to do what it takes to gain profit might lead to the worst disaster humankind can possibly face — the climate catastrophe.
Getting Inside the Doughnut: a Sweet Spot for Humanity
Economic teaching is shaping the minds of students that will be future policymakers. It’s clear that economics needs to be reformed to equip this generation and the future generation with a way of thinking that can answer the challenges of the 21st century. And the first step in doing so is to set a new goal for the economy. One that can overcome the flaws of GDP: its inability to account for environmental costs and to reflect welfare distribution, among many others.
Economist Kate Raworth created an ambitious framework that is suitable for the “real” economics and this framework comes in the form of a doughnut that acts as a compass to give direction to human progress:
The inner circle of the doughnut is the social foundation for humankind. It is the things that should be fulfilled to ensure prosperity. Things like clean water, access to healthcare, and gender equality. The outer circle of the doughnut is the ecological ceiling. It is the earth’s capacity to sustainably provide for human needs. In working to effectuate all social goals, we should also pay attention to not go beyond the said ecological ceiling. Going beyond it means that anthropogenic activities are incurring troubling pollution, biodiversity loss, ozone depletion, and other harms beyond what the environment can sustain.
This doughnut shows that humankind and planet earth are interconnected and not to be addressed individually. Human’s ability to provide nutritious food for all depends on climate stability, nutrient-rich soil, and plenty of freshwaters. Not only that, attaining social equity becomes harder when climate change is affecting the poor disproportionately. Increased flooding caused by climate change can be more harmful to the poor whose houses are built with flimsy materials and less harmful for the rich whose houses are made from sturdy materials. These cases display one important message — Raworth put it this way, “Human thriving depends upon planetary thriving.”
The Next Step towards Balance
At this point, humankind has gone beyond both the social and ecological boundaries. The rising inequality has made these goals more “expensive” to attain. It compels humankind to cross these ceilings that shouldn’t be crossed. In a society with an unequal distribution of wealth where the rich have so much and the poor live below the poverty line, the poor have to increase their contribution to the GDP to ensure that they, along with the rest of the society members, can live a decent life. Therefore, higher GDP will be required to fulfill the social goals. Whereas in a society with equal distribution of wealth, the GDP that is required will be much less since all people can enjoy an adequate share of the income. With most societies facing tradeoff between economic growth and environmental quality, inequality makes it more difficult for humankind to get inside the doughnut.
Along with the radical concept of doughnut economics, Raworth formulates five key factors that humankind has to focus on: population, distribution, aspiration, technology, and governance. Strengthening these five factors enables us to find balance and get inside the doughnut.
Arguing that GDP is not flawed and can be harmful doesn’t mean that we must abandon it. Fact is, it will remain an important reflection of the economy. But it is not perfect, nor is it our end goal to pursue. Replacing our old economic roadmap of eternal GDP growth with the doughnut-shaped compass is the first step of our long journey to reform economics. And to start treating human beings as more than a one-dimensional rational man might come afterwards. So what are the next steps? How can economics adapt to the challenges of the century? Seems like it’s our job to pave the way.
By Tasya Salensia
Editorial Member
