I recently ruined an economist’s morning lie-in, and for that much I am sorry.
Over at aidthoughts.org, Matt Collin read my blogpost on vandalizing economics textbooks and he got very annoyed. Why? Because I shared the view of many leading economic thinkers and critiqued this diagram, central to macroeconomics, for ignoring the environment, the unpaid care economy, and social inequality.
Matt says he’s never seen this diagram in an economics textbook. Really? Go look at some. It is six pages into the macroeconomic section of my 1987 edition of Economics by Begg, Fischer and Dornbusch (the standard Econ 101 book in my day). The text with it says “This framework will allow us to explore the behaviour of the economy as a whole” and then shows how this diagram is the basis for calculating GDP and national income accounts. This diagram defines the concept of national income used in everyday debate today about the state of the economy: that makes it the foundation of public understanding of economics, and so it matters.
What did my 1987 textbook have to say about the environment and the care economy? I checked the index. Between Entry barriers and Equilibrium, there was apparently no need for adding Environment. Between Capital Stock and Car Industry, there was no room for a reference to Care Economy.
But is my old textbook just decades out of date? No. When I popped into my local bookshop (which is also the bookshop for Oxford University students), I found The Circular Flow of Goods and Money diagram still going strong in all the major introductory texts, like Mankiw’s Macroeconomics (2010), Lipsey and Crystal’s Economics (2011), and Krugman and Wells’ Macroeconomics (2012).
So does it matter that the care economy, the environment, and social inequality are all still missing from the diagram?
1. Why should we care about care?
Matt says that the unpaid care economy is left out of macroeconomics because it’s hard to measure and that “the household economy isn’t fundamental enough to be covered in Econ 101”. Matt, you work inTanzania. When you see scores of women carrying water and firewood on their heads, and carrying crops and kids on their backs, do you think they are adding nothing fundamental to national output? Sure, like many things, it’s hard to measure, but that’s a bizarre reason to say we should leave it out of the picture altogether. The work of feminist economists such as Nancy Folbre and Diane Elson make clear the importance of bringing the care economy into the heart of macroeconomic thinking and accounting if we are going to create economies and societies that deliver long-term well-being.
2. What about the environment?
Matt says microeconomics has the tools for sorting that out (things like taxes and quotas), they just aren’t being applied. Is it that simple? I was pleased to see that tackling climate change is used as a case study in two of the three modern textbooks I reviewed, but they give the same answer as Matt: we have tools in microeconomics for dealing with that.
So what about the macroeconomic version of the question: can stopping climate change be reconciled with indefinite economic growth? Here’s how (if at all) today’s textbooks handle it:
Mankiw: No comment.
Krugman and Wells: “Most economists who have studied it think yes, it should be possible.” (Hmm, that sounds a bit uncertain. What’s the theory? Where’s the evidence?)
Lipsey and Crystal: “Let us hope that containment [of climate change] is possible and that appropriate action is taken.” (Wow, I didn’t realise that crossing your fingers and hoping was part of the economics toolkit).
None of these books actually grapple with what it means to take on the question of whether or how indefinite economic growth could be absolutely decoupled from natural resource use. But if The Circular Flow of Goods and Money diagram were drawn inside a box labeled The Environment, recognizing that question would be unavoidable (at least someone in every class would put up their hand and ask the awkward question). This is, of course, the conceptual starting point for ecological economics, and is explored in the writings of Herman Daly and Tim Jackson.
3. Lastly, inequality.
I agree, social inequality is a different kind of concern from the other two – not a flow of resources that’s missing from the conceptual framework, but a problematic outcome of the way many economies operate. But it still needs to be made more visible in macroeconomic frameworks and measurement. As the 2009 Stiglitz-Sen-Fitoussi Commission on The Measurement of Economic Performance and Social Progress concluded, policymakers would be far better served by national accounts that focused less on aggregate national production and more on the distribution of income and consumption across households.
Time for a better compass.
And this brings me to the real source of dispute between me and Matt. He is leaping to the defense of the marvelous toolkit of microeconomics, but my problem is with the macroeconomic compass of GDP which underpins national accounts. Of course many economists care about climate change, the care economy, and inequality. But macroeconomics makes it hard to care, and hard to debate about them, because it leaves these issues out of how the economy is defined in national accounts and in public discourse.
The Stiglitz-Sen-Fitoussi Commission (made up of 25 big thinkers on economy and society) concluded:
“..Those attempting to guide the economy and our societies are like pilots trying to steer a course without a reliable compass. The decisions they (and we as individual citizens) make depend on what we measure, how good our measurements are and how well our measures are understood. We are almost blind when the metrics on which action is based are ill-designed or when they are not well understood. For many purposes, we need better metrics. Fortunately, research in recent years has enabled us to improve our metrics, and it is time to incorporate in our measurement systems some of these advances.”
And it set out a series of recommendations for developing national accounts beyond GDP– including bringing in natural resource stock and flows, bringing in the unpaid care economy, and putting a spotlight on household income inequalities. That sounds like my kind of vandalism.
There are, of course, many really interesting innovations going on in an attempt to broaden the metrics of national accounts in these ways, in order to reflect the wider set of natural, human and social resources on which the economy (and human well-being) depends. Examples like the UK’s attempt to value its ecosystems, the World Bank’s efforts to measure human, social and natural capital, and UNRISD’s work on valuing the unpaid care economy. Some of these approaches are controversial (that’s for a future blogpost) – but they are evidence that policymakers want the concepts and tools needed to paint a richer picture of the economy.
Yet, despite all these innovations, and despite broad international agreement on the need to move “beyond GDP” in assessing economic performance, when the next intake of first year economics students turn up at university this autumn, they will be introduced to the same old circular flow diagram of national accounts that doesn’t even give the other issues a place on the page. Indeed, if the textbooks have their way, those students may never get to hear of these critiques and innovations in metrics within the course of their degree.
They deserve a far better compass than that.
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ready to join the world’s first guerrilla campaign to rewrite economics. The only weapon you need is a pencil…here’s why.
When I studied economics at university twenty years ago, the concept of The Circular Flow of Money and Goods was the gateway to understanding macroeconomics – and it still is. It shows how households provide labour to firms, in return for wages, and then use their income to buy the stuff that firms make.
The money flows round and round and so do the resources. When the arrows are going round and round like that, the only question to ask seems to be, how can you make those arrows get bigger? And from there on out, the aim of the game is GDP growth. Very simple. (And if you think it’s so simple that I’m making it up, go open an economics textbook – hey presto, there it is).
It’s such a deceptively simple model of the economy that it quietly inserts itself into the back of the head of every economics student – so quietly that you don’t even realize it is there. But it is there, and that’s a problem because it’s a deeply flawed view of the economy we actually live with. By focusing only on resource flows that are monetized, it misses much that matters in our lives.
In fact it misses the big picture three times over.
1.It’s not free floating
First, the economy does not float freely against a white background. It is embedded within the planet’s environment, drawing on its natural resources and dumping pollutants back out into it. Mention that and an economist will say – ah yes, environmental externalities, we’ll come to those later. But calling nature’s resources ‘externalities’ and leaving them till later has led us to this crisis of climate change. How can it make sense to treat the fundamental resource on which all life depends as a factor external to the system? We have to draw a box around the economy and label in The Environment (a point that Herman Daly made some decades ago).
2. It’s not all in the money
Second, the monetized economy is heavily supported by the unpaid care economy: the services provided by parents and carers (usually women) in raising children, getting the sick back to work, and caring for the elderly. In many low-income countries, that unpaid caring work also includes providing the family’s water, firewood, and food every day – in other words, providing the most essential goods and services for well-being. And it’s all outside the monetized economy. If we ignore it, we ignore many of life’s most valued goods and services, and misunderstand the working lives of many of the world’s women. So the unpaid care economy has to be drawn in.
3. It’s the inequality, stupid
Thirdly, firms pay wages, rent and dividends to households, yes. But thanks to the kind of capitalism that most governments have been constructing, many people get low wages while a few get high rents and dividends. And, as the worldwide Occupy movement has made clear, that matters. Social inequality has been opening up at the heart of economies and needs to be brought to the fore. So it’s time to draw it in.
Now imagine if this was the diagram that economics students encountered on Day One. For starters, it opens up so many more interesting questions. How big should the economy be in relation to the environment? How can policies in the paid economy best support the services that the unpaid economy provides? What could reverse the increase in social inequality? And – going for the really big picture – let go of ‘growth’ for a moment: what would economic development look like from this perspective?
I think economics students deserve this more realistic starting point – and the world deserves economists who have a more realistic model like this inserted into the backs of their heads. It would certainly give us a far better chance of living between the social and planetary boundaries of the doughnut.
So here’s a guerrilla campaign to make it happen. Anyone can do it because all you need is a pencil. Here’s the plan (umm, I have to say at this point, this is not Oxfam Policy…). Sneak into the bookshops, the libraries and classrooms, and into the office of every economics professor you know. Get out the macroeconomic textbooks and find that diagram. Take your pencil. Now draw in the environment. Draw in the unpaid care economy. Draw in social inequality.
With these few strokes, we could stick a great big spanner in the wheel of mainstream economic thinking. We’d save the next generation of economics students from having the wrong model of the world stuck in the back of their heads. And that would help save us all from another era of economic policymakers who unknowingly have the wrong model of the economy shaping their decisions.
I made a pitch for vandalizing economics textbooks like this at IIED’s Fair Ideas conference at Rio+20 in June – here it is in a 10 minute video (starting at 59 minutes)
So it’s time for a guerrilla campaign – and I propose these three pen strokes to launch it. Got any suggestions for more?
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agrees: we have to get beyond GDP. Yes, yes, but enough talk – let’s get this train moving.
Some say we should forget GDP and jump straight to measuring well-being. I agree well-being measures are needed, but the economic description of the world is never going to go away, so rather than push it to one side, we should try to improve it. So here’s a first go (in very simple terms, and not-drawn-to-scale graphics) of what a wider conception of economic development would include.
The starting point: good old (bad old) GDP.
Gross Domestic Product is essentially the value of goods and services exchanged within a nation’s monetized economy in one year. Whether it is going up or down matters, most especially in countries that need to increase the incomes and wealth of people living in poverty. But it is far from all that matters.
I think there are at least three broad shifts needed to reach a concept of economic development that won’t keep leading us into environmental and social crises.
1. From monetized to un-monetized goods and services too.
The first shift is to take account of the value of goods and services that contribute so much to well-being but that fall outside of the monetary economy.
Anyone who got kids washed, dressed, fed, and off to school this morning knows the value (and cost) of the unpaid care economy (aka the reproductive economy) both to the household and to industry, in terms of raising and caring for the future workforce.
Anyone who breathed in clean air and drank clean water today should be grateful to the planet’s atmospheric system and freshwater cycle for these ecosystem functions – sometimes described as ecosystem services.
And anyone who has had a heart operation knows that its value far exceeds the cost of doctors and medicines required to perform it: most public goods get valued at cost, so are undervalued in reality.
The flow of goods and services, both monetized and un-monetized, gives a much more realistic picture of the consumption that we truly value. If we ignore the ‘free’ stuff and just focus on increasing GDP, we’ll squeeze out much of what actually matters to us.
2. From goods and services to underlying assets and debts.
Any company that presented only its profit and loss account would get laughed off the stock exchange. And any country that focuses only on its GDP account should get pulled up for it too. GDP matters, but so do changes in the underlying stock of assets / wealth / capital (pick your favourite/ least offensive word) from which all goods and services flow.
National physical and financial assets (or debts) have long been counted but so too should be human, social and natural assets – after all, without this trio, there would no physical or financial capital to talk of. Finding meaningful measurements of these is no easy task, but there are some interesting (and controversial) initiatives under way, especially around ‘natural capital’ and the care economy.
Monitoring changes in this underlying wealth is crucial for providing a better sense of whether GDP is growing by running down capital (turning forests into timber, turning community centres into business centres) or by building it up and reaping the reward (richer soils producing higher yield crops, closer communities producing safer neighbourhoods).
3. From averages and aggregates to distribution.
All these shifts above are well and good, but they still focus at the aggregate level (like national GDP) or average level (like GDP per capita). As the Occupy Movement has made loud and clear, distribution matters. We also need data and indicators that reveal the distribution of goods and services, and of assets, across households by income, by sex, by ethnicity.
So these are three conceptual shifts needed to get from a narrow focus on economic growth to a broader concept of economic development. Imagine if this ‘dashboard’ had indicators like a car dashboard, country by country. We’d have a far richer picture of each country’s economic progress – and whether GDP was going up or down at any one moment would no longer be the only question worth asking. Take the full dashboard away again and that little black arrow of GDP suddenly seems a rather impoverished view of what an economy should be aimed at.
Of course there are still big questions. How should un-monetized goods and services be accounted for – in ‘natural metrics’ (like hours of care worked) or ‘monetary’ metrics (like the going market rate for care)? How should natural capital be accounted for, and how much should there be? (Could planetary boundaries provide a powerful starting point for defining that?) What are the trade-offs and synergies between investing in natural, human and social capital, and increasing GDP? How equally should incomes and assets be distributed across households?…
Big questions – but at least we now have the beginnings of an economic framework in which we can discuss them. And it also happens to fit pretty well with the main recommendations of the Stiglitz Sen Fitoussi Commission’s work on measuring economic performance.
So what’s the verdict? Is this a helpful (albeit very simple) way to convey the essential difference between economic growth and economic development? What is missing or misconstrued? And do the political risks of framing nature and social cohesion as ‘capital’ outweigh the importance of ending their economic exploitation when left as invisible freebies?
Suggestions please, in the name of pushing us further along the track beyond GDP…
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