Doughnut economics #6

Key idea #6: inequality isn’t a precondition of economic growth.

Thanks to Rob Liu for granting permission to reprint this from the Conscioused website.

Buy Kate Raworth’s Doughnut economics  at Fishpond (New Zealand)

“No pain, no gain” is a motto usually associated with bodybuilders, but it’s also a slogan mainstream economists have taken to heart. They claim that if you want to build a stronger economy, you have to take the economic pain. And that means accepting inequality.

The model that supposedly proves this is known as the Kuznets curve. It’s another staple of economics textbooks. Flick through virtually any edition, and you’ll find a bell-shaped diagram showing the interaction between income inequality and per capita earnings over time.

Initially, inequality gets worse and worse. Once the line reaches the top of the bell, however, it begins to decline steeply. The model suggests that once a nation’s economy is rich enough, wealth begins to trickle down and inequality decreases.

Sounds too good to be true, doesn’t it? Well, that’s because it is. Simon Kuznets himself admitted as much. His work on inequality had been carried out in the 1950s and was based on limited data and plenty of guesswork. By the 1990s, economists had much more data at their fingertips. When they tested the theory – by looking for historical examples of countries becoming more equal as they grew richer – they couldn’t find a single one.

If the Kuznets curve were accurate, we’d expect to find very low levels of inequality in the richest countries. The data suggests otherwise: high-income countries are experiencing the highest levels of inequality in 30 years! Take the US. In 2015 there were over 500 billionaires in the country, but one in five children living below the federal poverty line. If rising incomes alone can’t make societies more equal, what can?

A good place to start is better design.

The Bangla-Pesa shows how this can be done. The currency was first issued in 2013 in the Bangladesh district of Mombasa, Kenya – an area in which business is generally unpredictable and money often scarce. The Bangla-Pesa wasn’t a replacement for the national currency – the Kenyan shilling – but a complementary tender. The idea was that it would be used to buy and sell goods within the district’s network of around 200 traders.

It let users save their shillings for utilities like electricity which have to be paid for in cash. Everyday essentials such as bread, or hiring a carpenter, could be bought using the Bangla-Pesa.

Because of this secondary currency, traders could still provide for themselves and their families, even if business drys up. When a power cut struck in 2014, local businessmen like barber John Wacharia was still able to buy food and essentials with the Bangla-Pesa.

Here is more about the Bangla-Pesa.

• Key idea #1: the doughnut is a new way of thinking about sustainable economics in the twenty-first century (see below).
• Key idea #2: economics is obsessed by growth, but it’s a narrow metric that doesn’t tell the whole story.
• Key idea #3: there’s more to the economy than the market, and it isn’t self-contained, as many mainstream economists believe.
• Key idea #4: economics often rests on flawed and mistaken assumptions about human behavior.
• Key idea #5: the real world economy is a complex network of interrelated systems.
• Key idea #7: twenty-first century economies can be both more sustainable and help regenerate the environment.
• Key idea #8: growth isn’t an infinite upward curve – we have to start asking ourselves what comes next.