Tuesday, April 25, 2017

ANS -- Old economics is based on false ‘laws of physics’ – new economics can save us

This is really good stuff on how we've been thinking wrong about the economy for quite a while, and we need to change our thinking.  
If you hesitate to read about economics, go to the site and watch the minute-and-a-half video first. but I really do recommmend reading it.  There's also links to a TED talk and another lecture, if you're interested.

Old economics is based on false 'laws of physics' – new economics can save us

It is time to ditch the belief that economies obey rigid mechanical rules, which has widened inequality and polluted our planet. Economics is evolving

Economists are shifting from working with 'laws of physics' to taking a more organic approach
Economists are shifting from working with 'laws of physics' to taking a more organic approach Illustration: Sarah Walsh

Things are not going well in the world's richest economies. Most OECD countries are facing their highest levels of income inequality in 30 years, while generating ecological footprints of a size that would require four, five or six planet Earths if every country were to follow suit. These economies have, in essence, become divisive and degenerative by default. Mainstream economic theory long promised that the solution starts with growth – but why does that theory seem so ill-equipped to deal with the social and ecological fallout of its own prescriptions? The answer can be traced back to a severe case of physics envy.

In the 1870s, a handful of aspiring economists hoped to make economics a science as reputable as physics. Awed by Newton's insights on the physical laws of motion – laws that so elegantly describe the trajectory of falling apples and orbiting moons – they sought to create an economic theory that matched his legacy. And so pioneering economists such as William Stanley Jevons and Léon Walras drew their diagrams in clear imitation of Newton's style and, inspired by the way that gravity pulls a falling object to rest, wrote enthusiastically of the role played by market forces and mechanisms in pulling an economy into equilibrium.

Their mechanical metaphor sounds authoritative, but it was ill-chosen from the start – a fact that has been widely acknowledged since the astonishing fragility and contagion of global financial markets was exposed by the 2008 crash.

The most pernicious legacy of this fake physics has been to entice generations of economists into a misguided search for economic laws of motion that dictate the path of development. People and money are not as obedient as gravity, so no such laws exist. Yet their false discoveries have been used to justify growth-first policymaking.

In 1955, the economist Simon Kuznets thought he had found such a law of motion, one that determined the path of income inequality in a growing economy. The scant data that he could gather together seemed to suggest that, as a nation's GDP grows, inequality first rises, then levels off, and ultimately starts to fall. Despite Kuznets' explicit warnings that his work was 5% empirical, 95% speculation and "some of it possibly tainted by wishful thinking", his findings were soon touted as an economic law of motion, immortalized as "the Kuznets Curve"– resembling an upside-down U on the page – and has been taught to every economics student for the past half century.


As for the curve's message? When it comes to inequality, it has to get worse before it can get better, and more growth will make it better. And so the Kuznets Curve became a perfect justification for trickle-down economics and for enduring austerity today in the pursuit of making everyone better off some day.

Forty years later, in the 1990s, economists Gene Grossman and Alan Krueger thought they too had found an economic law of motion, this time about pollution. And it appeared to follow the very same trajectory as Kuznets' curve on inequality: first rising then falling as the economy grows. Despite the familiar caveats that the data were incomplete, and available for local air and water pollutants only, their findings were quickly labeled the "Environmental Kuznets Curve". And the message? When it comes to pollution, it has to get worse before it can get better and – guess what – more growth will make it better. Like a well-trained child, growth will apparently clean up after itself.

Except it doesn't. If we have learned one thing from the emergent crises of recent decades – from the tipping points of climate change and the rise of the 1% to the near-collapse of financial markets – it is that it's time for economics to ditch the fake physics. Thanks to more and better data, it has become clear that such economic laws of motion simply don't exist. Far from being a necessary phase of development, extreme inequality and environmental degradation are the result of policy choices, and these choices can be changed. In the place of laws to be obeyed, there are design decisions to be made.

From physics to gardening in just a minute: a Doughnut Economics animation by Ainslie Henderson in collaboration with Kate Raworth

So if the economy is not best thought of as a mechanism that returns to equilibrium and follows fixed laws of motion, how should we think of it? Like the living world: it's complex, dynamic and ever-evolving. And for economists, that means it's time for a metaphorical career change: from engineer to gardener. Let's take off the hard hat and give up on reaching for the economy's control levers because they simply don't exist. Instead, put on some gardening gloves, pick up a pair of secateurs, and start to steward the economic garden. And if you think that sounds laissez faire, then you've never done a hard day's work in the garden: it calls for getting stuck in, digging, pruning, weeding and watering the plants as they grow and mature.

How can economic gardeners help to create a thriving economy, one that is inclusive and sustainable and will help to achieve the sustainable development goals? By following two core principles: make it regenerative and distributive by design.

Follow the laws of nature, not the laws of physics

Regenerative economic design ensures that instead of using up Earth's resources, we use them again and again and again. We learn to work with, not against, the cyclical processes of life, including those for carbon, water and nutrients. Thanks to innovations in the circular economy and cradle-to-cradle design we can start turning last century's degenerative economy into this century's regenerative one.

Distributive economic design, in turn, ensures that value created is spread far more equitably among those who helped to generate it. Think employee-owned companies – such as the John Lewis Partnership and Unipart – that reward committed employees rather than short-term shareholders. Think community-owned renewable-energy systems that generate electricity along with income for community purpose. Think creative commons licensing that enables valuable innovations, like those of the Open Building Institute, to be shared, improved and used without end. Thanks to the rise of digital networks, there's more opportunity than ever to turn last century's divisive economy into this century's distributive one.

So how can economic policymakers be more like gardeners in their approach? They should think of policy as an adapting portfolio of experiments, says Eric Beinhocker, a leading thinker in the field of evolutionary economics. We should mimic nature's process of natural selection, which can be summed up as diversify-select-amplify: set up small-scale policy experiments to test out a variety of interventions, put a stop to the ones that don't work and scale-up those that do. Nobel-prize-winning political scientist Elinor Ostrom agreed. "We have never had to deal with problems of the scale facing today's globally interconnected society," she wrote. "No one knows for sure what will work, so it is important to build a system that can evolve and adapt rapidly."

Realising that the economy is ever-evolving is an empowering insight. If complex systems evolve through their innovations and deviations, then this gives added importance to novel initiatives – from complementary currencies to open-source design – that are at the leading edge of new economic design.

Better still, every one of us can have a hand in shaping the economy's evolution. Not just in how we shop, eat and travel, but in how we volunteer, invest and protest. In how we set up new businesses, save for our pensions, license our inventions, and power our homes. Who knows, we could just turn out to be butterflies that stir up powerful winds of change.

Doughnut Economics: Seven Ways to Think Like a 21st-Century Economist by Kate Raworth is out now, published by Penguin Random House .

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