The Economic Vandal Strikes Back

I recently ruined an economist’s morning lie-in, and for that much I am sorry.

Over at, 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But is my old textbook just decades out of date?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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