The Economic Vandal Strikes Back

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But is my old textbook just decades out of date?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.

5 thoughts on “The Economic Vandal Strikes Back

  1. Iain
    3 August 2012 at 10:01

    Excellent, again, Kate. I think part of the problem is that the current difficulties facing economists now aren’t really about economics. They’re questions of ethics. Since Adam Smith and the Classical Economists, the profession has been happy with ‘maximising wealth’ as a Utilitarian-inspired moral basis, then just sought how to do it; ‘positive economics’ is a pretence at science, with the normative dimension (all wealth is good) tucked away and hidden. This is no longer good enough. And it means economist have to look beyond their comfort zone – what we do and how we behave – to get the answers needed. Instead, they need to study what is right, questions of fairness etc.

    1. 25 August 2012 at 21:12

      Iains comments seem about right to me. Can it not be said that the attraction of the Chicago school, the liberalisation of markets and the linking of ‘greed is good’ to some aspects of evolutionary theory, all appeal because they play to the attractive simplicity of positivism and a more generally scientistic attitude to human affairs?

      Ethics is hard. We know that; but if Economics is to take some kind of universal position on human affairs (as it increasingly seems to want to do), then ethics must be included in that picture. Any purely scientistic approach to human affairs (be it in economics, life sciences or even physics) is too ghastly to contemplate.

      My hopes are vaguely pinned on some kind of combination of behavioural economics combined with virtue ethics which acknowledges many of the things discussed here. But we’re a bit of a way off…

  2. 7 August 2012 at 03:07

    Hello Kate,

    I’m trying to follow the debate that you are having with those criminal bankers and economists and am still not understanding. I come from the humbe postion of a secondary school teacher. Which diagram should we encourage our kids to deface (ie which page of which GCSE text book?)

    Also, what additiional aspects of the currenct curriculum should we ask kids to to vandalise?

    1. Kate Raworth
      7 August 2012 at 15:21

      I’m sure you know the GCSE textbooks far better than me. I’m on holiday at the seaside so the closest thing I could find in the local bookshop was for revising AS Level Economics (pub. Nelson Thornes). The Circular Flow of Income diagram is on p.140. Same diagram, same changes.

  3. 4 February 2014 at 04:10

    Well I am glad some economist in the know and in the development debate is taking this to the streets. As a non-economist (engineer) squatting in the tribe of development economists at the Inter-American Development Bank I was declared a heretic for my attempt to measure impact of social exclusion due to racial discrimination in an format decidely not with the orthodoxy of mainstream macro or even micro economics. Of course my proposal was nixed and I had to bring onboard noted race economist Sandy Darity to try to make sense of my un-sense. That said.. the dead economists whose methods we are still following lock, stock and barrel will also lead us to an early grave. I wish I could get the Caribbean governments to move from GDP and GNP to some other measure that takes into account the precarious nature of our eco-economy as well as inequalities. That said, another sad note is that I am not even sure CHINA now opening up more changes due to pollution in Beijing er has made the leap into a new metric system..
    I am sure there is work to be done in there somewhere. Perhaps if we put our heads together we may come up with something.. between Oxford and the University of the West Indies – at Mona Campus in Jamaica. Maybe a Daylong Seminar/Symposium
    The Future of Development Economics. A Dialogue of Discovery…
    Let me know if you are interested and I will look into it.