Rewriting the Rules for an Economic System that Serves All

Few issues generate more debate today than economics. Occupy Wall Street, the 99 vs. 1 percent, unequal development, and other impacts of globalization have spawned bestsellers, undergirded contentious political campaigns, and spurred calls for reform. Rewriting the Rules for an Economic System that Serves All brought top-tier intellectual firepower to this Skoll World Forum conversation, in the forms of Kate Raworth, Roger Martin, and Shamika Ravi, expertly moderated by James Mwangi of the Dalberg Group.

Raworth, author of Doughnut Economics, kicked off with a conceptual framing: a doughnut-shaped model that visually connects 12 key social indicators that drive human wellbeing (and the UN SDGs) to nine planetary boundaries. We aim for global objectives for social wellbeing—food, housing, health, education, equity, and more—but need to do so without breaking through environmental limits: climate change, freshwater withdrawal, and chemical pollution, among others.

While making progress on social goals, we’re still well short, yet we’re already testing the breaking point in key environmental areas. Raworth calls for a new design approach based on three principles:

• moving from a degenerative linear economy to a circulate economy based on re-use of materials
• shifting from central to distributed approaches, in energy, manufacturing, communication, and knowledge sharing
• moving from a “growth” to “thriving” mindset. When assessing companies, we need to ask about their purpose, network, governance, ownership, and financing to ensure we get to regenerative enterprise.

Roger Martin, director of the Martin Prosperity Institute, highlighted his concern that growing inequality puts democratic capitalism at risk. Democratic capitalism is based on a normal (bell-curve) distribution of wealth: you have some very poor, some very rich, and a large middle class. The conventional wisdom has been that growth lifts everyone together over time, keeping the bell-curve distribution. Now, though, we are increasingly looking not at normal, but rather skewed Pareto distributions, with gains going predominantly to those already wealthy and the middle class and poor lagging.

Two forces lead this shift: pressure and low costs of connection. Pressure has manifest as an intense drive toward efficiency at all cost, one result of which has been to drive returns to labor lower. At the same time, the digital economy had reduced the costs of connection. Instagram illustrates this environment. You don’t see a normal distribution of followers across Instagram. Instead, those with huge followings—Kim Kardashian—get even more followers, leading to increasingly skewed distributions.

Examples like this abound in the digital economy, Martin argues, and we’re seeing Pareto distributions of people, companies, cities, and more. While we’ve been taught in economic course that friction is bad, we actually need more friction (i.e, paying beyond minimum wage or hiring more than an absolute minimum number of employees) in the economic system to return to more normal wealth distributions. The disconnect between productivity and wage growth is an example of too much efficiency and not enough friction. If we don’t balance this better, we’ll see more inequality which, in turn, will undermine democracy.

Presenting a contrasting view, Shamika Ravi, the director of research at Brookings India, argued that globalization has led to unprecedented gains in India. For India, absolute levels of poverty reduction are the primary goal. Questions of relative income, wealth, and inequality are secondary. The debate around, and critiques of, globalization, she feels, are largely issues of country in the Organisation for Economic Co-operation and Development. Somewhat ironically, tables have turned. Two decades back, the developing world criticized globalization as delivering advantages to the global North. Now, emerging economics, which have seen significant poverty reduction over this time frame, support the global economic system.

In an electoral democracy, leaders must respond to popular will, and, in India, the people see the benefits in poverty reduction of integration into the global economy. Inequality should be addressed with redistributive policies, not by throwing out the entire system. Emerging economies recognize the issues around planetary boundaries, but don’t have the relative ability that more wealthy countries have to curb emissions. While these emerging economies are eager to deploy clean technologies, this has to be within a conversation around the “terms of trade” of global public goods and not disadvantage the emerging economies.

Mwangi closed the session with a provocative challenge. He’s long worked for a world of inclusive and sustainable growth, but the conversation suggests that it may not be possible to have only two of these three at any given time, he said. Which would you choose?

Image: steven gomez from Pexels