Economists *Do Not* Prioritize Economic Growth Over Everything Else!
Part 2 in my series on "Doughnut Economics"
Introduction
On Monday, I began my critique of Kate Raworth’s “Doughnut Economics” approach to economic policymaking, as explained in her book Doughnut Economics: 7 Ways to Think Like a 21st Century Economist.
While doing so, I stressed that I see merit in most of her seven ways of thinking about economics, but they are not as revolutionary as she claims. To put it another way, while I believe she made an important contribution to economic thought and policymaking, she is being too harsh regarding how economists have approached our field, especially during recent decades.
In today’s post, I want to focus on her first way of thinking like an economist in the 21st century: change the goal. In particular, she argues the following on page 22:
For over 70 years, economics has been fixated on GDP, or national output, as its primary measure of progress. That fixation has been used to justify extreme inequalities of income and wealth coupled with unprecedented destruction of the living world. For the twenty-first century, a far bigger goal is needed: meeting the human rights of every person within the means of our life-giving planet. And that goal is encapsulated in the concept of the Doughnut. The challenge now is to create economies — local to global — that help to bring all humanity into the Doughnut’s safe and just space. Instead of pursuing ever-increasing GDP, it is time to discover how to thrive in balance.
As much as I agree we should not be fixated on GDP, this is not the primary focus of economists, and this misrepresentation of economics is one that has been propagated by other prominent figures like David Suzuki, who have wrongly defined the economic concept of externalities as “we don’t give a shit”.
That does not mean no economists glorify GDP growth, but from my experience they are in the minority. Furthermore, the people who use economics to “justify extreme inequalities of income and wealth coupled with unprecedented destruction of the living world” tend to either have little-to-no formal training in economics, are politicians who use these stereotypes to gain political power, and/or are media personalities who use neoliberalism or libertarianism as a shtick.
Indeed, pick up any modern economics textbook going back long before 2017 when Raworth published her book — including principles textbooks — and you will find plenty of evidence that GDP growth is not our primary objective. For example:
Public sector economists make their livings focusing on how to formulate tax-and-spend policies for the good of society — including the environment — from both efficiency and equity perspectives.
Labour economists concentrate on important issues including minimum wages and unionization. In fact, in “monopsony” models of the labour market — where the employer has market power over the employee — it has been demonstrated that minimum wages can actually increase employment and wages.
Antitrust economists focus on encouraging competition by developing and enforcing laws and policies regarding mergers, abuses of dominance, cartels, and fair business practices. I began working at the Canadian Competition Bureau in 1999 as an economist, where I know from experience there was a debate on the appropriate standard for evaluating mergers, such as one focused on consumer surplus vs. total surplus of the entire economy vs. a balancing weights approach. These laws also seek to protect the average consumer from market power of large multinational businesses. These concerns have only intensified in the antitrust community over the years.
International trade economists do research and advise governments on “free trade” deals, including identifying people who either “win” or “lose” from trade, as well as making recommendations on how to redistribute gains of trade from winners to losers. Furthermore, the environment is also important in modern thinking on trade liberalization, as demonstrated by Dr. Yoram Bauman who ended a comedic bit by seriously demonstrating free trade might actually harm countries overall in the presence of pollution, which the basic Ricardian model ignores. This research informs governments who try to include environmental provisions in their trade agreements with other jurisdictions, such as with the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (TPP).
Then there are energy and environmental economists who conduct research and advise businesses and governments on environmental policies — including carbon pricing and cap-and-trade systems — and alternative energies.
There are also transport economists who devote their careers to creating more efficient, equitable, and environmentally-friendly transportation systems and infrastructures.
Similarly, urban economists study the location choices of firms and households. As Arthur O’Sullivan writes on page 2 of his textbook Urban Economics (5th edition), published 15 years before Raworth’s book:
We’ll also explore the economics of various urban problems, including poverty, urban decay, congestion, pollution, and crime. The location decisions of households and firms contribute to these problems.
Other economists like Mike Moffatt conduct a lot of research and also consult on affordable housing. More specifically:
The Missing Middle Initiative, housed at the University of Ottawa’s Institute for the Environment, seeks to revive Canada’s urban middle class. We’re devoted to addressing the challenges facing young urban Canadians, for whom the middle class is getting harder to join. Through research, a Substack newsletter thought pieces, videos, and the Missing Middle Podcast, we explore the barriers preventing young Canadians and new families from entering the middle class and the policy solutions needed to help them achieve this.
And don’t get me started on gender economists!
In short, when Raworth argues (on page 36) that: “We evidently want something more than growth, but our politicians cannot find the words, and economists have long declined to supply them”, she is flat-out wrong when it comes to economists.
But I want to do more than just rant. I want to back up these arguments rigorously by explaining just how much undergraduate Economics courses are designed such that GDP growth rates are not prioritized over fighting climate change. In fact, in terms of negative externalities, we argue for policies which could reduce growth — at least in the short run — for the benefit of society as a whole. That will be my focus today.
I have actually written on this issue in the past with Michaelle-Tuz Atkinson, my wife and partner in life for over 30 years — where “life” means everything, including professionally and spiritually — for our Ride On Substack newsletter:
This article was written back in 2023, but it is so relevant to this current discussion, I am publishing an updated version of it here today.
In short, we will demonstrate why economists tend to support carbon taxes with rebates, for the purpose of ensuring people will reduce pollution without undue harm on their pocketbooks.
In the end, our opinion is anyone who claims to support market-based solutions to problems should support a carbon tax over ham-fisted environmental regulations. Also keep in mind a carbon tax works better than regulations because people know they can reduce their tax burden by reducing pollution, so their incentives are aligned with the social optimum.
Regulations, on the other hand, are not as effective at reducing pollution because even though they also lead to higher prices for consumers, the reason for these higher prices is hidden from these consumers, so their incentives to reduce pollution are reduced.
We will proceed as follows: first we will focus on the theory of externalities to show why the free market is not effective at aligning the incentives of private producers and consumers to the benefit of society as a whole, so a carbon tax can actually make society better off than under the free-market equilibrium.
Students learn this material in their very first year studying economics, specifically Principles of Microeconomics.
We will then turn to consumer theory to explain in more detail how a carbon tax will affect consumers, and also how a carbon tax credit — such as the one which currently exists in Canada — can at least partly eliminate the negative effects of a carbon tax on real consumer incomes while still reducing pollution overall.
The concept of indifference curves is also taught in Principles of Microeconomics courses, while the concepts of substitution effects and income effects are taught in Intermediate Microeconomics (Year 2).
But before we begin, if you enjoy what I write and find it valuable, please consider a paid subscription. It will help me to devote more resources into what I write so it will get even better!
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Externalities
We will first dive anxiously into a very exciting and rewarding area that is studied by many economists: an externality refers to the uncompensated impact of one person’s actions on the well-being of a bystander. It causes markets to be inefficient, and thus not maximize total surplus.