Chapter 14.
“The ultimate purpose of economics is to promote the flourishing of human life.” — Gary S. Becker
The Limits of Fixed Pie Thinking
A common concept in economic discourse is fixed pie thinking. This perspective posits that at any given time there is a static, unchanging amount of wealth or resources in the world. This way of thinking, prevalent since at least 1891 in discussions about fixed labour, extends beyond just employment, permeating various economic arguments and beliefs.
This narrow-mindedness assumes that one person’s success requires another’s loss, rooted in toxic zero-sum thinking. Such simplistic notions of economics are frequently wielded to justify particular policy views, sometimes leading to the dismissal of the entire field as fake or just made up.
Economics as a Behavioural Science
While aspects of economics are indeed socially constructed, the fundamental questions of how societies produce, distribute and consume resources are undeniably real. Dismissing the entire field risks ceding vital intellectual ground and overlooking the essential insights it offers for improving human lives.
At its core, economics is a behavioural science. While it often involves the manipulation of numbers and the analysis of data, it is fundamentally about human behaviour. As Gary Becker explores in The Economic Approach to Human Behavior, it is the study of how individuals and societies make decisions in the face of scarcity, and how these decisions impact the production, consumption and transfer of wealth.
The Human Side of Economic Decisions
Economics seeks to explain why people make the choices they do, how they respond to incentives, and how these individual actions shape the broader economic landscape. Nobel laureate Daniel Kahneman, drawing on decades of research with his collaborator Amos Tversky, demonstrated in Thinking, Fast and Slow that human decision-making is influenced by mental shortcuts and biases, often deviating from perfectly rational models.
This vital shift in perspective, further championed by Nobel laureate Richard Thaler in works like Misbehaving, highlights that understanding how people actually behave, rather than how purely rational agents should behave, is fundamental to comprehending economic phenomena. Humans are not so much rational as they are adept at finding a rationale for their emotionally driven behaviour. A robust behavioural economic approach uses data to observe what people do, not simply why they say they did it.
The Evolution of Economic Thought
To fully appreciate the current landscape of economic thought, it is useful to briefly trace its historical evolution. What we now call economics began as moral philosophy and political economy.
Thinkers like Adam Smith, often considered the father of modern economics, published The Wealth of Nations (1776) after his work on moral philosophy. His foundational insights on markets, division of labour and the invisible hand were deeply embedded in observations of human nature and societal organisation. Following Smith, David Ricardo extended this classical tradition. In his 1817 book On the Principles of Political Economy and Taxation, Ricardo developed the theory of comparative advantage. This theory explains how countries can benefit from specialising in the production of goods they can produce most efficiently, even if they are not the most efficient producers of any good. By focusing on what they do relatively best, countries can trade with one another and achieve mutual gains, leading to more efficient global resource allocation.
Neoclassical Economics and Modern Theories
Through the late 19th and much of the 20th century, economics progressively sought to emulate the rigour of the natural sciences. This period saw the rise of neoclassical economics, with Alfred Marshall providing systematic frameworks for supply and demand. This approach led to an increasing emphasis on mathematical modelling and the development of idealised concepts like homo economicus, the perfectly rational, self-interested agent.
Major historical events fundamentally shaped economic theory. The Industrial Revolution spurred classical economists to explain growth, while the economic crisis of the Great Depression radically challenged the prevailing belief in self-correcting markets, leading to the rise of Keynesian economics. John Maynard Keynes argued for the necessity of government intervention, particularly through fiscal policy, to stabilise economies. Later, as concerns about inflation grew, thinkers like Milton Friedman championed monetarism, emphasising the role of money supply and free markets.
Energy, Growth and Ecological Limits
Beyond these theoretical schools, an even more fundamental truth about the economy exists: the underlying real economy. This is it: energy is the economy. Every unit of currency of Gross Domestic Product (GDP) represents a physical transformation powered by energy somewhere.
This realisation shatters the illusion that economic value is purely financial, connecting all transactions to the physical world of atoms and resources. The modern fractional reserve banking system, by creating money as interest-bearing debt, has a built-in growth imperative. Since the interest must be paid from future expansion, the collective system is structurally tethered to continuous, exponential growth. This systemic mandate for expansion is a crucial factor in the deep conflict between our financial reality and our ecological limits.
Rethinking Scarcity and Growth
One of the foundational concepts in economics is scarcity. Scarcity refers to the gap between limited resources and theoretically limitless wants. The perception of this gap powerfully influences economic behaviour and the choices societies make.
This understanding of scarcity requires constant decisions about resource allocation by individuals, businesses and governments. These decisions involve trade-offs and give rise to the concept of opportunity cost. Despite the reality of finite planetary resources, human behaviour too often operates as if there were no scarcity.
True scarcity, in its most problematic sense, predominantly exists as a defining characteristic of an extractive economy. It is vital to understand that a finite planet does not necessarily mean a finite economy.
Creativity Within Constraints
While there are undeniable biophysical limits, economic growth is fundamentally about the creation of value, which can be decoupled from ever-increasing physical consumption. Value can increasingly be generated through knowledge, services, innovation and efficiency.
This principle, that constraints can be a wellspring of creativity, is powerfully illustrated in other human endeavours. Consider the beauty of Islamic architecture and design. Traditional Islamic religious art deliberately avoids figurative representations, focusing instead on intricate geometric patterns.
This restriction did not stifle artistic expression; instead, it channelled creative energy into an extraordinary flourishing of abstract beauty and mathematical precision, demonstrating how depth can arise precisely because of boundaries.
Lessons from Natural Ecosystems
A different lens, borrowed from biology, offers a compelling counter-narrative to this linear, extractive view. When observing natural ecosystems, we see systems that become progressively diverse and abundant.
These ecologies thrive through regenerative processes and the continuous cycling of resources. This biological perspective challenges us to reconsider how human economic systems can emulate such regenerative principles, moving beyond managing limits to actively cultivating conditions for sustained flourishing.
Economics as a Reflection of Values
Economic decisions are not merely technical calculations but stark manifestos of underlying societal values and ethical priorities. They are the direct outcome of political choices made by those who frame the system.
The choices we make about how resources are produced and distributed inevitably shape the kind of society we inhabit, impacting everything from social equity to ecological health. Recognising these embedded values and the power dynamics that enshrine them is essential for building economic systems that truly serve the prosperity of both people and planet.
The Role of Markets and GDP
To build economies that truly serve both people and planet, understanding traditional economic mechanisms is vital, but so is recognising their limitations and integrating them with newer, more holistic frameworks. Markets play a crucial role in coordinating economic activity. A market is any place, physical or virtual, where buyers and sellers interact to exchange goods or services.
The interaction of supply and demand determines prices and quantities. However, the prevailing goal in traditional market-driven economies is often measured by Gross Domestic Product (GDP). GDP has significant limitations, as it does not account for non-market activities, the distribution of income or the environmental impact of production, the so-called externalities.
Alternative Frameworks: Doughnut Economics
This is where alternative economic frameworks become essential. One such framework is Doughnut Economics, introduced by Kate Raworth in her book Doughnut Economics: Seven Ways to Think Like a 21st Century Economist. This model offers a visual representation of a sustainable and equitable economy.
It consists of two concentric rings: the social foundation for human flourishing and the ecological ceiling of planetary boundaries. The space between these rings is the safe and just space for humanity. Raworth argues that the goal of economic activity should be to bring humanity into this space.
She proposes seven ways to rethink economics: change the goal to focus on the Doughnut, see the big picture, nurture human nature, get savvy with systems, design to distribute, create a circular economy and be agnostic about endless growth. This framework has significant implications for how we approach economic issues, including the role of government.
For example, Amsterdam has used the Doughnut to develop a post-COVID-19 recovery plan that prioritises social and environmental goals. The framework also has relevance for businesses, which can use it to assess their social and environmental impacts and develop more sustainable models.
Complexity Economics and Emergent Behaviour
While this framework is relatively new, it has generated considerable interest and debate. Many proponents see this approach as a valuable tool for rethinking economics in a way that is more aligned with the challenges and opportunities of the 21st century.
To this understanding of economics, we can add the insights of J. Doyne Farmer, who, in his work on complexity economics, argues that traditional economic models often fall short by assuming a level of rationality that does not reflect reality. Farmer highlights that real-world economies are complex systems characterised by feedback loops and emergent behaviour.
In Making Sense of the Modern Economy, Farmer argues that these complex systems can exhibit sudden, unpredictable changes, much like phase transitions in physics. This perspective underscores the need for new economic thinking that can account for the dynamic, non-linear nature of real-world economies.
It also highlights the importance of interdisciplinary approaches, drawing on insights from fields like physics, biology and computer science to better understand and address economic challenges.
This broader, more dynamic understanding of economics as a complex, adaptive system opens the door to new possibilities for systemic change. By recognising the interconnectedness of economic, social and environmental factors, we can begin to design policies and practices that address the root causes of inequality, environmental degradation and economic instability.
This systems thinking approach encourages us to move beyond siloed solutions and towards integrated strategies that can create lasting, positive change for both people and the planet.
The Power of Economic Narratives
Economic ideas do not exist in a vacuum. They are shaped by and in turn shape the narratives that societies tell about progress, value and human flourishing. These narratives have immense power, as they influence not only individual behaviour but also collective action and policy decisions.
By critically examining and reframing these narratives, we can begin to shift the economic paradigm towards one that prioritises sustainability, equity and long-term prosperity over short-term growth and consumption.
Culture’s Role in Economic Transformation
Narratives are deeply embedded in culture, which plays a crucial role in economic transformation. Culture shapes our values, beliefs and behaviours, influencing how we perceive and engage with economic systems.
By fostering a culture that values sustainability, cooperation and innovation, we can create an environment that supports and accelerates the transition towards a more equitable and ecological economy.
Education as a Catalyst for Change
Education plays a pivotal role in shaping cultural narratives and driving economic transformation. By integrating principles of sustainability, systems thinking and ethical decision-making into educational curricula, we can equip future generations with the knowledge and mindset needed to build a more just and regenerative economy.
This approach not only empowers individuals to make informed choices but also fosters a collective understanding of the interconnectedness of economic, social and environmental systems.
Policy, Governance and Collective Action
To translate these ideas into action, policy and governance must evolve to support a new economic paradigm. This requires creating frameworks that incentivise sustainable practices, penalise harmful activities and promote equity and resilience.
By aligning policy with the principles of a just and regenerative economy, governments can help shift the economic landscape towards one that prioritises the long-term prosperity of both people and the planet.
Ultimately, the transition to a new economic paradigm requires collective action at all levels of society. From individual choices to global policy, every action contributes to the larger systemic change needed to create a more sustainable and equitable world.
By working together, we can build economic systems that reflect our shared values and aspirations, ensuring a prosperous and resilient future for all.
The journey towards a new economic paradigm is not just about changing systems but also about transforming the narratives and values that underpin them. By embracing complexity, fostering innovation and prioritising sustainability and equity, we can create an economy that serves the needs of both people and the planet.
This transformation requires the collective effort of individuals, communities, governments and businesses, each playing a role in shaping a future where economic activity is a force for good.
Next Chapter: Civil Society: Association and Moral Ambition
Bibliography
Becker, Gary S. The Economic Approach to Human Behavior. University of Chicago Press. 1976
Jackson, Tim. Prosperity Without Growth: Economics for a Finite Planet. Earthscan. 2017
Kahneman, Daniel. Thinking, Fast and Slow. Farrar, Straus and Giroux. 2011
Lietaer, Bernard. The Future of Money: Beyond Greed and Scarcity. Century. 2001
Raworth, Kate. Doughnut Economics: Seven Ways to Think Like a 21st-Century Economist. Chelsea Green Publishing. 2017
Thaler, Richard H. Misbehaving: The Making of Behavioral Economics. W. W. Norton & Company. 2015
Thaler, Richard H., and Cass R. Sunstein. Nudge: Improving Decisions About Health, Wealth, and Happiness. Yale University Press. 2008