## A New Compass for Economics

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**Canonical URL:** [A New Compass for Economics](https://www.imf.org/-/media/files/publications/fandd/article/2024/03/raworth.pdf)

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### Context and central thesis
- Economics must be renewed with "a new compass and map that are fit for our times."
- The goal shifts from GDP growth to "human flourishing on a thriving, living planet."
- Keynes (1938) invoked as urging economists to "create new models that reflect the knowledge, reality, and values of our times."

### The doughnut as a compass
- The doughnut framework prioritizes "the essential needs and rights of every person—from food, water, and health to decent work and gender equality," while recognizing planetary limits such as "a stable climate, fertile soil, healthy oceans, and a protective ozone layer."
- It defines the safe-and-just space as "meeting the needs of all people within the means of the living planet."
- Embraces replacing a single GDP metric with "a dashboard of diverse social and ecological metrics."
- Empirical point: "no economy in the world has met the needs of all its people within the means of the living planet (Costa Rica is the closest to doing so), no economy should yet consider itself 'developed.'"
- Chart source: Raworth, K. 2017. Doughnut Economics: Seven Ways to Think Like a 21st Century Economist.

### Reframing the macroeconomic map
- The dominant 20th century macro map (Samuelson’s circular flow) omitted "the vast quantities of energy, materials, and waste involved in economic activity."
- Quotation: John Sterman — "The most important assumptions of a model are not in the equations, but what’s not in them; not in the documentation, but unstated; not in the variables on the computer screen, but in the blank spaces around them."
- A 21st century map must depict "the economy as a subsystem of Earth’s biosphere" and recognize the economy as "an open system—with large inflows and outflows of both energy and matter—within our planet’s unique and delicately balanced biosphere."

### Energy, biophysical limits, and growth
- Argument: "energy, not money, is the fundamental currency of life, underpinning all human, ecological, and industrial systems."
- Humanity’s resource use "puts intense pressure on planetary boundaries, creating a high risk of undermining the ecological stability on which human and all life fundamentally depends."
- The ambition of "decoupling consumption-based carbon emissions and material use from GDP growth in today’s high-income economies is not happening at anywhere near the speed and scale required to avert critical tipping points."
- Conclusion: This compels questioning "the limits to growth and explore postgrowth economic possibilities, particularly in wealthy economies."
- Moral imperative: "Facing up to the ecological consequences of economic activity is now a critical moral obligation."

### Broader provisioning beyond market and state
- Mainstream thought has focused on market versus state, overlooking two critical sources of provisioning:
  - The household (e.g., "the unpaid caregiving done predominantly by women in the home").
  - The commons (e.g., "open-source software to Wikipedia to transnational watershed management").
- Much of the value from household and commons "is not reflected in GDP," yet is "critical for human well-being" and part of the embedded-economy model.

### Policy implications and the role of economists
- Economists should:
  - Help design "a new set of rules for the global economy" that enable governments to "attend to their domestic economic, social, and environmental agendas while avoiding explicitly beggar-thy-neighbor policies."
  - Develop principles clarifying "the distinction between domains where global cooperation is necessary and those where national action should take priority."
  - Address "the trade-off between the gains from trade and the gains from national institutional diversity" recognizing that "Maximizing one undermines the other" and that "reasonable outcomes will involve sacrificing some of both sorts of gains."
  - Offer "concrete solutions to the central problems of our time: speeding the climate transition, creating inclusive economies, promoting economic development in poorer nations" while avoiding "cookie-cutter Econ 101 solutions."
- Finance must be "redesigned to be in service to the real economy, in service to life."

### Critique of governance by price
- "Rule by price has become fashionable" and leads to "governance by price tags" where politics is reduced to cost-effectiveness spreadsheets.
- Idealized market assumptions (no information costs, no transaction costs) rarely hold, so "price-tag policymaking doesn’t measure the things that matter to people."

*Source: Kate Raworth, "A New Compass for Economics," F&D, March 2024.*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2024/03/raworth.pdf_