by Kate Raworth
Network effects also influence social behaviour, as illustrated by the power of a prominent example. In October 2011, Brazil’s former president Lula da Silva went public with news of his throat cancer, saying he believed it was due to smoking cigarettes. Over the following four weeks, there was a national surge in Google searches for information about quitting smoking – far greater than similar searches made on World No Tobacco Day or even on New Year’s Day, when resolutions to quit are common. Likewise, when the UK reality TV star Jade Goody went public with her diagnosis of cervical cancer in 2009, there was a 43% increase in women making appointments to be tested.61 Those cases acted as warnings, but network effects can inspire too. Thanks to the courageous stance of the Pakistani educational activist Malala Yousafzai, millions of girls worldwide have been inspired by ‘the Malala effect’ to demand and cherish their right to an education. Such effects work on a local scale too. Researchers in West Bengal, India found that when women started being appointed to lead village councils for the first time, local teenage girls began to have higher aspirations for their education and themselves, as did their parents. No prices, no payments, just pride.62
Nudges and network effects often work because they tap into underlying norms and values – such as duty, respect and care – and those values can be activated directly. That’s what researchers in the US discovered when they set out to explore how to prompt pro-environmental behaviour. They set up signs at a petrol station inviting passing motorists to have a free tyre check, offering either financial, safety or environmental reasons for doing so. The forecourt sign saying ‘Care about your finances? Get a free tire check!’ triggered no interest at all from passing motorists, whereas the sign saying ‘Care about the environment? Check your car’s tire pressure!’ prompted the most. Activating the right values clearly makes quite a difference to action.63
In communities that are low on income but high on social capital, activating social norms can have far-reaching effects, as researchers in Uganda discovered when they set out to improve rural healthcare simply by creating a renewed sense of social contract. In 50 districts with poorly performing clinics, they brought local community members together with health centre staff to assess current practices and to draw up their own agreement setting out the standards that the community expected. Each community established a system for monitoring its own local clinic, such as staff duty rosters, suggestion boxes, and numbered waiting room tickets, then posted the monthly results on a public notice board. One year on, the quality and quantity of primary healthcare provided had dramatically improved: 20% more patients were being seen and with shorter waiting times; absenteeism among doctors and nurses had plummeted; and – most strikingly – 33% fewer children under the age of five were dying in those communities. All of this was achieved without fees, fines or a bigger budget, but thanks to the expectations of a social contract backed up with public accountability.64
These small-scale examples of tapping into people’s values are compelling, but some might dismiss their successes as inherently incremental, merely tweaking at the margins of humanity’s grand challenges. Tom Crompton and Tim Kasser, experts in environmental values, attitudes and behaviour, would disagree. They argue that when it comes to creating deep and lasting social and ecological behaviour change, the most effective approach is precisely to connect with people’s values and identity, not with their pocket and budget. Their research finds that people in whom self-enhancing values and extrinsic motivations have come to predominate tend to seek wealth, possessions and status. They are also less likely to care about the living world, to make an effort to cut their ecological footprint, to use public transport, or to recycle household waste. Moreover, when faced with environmental threats – such as the prospects of climate change – they are more likely to seek diverting distractions which might further raise the pressure on the planet. In contrast, people in whom self-transcending values and intrinsic motivations have come to dominate express greater concern about ecological issues and are more motivated to get involved in local action or global movements that proactively engage with the issues at hand.65 The challenge now is to discover how lessons from street-level success with sweet wrappers and text messages could be scaled up to nudge and network whole cities, nations, and international negotiations, into the Doughnut.
Meeting ourselves all over again
If a picture speaks a thousand words, how then should we literally draw our new self-portrait? I have playfully but seriously posed this question in Doughnut discussions in many countries, to students, corporate executives, policymakers and activists – each time inviting the group to visualise and literally sketch out figures that would best replace the cartoon of rational economic man. Three images keep cropping up time and again: humanity as a community, as sowers and reapers, and as acrobats.
The image of community reminds us that we are the most social of species, dependent upon each other throughout the cycles of our lives. The sower-reaper embeds us within the web of life, making clear that our societies co-evolve with the living world on which we depend. And the acrobats exemplify our skill of trusting, reciprocating and cooperating with each other to achieve things that none of us could alone. There are, no doubt, many other ways we can sketch ourselves: this portrait is far from complete. But it already takes us far. We wasted two hundred years staring at the wrong portrait of ourselves: Homo economicus, that solitary figure poised with money in his hand, calculator in his head, nature at his feet, and an insatiable appetite in his heart. It is time to redraw ourselves as people who thrive by connecting with each other and with this living home of ours that is not ours alone.
A new portrait of humanity: preparatory sketches.
It was Henri Poincaré who first remarked that we were more like sheep than we care to imagine. If today we could bring him up to speed on the insights of behavioural psychology and hand him a snorkel and flippers, I think he would beg to expand on his animal analogies. Thanks to our multiple values and motivations we also bear an uncanny resemblance to the octopus. Like its many tentacles – each of which has something akin to its own personality – we have many different roles in relation to the economy, as employees, citizens, entrepreneurs, neighbours, consumers, voters, parents, collaborators, competitors and volunteers. What’s more, octopuses have the dazzling ability to keep changing colour, shape and texture to reflect their mood and their ever-shifting surroundings. We humans can be just as fluid, engaging a wide range of our values many times a day as we switch from bargaining to giving to competing to sharing in our constantly changing economic landscape.66
If we are to bid farewell to the name Homo economicus too, what should take its place? Many new names have been proposed, from Homo heuristicus and Homo reciprocans to Homo altruisticus and Homo socialis. But it makes no sense to pin ourselves down to just one of these identities: we inhabit them all simultaneously. Adam Smith was right when he said that we love to truck, barter and exchange, but he was also right that we and our societies flourish best when we display our ‘humanity, justice, generosity and public spirit’. Rather than pick and choose just one of these many names for our new self-portrait, we should convey all of them within it. Having taken the cartoon of rational economic man down from the gallery wall, perhaps the most apt thing to do is replace it with a hologram of humanity, ever changing in the light.
The economic stage is now set, the cast drawn up, and the play’s protagonist – humanity – amply introduced. It is time then, to explore the ways in which our collective behaviour plays out on that stage, as reflected in the economy’s dynamics. And for insight into that, we need look no further than an apple tree.
4
GET SAVVY WITH SYSTEMS
from mechanical equilibrium to dynamic complexity
Newton’s apple has a lot to answer for. In 1666 as the brilliant young scientist sat in his mother’s Lincolnshire garden, he marvelled – it is said – at how an apple fell: why never sideways or up,
but always down? The answer prompted his famous insight into gravity and the laws of motion, which went on to revolutionise science. But, two centuries later, those same laws also gave rise to physics envy, misplaced metaphors, and painfully narrow thinking in economics. If only – just before that apple fell – young Isaac had also marvelled at how it grew: in a fascinating, ever-evolving interplay of trees and bees, sun and leaves, roots and rain, blossom and seeds. It might have led him to equally revolutionary insights into the nature of complex systems, thus transforming the history of science. It would have changed the course of economics, too, inspiring his economic admirers with a far more fruitful metaphor. Today we would be talking not of the market mechanism but of the market organism – and we’d be so much the wiser for it.
So much for that fantasy. It was the apple as it fell that grabbed Isaac’s attention and led to his groundbreaking discoveries. Craving the authority of science, economists then mimicked Newton’s laws of motion in their theories, describing the economy as if it were a stable, mechanical system. But we now know it is far better understood as a complex adaptive system, made up of interdependent humans in a dynamic living world. So if we are to have half a chance of bringing ourselves into the Doughnut, then it is essential to shift the economist’s attention from the apple as it falls to the apple as it grows, from linear mechanics to complex dynamics. Bid farewell to the market as mechanism and discard the engineer’s hard hat: it’s time to don a pair of gardening gloves instead.
Overcoming our inheritance
Thanks to the last 100,000 years of evolution that fine-tuned Homo sapiens, we humans don’t find it so easy to think in terms of complex systems. For millennia, people lived relatively short lives in small groups, learned from quick feedback (put your hand in the fire: it gets burned) and had little impact on their wider surroundings. Hence our brains evolved to cope with the near, the short term and the responsive, while expecting incremental, linear change. Add to that our evident desire for equilibrium and resolution: we promise it in our stories, with their happily-ever-after endings, and seek it in our music with harmonic melodies that resolve. But these traits leave us ill equipped when the world turns out to be dynamic, unstable and unpredictable.
Of course we know that counter-intuitive things do happen, so we warn ourselves with folk sayings. It was the straw that broke the camel’s back (incremental change can lead to sudden collapse). Don’t put all your eggs in one basket (a lack of diversity makes you vulnerable). A stitch in time saves nine (beware of escalating effects). What goes around comes around (everything is connected). Wise advice, but it still doesn’t make it easy for us to anticipate and interpret the complex world as it comes at us.
If our understanding of complexity has been hampered by 100,000 years of evolution, then it has been topped off by 150 years of economic theory that has reinforced our biases with mechanistic models and metaphors. In the late nineteenth century a handful of mathematically minded economists set out to make economics a science as reputable as physics. And they turned to differential calculus – which could so elegantly describe the trajectory of falling apples and orbiting moons – to describe the economy with a set of axioms and equations. Just as Newton had uncovered the physical laws of motion that explained the world from the scale of a single atom to the movement of the planets, they sought to uncover the economic laws of motion that explained the market, starting with a single consumer and scaling up to national output.
The British economist William Stanley Jevons set the metaphorical ball rolling in the 1870s when he claimed that ‘the Theory of Economy … presents a close analogy to the Science of Statical Mechanics, and the Laws of Exchange are found to resemble the Laws of Equilibrium of a lever’.1 Over in Switzerland, the engineer-turned-economist Léon Walras had a similar vision, declaring that ‘the pure theory of economics … is a science which resembles the physio-mathematical sciences in every respect’ and – as if to prove it – he started referring to market exchange as ‘the mechanism of competition’.2 They and others likened the role played by gravity in pulling a pendulum to rest to the role played by prices in pulling markets into equilibrium. As Jevons put it:
Just as we measure gravity by its effects in the motion of a pendulum, so we may estimate the equality or inequality of feelings by the decisions of the human mind. The will is our pendulum, and its oscillations are minutely registered in the price lists of the markets. I know not when we shall have a perfect system of statistics, but the want of it is the only insuperable obstacle in the way of making Economics an exact science.3
Such mechanical metaphors – from the lever to the pendulum – must have seemed cutting edge in their day. No wonder these economists put them at the heart of their theories of how individuals and firms behave, thus founding a field that came to be known as microeconomics. But in order to make this new theory echo Newton’s laws and conform to the rigours of differential calculus, Jevons, Walras and their fellow mathematical pioneers had to make some heroically simplifying assumptions about how markets and people work. Crucially, the nascent theory hinged on assuming that, for any given mix of preferences that consumers might have, there was just one price at which everyone who wanted to buy and everyone who wanted to sell would be satisfied, having bought or sold all that they wanted for that price. In other words, each market had to have one single, stable point of equilibrium, just as a pendulum has only one point of rest. And for that condition to hold, the market’s buyers and sellers all had to be ‘price-takers’ – no single actor being big enough to have sway over prices – and they had to be following the law of diminishing returns. Together these assumptions underpin the most widely recognised diagram in all of microeconomic theory, and the first one that must be mastered by every novice student: the diagram of supply and demand.
Supply and demand: the point at which price matches supply with demand is the point of market equilibrium.
What lies behind this iconic pair of crossing lines? Think of a good, any good (let’s say pineapples) and here’s how it works. The demand curve shows how many pineapples customers will want to buy at each price, given their aim of maximising their utility, or satisfaction. The curve slopes downwards because the more pineapples a customer buys, the less utility they are likely to gain from buying yet one more – an assumption known as the diminishing marginal utility of consumption – and so they will be willing to pay a little less for each successive one. The supply curve, in contrast, shows how many pineapples the sellers will be prepared to supply for any given price, given their aim of maximising their profits. Why does the curve slope upwards? Because – the theory goes – if each pineapple farmer has a fixed plot of land, then the cost of growing yet more pineapples on it will start to rise – that’s the law of diminishing marginal returns – and so they will require a higher price for supplying each successive piece of fruit.
Alfred Marshall, who drew the definitive version of this diagram in the 1870s, likened the criss-crossing of its lines to a pair of scissors – yet another mechanical analogy – to explain the mystery of how market prices are set. Just as a pair of scissors does not cut paper with its upper blade or lower blade alone but precisely where the two blades cross, so, he argued, market price is set not by suppliers’ costs nor consumers’ utility alone, but precisely where costs and utility meet – and there lies the point of market equilibrium.
Walras had an ambitious agenda for these scissors: he was convinced it was possible to scale the analysis up from a single commodity to all commodities, so creating a model of the whole market economy. And, he reasoned, if those markets were comprised of fully informed, small-scale competitive sellers and buyers, then the economy would reach a point of equilibrium that maximised total utility. In other words – in a neat echo of Smith’s invisible hand – it would, for any given income distribution, produce the best possible outcome for society as a whole. The mathematical techniques did not yet exist for Walras to prove his hunch but his agenda wa
s later picked up by Kenneth Arrow and Gerard Debreu, who set out its equations in their 1954 model of general equilibrium. It appeared to be a landmark proof, giving microeconomic underpinning to macroeconomic analysis, launching a seemingly unified economic theory and laying the foundations of what has been known ever since as ‘modern macro’.4
The theory looks complete, sounds impressively like physics, and is set out in authoritative equations. But it is deeply flawed. Thanks to the interdependence of markets within an economy, it is just not possible to add up all individuals’ demand curves to get a reliable downward-sloping demand curve for the economy as a whole. And without that, there is no promise of equilibrium. This is not news to economists, or at least it shouldn’t be: in the 1970s several smart theorists realised (to their own horror) that the foundations of equilibrium theory didn’t hold up. But the implications of their insight (catchily known as the Sonnenschein–Mantel–Debreu conditions) were so devastating for the rest of the theory that the disproof seems to have been hidden, ignored or brushed aside in the textbooks and the teaching, leaving students ever since unaware that anything was fundamentally out of whack with the equilibrating pulleys and pendulum of the market mechanism.5
As a result, general equilibrium theories dominated macroeconomic analysis through the second half of the twentieth century, and all the way up to the 2008 financial crash. The ‘New Classical’ variants of equilibrium theory – which assume that markets adjust instantly to shocks – jostled for attention with so-called ‘New Keynesian’ variants that assume there will be adjustment delays due to ‘sticky’ wages and prices. Both variants failed to see the crash coming because – being built on the presumption of equilibrium, while simultaneously overlooking the role of the financial sector – they had little capacity to predict, let alone respond to, boom, bust and depression.