The World Economic Forum is promoting a new economic model that could help end inequality. Like the doughnut it resembles, it looks appealing, but has no nutritional value. It is empty at its core and in practice will benefit nobody other than corrupt politicians and their cronies.
On the eve of the World Economic Forum on Africa (WEF-Africa), held in Durban last week, the group of government jetsetters and their rich cronies unveiled a doughnut. They called it a new economic model that could help end inequality. Heres what it looks like:
The image is described as follows: The hole at the Doughnuts centre reveals the proportion of people worldwide falling short on lifes essentials, such as food, water, healthcare and political freedom of expression and a big part of humanitys challenge is to get everyone out of that hole. At the same time, however, we cannot afford to be overshooting the Doughnuts outer crust if we are to safeguard Earths life-giving systems, such as a stable climate, healthy oceans and a protective ozone layer, on which all our well-being fundamentally depends.
It was written by a self-proclaimed renegade economist, Kate Raworth, an Oxford academic who focuses on environmental and sustainability issues, a former researcher for Oxfam, and a member of the Club of Rome.
The Club of Rome is a group of professional alarmists that has since 1972 been warning us about the The Limits to Growth. It restates the old Malthusian misconception that population grows exponentially, while the technology to produce more resources grows only linearly. Therefore, Malthusians argue, the world is in trouble, and it will only get worse unless economic growth is somehow constrained.
A typical phrasing, by Kenneth Boulding, an environmental adviser to the late US President John F. Kennedy, was made famous by naturist and filmmaker David Attenborough: Anyone who believes in indefinite growth on a physically finite planet is either mad or an economist.
Ironically, technology did advance at an exponential rate, and neither population growth nor resource depletion has proved to be catastrophic. On the contrary, by any measure of human welfare poverty, hunger, literacy, farm productivity, life expectancy, child mortality, disease burden, you name it the world has become a better place.
In previous columns, I have debunked the inanity of limits to growth rhetoric, disputed the resource depletion myth in great detail, and showed how history keeps proving prophets of eco-apocalypse wrong. Last year, I wrote an article (and a follow-up) defending the record of free-market capitalism in terms of both human welfare and environmental risk.
Oxfam, which co-hosted WEF-Africa and whose international chairperson, Winnie Byanyima, was a co-chairperson, likewise has a dismal record. Its inequality rhetoric is fatally flawed, and based on blatant falsehoods. They bang on about inequality because they cant make the case that things are getting worse using just poverty statistics, but even then theyre wrong. Global inequality is actually decreasing. (See a more technical treatment of the subject here.)
The WEF-Africa doughnut explicitly cites Oxfams false and misleading inequality reports. It also cites the 2009 book The Spirit Level, by Kate Pickett and Richard Wilkinson, which argues that more equal societies almost always do better. Although wildly popular on the left, the book has been harshly criticised in economic circles for using outdated data, cherry-picking countries, and ignoring confounding variables in its analysis. Its conclusion is simply not supported by the facts presented.
Having done a re-analysis using the very same methodology the book used, but using newer data, Christopher Snowdon, research fellow at the Institute for Economic Affairs, concluded: It seems that the relationship between inequality and life expectancy only holds when we use data from early in the last decade and arbitrarily exclude a number of countries. It fails the basic scientific test of reproducibility. A law that only works under certain circumstances and in certain years is no law at all.
Finally, the doughnut article cites the book that made Thomas Piketty a superstar on the left, Capital in the 21stCentury. His central thesis is that if interest rates on capital are consistently greater than wage growth, social conflict results. While the book has its merits, particularly in collating vast amounts of economic data from around the world, its conclusions are far grander than the limits of the data he presents allow, as Clive Crook argues for Bloomberg.
This tendency is apparent all through the book, Crook writes, but most marked at the end, when he sums up his findings about the central contradiction of capitalism:
The inequality r>g [the rate of return on capital is greater than the rate of economic growth] implies that wealth accumulated in the past grows more rapidly than output and wages. This inequality expresses a fundamental logical contradiction. The entrepreneur inevitably tends to become a rentier, more and more dominant over those who own nothing but their labor. Once constituted, capital reproduces itself faster than output increases. The past devours the future. The consequences for the long-term dynamics of the wealth distribution are potentially terrifying ...
Every claim in that dramatic summing up is either unsupported or contradicted by Pikettys own data and analysis.
In an article for Reason Magazine, Garett Jones points out that taxing capital, which is Pikettys proposed remedy for reducing inequality, cannot work: The Boston University economist Christophe Chamley and the Stanford economist Kenneth Judd came up independently with what we might call the Chamley-Judd Redistribution Impossibility Theorem: Any tax on capital is a bad idea in the long run, and that the overwhelming effect of a capital tax is to lower wages. A capital tax is such a bad idea that even if workers and capitalists really were two entirely separate groups of people if workers could only eat their wages and capitalists just lived off of their interest like a bunch of trust-funders it would still be impossible to permanently tax capitalists, hand the tax revenues to workers, and make the workers better off.
As Tim Worstall explains in Forbes: Average wages in an economy are determined by the average productivity of labour in that economy. Applying capital to labour is what drives up productivity in an economy. Thus we would like there to be more capital applied to labour as that raises the average income in said economy.
So whether it relies on Oxfam, The Spirit Level or Piketty, from the outset, the economic validity of the doughnut model looks suspect. But even on its own, it doesnt bear a lot of scrutiny.
The first problem with the chart is that it quantifies nothing. The green lines it draws for the social foundation and ecological ceiling are entirely arbitrary. What constitutes inadequate, sufficient, or excessive prosperity? How much pollution is too much? The model doesnt even say whether the lines indicate income, wealth, productivity, growth, or some other measure of economic performance. Its just a vague and generalised critique of wealth. No wonder it is popular in the halls of academia, the only place where discredited socialist ideas which have killed more people than Nazism retain an air of respectability.
It also does not show the proportion of people worldwide falling short on anything, as Raworth claims. It doesnt show proportions at all. How to interpret the funny-shaped red boxes in the hole is a mystery. In fact, the shapes that are supposed to indicate proportions of poor people who suffer various shortfalls dont even occur in Raworths original concept. The illustration is meaningless, and relies on no data at all. It depicts ideology; it does not depict reality.
In the outer, overshoot ring, which is supposed to represent the dangers of exceeding some arbitrary ecological ceiling, there is no indication of the possible causes of environmental harm. It just assumes that excessive wealth causes them all. It does not recognise that some of the worlds most serious environmental problems are caused not by rich people, but by poor people trying to get rich. Compare the environment surrounding poor slums and rich suburbs. Consider that poor farmers are the primary culprits in deforestation. Big corporations with valuable brands to protect have to be far more careful about their environmental record than the thousands of small, obscure miners or manufactories of the developing world. Think about the difference in attitude towards species conservation between rich elites and poor communities for whom wildlife is either potential food or a potential threat. Contrast the environmental policies of rich countries with those of poor societies.
When you dont know where your next meal is coming from, youre not likely to care much for anything else. When youre well-off, your horizons become broader and youre far more likely to consider the social and environmental impact of your choices. Simply put, rich people can afford to look after the environment, and inevitably choose to do so. None of this complexity is reflected in the WEFs new economic model.
All this is not to say we shouldnt address the worlds problems, of course. But they are best solved by increasing prosperity for all instead of appealing to populism about restraining the rich. According to Simon OConnell, executive director of Mercy Corps Europe, the World Bank recently elevated conflict from being one of many drivers of suffering and poverty to being the primary driver. Hunger is not an environmental problem or a problem caused by inequality. It is a man-made problem caused by war, marginalisation and weak governance. I would add socialism and corrupt dictatorships to that mix, as weve seen in Zimbabwe, Venezuela, and so many postcolonial African countries. Address these underlying problems, and much of the worlds remaining poverty will evaporate like dew under the bright rays of economic freedom.
That an institution such as the World Economic Forum instead falls prey to socialist rhetoric about inequality is distressing, not only for the rich that are targeted (by which we mean the capitalists funding the worlds productivity, not the rich who are represented at WEF shindigs, of course). It is especially distressing for the worlds remaining poor. Self-serving hot air by wealthy elites who can afford to indulge socialist fantasies, and government bureaucrats whose only motive is to manipulate the poor for votes, are a curse they dont deserve.
In the Mail & Guardian, Patrick Bond, professor of political economy at Wits and honorary professor of development studies at the University of KwaZulu-Natal, compiled a scathing account of how Oxfam facilitated the corruption swamp of controversial politicians and crony capitalists that were involved in WEF-Africa.
One consequence is to embolden corrupt leaders like Jacob Zuma. As Sean Gossel and Misheck Mutize point out in The Conversation, his attacks on capital are a dangerous political approach used in failing states like Algeria, Zimbabwe and Venezuela. Its aim is to deflect attention from its policy failures and from numerous scandals surrounding President Jacob Zuma, his family and the politically connected Gupta network.
This approach, they argue, makes it harder to hold the private sector to account for its real sins, damages our chances of economic recovery, and fails to address the countrys structural challenges.
What needs to be made clear is that the debate around white monopoly capital and radical economic transformation is about much more than statistics and definitions, write Gossel and Mutize. It is about the ownership and control of both public and private capital by a politically connected elite. Thus it comes with the potential risk of turning South Africas entire economy into a centrally controlled patronage network.
That the World Economic Forum is aiding and abetting this descent into socialism, cronyism and poverty is a disgrace. Their new economic model is as unhealthy as the doughnut upon which it is based. DM
Read more:
Ivo Vegter - Daily Maverick