Terms Beginning With 'd'

Doughnut Economics

What is meant by doughnut economics?

Doughnut economics is an economic model newly formed to better fit the 21st century. The model incorporates humanity into a doughnut-shaped economic model. The model takes a holistic approach and provides visual simplicity, making it a perfect space to bring new conversations.

The doughnut model could be the next new thing for businesses and governments as it depicts the state of humanity in a single image.

What is the doughnut made up of?

The goal of the doughnut is to meet the needs of all people that are on the planet. The model derives its name from a doughnut, a ring with a hollow space inside it. The model has two rings:

  • Social foundation: To ensure that nobody is left out in achieving essentials in life.
  • Ecological ceiling: To create a boundary beyond which humans should not overshoot their demands.

These two boundaries lie around a doughnut-shaped space. The space represents an ecologically safe and socially just area wherein humanity can thrive.

The hole in the middle represents the proportion of people who are falling short on life’s essentials like food, water, healthcare, freedom of expression. The main challenge faced by governments and organizations worldwide is that of bringing everyone out of that hole.

The main point to note here is that everyone, when moved out of that hole, should not overshoot the doughnut boundary. The model not only considers the efficient use of existing resources but also promotes sustainable living.

Why was there a need for the doughnut model?

Economics has always taught the allocation of scarce resources through an efficient method. However, as time progressed, the problem of scarcity has found solutions through various alternatives.

With available alternatives, the study of economics has shifted to finding solutions to the problems caused by these alternatives. Sustainable living is one such solution. However, finding the means to achieve the same is still deemed an arduous task.

Society needs to move towards a system centred on maximizing growth to overcome scarcity and creating a community utilizing resources sustainably. Thus, the focus has been shifted from achieving growth to moving towards more ecologically friendly production methods.

What are the seven principles of doughnut economics?

The theory focuses on seven ways to rethink economics fundamentally and alter the economy into one that is everyone:

  • Changing the goal from GDP to Doughnut: Economists and governments have been focused on boosting GDP and production in the economy since the 20th Economics growth cannot itself solve all problems faced by society.

The sustainable development goals provide a good blueprint for the transition to a healthier planet and more fair means of living. These goals are represented through the inner and outer dimensions of the doughnut.

The concepts help link the social, ecological, and economic aspects of sustainability. Social issues can only be taken care of if ecological and economic aspects are first brought to the attention of policymakers.

  • Seeing the big picture from the self-contained market to the embedded economy: This aspect advocates bringing a broader view of the economy. In an economy, the household, the market, the state, and commons have an equal role.

The responsibility should be equally divided amongst the different aspects of the economy, and neither should be given priority over the other. Instead, equal support should be given to all to serve human welfare in complementing ways.

  • Nurture Human Nature – from rational economic man to social adaptable humans: The rational consumer’s existing notion may not be the perfect fit today where a little bit of altruism is key to a more efficient form of living.

This model suggests that a new representative is required to better fit economic models around. The rational consumer is too aware and too smart to represent an average human being that possesses the capacity to be empathetic and kind to others.   

Humans may not always act in their selfish interests and may not be ego-driven while making all decisions faced by them. Thus, attributes associated with a consumer need to shift from money-hungry beings to more humanistic beings.

  • Get savvy with systems- from mechanical equilibrium to dynamic complexity: Making economic models with mechanical diagrams explaining them has been an idea borrowed from the subject of physics.

The only way to bring in the world’s complexities into an economic model is to move toward system thinking. A systematic thinking approach can provide a better understanding of how the world works.

  • Design to distribute - from ‘growth will even it up again’ to distributive by design: Inequality may not be the steppingstone on which future growth may be dependent. The model suggests that more unequal societies have been observed to be less happy and have a higher degree of environmental degradation.

The solution to this is not just redistribution but also addressing the inequality caused by wealth concentration because of returns on capital.

  • Create to regenerate- from ‘growth will clean it up again’ to regenerative by design: The current flow of resources is from the production stage towards the stage of unusable waste. Resources are used and thrown, creating mass amounts of waste that can be highly detrimental to the environment.

Focus, instead, should be on moving towards a circular flow wherein resources are reduced, renewed, and reused.

  • Be agnostic about growth- from growth addicted to growth agnostic: This principle has been placed to renew the idea of economics placed in people’s mind up until now. This would help achieve a different type of growth, one that is much needed in the current times.



What is Keynesian economics? Keynesian economics is the economic theory that states demand is the driver of economic growth. This economic theory also states that fiscal aid helps recover an economy from a recession. Certain Keynesian economic principles stand in stark contrast to the Classical theory of economics. The theory was given by John Maynard Keynes in the 1930s and published in Keynes’ “General Theory of Employment, Interest and Money” in 1936. The Keynesian theory stated that government spending was an essential factor in increasing demand and maintaining full employment. What are the theories under Keynesian economics? Aggregate demand is affected by a host of factors: Aggregate demand is affected by various factors public and private factors. Monetary and fiscal policy both affect the level of aggregate demand in the economy. Any decision taken by the monetary authority or the government greatly affects the economy’s level of demand. Say’s Law proposes that supply generates its own demand. However, Keynesian economics suggests that demand is the driver of supply and overall growth in the economy. Sticky Wages: According to the theory of sticky wages, employers would prefer laying off workers over decreasing the existing workers’ wages. This happens because even in the absence of labour unions, workers would still resist wages cuts. Even if the employers were to reduce wages, it would lead to economic depression as demand would fall and people would become more cautious about their spending. Keynes advocated that the labour markers do not function independently from the savings market. Therefore, prices and wages respond slowly to changes in supply and demand. Liquidity Trap: Liquidity trap refers to an economic scenario where there is a contraction in the economy despite very low interest rates. This contrasts with the relationship between interest rates and investment given in Classical economics. How is Keynesian economics different from Classical economics? Classical economics states that the economy self-regulates in case of a disequilibrium. Any deviations from the market equilibrium would be adjusted on its own without any government regulation. However, Keynesian economics propagates that government intervention must maintain equilibrium or come out of an economic downturn. Keynesian economics highlights the importance of monetary and fiscal policy, while Classical economics does not mention any government intervention. Another crucial difference is that Classical economics suggests that governments should always incur less debt, while Keynesian economics advises that governments should practice deficit financing during a recession. Classical economics states that government spending can be harmful as it leads to crowding out of the private investment. However, it has been later established that this happens when the economy is not in a recession. Government borrowing competes with private investment leading to higher interest rates. Thus, Keynesian economics is of the view that deficit spending during a recession does not crowd out private investment. What are the policy measures advocated by Keynesian economics? According to Keynes, adopting a countercyclical approach can help economies stabilise. This means that governments must move in a direction opposite to the business cycles. The theory also states that governments should recover from economic downturns in the short run itself, instead of waiting for the economy to recover over time. Keynes wrote the famous line, “In the long run, we are all dead”. The short run knowledge of the economy would be far better than the long run prediction made by any government. Thus, it makes sense for governments to focus on short run policies and maintain short run equilibrium. Keynes’ multiplier effect states that government spending would increase the GDP by a greater amount than the increase in government spending. This multiplier effect established a reason for governments to go for fiscal support when the economy requires it. What have been the criticisms of Keynesian economics? The initial stages of Keynesian economics propagated that monetary policy was ineffective and did not play any role in boosting economic growth. However, the positive effects of monetary policy are well established and have been integrated into the new Keynesian framework. Another criticism is that the advantage of the fiscal benefits to the GDP cannot be measured. Thus, it becomes difficult to fine-tune the fiscal policy to suit the economic scenario better. Also, the Keynesian belief of increased spending leading to economic growth may lead to the government investing in projects with a vested interest. It could also lead to increased corruption in the economy. The theory of rational expectations suggests that people understand that tax cuts are only temporary. Thus, they prefer to save up the income left behind to pay for future increases in taxes. This is the Ricardian Equivalence theory. Thus, fiscal policy may be rendered ineffective due to this. Supply-side economics has also shown contrast to Keynesian beliefs. During the stagflation in the 1970s, the Phillips curve failed, bringing out the importance of supply-side economics.

K-Percent rule deals in monetary policy economics. It is a monetary policy tool under which money supply in an economy should be increased at a constant percentage rate each year, even in recession, recovery or all kind of business cycles.
