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irsa.institute › library › circulatory-economics
Almost everyone agrees GDP is the wrong measure, and nothing has changed in ninety years. The persistence is structural rather than intellectual: at Bretton Woods GDP became the accounting language of international finance, so alternatives failed not by being worse but by being optional. A replacement must be adoptable without anyone's permission — which points at one pool of philanthropic capital where the claim is immediately testable.
Where it sits. Names the paradigm. Unifies R*, GIC, and AoE into a single claim about what economies are and how they should be measured. The capstone paper of the entire corpus.
For nearly a century GDP has been treated as the measure of economic health. But GDP measures volume — how much is produced. Circulatory Economics argues the right variable is velocity — how freely value moves through human relationships and institutions. The economy is a circulatory system: healthy when value moves, sick when it pools.
GDP was designed by Simon Kuznets in 1934 as a wartime production measure. He explicitly warned against using it as a measure of welfare. The warning was ignored at Bretton Woods in 1944, and GDP became the world’s dominant economic indicator — not because it measured the right thing, but because it measured one thing with institutional legibility.
The core error is not that GDP is a bad measure. It is that GDP measures the wrong system property — volume where it should measure velocity. That is not a measurement error. It is a paradigm error.
Every element of circulatory economics has been present in the literature for a century. What has been missing is a name, and instruments that make it measurable. Read in order, these five are one continuous argument that nobody assembled.
Two economies can produce identical output and be in completely different health. What separates them is how many hands the value passes through before it settles.
The historical case is the clearest version of the argument. The post-war decades and the financialisation era are not two levels of the same variable — they are two different variables being optimised.
| Dimension | Golden age | Financialisation |
|---|---|---|
| Primary variable | Velocity — broad circulation | Volume — GDP growth |
| M2 velocity | High and stable | Declined 39% (1997–2023) |
| Income distribution | Broadly shared gains | Top 1% capture |
| Top marginal tax rate | 91% | 37% |
| Union membership | ~35% | ~10% |
| Institutional trust | 70%+ in government | 20% in government |
| Capital structure | Public investment dominant | Financial asset inflation |
| GDP growth | ~4% average | ~2.3% average |
Most economics takes the individual as the unit and treats relationships as frictions. Circulatory economics inverts that: the relationship is where value actually moves, and the individual is the node it moves between.
The clearest demonstration is the gift. A transaction produces one output — the transfer. A gift produces eight, and seven of them are invisible to GDP:
That single change is what makes a gift, a grant and a loan comparable objects rather than three separate literatures.
A paradigm without instruments is a position. These three are what turn circulatory economics into something an institution can be scored against.
Macroeconomic policy. Velocity-targeting alongside inflation-targeting; circulatory impact assessments for fiscal policy; austerity re-evaluated through a circulatory lens rather than a volume one.
Capital markets. A circulatory asset class alongside debt, equity and grants. R*-rated products. Portfolios evaluated on velocity rather than only on return.
Institutional design. Governance treated as substrate rather than superstructure; commitment architecture that enables flow; learning systems that circulate evidence instead of storing it.
Philanthropy. Gift recycling as a circulatory mechanism, and perennial social capital as its instrument. The proof of concept is already sitting still: $28 billion in dormant Australian PUAFs.
The works either side of this one in the canon order — what it builds on and what builds on it.
Where to go once you have the argument — the paper it comes from, the instrument that measures it, or the next thing it depends on.