WHY WE NEED A STEADY STATE ECONOMY
The Earth evolves and develops without growing in size. The economy should follow the same pattern, says Herman Daly.
There is an optimal scale beyond which growth becomes uneconomic in the literal sense that it increases environmental and social costs faster than production benefits.
How do you envision a successful economy without continuous growth? To answer that question, it helps to consider a prior question: how do you envision a successful planet Earth without continuous growth? That is easy to envision, because it exists. The Earth as a whole does not grow in physical dimensions. Yet it does change qualitatively: it evolves and develops. Total matter on the Earth cycles, but does not grow. Energy from the sun flows through the Earth, coming in as radiant low-entropy energy and exiting as high-entropy heat. But the solar flow is not growing. Nearly all life is powered by this entropic throughput of solar energy. There is birth and death, production and depreciation. New things evolve; old things go extinct. There is continual change. But the Earth is not growing.
Our global economy is a sub-system of the Earth. Imagine that the economy were to grow to encompass Earth. At that point, the economy would have to conform to the behaviour mode of the Earth. That is, it could no longer grow, and would have to live on a constant asolar flow approximating a steady state — an exceedingly large steady state to be sure, well beyond optimal scale. By then the economy would have taken over the management of the entire ecosystem — every amoeba, every molecule and every photon would be allocated according to human purposes and priced accordingly. All ‘externalities’ would be internalised by this all-encompassing economy. This is not an achievable or even a desirable goal: the information and management problem would be astronomical — vastly beyond the combined capacities of both central planners and free markets.
A more realistic aim would be to limit the economy’s physical scale relative to the containing ecosystem. The way to do that is to leave a large part of the ecosphere untransformed, to limit our absorption of it into the economic subsystem — to keep a large part of the Earth ecosystem in nature — as a source for low-entropy matter/energy inputs and as a sink for high-entropy waste, and as a provider of life-support services.
In this context, laissez-faire takes on a new meaning — it is the ecosystem that must be left alone to manage itself and evolve by its own rules, while the economy is carefully constrained in aggregate scale to stay within the limits imposed by the ecosystem. To stay alive and produce, we must use environmental sources and sinks. But the rate of use must remain within the regenerative and absorptive capacities of the ecosystem. That quantitative limit on resource throughput at a sustainable volume will automatically get reflected in market prices, effectively internalising the social value of sustainability imposed by limits on resource extraction. The metabolic throughput from and back to the ecosystem cannot keep growing.
Every encroachment of the economy into the ecosystem is a physical transformation of ecosystem into economy. Growth means less habitat for other species, with loss of both their instrumental value to the ecosystem, and the intrinsic value of their own sentient life. Clearly, in addition to a maximum scale of the economy relative to the containing ecosystem, there is also an optimal scale (much smaller), beyond which growth becomes uneconomic in the literal sense that it increases environmental and social costs faster than production benefits. We fail to recognise the point at which economic growth becomes uneconomic, because we measure only production benefits (for which there is a market demand), and fail to measure environmental and
social costs (for which there is no market demand).
Nevertheless, illth — the opposite of wealth — is also a consequence of wealth production. Examples of illth are everywhere, even if usually unmeasured in national accounts. They include nuclear waste, climate change from excess carbon in the atmosphere, biodiversity loss, depleted mines, deforestation, eroded topsoil, dry wells and rivers, sea-level rise, the `dead zone’ in the Gulf of Mexico, gyres of plastic waste in the oceans, the hole in the ozone layer, exhausting and dangerous work, and the unrepayable debt from attempting to push growth in the symbolic financial sector beyond what is possible in the real sector.
Growth all the way to the limit of carrying capacity has an unrecognised political cost as well. Excess capacity is a necessary condition for freedom and democracy. Living very close to the carrying capacity limit, as on a submarine or spaceship, requires very strict discipline. On submarines we have a captain with absolute authority, not a two-partv democracy. If we want democracy, we’d better not grow up to the limit of carrying capacity — better to leave some slack, some margin for tolerance of the errors that freedom entails.
We need a non-growing economy that strives to maintain: itself in a steady state at something like the optimum scale. How are we to achieve that?
It is as simple (and difficult) as going on a diet. Cut the matter-energy throughput to a sustainable level by cap¬-auction-trade (quotas on the right to extract resources are set within ecological limits, then auctioned by government and then freely traded among purchasers — the auction receipts are then used to lower income taxes, especially those on lower incomes) and/or ecological tax reform (taxing resource throughput — fossil fuels — rather than value added).
We should cap or tax fossil fuels first, and then redistribute the auction or eco-ta* revenues by cutting income taxes for all, but first and mainly for the poor. A policy of quantitative limits on throughput (cap-auction-trade) raises resource prices and induces resource-saving technologies. The quantitative cap will also block the subsequent erosion of resource savings, as induced efficiency makes resources effectively cheaper (known as the Jevons effect). In addition, the auction will raise much revenue and make it possible to tax value added (labour and capital) less, because in effect we will have shifted the tax base to resource throughput. Value added is a good thing, so it should not be taxed. Depletion and pollution are had things and should be taxed accordingly.
Along with a physical diet, we need a serious monetary diet for the obese financial sector, specifically movement away from fractional reserve banking and towards a system of 100% reserve requirements. This would end the private banks’ alchemical privilege to create money out of nothing t and lend it at interest. Every pound or dollar loaned would then be a pound or dollar that someone previously saved, restoring the classical balance between abstinence and investment. This balance was abandoned by the Keynesian-neoclassical synthesis after the Great Depression because it was thought to be a drag on economic growth, the political panacea. But in the new era of uneconomic growth, the discipline recommended by classical economists regains its relevance. With investment limited by past savings, investors must choose only the best projects, thereby improving the quality of new ventures while limiting their quantity.
This idea of 100% reserve requirements on demand deposits has an impeccable academic pedigree. It was championed by the early Chicago school in the 193os, as well as by Irving Fisher of Yale. The idea was first proposed in 1926 by Frederick Soddy, the Nobel Prize-winning chemist and underground economist. In addition to t00% reserves, a small tax on all
financial trades would reduce speculative and computerised short-term trading, as well as raising significant revenue.
What about population growth? In my lifetime the world population has tripled, and the populations of other ‘dissipative structures’ (cars, houses, livestock, cell phones, etc.) have vastly more than tripled,
Limiting the populations of artefacts by capping the metabolic throughput (food supply) that sustains them seems a good policy. However, limiting food supply to humans is Nature’s harsh limit, Malthus’s positive check. There is also Malthus’s preventive check (celibacy and late marriage), and the more palatable neo-Malthusian preventive check of contraception. Contraceptives should be made easily available for voluntary use everywhere.
More people are better than fewer, but not if all are alive at the same time. We should strive to maximise the cumulative number of people ever to live over time in a condition of sufficiency. That means not too many people alive at the same time — no more than could enjoy a per capita resource availability that is enough for a good (not luxurious) life. Exactly how many people at exactly what per capita standard would that be? We do not know, but the current rate of ecological degradation tells us that it is not more people at a higher per capita consumption, and that is enough to get started in the right direction.
Even if we limit quantitative physical throughput (growth), it will still be possible to experience qualitative improvement (development), thanks to technological advance and to getter etiticafordering of our priorities. Some say that we should not limit growth itself, but only stop bad growth and encourage good growth. However, only if we limit total growth will we be forced to choose good growth over had. And furthermore, we can also have too much ‘good’ growth or, as it is often called, ‘green growth’.
There is a limit to how many trees we can plant as well as to how many cars we can make, Growth beyond optimal scale is uneconomic growth, and we should stop the folly of continuing it. It makes us poorer, not richer. It makes it harder, not easier, to end poverty.
Those who are optimistic regarding ‘soft’ technologies (e.g. conservation, or solar energy) may be right. I hope they are. But even if they turn out to be wrong, there is really no downside, because it was still necessary to limit throughput and consequently the ‘hard’ resource-intensive technologies (e.g. fossil fuels, or nuclear energy) that are currently pushing uneconomic growth.
Our strategy so far has been to seek efficiency first in order to avoid frugality (i.e. limiting physical throughput), But ‘efficiency first’ leads us to the Jevons paradox — we just consume more of the resources whose efficiency has increased, thereby partially or even totally cancelling the initial reduction in quantity of resources used. If we impose frugality first (caps on basic resource throughput), then we will get efficiency second as an induced adaptation to frugality, avoiding the Jevons paradox. Blocking the Jevons paradox is an advantage of the cap-auction-trade system over eco-taxes, although taxes have the advantage of being administratively simpler.
Is this vision of a developing but non-growing economy not more appealing and realistic than the deceptive dream of an economy based on continuous growth? Who, in the light of biophysical reality can remain committed to the ‘growth forever’ vision?
Apparently our decision-making elites can. They have figured out how to keep the dwindling extra benefits of growth for themselves, while ‘sharing’ the exploding extra costs with the poor, the future, and other species. The elite-owned media, the corporate-funded think tanks, and the kept economists of high academia, Wall Street and the World Bank all sing hymns to growth in perfect unison, deceiving average citizens, and perhaps themselves. Their commitment is not to maximise the cumulative number of people ever to live at a sufficient standard of consumption for a good life for all. Rather, it is to maximise the standard of resource consumption for a small minority of the present generation (including themselves), and shift the costs onto the poor, the future, and other species.
Some of the elite do not realise the cost of their behaviour and will change once they are made aware. Others, I suspect, are already quite aware and don’t care. The former can be persuaded by argument; the latter require repentance and conversion — or violent revolution, as Marxists would argue. Probably this line of division in some way runs through each of us rather than only between us. Intellectual confusion is real and we need better understanding, but that is not the whole story. The elite may already understand that growth has become uneconomic. They may have already adapted by learning how to keep the dwindling extra benefits of growth for themselves, while ‘sharing’ the rising extra costs. On what grounds could one oppose them?
I am not able to solve this large ethical and metaphysical difficulty, least of all in a short article aimed only at explaining the idea of a steady-state economy. But it would be disingenuous to pretend that merely describing the steady-state economy (or any other proposal) will some provide the purpose and inspiration to bring it about.
So, in closing, I will only mention what seems to me to be the deeper issue. Is Creation the purposeless, random consequence of multiplying infinitesimal probabilities by an infinite number of trials, as taught by the reigning paradigm of scientific materialism? I say Creation with a capital C advisedly, and certainly not in denial of the well-established scientific facts of evolution. Rather it is in protest to the metaphysics of Naturalism that everything, including evolution (by random genetic mutations selected by a randomly changing environment), is ultimately happenstance.
It is hard to imagine within such a worldview from where one would get the inspiration to care for Creation, which of course Naturalists would have to call by a different name — say, `Randomdom’. Imagine urging our fellow citizens to work hard and sacrifice to save Randomdom! Intellectual confusion is real, but the moral nihilism logically entailed by deterministic materialism (Naturalism), uncritically accepted by so many, is probably the bigger cause of environmental destruction.
Herman Daly is Professor Emeritus at the School of Public Policy, University of Maryland. He was senior economist at the World Bank 1988-94, has written numerous books, and received the 1996 Honorary Right Livelihood Award.
p28 Resurgence & Ecologist December 2014