From a Failed Growth Economy to a Steady-state Economy
Herman Daly’s 71st Birthday Address to the USSEE
Washington, D.C., June 1st, 2009
Remarks below constitute the majority of Daly’s speech. For brevity and flow I have deleted his introductory remarks aimed at this particular audience, as well as a few asides and audience specific remarks within the speech. Deletions are indicated with […], and do not affect the substance of his remarks. The text was transcribed from a clear recording, and I believe it to be accurate. – Bryan Long
[Introductory remarks, thank you’s and acknowledgements]
I give my remarks today the title “From a Failed Growth Economy to a Steady-state Economy”, and it seems to me that we still don’t distiguish adequately between the two. I’ve had people come to me and say: “Well Herman, are you happy now? Look at all the misery that is being caused!” Well, no, we’re not advocating a failed growth economy – a failed growth economy is a mess. And its because of that, that the idea of a steady state economy I believe has to be taken seriously.
The goal of the steady state economy is to sustain a constant, sufficient stock of real wealth and people for a long time. Not forever – nothing’s forever – but a long time is better than a short time.
A downward spiral of negative growth, a depression such as we’re entering now, is a failed growth economy, not a steady state economy. And halting an accellerating downward spiral is necessary, but it is not the same thing as resuming a continuous, positive, growing economy.
A growing economy now fails us in two ways. Positive growth becomes uneconomic in our full world economy. And negative growth, resulting from the bursting of financial bubbles, which have been inflated beyond physical limits, although that may be temporarily necessary, it soon becomes self-destructive and indeed negative growth has its own limits. So that leaves a non-growing, or steady state economy, as the only long run alternative.
Now the level of physical wealth that the biosphere can sustain in a steady state may well be below the present level. The fact that recent growth has resulted mainly in bubbles suggests that this is probably so. So we may be in a period of downward adjustment, but that’s only a temporary thing.
Nevertheless, the current policies, as far as I can tell, all aim for the full re-establishment of the growth economy as soon as possible.
Now I don’t think that anyone really denies that our problems would be easier to solve, many of them, if we were richer. The question is: Does growth any longer make us richer, or is it now making us poorer? And I think that we need to insist on an answer to that question.
I’ll spend just a few more minutes cursing the darkness of growth, but then will try to light ten little candles on the way to a steady state economy. […]
We have many, many problems: poverty, environmental destruction, budget deficit, trade deficit, bailouts, bankruptcies, foreclosures – but apparently only one solution. What’s that solution? Economic growth! […]
[Let us] ask two questions that all student should put to their economic professors in class:
First: […] When something grows, it gets bigger. […] So, when the economy grows, it too gets bigger. How big can the economy be, Professor? How big is it now? How do you measure? How big should it be? Have economists ever considered these questions? And, more pointedly, what makes them think that growth, that is, physical expansion of the economics subsystem into the finite containing biosphere; what makes them think this growth is not already increasing environmental and social costs faster than it’s increasing production benefits?
Real GDP, the measure of economic growth, does not separate cost from benefits, but conflates them as economic activity. How would we know when growth became uneconomic? How would our national accounts signal that?
Remedial and defensive activity becomes ever greater as we grow from an empty world to a full world. This full world is characterized by congestion, interference, displacement, depletion and pollution. So the defensive expenditures generated by these negatives are all added to GDP, not subtracted. So students, be prepared for some hand waving, throat clearing, subject-changing – but don’t be bluffed. Go on with the next question. […]
Second Question: Do you then, Professor, see growth as a continuing process, desirable in itself, or a temporary process required to reach a sufficient level of wealth, which would thereafter be maintained more or less in a steady state.
Well, Professor, at least 99% of the neo-classical economists on the reading list hold the grow forever view. We have have to go back to John Stewart Mills of the Classical economists to find any serious treatment of the idea of non-growth – of what they call the stationary state, or steady state economy. What makes modern economists so sure that the classical economists were wrong? Just dropping history of economic thought from the curriculum doesn’t really prove the case.
Here are some of the reasons to think that maybe the classical economists were right.
A long run norm of continuous growth would make sense only under 3 pre-suppositions:
1) If the economy were not an open subsystem of a finite and non-growing biophysical system.
2) If the economy were growing in a non-physical dimension, so that what’s growing is really not physical, it’s something else, so physical limits are not really relevant.
3) If the laws of thermodynamics are not actually true. […]
If you can think of a 4th one, let me know, because this is all I’ve been able to come up with.
1) The economy is not an open system. Well, I think that some economists do in fact think of nature as the set of extractive sub-sectors of the economy. That is, the forest sector, fisheries, mines, wells, pastures, and even agriculture is considered “nature”. […] The economy, not the ecosystem or the biosphere, is seen as the whole. And nature is just divided into a collection of parts. And if the economy then is the whole, it is not part of any larger system, that might restrain its expansion. It just expands into the void, and if some extractive natural sector gets scarce, we will just substitute other sectors for it, and growth of the whole economy will continue, not into any restraining biospheric envelope, but presumably out into sideral space, presumably also full of resource-bearing asteroids and friendly, highly evolved aliens eager to teach us how to grow forever into their territory. Sources and sinks, then, are considered infinite. […]
2) Some economists say that what is growing in economic growth is value, and value is not reduceable to physical units. Well that’s true. But that does not mean that value is independent of physics. After all, value is price times quantity. Quantity is always basically physical, even services are always services of some thing or some body for some time period. And people who render services of course have to eat. So the value unit of GDP is not dollars, but dollars worth. A dollar’s worth of gasoline is a physical amount. […] And the aggregation of the dollars worth amounts of many different physical commodities into GDP does not abolish the physicality of the measure. Although the aggregate can no longer be expressed in a simple physical unit. And it doesn’t help to switch speaking of value to value-added, as we often do. Value is added by labor and capital to the resource flow, and low entropy matter/energy, the resource flow, has to be there. Development, squeezing more welfare from the constant throughput of resources, is a good thing. Growth, pushing more things physically through the economy is what causes problems. So limiting the quantitiative growth of the throughput is one very good way to force qualitative development. The path of progress is then shifted from growth to development.
3) Deny the laws of thermodynamics. If resources could be created out of nothing and wastes could be annihilated into nothing, then we would have an ever growing resource throughput by which to fuel continuous growth of the economy. But the 1st law of Thermodynamics says no, you can’t do it. Or, if we could recycle the same matter and energy through the economy faster and faster, then we could keep growth going. The circular flow diagrams in the first pages of most economic textbooks comes pretty close to affirming that. But the 2nd law of Thermodynamics says no. That won’t work either.
So, if we can’t just keep on growing our way out of all these problems, then perhaps we should reconsider the logic and virtues of the possibility of non-growth, the steady state economy, the stationary state economy of the classical economists. Why this refusal by neoclassical economists to face what I would think is common sense, and to reconsider the ideas of the classical economists, their forebearers, in whose tradition they are continuing? I think the answer to that is distressingly simple. Without growth, the only way to cure poverty would be by sharing. But redistribution is anathema. With out growth to push the hoped for demographic transition, the only way to cure overpopulation is by population control, a second anathema. Without growth, the only way to increase funds to invest in environmental repair and reconstruction is by reducing current consumption. Anathema #3. Three anathemas and you’re damned. That’s the end of it.
And furthermore, without growth, how would we build up arsenals to protect democracy and remaining petroleum reserves; how could we go to Mars and Saturn and conquer space; where can technical progress come from, if not from the unintended spin-offs from the military and from space research? So gnostic techno-fantasies of escaping the Earth to outer space and of abolishing disease and death itself, feed on this perpetual growth myth of no limits. Digital-brained techies who have never heard of the problem of evil, see Heaven on Earth, eternal growth just around the corner. And without growth, we must face the very difficult social and religious task of finding a different God to worship. Too scary, we say, let’s try to grow some more instead. Let’s jump-start the GDP and the Dow Jones. Let’s build another tower of Babel, with obfuscating technical terms like sub-prime mortgages, derivatives, securitized investment vehicles, collateralized debt obligations, credit default swaps, and toxic assets […].
Well, what is my point? My point is let’s not do that. Let us ignore the anathemas, let us risk damnation, and instead think about what policies would be required to move to a steady state economy. Now they’re a bit radical by present standards. But not nearly as vainly unrealistic as any of the three alternatives for validating continuous growth discussed above. […]
So let’s take a brief look at ten specific policy proposals for moving to a steady state economy; an economy that maintains a constant metabolic flow, or throughput, at a level that is sufficient for a long future.
1) The Cap-Auction-Trade system for basic resources. If you just say Cap & Trade you kind of slip a step. Caps limit biophysical scale by quotas on depletion or pollution, whichever is more limiting. Auctioning the quotas captures scarcity rents for equitable redistribution, trade allows efficient allocation to the highest use. […]
2) Ecological Tax Reform. Shift the tax base from value-added, labor and capital, and on to that to which value is added, namely the entropic throughput of resources that is extracted from the environment and returned to nature. That’s what’s ultimately scarce. The labor is reproducable, the capital is reproducable, the entropic flow much less so. This internalizes external costs as well as raises revenue more equitably. It prices the scarce but previously unpriced contribution of nature. So value-added is something we want to encourage, so stop taxing it. Depletion and pollution are things we want to discourage, so tax them. Ecological tax reform could either be an alternative or a supplement to the Cap and Trade System. It harkens back to Henry George, as a way of capturing the scarcity rent for social purposes and redistributing. That’s unearned income, so it’s a good thing to capture and use for public works.
3) Limit the range in inequality of income distribution. A minimum income, and a maximum income. We’ve had minimum income proposals all the time. Maximum income has never been very popular, except recently thanks to the “banksters”, there has been a little bit of interest in putting caps. Complete equality is unfair. […] Unlimited inequality is unfair. So let’s seek fair limits to the range of inequality. The civil service, the military, and the university all manage to get along with a range of inequality in salaries of a factor of around 15 to 20. Corporate America has a range of over 500. Many industrial nations are below 25. So could we not limit the range of inequality to say, a factor of 100? See how it works, try it out for a while. People who had reached the maximum could either work for nothing if they enjoyed their work, or take off and devote themselves to hobbies or public service as people frequently do now who have reached a maximum. I emphasize this because I think community is very important in economics. It’s not just individual homo economicus but person in community. I think a sense of community is very hard to maintain when incomes differ by a factor of 500. […] The main justification for such inequalities in income has been that they stimulate growth and that one day everyone will become rich because of all this stimulation of growth. This may have had some superficial plausibility in an empty world economy, but in today’s full world economy I think it is a fairy tale and should be vigorously resisted.
4) Free up the length of the working day, week and year. Allow greater option for part-time or personal work. Other industrial countries have much longer and generous vacations and maternity leaves than the US does and I think we should move in that direction. Indeed, once again back to the classical economists, […] who saw the length of the working day as a key value by which the worker, usually considered self-employed yeoman or artisans, by which he balanced the marginal disutility of labor with the marginal utility of income and the marginal utility of leisure so as to maximize total life enjoyment. Under industrialism, the working day became more or less set by the employer, not an economic variable to be acted upon by the worker. And indeed for Karl Marx the length of the working day was the key determinant of the rate of exploitation. But we don’t have to be Marxists to recognize the importance and implications of the length of the working day. So make it more of a variable subject to choice by the worker. And perhaps we should stop biasing the labor/leisure choice by advertising. Advertising stimulates more consumption, and consequently more labor to pay for more consumption. Advertising should probably no longer be treated as a tax-deductable cost of doing business. […]
5) Re-regulate international commerce. […] Move away from free trade. Move away from free capital mobility. Move away from globalization. Adopt compensative tarriffs. […] Not to protect inefficient firms, but to protect efficient national policies of cost internalization, which would be com with pletely undermined […] by the standards lowering competition with countries that do not adopt those policies. So we cannot integrate with the global economy and at the same time have higher wages, environmental standards, and social safety nets than the rest of the world. Trade and capital mobility must be balanced and fair not de-regulated and free. Tariffs are also a very good source of public revenue that could be used to substitute for other taxes which are often worse.
6) Downgrade the IMF, World Bank, WTO. Downgrade them to something similar to John Maynard Keynes’ original plan for a multilateral payments clearing union, which would have taken the place of the IMF. And this payment clearing system charges penalty rates for both surpluses and deficits with the rest of the world. So a country which runs a deficit with the rest of the world has to pay a penalty interest rate, and has an incentive to correct its deficit, but also a country which has a surplus has to pay a penalty on its surplus and is forced to take compensating measures. So the goal is balance of the current account. With balance of the current account there is less need for capital flows and you slow down capital transfers. […] The IMF currently preaches free trade, based on comparative advantage, and has done so for a long time. More recently, the IMF/World Bank/WTO has started preaching the gospel of Globalization, which in addition to free trade means free capital mobility internationally. Now the classical comparative advantage argument explicitly assumes international capital immobility. So that presents quite a contradiction if you are going to advocate both mobility and immobility at the same time. When confronted with this suggestion, the IMF waves its hands, suggests that probably you’re a xenophobe, and that’s why you are raising this issue, because you just don’t like to have trade with foreigners. […] The IMF/World Bank/WTO contradict themselves in service of transnational corporations. International capital mobility, coupled with free trade, allows corporations to escape from national regulation in the public interest, and to escape into the global unregulated economy where they have free reign. Since there is no global government, they are in effect uncontrolled. And the nearest thing we have to a global government, unfortunately is the IMF/World Bank/WTO, which have shown absolutely no interest in regulating transnational capital in the public interest.
7) Move away from fractional reserve banking to a system of 100% reserve requirements. […] 100% reserve requirements were advocated forcefully by the leading American economist of the early part of the century, Irving Fisher. As was Frank Knight and other members of the Chicago School. So it has a respectable pedigree as well as a kind of strange one. Well, why 100% reserve requirements? This would put the control of the money supply and seniorage, the profit you get from printing token money, in the hands of the Government rather than the private banks, which would then no longer be able to create money out of nothing and lend it at interest. […] Now we are sort of nationalizing the banks. I’d rather not nationalize the banks, I’d rather nationalize money. We get that back under public control and let the banks be private, and break them up into smaller units. How would banks make their profits? By financial intermediation, lending savers money for them and charging loan rates higher than the deposit savings rate. And of course checking and services they can charge for. The government then could pay its expenses by issuing more non-interest bearing fiat money to make up for the eliminated bank-created interest bearing money. This is a real advantage to be able to pay your public bills by printing money. But you can only do it up to a point, a strict limit imposed by inflation. If the Government issues more money than the public wants to hold, then the public will trade it for goods, driving up the price level. As soon as the price index begins to rise, the government then must print less and tax more. So a policy of maintaining a constant price index would govern the internal value of the dollar; the external value of the dollar would be left to freely fluctuating exchange rates or, in the event that we have Keynes’ system it would be set by the clearing union relative to the clearing currency which Keynes also envisioned. And with 100% reserves, every dollar loaned would be a dollar previously saved, re-establishing the balance between abstinence and investment – again, a classical economist idea.
8 ) Stop treating the scarce as if it were non-scarce, but also stop treating the non-scarce as if it were scarce. We should enclose the remaining commons of rival natural capital – atmosphere, electromagnetic spectrum, and so forth – in public trust and price it by a Cap, Auction, Trade basis or by taxes. But at the same time, we should free from private enclosure and prices the non-rival commonwealth of knowledge and information. Knowledge, unlike throughput, is not divided in the sharing but rather is multiplied. Once knowledge exists, the opportunity cost of sharing it is zero, and so its allocated price should be zero. International development aid should more and more be in the form of freely shared knowledge and small grants, and less and less in the form of large, interest-bearing loans. Sharing knowledge costs very little, does not create unrepayable debts, and it increases the productivity of the truly rival and scarce factors of production. Existing knowledge is the most important input to the production of new knowledge, and keeping it artificially scarce and expensive is perverse, even from the point of view of producing knowledge. So patent monopolies, as they used to be called, that are now called intellectual property rights, should be granted for fewer and fewer inventions and for shorter time periods. So production of new knowledge should more and more move in the direction of publically financed and freely shared goods.
9) Stabilize population. That used to be #1 on everyone’s list. […] Work towards a balance where births plus in-migrants equal deaths plus out-migrants. This is controversial and difficult, but as a start, perhaps contraception should be made available for voluntary use everywhere and by all classes. And while each nation can debate whether it should have many or few immigrants, such a debate is rendered moot if immigration laws are simply not enforced in the interest of cheap labor or other things. […]
10) Reform National Accounts. Separate GDP into a cost account and a benefits account. Compare them at the margin; don’t ever add them. And in addition to this relatively objective approach, recognize the importance of the work on subjective measures of value that people have done that show a lack of corrolation between further GDP growth beyond some threshold and self-evaluated happiness. Take that seriously and think about why it may be the case.
Well, those are ten steps. What to say about them? I think these policies will appear radical to many people, but it’s worth remembering that for one, they are amenable to gradual application. For example, you can gradually approach 100% reserve requirements. You can gradually lower the cap in Cap and Trade, you can gradually tighten the distribution limits between maximum and minimum. And they are also based on the quite conservative historical institutions of private property and decentralized market allocation. They simply recognize that private property loses its legitimacy if it is too unequally distributed. So in order to keep private property legitimate, lets keep it within some distributive limits that are acceptable. And that markets and market prices lose their legitimacy if those prices do not tell the whole truth about the whole opportunity cost. In addition, the macro economy becomes an absurdity if its scale is structurally required to grow beyond the limits of the biosphere. And well before that radical physical limit, we are encountering a much more conservative economic limit in which the extra costs of growth are greater than the extra benefit, ushering in a new era of “uneconomic growth” so far unrecognized.
My hope is that in the future, in economic textbooks when you go to the index, in addition to economic growth you will find uneconomic growth as an entry.
Thank you very much.