ecological/steady-state economics, an introduction

Most of what I’ve learned about ecological economics has come from exploring Dave Iverson’s blog Ecological Economics and following up ideas I found there. Just recently I realized that the notes I’ve made for myself might of interest to others learning about the topic. So, with only a bit of rework, that’s what follows.

[Note: emphasis in the quotations below is my own.]

Herman Daly

The “founding father of ecological economics”, Herman Daly is an American ecological economist and professor at the School of Public Policy of University of Maryland, College Park, in the United States. For six years he served as an economist for the World Bank. He was born in 1938.

There were three experiences that combined to lead me in the direction I took : (1) studying economics under Nicholas Georgescu-Roegen who tied economics to its biophysical foundations in his brilliant but ignored book, The Entropy Law and the Economic Process, (2) Teaching economics in Northeast Brazil in the late 1960’s where the population explosion was an undeniable reality, (3) Reading Rachel Carson’s Silent Spring.

A few quotes form Steady-State Economics by Herman Daly:

First a preliminary point. The verb “to grow” has become so overladen with positive value connotations that we have forgotten its first literal dictionary denotation, namely, “to spring up and develop to maturity.” Thus the very notion of growth includes some concept of maturity or sufficiency, beyond which point physical accumulation gives way to physical maintenance; that is, growth gives way to a steady state. It is important to remember that “growth” is not synonymous with “betterment.”

Growth in GNP should cease when decreasing marginal benefits become equal to increasing marginal costs. But there is no statistical series that attempts to measure the cost of GNP. This is growth mania, literally not counting the costs of growth. But the situation is even worse. We take the real costs of increasing GNP as measured by the defensive expenditures incurred to protect ourselves from the unwanted side effects of production and add these expenditures to GNP rather than subtract them. We count real costs as benefits. This is hypergrowthmania.

… Once we have gone beyond the optimum, and marginal costs exceed marginal benefits, growth will make us worse off. Will we then cease growing? On the contrary, our experience of diminished well-being will be blamed on the traditional heavy hand of product scarcity, and the only way the orthodox paradigm knows to deal with increased scarcity is to advocate increased growth — this will make us even less well off and will lead to the advocacy of still more growth! Sometimes I suspect that we are already on this “other side of the looking glass,” where images are inverted and the faster we run the “behinder” we get.

When Daly in 1994 left the World Bank after six years there he prescribed: that the Bank take “a few antacids and laxatives to cure the combination of managerial flatulence and organizational constipation giving rise to such a high-pressure internal environment” and to improve interactions with the external world he prescribed “new eyeglasses and a hearing aid.”

His prescription included these steps (remember this was 13 years ago):

#1. Stop counting the consumption of natural capital as income. Income is by definition the maximum amount that a society can consume this year and still be able to consume the same amount next year. Thus sustainability is built into the very definition of income. But the productive capacity that must be maintained intact has traditionally been thought of as manmade capital only, excluding natural capital. We have habitually counted natural capital as a free good. This might have been justified in yesterday’s empty world, but in today’s full world it is anti-economic. …

#2. Tax labor and income less, and tax resource throughput more. In the past it has been customary for governments to subsidize resource throughput to stimulate growth. Thus energy, water, fertilizer, and even deforestation, are even now frequently subsidized. To its credit the World Bank has generally opposed these subsidies. But it is necessary to go beyond removal of explicit financial subsidies to the removal of implicit environmental subsidies as well. By “implicit environmental subsidies” I mean external costs to the community that are not charged to the commodities whose production generates them. …

#3. Maximize the productivity of natural capital in the short run, and invest in increasing its supply in the long run. Economic logic requires that we behave in these two ways toward the limiting factor of production — i.e. maximize its productivity and invest in its increase. Those principles are not in dispute. Disagreements do exist about whether natural capital is really the limiting factor. Some argue that manmade and natural capital are such good substitutes that the very idea of a limiting factor, which requires that the factors be complementary, is irrelevant. It is true that without complementarily there is no limiting factor. So the question is, are manmade capital and natural capital basically complements or substitutes? Here again we can provide perpetual full employment for econometricians, and I would welcome more empirical work on this, even though I think it is sufficiently clear to common sense that natural and manmade capital are fundamentally complements and only marginally substitutable. …

#4. Move away from the ideology of global economic integration by free trade, free capital mobility, and export led growth-and toward a more nationalist orientation that seeks to develop domestic production for internal markets as the first option, having recourse to international trade only when clearly much more efficient.

At the present time global interdependence is celebrated as a self-evident good. The royal road to development, peace, and harmony is thought to be the unrelenting conquest of each nation’s markets by all other nations. The word “globalist” has politically correct connotations, while the word “nationalist” has come to be pejorative. This is so much the case that it is necessary to remind ourselves that the World Bank exists to serve the interests of its members, which are nation states, nation communities — not individuals, not corporations, not even NGOs. It has no charter to serve the one-world without borders cosmopolitan vision of global integration — of converting many relatively independent national economies, loosely dependent on international trade into one tightly integrated world economic network upon which the weakened nations depend upon for even basic survival.

…

Cosmopolitan globalism weakens national boundaries and the power of national and subnational communities, while strengthening the relative power of transnational corporations. Since there is no world government capable of regulating global capital in the global interest, and since the desirability and possibility of a world government are both highly doubtful, it will be necessary to make capital less global and more national. I know that is an unthinkable thought fight now, but take it as a prediction — ten years from now the buzz words will be “renationalization of capital” and the “community rooting of capital for the development of national and local economies”, not the current shibboleths of export-led growth stimulated by whatever adjustments are necessary to increase global competetivness.

From the acceptance speech by Herman Daly, December 9th, 1996, on being awarded the Right Livelihood Award:

We now need more radical and direct solutions to the problems of Malthus, Marx, and Keynes: population control to deal with overpopulation; redistribution to deal with excessive inequality; and ecological tax reform to raise resource productivity and employment. These must be national policies. It is utopian (or dystopian) to think of them being carried out by a world authority. Many nations have made progress in controlling their population growth, in limiting domestic income inequality, in reducing unemployment. They have also improved resource productivity by internalizing environmental and social costs into prices. These significant national gains are now being undercut by the ideology of globalization. Global economic integration by free trade and free capital mobility effectively erases the policy significance of national boundaries, turning the federated community of nations into a cosmopolitan non community of globalized individuals. Some of these “individuals” are giant transnational corporations, treated as individuals by legal fiction.

Under globalization, each country seeks to expand beyond the limits of its own ecosystem and market by growing into the ecological and economic space of all other countries, as well as into the remaining global commons. Globalization operates by standards-lowering competition to bid down wages, to externalize environmental costs, and reduce social overhead expenses for public goods. But it is far worse than an unrealistic global dream – it actively undercuts the ability of nations to continue dealing with their own problems of unjust distribution, unemployment, external costs, and overpopulation. It is hard to imagine any country continuing to limit its birth rate or internalize its environmental and social costs when the results of overpopulation and cost externalization in other countries freely spill over into it.

Globalization is the latest elixir concocted by the growth-forever alchemists. Export-led growth is the new philosopher’s stone that turns lead into gold by the alchemy of free trade. With the revival of alchemy comes a return to the logic of Mercantilism: wealth is gold, and the way for countries without mines to get gold is to export more goods than they import, and receive payment for the difference in gold. The way to export more than you import is to reduce wages. The way to keep wages low is to have an oversupply of labor, attained by easy immigration or high birth rates among the working class. Globalization requires, therefore, that for a nation to be rich, the majority of its citizens must be poor, increase in number, and live in a deteriorating environment.

Truly, John Ruskin foresaw the era of uneconomic growth, a time when:

“That which seems to be wealth may in verity be only the gilded index of far-reaching ruin…….”

The Steady-State Economy: What It Is, Why We Need It

John Attarian (1956 – 2004), a conservative libertarian economist, isn’t someone that naturally appeals to me (he wrote his doctoral thesis on Ayn Rand’s economics), but in The Steady-State Economy: What It Is, Why We Need It he succinctly addresses the need to move from traditional models of growth economies to a steady-state one.

Viewed superficially, humanity’s material condition and prospects have never looked better. Modernization and affluence are unprecedentedly democratized. A more penetrating examination, however, reveals that humanity is hideously vulnerable, that its present course cannot long endure, and that a radically different type of economy is urgently needed.

The quantity of accessible fresh water is no greater than it was when human life began, and our demands on it are rising relentlessly. With over 1.3 billion people and a hectically growing economy, China has a worsening water crisis. The shallow aquifer under the North China Plain, where about a third of China’s corn and over half its wheat are grown, is depleted. China is tapping the plain’s deep aquifer of irreplaceable prehistoric water. … Other countries, including Pakistan, the United States, Mexico, Saudi Arabia and Iran are also draining their aquifers faster than they are recharging. … Humanity is similarly dependent upon, and rapidly depleting, the world’s oil. … Many fish stocks have collapsed from overfishing. … We are overloading the ecosystem with carbon dioxide, too.

This overburdening of the environment means economic growth cannot continue for long, and that maintaining current living standards long-term, let alone universalizing affluence, is impossible.

Economist Herman Daly, founding father of ecological economics, warned of this decades ago. Since the facts vindicate him, Daly’s economics invite attention.

Whereas mainstream economics either ignores the economy’s relation to the environment or assumes that the environment is a subset of the economy, i.e., the extractive industry (mining, energy, etc.), Daly maintains that the economy is a subset of the ecosystem, which is finite, nongrowing, and materially closed — no matter enters or leaves it. The ecosystem is a source of the economy’s resources, and a sink for its wastes. Energy and matter enter the economy as inputs, are transformed into goods and services, and leave as wastes, this flow of energy and matter being known as “throughput.”

Ecological interdependence limits growth, too. The environment provides vital services which excessive economic growth removes. Forests help hold topsoil in place, preventing erosion; help absorb rainwater, preventing floods and transmitting the water elsewhere; take carbon dioxide out of the atmosphere; and so on — valuable benefits which deforestation eliminates.

Resource finitude necessarily implies that worldwide attainment of American affluence is impossible, and that even if it could be attained it could not last. Daly points out that universalizing American per capita resource consumption would take even more resources, because processing the larger resource flow would require a much larger capital stock — which, of course, is made of resources.

Mainstream economics treats factors of production as substitutes. That is, if we have less of one factor (labor, say), we can add more of another (machinery) and still produce the same output. Daly argues that natural capital (resources) and man-made capital (machines, tools, buildings, etc.) are complements, not substitutes: they must be used together in essentially fixed proportions, so that adding more of one cannot compensate for having less of the other. We cannot offset a dwindling supply of natural capital by adding more manmade capital (which itself is produced from natural capital!).

When the world was “empty” (the economy was small relative to the ecosystem), man-made capital was the limiting factor. Thus, when trees were abundant, the supply of axes, saws, and sawmills determined how much lumber could be produced at a given time; when cod were plentiful off the coasts of New England and Canada, the number and capacity of fishing boats determined the catch size. Now, however, Daly argues, the factors’ roles have reversed: the economy has become very large relative to the ecosystem, making natural capital the limiting factor. With large, technologically advanced fleets fishing from depleted stocks, for example, the number of fish in the sea determines how many fish can be taken

An important concept in ecological economics is optimal scale, which is closely related to limits to growth. Just as individual firms have an optimal scale, so does the economy. Economics teaches that the firm’s optimal scale of operations is that at which marginal revenue equals marginal cost — the addition to the firm’s revenue from the last unit of output produced and sold equals the addition to cost. If the firm operates at a larger than optimal scale, marginal cost will exceed marginal revenue, making profit smaller. Analogously, the economy’s optimal scale is the output level at which the marginal gain from growth (additional utility from increasing the manmade capital stock) equals the marginal cost of growth (lost services from natural capital, pollution, resource depletion, environmental degradation, and so on). Beyond this point, growth generates more costs than benefits.

Unfortunately, Daly maintains, the world economy has already exceeded optimal size. It is now so large that it is overloading the ecosystem’s ability to serve as a source and a sink.

Daly advocated an economy which, unlike the growth economy, is sustainable — i.e., can continue for an indefinitely long period (though not forever) — in a finite world. Specifically, a steady-state economy (SSE), in which the stock of manmade capital and the population are fixed, and the throughput supporting them is minimized.

Since natural capital is now the scarce input, we should maximize its productivity: get as much utility from it as possible while minimizing its use. Economic growth (quantitative enlargement) is forsaken in favor of development (qualitative improvement).

Stabilizing population below carrying capacity is crucial. Population should be stabilized, moreover, at a level which allows enough per capita wealth for a good life. Daly’s working notion of a good life is Malthus’s standard that it would enable one to have a glass of wine and piece of meat at dinner. A decent standard of living, he maintains, would “rule out populations at or above today’s level. What really must be stabilized is total consumption, which of course is population times per capita consumption. Both of the latter factors must be reduced.”

Acknowledging the value of liberty, the difficulty and undesirability of micromanagement, and the market’s effectiveness at resource allocation, Daly maintains that attaining and maintaining a steady-state economy should rely as much as possible on macro-level social controls and preserve the maximum possible individual freedom. One reason for keeping the load on the environment well below carrying capacity is that the greater the strain on the ecosystem, the greater the need for intrusive micromanagement.

Our first task, Daly persuasively argues, is to stop growth. Only after we have stabilized the economy at or near its present size should we determine, and move to, an optimum scale. For one thing, since our survival depends on stopping growth, it is imperative that we do so as soon as possible. Besides, settling such issues as the optimal levels of population and per capita resource use will be difficult, as it will entail searching public debate over such fundamental questions as the present generation’s obligations to posterity and reproductive freedom. Achieving consensus on them will be time-consuming. Meanwhile the economy would still be growing and further damaging the ecosystem. Also, making the economy smaller can’t be done without halting growth first.

Meanwhile population is growing at 1.2 percent a year, for an annual net gain of 77 million people. Even assuming declining fertility thanks to family planning, the United Nations projects that world population will reach 8.9 billion in 2050, 2.6 billion above today’s 6.3 billion. If current fertility levels persist, population will more than double, to 12.8 billion. Moreover, all governments and societies still pursue faster economic growth.

We are going ever farther out on a limb which resource depletion will saw off. The myopic strategy of natural capital consumption has created what Lester Brown aptly calls “an environmental bubble economy.”

As Henry Kendall and David Pimentel noted, only a limited amount of land is suitable for raising food, and most of it is already in use. A growing population will devour ever more land for housing, roads, etc., at the expense of forests (and their ecosystem services) and agricultural land. The ecosystem will have to work harder with less land to feed more people.

See also John Attarian’s Tribute to Garrett Hardin.

The last three years or so have been a decisive, if often agonizing, intellectual odyssey for me, as I have become vividly aware of the mortal danger mankind is in from simultaneous population growth and rapid drawdown of finite nonrenewable resources, especially petroleum and natural gas.

It is horribly clear that humanity has overshot the planet’s carrying capacity, is actually reducing carrying capacity in almost every location, and is lurching blindly towards a hideous population crash; that the reigning ideology of perpetual economic growth and denial of scarcity and the reality of limits is nightmarishly wrongheaded; and that America is far gone in committing suicide through, among other things, hyperconsumption, overpopulation, immigration, and self-lacerating multiculturalism.

Garrett Hardin was one of the thinkers most prominent in turning my mind to confront our terrible predicament, and for that I am forever grateful.

ecological economics in Wikipedia

From the Wikipedia article on Ecological Economics:

The objective of ecological economics (EE) is to ground economic thinking and practice in physical reality, especially in the laws of physics (particularly the laws of thermodynamics) and in knowledge of biological systems. It accepts as a goal the improvement of human wellbeing through economic development, and seeks to ensure achievement of this through planning for the sustainable development of ecosystems and societies. It distinguishes itself from neoclassical economics (NCE) primarily by its assertion that economics is a subfield of ecology, in that ecology deals with the energy and matter transactions of life and the Earth, and the human economy is by definition contained within this system. In contrast, NCE has historically assumed implicitly (and, more recently, explicitly) that the environment is a subset of the human economy. In this approach, if nature is valuable to our economies, that is because people will pay for its services such as clean air, clean water, encounters with wilderness, etc. It is largely this assertion which allows for NCE to claim theoretically that infinite economic growth is both possible and desirable. However, this belief disagrees with much of what the natural sciences have learned about the world, and, according to EE, completely ignores the contributions of natural capital to the creation of wealth. Natural capital can be considered the planetary endowment of scarce matter and energy, along with the complex and biologically diverse ecosystems that provide goods and ecosystem services directly to human communities: micro- and macro-climate regulation, water recycling, water purification, storm water regulation, waste absorption, food and medicine production, pollination, protection from solar and cosmic radiation, the view of a starry night sky, etc.

While [neoclassical economics (NCE)] deals with the efficient allocation of resources, it ignores two other fundamental economic problems which are central to ecological economics: distribution (equity) and the scale of the economy relative to the ecosystem upon which it is reliant. [Ecological economics (EE)] also makes a clear distinction between growth (quantitative) and development (qualitative improvement of the quality of life) while arguing that NCE confuses the two. EE challenges the common normative approach taken towards natural resources, claiming that it undervalues natural capital by displaying it as interchangeable with human capital — labor and technology. EE counters this convention by asserting that human capital is instead complementary to and dependent upon natural capital, as human capital inevitably derives from natural capital. From these premises, it follows that economic policy has a fiduciary responsibility to the greater ecological world, and that, by undervaluing the importance of natural capital, sustainable development (as opposed to growth) —which is the only solution to elevating the standard of living for citizens worldwide—will not result. Furthermore, ecological economists point out that, beyond modest levels, increased per-capita consumption (the economist’s version of “standard of living”) does not necessarily lead to improvements in human wellbeing, while this same consumption can have harmful effects on the environment and even on broader societal wellbeing.

neoclassical economics

Contrast the ecological economics described above with traditional economics, the kind I was taught when in college.

From Wikipedia’s exogenous growth model article:

In neoclassical growth models, the long-run rate of growth is exogenously determined – in other words, it is determined outside of the model. A common prediction of these models is that an economy will always converge towards a steady state rate of growth, which depends only on the rate of technological progress and the rate of labor force growth.

A country with a higher saving rate will experience faster growth, e.g. Singapore had a 40% saving rate in the period 1960 to 1996 and annual GDP growth of 5-6%, compared with Kenya in the same time period which had a 15% saving rate and annual GDP growth of just 1%. This relationship was anticipated in the earlier models, and is retained in the Solow model; however, in the very long-run capital accumulation appears to be less significant than technological innovation in the Solow model.

Winner of the 1987 Nobel Prize in Economics, Robert Solow:

If it is very easy to substitute other factors for natural resources, then there is, in principle, no problem. The world can, in effect, get along without natural resources.

Wikipedia also has a good article on growth theory.

cute quotes

Ken Boulding (1910-1993):

“Anyone who believes exponential growth can go on forever in a finite world is either a madman or an economist.”

“There is no such thing as economics, only social science applied to economic problems.”

“Mathematics brought rigor to Economics. Unfortunately, it also brought mortis.”

other resources

Gund Institute for Ecological Economics

The Real Economy (PDF) by Robert Costanza, Gund Professor of Ecological Economics and Director, Gund Institute of Ecological Economics. ‘Ultimately, getting out of the 25-year recession in well-being we are currently in will require us to look beyond the limited definition of the “economy” we read about in the newspapers, and recognize what the real economy is and what it is for. We must not allow deceptive accounting practices — analogous to those that caused the Enron and WorldCom debacles — to paint an inaccurate and ultimately destructive picture of how “well” we are doing. Alternatives are available, but they need significant further discussion and research.’

Ecological Economics, a paper by Farber and Bradley. “In this paper, we outline how the emerging interdisciplinary perspective of Ecological Economics can be of use in providing conceptual and concrete approaches to identifying, understanding, and maintaining those features of ecosystem and human economic interactions that are necessary to achieve sustainable futures for economic and natural systems.”

Ecological Economics at Rensselaer. “The central insight of ecological economics is that the human economy is part of the global environmental system. Economic activity is invariably dependent on natural resources, generates material wastes, and is governed by the same biophysical laws as the rest of the physical environment. The name ecological economics reflects concern with extending and integrating the study and management of nature’s household (ecology) and humankind’s household (economics).”

• The Wealth of Nature A three-part series profiling ecological economists by Lissa Harris published on the Grist
  • At What Cost?: Ecological economist Robert Costanza puts a price tag on nature
  • The Skeptical Economist: Rewriting the book on economics (work of Joshua Farley)
  • Breaking the Bank:The economic heresy of Herman Daly

[updated from the comments] steady state economy, encyclopedia artical by Brian Czech, President of the Center for the Advancement of the Steady State Economy and author of Shoveling Fuel for a Runaway Train (see this review). Listen to a 37 minute interview with Brian from 12/05.  See also this quest post by Brian on Growth is Madness!.