Herman Daly’s economics for society and the biosphere

27 01 2009

We live in a vulnerable world-system characterised by mass consumption, appropriation, plunder, environmental degradation, domination of rich over poor and war. Plagued with crises that transcend nations and the consequences of climate change lurking around the corner, we need a solution that subordinates economic growth for human well-being and ecological resilience. Herman has a proposal:

The earth as a whole is approximately in a steady state. Neither the surface nor the mass of the earth is growing or shrinking; the inflow of radiant energy to the Earth is equal to the outflow (the greenhouse effect has slowed the outflow, but the resulting temperature increase will force it back up); and material imports from space are roughly equal to exports (both negligible).

None of this means that the earth is static – a great deal of qualitative change can happen inside a steady state, and certainly has happened on Earth. The most important change in recent times has been the enormous growth of one subsystem of the Earth, namely the economy, relative to the total system, the ecosphere. This huge shift from an “empty” to a “full” world is truly “something new under the sun,” as historian J. R. McNeil calls it in his book of that title. The closer the economy approaches the scale of the whole Earth, the more it will have to conform to the physical behavior mode of the Earth. That behavior mode is a steady state – a system that permits qualitative development but not aggregate quantitative growth. Growth is more of the same stuff; development is the same amount of better stuff (or at least different stuff). The remaining natural world is no longer able to provide the sources and sinks for the metabolic throughput necessary to sustain the existing oversized economy – much less a growing one. Economists have focused too much on the economy’s circulatory system and have neglected to study its digestive tract. Throughput growth means pushing more of the same food through an ever larger digestive tract; development means eating better food and digesting it more thoroughly. Clearly the economy must conform to the rules of a steady state – seek qualitative development, but stop aggregate quantitative growth. GDP increase conflates these two very different things.

We have lived for 200 years in a growth economy. That makes it hard to imagine what a steady-state economy (SSE) would be like, even though for most of our history mankind has lived in an economy in which annual growth has been negligible. Some think an SSE would mean freezing in the dark under communist tyranny. Some say that huge improvements in technology (energy efficiency, recycling) are so easy that it will make the adjustment both profitable and fun.

Regardless of whether it will be hard or easy, we have to attempt an SSE because we cannot continue growing, and in fact so-called “economic” growth already has become uneconomic. The growth economy is failing. In other words, the quantitative expansion of the economic subsystem increases environmental and social costs faster than production benefits, making us poorer not richer, at least in high-consumption countries. Given the laws of diminishing marginal utility and increasing marginal costs, this should not have been unexpected. And even new technology sometimes makes it worse. For example, tetraethyl lead provided the benefit of reducing engine knock, but at the cost of spreading a toxic heavy metal into the biosphere; chlorofluorocarbons gave us the benefit of a nontoxic propellant and refrigerant, but at the cost of creating a hole in the ozone layer and a resulting increase in ultraviolet radiation. It is hard to know for sure that growth now increases costs faster than benefits since we do not bother to separate costs from benefits in our national accounts. Instead we lump them together as “activity” in the calculation of GDP.

Ecological economists have offered empirical evidence that growth is already uneconomic in high-consumption countries. Since neoclassical economists are unable to demonstrate that growth, either in throughput or GDP, is currently making us better off rather than worse off, it is blind arrogance on their part to continue preaching aggregate growth as the solution to our problems. Yes, most of our problems (poverty, unemployment, environmental degradation) would be easier to solve if we were richer – that is not the issue. The issue is: Does growth in GDP any longer really make us richer? Or is it now making us poorer?

For poor countries GDP growth still increases welfare, at least if reasonably distributed. The question is, what is the best thing for rich countries to do to help poor countries? The World Bank’s answer is that the rich should continue to grow as rapidly as possible to provide markets for the poor and to accumulate capital to invest in poor countries. The steady state answer is that the rich should reduce their throughput growth to free up resources and ecological space for use by the poor, while focusing their domestic efforts on development, technical and social improvements, that can be freely shared with poor countries.

International capital mobility, coupled with free trade, allows corporations to escape from national regulation in the public interest, playing one nation off against another. Since there is no global government they are, in effect, uncontrolled. The nearest thing we have to a global government (IMFWBWTO) has shown no interest in regulating transnational capital for the common good. Their goal is to help these corporations grow, because growth is presumed good for all – end of story. If the IMF wanted to limit international capital mobility to keep the world safe for comparative advantage, there are several things they could do. They could promote minimum residence times for foreign investment to limit capital flight and speculation and they could propose a small tax on all foreign exchange transactions (Tobin tax). Most of all they could revive Keynes’ proposal for an international multilateral clearing union that would directly penalize persistent imbalances in current account (both deficit and surplus), and thereby indirectly promote balance in the compensating capital account, reducing international capital movements.

Taxing what we want less of (depletion and pollution), and ceasing to tax what we want more of (income, value added) would seem reasonable – as the bumper sticker puts it, “tax bads, not goods.” The shift could be revenue-neutral and gradual. Begin for example by forgoing $x revenue from the worst income tax we have.

Simultaneously collect $x from the best resource severance tax we could devise. Next period get rid of the second-worst income tax and substitute the second-best resource tax, etc. Such a policy would raise resource prices and induce efficiency in resource use.

Knowledge, unlike throughput, is not divided in the sharing, but multiplied. Once knowledge exists, the opportunity cost of sharing it is zero and its allocative price should be zero. International development aid should more and more take the form of freely and actively shared knowledge, along with small grants, and less and less the form of large interest-bearing loans. Sharing knowledge costs 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. Patent monopolies (aka “intellectual property rights”) should be given for fewer “inventions,” and for fewer years.

Could an SSE support the enormous superstructure of finance built around future growth expectations? Probably not, since interest rates and growth rates would be low. Investment would be mainly for replacement and qualitative improvement. There would likely be a healthy shrinkage of the enormous pyramid of debt that is precariously balanced atop the real economy, threatening to crash. Additionally, the SSE could benefit from a move away from our fractional-reserve banking system toward 100 percent reserve requirements.

One hundred percent reserves would put our money supply back under the control of the government rather than the private banking sector. Money would be a true public utility, rather than the by-product of commercial lending and borrowing in pursuit of growth. Under the existing fractional reserve system, the money supply expands during a boom and contracts during a slump, reinforcing the cyclical tendency of the economy. The profit (seigniorage) from creating (at negligible cost) and being the first to spend new money – and receive its full exchange value – would accrue to the public rather than the private sector. The reserve requirement, something the Central Bank manipulates anyway, could be raised from current very low levels gradually to 100 percent. Commercial banks would make their income by financial intermediation (lending savers’ money for them) as well as by service charges on checking accounts rather than by lending at interest money they create out of nothing. Lending only money that has actually been saved by someone re-establishes the classical balance between abstinence and investment. This extra discipline in lending and borrowing likely would prevent such debacles as the current “sub-prime mortgage” crisis. One hundred percent reserves would both stabilize the economy and slow down the Ponzi-like credit leveraging.

While these transitional policies will appear radical to many, it is worth remembering that, in addition to being amenable to gradual application, they are based on the conservative institutions of private property and decentralized market allocation. They simply recognize that private property loses its legitimacy if too unequally distributed, and that markets lose their legitimacy if prices do not

Tell the whole truth about costs. In addition, the macro-economy becomes an absurdity if its scale is structurally required to grow beyond the biophysical limits of the Earth. And well before that radical physical limit, we are encountering the conservative economic limit in which extra costs of growth become greater than the extra benefits.

Backing away from the Tipping Point
Ten crucial steps to attain an ecologically viable economic future

1. Cap-auction-trade systems for basic resources – Cap limits to biophysical scale according to source or sink constraint, whichever is more stringent. Auction captures scarcity rents for equitable redistribution. Trade allows efficient allocation to highest uses.

2. Ecological tax reform – Shift tax base from value added (labor and capital) and on to “that to which value is added,” namely the entropic throughput of resources extracted from nature (depletion), through the economy, and back to nature (pollution). Internalizes external costs as well as raises revenue more equitably. Prices the scarce but previously unpriced contribution of nature.

3. Limit the range of inequality in income distribution – A minimum income and a maximum income. Without aggregate growth, poverty reduction requires redistribution. Complete equality is unfair; unlimited inequality is unfair. Seek fair limits to inequality.

4. Free up the length of the working day, week and year – Allow greater option for leisure or personal work. Full-time external employment for all is hard to provide without growth.

5. Re-regulate international commerce – Move away from free trade, free capital mobility and globalization; adopt compensating tariffs to protect efficient national policies of cost internalization from standards-lowering competition from other countries.

6. Downgrade the IMFWBWTO to something like Keynes’ plan for a multilateral payments clearing union, charging penalty rates on surplus as well as deficit balances – seek balance on current account, avoid large capital transfers and foreign debts.

7. Move to 100 percent reserve requirements instead of fractional-reserve banking. Put control of money supply and seigniorage in hands of the government rather than private banks.

8. Enclose the remaining commons of rival natural capital in public trusts, and price it, while freeing from private enclosure and prices the non-rival commonwealth of knowledge and information. Stop treating the scarce as if it were non-scarce, and the non-scarce as if it were scarce.

9. Stabilize population – Work toward a balance in which births plus in-migrants equals deaths plus out-migrants.

10. Reform national accounts – Separate GDP into a cost account and a benefits account. Compare them at the margin, stop growing when marginal costs equal marginal benefits. Never add the two accounts.

While I sourced it from Adbusters.org, this article is adapted from Towards a Steady-State Economy, a paper Herman Daly wrote for the UK Sustainable Development Commission in 2008. The complete text can be found here.




2 responses

31 03 2009
Chaos is a vacant space « dsdntDICTION

[…] such high living-standards. For years ecological economist Herman Daly has presented his ‘Steady-State Economy‘ as a solution, but still those in power are not taking heed. So just like in the forest […]

31 03 2009
Toward a New Sustainable Economy « dsdntDICTION

[…] see my previous post on Herman Daily’s “Steady-State Economics”. Possibly related posts: […]

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