A steady-state economy

Economist Herman E Daly argues that our future depends on a new economic model, one that needs to be defined by the dynamic balance – the steady state – of the natural world upon which it depends.

We have lived for 200 years in a growth economy. In this time we have come to believe that all our major economic ills – from unemployment and poverty to overpopulation and even environmental degradation – can be solved by more growth. And if the global economy existed in a void perhaps that would be true. But it does not.

Instead the economy is a subsystem of the finite biosphere that supports it. When the economy’s expansion encroaches too much on the surrounding biosphere, we begin to sacrifice natural capital (animals, plants, minerals and fossil fuels) that is worth more than the manmade capital (roads, factories, appliances) added by ‘growth’.

The Earth as a whole is approximately a ‘steady state’. Neither the surface nor the mass of the earth is growing or shrinking; the inflow of energy to the Earth is equal to the outflow; and material imports from space are roughly equal to exports (both negligible).

In the last 60 years the global population has tripled and the amount of things our population has produced has increased by many times more, increasing our draw on natural capital, as well as on the earth’s capacity to deal with the waste produced by all that we produce.

This huge shift from an empty to a full world is truly ‘something new under the sun’ as historian JR McNeil calls it. But the facts are plain and incontestable: the biosphere that supports us is finite, non-growing, closed and constrained by the laws of thermodynamics. Any subsystem, such as the economy, must at some point cease growing and adapt itself to the dynamic equilibrium – the steady state – of the planet.

For many it is hard to imagine what a steadystate economy would look like. Some think it would mean freezing in the dark under communist tyranny. Others think that huge improvements in technologies, such as energyefficiency and recycling, are so easy that it will make the adjustment easy.

Regardless of whether it will be hard or easy we have to attempt it because we cannot continue growing, and in fact so-called ‘economic’ growth already has become uneconomic, increasing environmental costs faster than any production benefits, making us poorer not richer, particularly in high-consumption countries.

Examples abound: tetraethyl lead provided the benefit of reducing engine knock, but at the cost spreading a toxic heavy metal into the biosphere; chlorofluorocarbons gave us a nontoxic propellant and refrigerant, but at the cost of creating a hole in the ozone layer, which protects us from too much ultraviolet radiation.

Likewise the consistent finding of economists and psychologists that the correlation between absolute income and happiness extends only up to some threshold of ‘sufficiency’. Beyond that point only relative income influences happiness – that is, you will only feel richer if you have more than your neighbours – suggesting that the growth economy is actually providing a net dis-benefit for people on a very profound level.

The notion of a steady state has meant different things at different times in history. To the traditional or classical economist, the steady state takes the biophysical dimensions of the planet — including population and available resources — as given and adapts technology and tastes to these objective conditions.

At a more profound level, the classical view is that man is a creature who must ultimately adapt to the limits of the Creation of which he is a part. In contrast, the modern, or neoclassical, view is that man the creator will surpass all limits and remake Creation to suit his subjective individualistic preferences, which are considered the root of all value. In the end, economics is religion.

To a neoclassical economist, a steady-state economy would promote proportional growth of man-made capital and population. It takes as its steady state the ratio of this capital to labour, rather than absolute amounts of either. The technology and tastes of humanity are taken as given, and the economy adapts to them by encouraging growth, even in the face of finite biophysical dimensions.

Neoclassical economists consider the concept of sustainability to be a fad and trust that we have come so far with growth that we can keep going ad infinitum. But since these same economists are unable to demonstrate that growth, either in throughput (the energy and materials used to produce goods and services) or GDP (gross domestic product – the total volume of products and services we buy and sell), is 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.

Accepting that an ever-growing economy is biophysically impossible, it is a good time to address the question of just what a sustainable, steady-state economy (SSE) might look like.

Will a steady-state economy end poverty?

Growth cannot increase everyone’s relative income. Indeed, growth is like an arms race in which the two sides cancel each other’s gains. what is more, if everyone’s income increases proportionally then no-one’s relative income rises.

How, then, do we deal with poverty? a simple answer is redistribution – for instance by limits to the range of permissible inequality, by a minimum income and, perhaps more controversially, a maximum income.

The question is, what would be a reasonable range of inequality between the wealthiest and the poorest people of the world, one that acknowledges real differences and contributions rather than simply multiplying privilege?

Plato thought society could be content with a factor of four between the richest and poorest. universities, civil services and the military seem to manage with a factor of 10 to 20. In the corporate sector it is over 500. as a first step, why not try lowering the overall range to a factor of, say, 100?

The private sector would throw up its hands in horror, but remember – in a SSE we are no longer trying to provide massive incentives to stimulate growth. also, since we are not trying to stimulate growth, we no longer need to spend billions on advertising. Instead of treating advertising as a tax-deductible cost of production we should tax it heavily as a public nuisance. If economists really believe the consumer is sovereign then she should be obeyed rather than cajoled, manipulated, badgered and lied to.

Will there still be pensions?

One problem for the SSE is in an increase in the average age of the population – more retirees relative to workers. adjustment may require some tough choices, for instance either higher taxes (though not necessarily on income), older retirement age or reduced retirement pensions. finding an equitable solution is confounded by the fact that for many countries net immigration has become a larger source of population growth than natural increase. Immigration may temporarily ease the age-structure problem, but the steady-state population requires that births plus in-migrants equal deaths plus out-migrants. It is hard to say which is more divisive, birth limits or immigration limits? Many politicians prefer to deny arithmetic and ignore the issue.

What sorts of products could I buy?

A steady-state economy will require a move towards longer-lived, more durable goods, ones that make more efficient use of raw materials and energy. this means a shift in manufacturing protocols.

As an example, a population of 1,000 cars that last 10 years will require new production of 100 cars per year. If more durable cars are made to last 20 years then we need new production of only 50 cars per year.

To see the latter as in improvement requires a change in perspective, from emphasising production as a benefit to emphasising production as a cost of maintenance.

If we can maintain 1,000 cars and the transportation services thereof by replacing only 50 cars per year rather than 100, we are surely better off – the same capital stock yielding the same service with half the throughput previously used to build and maintain the fleet. Yet the idea that production is a maintenance cost to be minimised is strange to most people.

One adaptation in this direction is the service contract that leases the service of equipment (ranging from carpets to copying machines), which the lessor/ owner maintains, reclaims and recycles at the end of its useful life.

What about free trade?

‘Free trade’ as we currently define it would not be feasible for a SSE, since producers in SSE countries would carefully be counting environmental costs in the price of their products ignored by their overseas competitors in growth economies. any foreign firms not operating in a SSE would ‘win’ in competition, not because they were more efficient, but simply because they did not pay the cost of sustainability.

Regulated international trade under rules that compensated for these differences (perhaps through trade tariffs) could exist, as could ‘free trade’ among nations that were equally committed to sustainability and to accurate environmental accounting.

But bigger questions arise, such as how we could get to a situation where international trade occurs when it really needs to, as opposed to when it suits a growth economy? to address these, we need to understand the principles of ‘comparative advantage’, developed by David Ricardo in 19th century.

For world trade to be fair it must be mutually beneficial to trading nations. Comparative advantage, in which a country chooses to specialise in goods it can produce efficiently and in volume to trade for others goods of equal value – even if it is able to produce these goods domestically – is the reason why Portugal might consider trading wine for British wool even though it could produce both.

This is logical, but like all economic arguments, comparative advantadge is based on premises, one of which is that while capital can move between industries within a nation, it cannot move between nations. If capital (as investment) could move abroad it would have no reason to be content with a mere comparative advantage between nations, but would seek absolute advantage – the absolutely lowest cost of production anywhere.

Now comes the problem. the International Monetary fund (IMF, which exists to maintain balanced trade between nations) preaches free trade based on comparative advantage, and has done so for a long time. But recently the IMf has also started preaching the gospel of globalisation, which means capital is free to move between countries—exactly what comparative advantage forbids! When confronted by this contradiction, the IMf waves its hands, calls you a xenophobe and changes the subject.

The IMF, World Bank (which bankrolls economic growth internationally) and World Trade Organization (which promotes globalised free trade) contradict themselves in this way because they have chosen to serve the interests of transnational corporations fixated on growth. This allows corporations to play one nation against another. As there is no global government, these organisations are uncontrolled.

In order to return to a system of true comparative advantage, the IMF could limit international investment to keep the world safe for comparative advantage. Specifically, it could promote minimum residence times for foreign investment to stop companies making a quick buck, or they could propose a small tax on all foreign exchange

What about jobs?

Can a steady-state economy maintain full employment? It’s a tough question, but in fairness one must also ask if full employment is achievable in a growth economy driven by free trade, off-shoring practices, easy immigration of cheap labour and adoption of labour saving technologies.

In a SSE, development in the jobs sector will mean new ways of doing old things: in the extractive sector, oilfield roughnecks may decrease in number while wind-power workers may increase; in the sciences, industrial chemists may be replaced by wildlife ecologists.

Maintenance and repair will also become more important. Being more labour-intensive than new production and relatively protected from off-shoring, these services may provide more employment. But a more radical rethinking of how income is earned may be required. If automation and the off-shoring of jobs increase profits but not wages, the principle of distributing income purely through jobs becomes less tenable. 

A practical substitute may be to have wider participation in the ownership of businesses, so that individuals earn income through their share of the business instead of through full-time employment. The gains from technical progress should also be taken in the form of more leisure rather than more production – a long-expected but unrealised possibility.

Will taxes have to change?

A government concerned with using natural resources more efficiently would alter what it taxes. Ecological tax reform suggests shifting the tax base away from income earned by workers and business, and on to resources such as energy and natural materials, preferably at the point of ‘severance’ from the ground, at the mine-mouth or well-head, for instance.

Taxing resources at their point of severance induces more efficient resource use in production as well as consumption. Taxing what we want less of (depletion and pollution) and ceasing to tax what we
want more of (income) would seem reasonable – as the bumper sticker puts it, ‘tax bads, not goods’.

Such a shift could be revenue-neutral and gradual. Governments could begin by forgoing x per cent revenue from the worst income tax we have. Simultaneously collect the same amount from the best severance tax we could devise. Next period get rid of the second-worst income tax and substitute the second-best, and so forth until the tax base has shifted.

Can the economy still grow?

Trying to define sustainability in terms of GDP is problematic because GDP conflates qualitative development (an improvement in the quality of goods and quality of life) with quantitative growth (producing and consuming more goods and services).

The sustainable economy must, at some point, stop growing, but it need not stop developing, and nothing about a steady state precludes qualitative progress. for example, organic farms may supplant factory farms, the proportion of bicycles to hummers may increase, and professional soccer may attract more fans while NASCAR racing attracts fewer.

There is likewise no reason to limit qualitative improvement in design of products. Indeed, such improvements can, in turn, increase GDP (or whatever measurement of progress that might be brought in to replace it) without placing further strain on limited resources.

Under such circumstances, environmentalists would be happy because demand on energy and resources is not growing; economists would be happy because the economy is growing, albeit more slowly. this model should be pushed as far as it will go, but opinions differ on how far that is likely to be. Consider that sectors of the economy generally thought to be less material-intensive, such as information technology, turn out on closer inspection to make a significant draw on natural capital – for instance through a reliance on a number of rare-earth, toxic metals. 

A SSE will need to balance these demands as well as address the issue of how growth might benefit the poor. If expansion is to be of benefit to the poor, it must be comprised of goods the poor need – clothing, shelter and food on the plate, not 10,000 recipes on the Internet. Even the wealthy spend most of their money on cars, houses and trips, rather than intangibles. Finally, while much of the discussion around SSEs centres on how to distribute consumable products, such as energy or food, there are other goods that should be entirely free from price systems. I refer especially to knowledge.

In a SSE, international development aid could more and more take the form of freely and actively shared knowledge, along with small grants, and less and less the form of interest bearing loans. Existing knowledge is the most important input to the production of new knowledge, and keeping it artificially scarce is perverse.

How would banking and finance be structured?

Could a 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 financial sector that is precariously balanced atop the real economy and currently threatening to crash.

Additionally, the SSE would benefit from a move away from our fractional reserve banking system (where only a portion of deposits are held in reserve and the rest loaned out) toward 100 per cent reserve requirements, which would put our money supply back under the control of government rather than the private banking sector.

Under the existing fractional-reserve system, the money supply expands during a boom and contracts during a slump, reinforcing the cyclical ‘boom to bust’ tendency of the growth economy.

The reserve requirement, something the Central Bank manipulates anyway, could be raised from current very low levels gradually to 100 per cent.

Banks would make their income by financial intermediation (lending savers’ money for them) rather than by lending at interest money they create out of nothing, as well as by service charges on checking accounts and so on. Lending only money that has been saved by someone creates a greater discipline in borrowing and lending and would prevent such debacles as the current ‘sub-prime mortgage’ crisis.

Would the interest rate in a SSE not fall to zero without growth? Not likely. Because capital would still be scarce there would still be a desire to own goods (such as houses) before you had saved enough to buy them outright, and the value of new goods may still increase without growth in throughput – as a result of qualitative development. Investment in qualitative improvement may yield an increase in value out of which interest could be paid, but the productivity of capital would surely be less without throughput growth, so one would expect lower interest rates in a SSE, though not a zero rate.

How will we measure how well we are doing?

A SSE should not have a system of national income accounts, GDP, in which nothing is ever subtracted. Ideally, we should have two accounts: one that measures the benefits of physical growth in scale and one that measures the costs of that growth. our policy should be to stop growing where marginal costs equal marginal benefits. Or if we want to maintain the single national income concept, we should adopt Nobel laureate economist Jr Hicks’ concept of income, namely the maximum amount that a community can consume in a year and still be able to produce and consume the same amount next year. In other words, any consumption of capital, man-made or natural, must be subtracted in the calculation of income. Note that hicks’ conception of income is sustainable by definition. National accounts in a sustainable economy should follow this model and abandon GDP.

Herman E Daly is an ecological economist and professor at the School of Public Policy of University of Maryland. Read a list of his books and some of his papers in-depth.

This article first appeared in the Ecologist April 2008