A steady state economy is an economy with stable or mildly fluctuating size. The term typically refers to a national economy, but it can also be applied to a local, regional, or global economy. An economy can reach a steady state after a period of growth or after a period of downsizing or degrowth. To be sustainable, a steady state economy may not exceed ecological limits.
Herman Daly, one of the founders of the field of ecological economics and a leading critic of neoclassical growth theory, defines a steady state economy as:
An economy with constant stocks of people and artifacts, maintained at some desired, sufficient levels by low rates of maintenance ‘throughput’, that is, by the lowest feasible flows of matter and energy from the first stage of production to the last stage of consumption.
Daly, Herman. 1991. Steady-State Economics, 2nd edition. Island Press, Washington, DC. p.17.
A steady state economy, therefore, aims for stable or mildly fluctuating levels in population and consumption of energy and materials. Birth rates equal death rates, and production rates equal depreciation rates.
History of the Steady State Concept
For centuries, economists have considered a transition from a growing economy to a stable one, from classical economists like Adam Smith down to present-day ecological economists. Adam Smith is famous for the ideas in his book The Wealth of Nations. A central theme of the book is the desirable consequences of each person pursuing self interests in the marketplace. He theorized and observed that people trading in open markets leads to production of the right quantities of commodities, division of labor, increasing wages, and an upward spiral of economic growth. But Smith recognized a limit to economic growth. He predicted that in the long run, population growth would push wages down, natural resources would become increasingly scarce, and division of labor would approach the limits of its effectiveness. He even predicted 200 years as the longest period of growth, followed by population stability.
John Stuart Mill, pioneer of economics and gifted philosopher, developed the idea of the steady state economy in the mid-19th century. He believed that after a period of growth, the economy would reach a stationary state, characterized by constant population and stocks of capital. His words eloquently describe the positive nature of such an economic system:
It is scarcely necessary to remark that a stationary condition of capital and population implies no stationary state of human improvement. There would be as much scope as ever for all kinds of mental culture, and moral and social progress; as much room for improving the Art of Living and much more likelihood of its being improved, when minds cease to be engrossed by the art of getting on.
John Maynard Keynes, the most influential economist of the twentieth century, also considered the day when society could focus on ends (happiness and well-being, for example) rather than means (economic growth and individual pursuit of profit). He wrote:
…that avarice is a vice, that the exaction of usury is a misdemeanour, and the love of money is detestable… We shall once more value ends above means and prefer the good to the useful.
The day is not far off when the economic problem will take the back seat where it belongs, and the arena of the heart and the head will be occupied or reoccupied, by our real problems – the problems of life and of human relations, of creation and behavior and religion.
Nicholas Georgescu-Roegen recognized the connection between physical laws and economic activity and wrote about it in 1971 in The Entropy Law and the Economic Process. His insight was that the second law of thermodynamics, the entropy law, determines what is possible in the economy. Georgescu-Roegen explained that useful, low-entropy energy and materials are dissipated in transformations that occur in economic processes, and they return to the environment as high-entropy wastes. The economy, then, functions as a conduit for converting natural resources into goods, services, human satisfaction, and waste products. Increasing entropy in the economy sets the limit on the scale it can achieve and maintain.
Around the same time that Georgescu-Roegen published The Entropy Law and the Economic Process, other economists, most notably E. F. Schumacher and Kenneth Boulding, were writing about the environmental effects of economic growth and suggesting alternative models to the neoclassical growth paradigm. Schumacher proposed “Buddhist Economics” in an essay of the same name, included in his book Small Is Beautiful. Schumacher’s economic model is grounded in sufficiency of consumption, opportunities for people to participate in useful and fulfilling work, and vibrant community life marked by peace and cooperative endeavors. Boulding used the spaceship as a metaphor for the planet in his prominent essay, The Economics of the Coming Spaceship Earth. He recognized the material and energy constraints of the economy and proposed a shift from the expansionist “cowboy economy” to the conservative “spaceman economy.” In the cowboy economy, success is gauged by the quantity and speed of production and consumption. In the spaceman economy, by contrast, “what we are primarily concerned with is stock maintenance, and any technological change which results in the maintenance of a given total stock with a lessened throughput (that is, less production and consumption) is clearly a gain.”
Georgescu-Roegen’s student, Herman Daly, built upon his mentor’s work and combined limits-to-growth arguments, theories of welfare economics, ecological principles, and the philosophy of sustainable development into a model he called steady state economics. He later joined forces with Robert Costanza, AnnMari Jansson, Joan Martinez-Alier, and others to develop the field of ecological economics. In 1990, these prominent professors established the International Society of Ecological Economics. The three founding positions of the society and the field of ecological economics are:
- The human economy is embedded in nature, and economic processes are actually biological, physical, and chemical processes and transformations.
- Ecological economics is a meeting place for researchers committed to environmental issues.
- Ecological economics requires trans-disciplinary work to describe economic processes in relation to physical reality.
Ecological economics has become the field of study most closely linked with the concept of a steady state economy. Ecological economists have developed a robust body of theory and evidence on the biophysical limits of economic growth and the requirements of a sustainable economy.
Sustainable Scale and Degrowth
Sustainable scale is the key characteristic of a steady state economy. Scale is simply a measure of the size of one object relative to another. In this case, we are concerned with the size of the human economy relative to the ecosystems that contain it. Sustainability is achieved when the human economy fits within the capacity provided by Earth’s ecosystems. Economic activity degrades ecosystems, interfering with natural processes that are critical to various life support services. In the past, the amount of economic activity was small enough that the degree of interference with ecosystems was negligible. The unprecedented growth of economic activity, however, has significantly shifted the balance with potentially disastrous consequences. This is why getting the scale of the economy right (technically the point at which the marginal costs of growth equal the marginal benefits) is the highest priority for a steady state economy.
Finding the Goldilocks scale of the economy, the size that’s not too small and not too large, but just right, is no easy feat. In cases where the benefits of growth outweigh the costs (for example, where people are not consuming enough to meet their needs), growth or redistribution of resources may be required. In cases where the size of the economy has surpassed the carrying capacity of the ecosystems that contain it (a condition known as overshoot), degrowth may be required before establishing a steady state economy that can be maintained over the long term. Adjusting the scale of the economy through accurate measurement of benefits and costs, through trial and error, through regulation of markets, and through political will to achieve sustainability is the great challenge of our times.
Since continuous growth and sustainable scale are incompatible, growth cannot be relied upon to alleviate poverty, as has been done (ineffectively) in the past. If the pie isn’t getting any bigger, we need to cut and distribute the pieces in a fair way. In addition, poor people who have trouble meeting basic needs tend not to care about sustainability, and excessively rich people tend to consume unsustainable quantities of resources. Fair distribution of wealth, therefore, is a critical part of sustainability and the steady state economy.
The conventional economic thought focuses almost exclusively on efficient allocation of scarce resources. The dominant thinking is that free and competitive markets, along with prices driven by supply and demand, result in efficient allocation of goods and services (in the absence of pesky, omnipresent externalities and market imperfections). Efficient allocation is also important in a steady state economy – ecological economists support many market strategies to accomplish efficient allocation of resources – but only after achieving sustainable scale and fair distribution. Efficient allocation, although a valid criterion for managing and using resources, means very little in an unsustainable or unjust economic system.
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