A Liberating (but Damned Uncomfortable) Conversion

by Herman Daly

Foreword to Wendell Berry’s What Matters? Economics for a Renewed Commonwealth

Herman DalyAs a poet, novelist, essayist, farmer, and thinker on matters agrarian, Wendell Berry needs no introduction. But he is not a professional economist, not a guild member with a Ph.D. union card. Nor does he claim to be such. In a world where knowledge is organized by discipline and professionalized in tight circles, it is often hard to be heard outside the circumference of one’s own silo. Therefore I fear that the very people for whom reading these essays would be most beneficial, and through whom they could have the most salutary impact on our ailing world, will simply not read them. I can imagine some of my university colleagues and students in economics departments asking: Why should I read a book by a noneconomist on “economics for a renewed commonwealth”? There likely won’t be a single equation in the book, and use of the archaic word “commonwealth” betrays a probable lack of understanding of the individualistic basis of neoclassical economic theory. Economists don’t write poetry or fiction (well, maybe a bit of the latter, but not on purpose), so let not poets or agrarian-environmentalist- localists write about the sophisticated technical science of economics in a globalized industrial growth economy. Leave it to the experts to continue to grow the economy and thereby provide the only possible solution to the problems of poverty, energy, and climate change. I can hear it now, complete with aggrieved intonation.

My purpose in this foreword is therefore to preemptively reply to this imagined but not unlikely invitation for Wendell to shut up. I want to explain why it is critically important for all citizens, especially professional economists, to read and reflect deeply on the essays in this book. Yet I understand the reluctance of someone with the commitments sketched above to give these essays a fair reading. To do so is to run a serious risk of conversion away from the dominant idolatry of our culture—a liberating conversion to be sure, but damned uncomfortable.

What do we economists have to learn from Wendell Berry? Many things, but here I will mention only two. First is a definitional correction regarding the basic nature of our subject matter—exactly what reality matters most to our economic life and why? Second, what mode of thinking does this reality require of us in order to understand it as well as possible, without seducing us into spurious substitutes for honest ignorance?

The definitional correction goes back to Aristotle and, while somewhat retained by the classical economists, seems to have been dropped from the current neoclassical canon. Aristotle distinguished “oikonomia” from “chrematistics.” Oikonomia is the science or art of efficiently producing, distributing, and maintaining concrete use values for the household and community over the long run. Chrematistics is the art of maximizing the accumulation by individuals of abstract exchange value in the form of money in the short run. Although our word “economics” is derived from oikonomia, its present meaning is much closer to chrematistics. The word chrematistics is currently relegated to unabridged dictionaries, but the reality to which it refers is everywhere present and is frequently and incorrectly called economics. Wendell Berry is, I believe, urging us to correct our definition of economics by restoring to it the meaning of oikonomia and freeing it from confusion with, and excessive devotion to, chrematistics. In replacing chrematistics by oikonomia we not only refocus on a different reality but also embrace the purposes served within that different reality—community, frugality, efficiency, and long-term stewardship of particular places.

Where today do we find chrematistics masquerading as economics? Certainly in the recent Wall Street fiasco—“selling a bet on a debt [as] an asset” as Wendell succinctly put it. It is amazing that people who have recently engaged in this disastrous stupidity on such a massive scale still have any credibility at all! Yet belief in “free markets” as the philosopher’s stone that alchemically transmutes the dross of chrematistics into the gold of oikonomia remains strong.

Other examples of chrematistics at work include monopoly pricing, tax evasion, subsidies, rent seeking, forced mobility of labor, cheap labor from union busting and illegal immigration, off-shoring, mergers, hostile takeovers, usury, and bullying litigation—not to mention the airlines’ successful shifting on to their customers the labor previously done by former travel agents, check-in clerks, and baggage handlers. Externalizing environmental costs—shifting the cost of depletion and pollution from the producer to the general public, the future, and other species—is probably the most common and most disastrous chrematistic maneuver. The unaccounted costs range from irksome noise, to mountaintop removal and filling up of valleys with toxic tailings, to a dead zone in the Gulf of Mexico, to global climate change and species extinction. Confusing oikonomia and chrematistics, misdefining the proper subject matter of economics, has deadly consequences. In the face of all this it is hard to remember that there are still some people doing useful work and creating wealth to really benefit the community. Chrematistics has not entirely displaced oikonomia, but it is trying to. In Wendell’s terms the little economy is trying to impose its puny logic on the mysteries and complexities of the Great Economy.

Professional economists should thank Wendell for his sharp reminder about what matters. However, if we are too proud to accept correction from a poet and agrarian, we can claim to have rediscovered Aristotle’s forgotten definitions all by ourselves. But then we will still be obliged to apply those definitions to the modern world and be brought face to face with the collective fantasy, idiocy, and horror that Wendell has identified and discussed.

The other thing economists can learn from Wendell Berry, as much from his example as from explicit discussion, has to do with the proper matching of our mode of thinking to the particular reality we are thinking about, and inevitably shaping. Blaise Pascal spoke of two modes of thinking: the “spirit of geometry” and the “spirit of finesse.” Similarly, economist Nicholas Georgescu-Roegen recently distinguished thinking with precisely defined analytic concepts that do not overlap with their other, from thinking with dialectical concepts that do overlap with their other at the boundaries. The best example of an analytic concept is a number. It is only itself and does not overlap with any other number. Land and sea would be dialectical concepts because, although for the most part distinct, they must overlap in tidal marshlands, estuaries, beaches, river deltas, or even the continental shelf, if they are to reflect reality. Each of these border areas in some reasonable sense is both land and sea—a logical contradiction but true to reality. Money is a notoriously dialectical concept, overlapping with nonmonetary assets of varying degrees of liquidity. When economists try to impose an analytical definition on money they end up multiplying categories (M1, M2, M3 . . .) or failing to capture the shaded subtleties of the borderlands. Analytical concepts employ mathematics to weed out contradictions where “yes-and-no” answers are not allowed. The virtue demanded by analytic thought is rigor; its defect is its inability to deal with qualitative change and evolution. If we do not allow something to overlap with its other then how could it ever evolve into anything different from what it is? The virtue of dialectical thinking is that it can accommodate qualitative change—what used to be dry land can gradually become sea or vice versa. Its defect is that it has to tolerate at least a range of contradiction. The virtue demanded by dialectical thought is good judgment, or as Pascal preferred, “finesse”—finesse in handling contradiction.

Today analytic thought is very much in vogue, and in economics quite dominant. It has the aura of science. Analytic thinking requires a reality that is like a number, and since chrematistics is about the maximization of exchange value numerically measured by money, it tends to attract those with a strong prior commitment to analytical thinking. Dialectical thinking is required by a reality that changes qualitatively through overlapping categories. Oikonomia deals with use values that are embodied in products that evolve over the long run to serve changing wants, and with changing technical efficiency in an evolving community that coheres around values that also change. A preference for dialectical thinking leads to a focus on oikonomia, and vice versa.

My point is not to say that one mode of thought is good and the other bad. Both are clearly necessary. There is a limit to what we can do with numbers, just as there is a limit to what we can do without them. But I do suggest that there is currently a bias toward the analytical and a corresponding prejudice against the dialectical. This quantitative bias is certainly not the only reason for the excessive importance given to chrematistics over oikonomia—greed, avarice, and intellectual sloth play a bigger role—but I think it is a contributing factor. In sum, the second thing that economists can learn from Wendell Berry’s essays is that clear-headed reasoning with dialectical concepts about what matters is possible, necessary, and enlightening. Here Wendell persuades by example.

When a problem yields neither to the spirit of geometry nor to the spirit of finesse, Wendell advises us to be more at home with ignorance and mystery. They are much better companions than either phony equations or empty verbiage, and more congenial to a creature trying to understand the overall workings of Creation and intuit the will of the Creator whose broken image he still bears.

In my eagerness to convince my fellow economists to read this book, I am afraid that I have failed to specifically address the general reader. So, dear general reader, for whom Wendell Berry wrote these essays, let me assure you that if you have read this far, you have gotten through the most obscure and convoluted part of the book. The rest is smooth sailing with a clear-headed and trustworthy navigator, albeit through deep waters. The essays require wakeful attention and focused thought, but priestly intermediation by professional experts is surely not needed.

Sustaining Our Commonwealth of Nature and Knowledge

by Herman Daly

Herman DalyLet’s start with this phrase: “sustaining our commonwealth.” By sustaining, I don’t mean preserving inviolate; I mean using, without using up. Using with maintenance and replenishment is an important idea in economics. It’s the very basis of the concept of income, because income is the maximum that you can consume today and still be able to produce and consume the same amount tomorrow – that is, maximum consumption without depleting capital in the broad sense of future productive capacity. By commonwealth, I mean the wealth that no one has made, or the wealth that practically everyone has made. So it’s either nature – nobody made it, we all inherited it – or knowledge – everybody contributed to making it, but everyone’s contribution is small in relation to the total and depends on the contributions of others. In managing the commonwealth of nature, our big problem is that we tend to treat the truly scarce as if it were non-scarce. The opposite problem arises with the commonwealth of knowledge, in which we tend to treat what is truly not scarce as if it were.

Clarifying Scarcity

There are two sets of important distinctions about goods, and they make four cross-classifications (see figure below). Goods can be either rival or non-rival, and they can be either excludable or non-excludable. My shirt, for example, is a rival good because if I’m wearing it, you can’t wear it at the same time. The warmth of the sun is non-rival because I can enjoy the warmth of the sun, and everyone else can enjoy it at the same time. Rivalness is a physical property that precludes the simultaneous use of goods by more than one person. Goods are also excludable or non-excludable. That’s not a physical concept, that’s a legal concept, a question of property. For example, you could wear my shirt tomorrow if I let you, but that’s up to me because it’s my property. My shirt is both rival and excludable, and that’s the case with most market goods. Meanwhile, the warmth of the sun is both non-rival and also non-excludable. We cannot buy and sell solar warmth; we cannot bottle it and charge for it. Goods that are rival and excludable are market goods. Goods that are non-rival and non-excludable are public goods. That leaves two other categories. Fish in the ocean are an example of goods that are rival and non-excludable. They are rival, because if I catch the fish, you can’t catch it. But they are also non-excludable, because I can’t stop you from fishing in the open seas. The management of goods that are rival and non-excludable gives rise to the famous tragedy of the commons – or the tragedy of open-access resources, as it’s more accurately called. Now, the other problematic category consists of goods that are non-rival and excludable. If I use the Pythagorean Theorem, I don’t prevent you from using it at the same time. Knowledge is non-rival, but it often is made excludable through intellectual property and patent rights. So those are two difficult categories that create problems. One is the tragedy of the commons, and the other we could call the tragedy of artificial scarcity.

The Commonwealth of Nature

Fish in the ocean are an example of the commonwealth of nature. I’ll ague that natural goods and services that are rival and have so far remained non-excludable should be enclosed in the market in order to avoid unsustainable use. Excludability can take the form of individual property rights or social property rights – what needs to be avoided is open access. For dealing with the broad class of rival but, up to now, non-excludable goods, the so-called cap-auction-trade system is a market-based institution that merits consideration.

In addition to its practical value, the cap-auction-trade system also sheds light on a fundamental issue of economic theory: the logically separate issues of scale, distribution, and allocation. Neoclassical economics deals mainly with the question of allocation. Allocation is the apportionment of resources among competing uses: how many resources go to produce beans, how many to cars, how many to haircuts. Properly functioning markets allocate resources efficiently, more or less. Yet the concept of efficient allocation presupposes a given distribution. Distribution is the apportionment of goods and resources among different people: how many resources go to you, how many to somebody else. A good distribution is one that is fair or just – not efficient, but fair. The third issue is scale: the physical size of the economy relative to the ecosystem that sustains it. How many of us are there and how large are the associated matter-energy flows from producing all our stuff, relative to natural cycles and the maintenance of the biosphere. In neoclassical economics, the issue of scale is completely off the radar screen.

The cap-auction-trade system works like this. Some environmental assets, say fishing rights or the rights to emit sulfur dioxide, have been treated as non-excludable free goods. As economic growth increases the scale of the economy relative to that of the biosphere, it becomes recognized that these goods are in fact physically rival. The first step is to put a cap – a maximum – on the scale of use of that resource, at a level which is deemed to be environmentally sustainable. Setting that cap – deciding what it should be – is not a market decision, but a social and ecological decision. Then, the right to extract that resource or emit that waste, up to the cap, becomes a scarce asset. It was a free good. Now it has a price. We’ve created a new valuable asset, so the question is: Who owns it? This also has to be decided politically, outside the market. Ownership of this new asset should be auctioned to the highest bidder, with the proceeds entering the public treasury. Sometimes rights are simply given to the historical private users – a bad idea, I think, but frequently done under the misleading label of “grandfathering.” The cap-auction-trade system is not, as often called, “free-market environmentalism.” It is really socially constrained, market environmentalism. Someone must own the assets before they can be traded in the market, and that is an issue of distribution. Only after the scale question is answered, and then the distribution question, can we have market exchange to answer the question of allocation.

Another good policy for managing the commonwealth of nature is ecological tax reform. This means shifting the tax base away from income earned by labor and capital and onto the resource flow from nature. Taxing what we want less of, depletion and pollution, seems to be a better idea than taxing what we want more of, namely income. Unlike the cap-auction-trade system, ecological tax reform would exert only a very indirect and uncertain limit on the scale of the economy relative to the biosphere. Yet, it would go a long way toward improving allocation and distribution.

The Commonwealth of Knowledge

If you stand in front of the McKeldin Library at the University of Maryland, you’ll see a quotation from Thomas Jefferson carved on one of the stones: “Knowledge is the common property of mankind.” Well, I think Mr. Jefferson was right. Once knowledge exists, it is non-rival, which means it has a zero opportunity cost. As we know from studying price theory, price is supposed to measure opportunity cost, and if opportunity cost is zero, then price should be zero. Certainly, new knowledge, even though it should be allocated freely, does have a cost of production. Sometimes that cost of production is substantial, as with the space program’s discovery that there’s no life on Mars. On the other hand, a new insight could occur to you while you’re lying in bed staring at the ceiling and cost absolutely nothing, as was the case with Renee Descartes’ invention of analytic geometry. Many new discoveries are accidental. Others are motivated by the joy and excitement of research, independent of any material motivation. Yet the dominant view is that unless knowledge is kept scarce enough to have a significant price, nobody in the market will have an incentive to produce it. Patent monopolies and intellectual property rights are urged as the way to provide an extrinsic reward for knowledge production. Even within that restricted vision, keeping knowledge scarce still makes very little sense, because the main input to the production of new knowledge is existing knowledge. If you keep existing knowledge expensive, that’s surely going to slow down the production of new knowledge.

In Summary

Managing the commonwealth of nature and knowledge presents us two rather opposite problems and solutions. I’ve argued that the commonwealth of nature should be enclosed as property, as much as possible as public property, and administered so as to capture scarcity rents for public revenue. Examples of natural commons include: mining, logging, grazing rights, the electromagnetic spectrum, the absorptive capacity of the atmosphere, and the orbital locations of satellites. The commonwealth of knowledge, on the other hand, should be freed from enclosure as property and treated as the non-rival good that it is. Abolishing all intellectual property rights tomorrow is draconian, but I do think we could grant patent monopolies for fewer “inventions” and for shorter time periods.