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The Surprising Conclusion to an Important New Book

by Herman Daly

Book Review: The Failure of Laissez Faire Capitalism and the Economic Dissolution of the West (Towards a New Economics for a Full World), by Paul Craig Roberts

About the author: Dr. Roberts was educated at Georgia Tech, University of Virginia, UC Berkeley, and Oxford University. He was Assistant Secretary of the US Treasury in the Reagan Administration, associate editor and columnist for the Wall Street Journal, Senior Research Fellow at the Hoover Institution, Stanford University, and holder of the William E. Simon Chair in Political Economy at Georgetown University. His honors include the US Treasury’s Meritorious Service Award, and France’s Legion of Honor.

As evident fromFailureCapitalism this description, Paul Craig Roberts writes from a very solid establishment background in academic political economy, financial journalism, and high public office. His radical critique of today’s economics and public policy will no doubt be surprising to some, but it is based on impressive knowledge and experience, as well as irresistibly convincing honesty. He did not inherit his present understanding of political economy, but developed it through study and experience, with openness to the persuasive power of facts, and willingness to question economic dogmas of both the right and the left.

The book is of special interest to ecological economists, not only for the explicit and insightful support his reasoning gives us, but also for the larger financial and political context in which he places steady-state economics. Although written mainly from a US perspective, the book includes a very clear and informative explanation of the European crisis.

Perhaps the best way to whet the prospective reader’s appetite is to reproduce the brief conclusions with which the book ends, and to testify that the rest of the book solidly supports these conclusions by clear reasoning from relevant facts.

“This book demonstrates that empty-world economic theory has failed on its own terms and that its application by policymakers has resulted in the failure of capitalism itself. Pursuing absolute advantage in cheap labor abroad, First World corporations have wrecked the prospects for First World labor, especially in the US, while concentrating income and wealth in a few hands. Financial deregulation has resulted in lost private pensions and homelessness. The cost to the US Treasury of gratuitous wars and bank bailouts threatens the social safety net, Social Security and Medicare. Western democracy and civil liberties are endangered by authoritarian responses to protests against the austerity that is being imposed on citizens in order to fund the wars and financial bailouts. Third World countries have had their economic development blocked by Western economic theories that do not reflect reality.

All of this is bad enough. But when we leave the empty-world economics and enter the economics of a full world, where nature’s capital (natural resources) and ability to absorb wastes are being exhausted, we find ourselves in a worse situation. Even if countries are able to produce empty-world economic growth, economists cannot tell if the value of the increase in GDP is greater than its cost, because the cost of nature’s capital is not included in the computation. What does it mean to say that the world GDP has increased four percent when the cost of nature’s resources are not in the calculation?

Economist Herman Daly put it well when he wrote that the elites who make the decisions “have figured out how to keep the benefits for themselves while ‘sharing’ the cost with the poor, the future, and other species (Ecological Economics, vol. 72, p. 8).

Empty-world economics with its emphasis on spurring economic growth by the accumulation of man-made capital has run its course. Full-world economics is steady-state economics, and it is past time for economists to get to work on a new economics for a full world.”

The Populations Problem

by Herman Daly

Herman DalyThe population problem should be considered from the point of view of all populations — populations of both humans and their artifacts (cars, houses, livestock, cell phones, etc.) — in short, populations of all “dissipative structures” engendered, bred, or built by humans. In other words, the populations of human bodies and of their extensions. Or in yet other words, the populations of all organs that support human life and the enjoyment thereof, both endosomatic (within the skin) and exosomatic (outside the skin) organs.

All of these organs are capital equipment that support our lives. The endosomatic equipment — heart, lungs, kidneys — support our lives quite directly. The exosomatic organs — farms, factories, electric grids, transportation networks — support our lives indirectly. One should also add “natural capital” (e.g., the hydrologic cycle, carbon cycle, etc.) which is exosomatic capital comprised of structures complementary to endosomatic organs, but not made by humans (forests, rivers, soil, atmosphere).

The reason for pluralizing the “population problem” to the populations of all dissipative structures is two-fold. First, all these populations require a metabolic throughput from low-entropy resources extracted from the environment and eventually returned to the environment as high-entropy wastes, encountering both depletion and pollution limits. In a physical sense the final product of the economic activity of converting nature into ourselves and our stuff, and then using up or wearing out what we have made, is waste. Second, what keeps this from being an idiotic activity, grinding up the world into waste, is the fact that all these populations of dissipative structures have the common purpose of supporting the maintenance and enjoyment of life.

What good are endosomatic organs without the support of exosomatic natural capital?

As A. J. Lotka pointed out, ownership of endosomatic organs is equally distributed, while the exosomatic organs are not. Ownership of the latter may be collective or individual, equally or unequally distributed. Control of these external organs may be democratic or dictatorial. Owning one’s own kidneys is not enough to support one’s life if one does not have access to water from rivers, lakes, or rain, either because of scarcity or monopoly ownership of the complementary exosomatic organ. Likewise our lungs are of little value without the complementary natural capital of green plants and atmospheric stocks of oxygen. Therefore all life-supporting organs, including natural capital, form a unity. They have a common function, regardless of whether they are located within the boundary of human skin or outside that boundary. In addition to being united by common purpose, they are also united by their role as dissipative structures. They are all physical structures whose default tendency is to dissipate or fall apart, in accordance with the entropy law.

Our standard of living is roughly measured by the ratio of outside-skin to inside-skin capital — that is, the ratio of human-made artifacts to human bodies, the ratio of one kind of dissipative structure to another kind. Within-skin capital is made and maintained overwhelmingly from renewable resources, while outside-skin capital relies heavily on nonrenewable resources. The rate of evolutionary change of endosomatic organs is exceedingly slow; the rate of change of exosomatic organs has become very rapid. In fact the evolution of human beings is now overwhelmingly centered on exosomatic organs. This evolution is goal-directed, not random, and its driving purpose has become “economic growth,” and that growth has been achieved largely by the depletion of non renewable resources.

Although human evolution is now decidedly purpose-driven we continue to be enthralled by neo-Darwinist aversion to teleology and devotion to random. Economic growth, by promising “more for everyone eventually,” becomes the de facto purpose, the social glue that keeps things from falling apart. What happens when growth becomes uneconomic, increasing costs faster than benefits? How do we know that this is not already the case? If one asks such questions one is told to talk about something else, like space colonies on Mars, or unlimited energy from cold fusion, or geo-engineering, or the wonders of globalization, and to remember that all these glorious purposes require growth now in order to provide still more growth in the future. Growth is good, end of discussion, now shut up!

Let us reconsider in the light of these facts, the idea of demographic transition. By definition this is the transition from a human population maintained by high birth rates equal to high death rates, to one maintained by low birth rates equal to low death rates, and consequently from a population with low life expectancy to one with high life expectancy. Statistically such transitions have been observed as standard of living (ratio of exosomatic to endosomatic capital) increases. Many studies have attempted to explain this fact, and much hope has been invested in it as an automatic cure for overpopulation. “Development is the best contraceptive” is a related slogan, partly based in fact, and partly in wishful thinking.

There are a couple of thoughts I’d like to add to the discussion of demographic transition. The first and most obvious one is that populations of artifacts can undergo an analogous transition from high rates of production and depreciation to low ones. The lower rates will maintain a constant population of longer-lived, more durable artifacts.

Our economy has a growth-oriented focus on maximizing production flows (birth rates of artifacts) that keeps us in the pre-transition mode, giving rise to growing artifact populations, low product lifetimes, high GDP, and high throughput, with consequent environmental destruction. The transition from a high-maintenance throughput to a low one applies to both human and artifact populations independently. From an environmental perspective, lower throughput is desirable in both cases, at least up to some distant limit.

The second thought I would like to add to the discussion of demographic transition is a question: does the human transition, when induced by rising standard of living, as usually assumed, increase or decrease the total load of all dissipative structures on the environment? Specifically, if Indian fertility is to fall to the Swedish level, must Indian per capita possession of artifacts (standard of living) rise to the Swedish level? If so, would this not likely increase the total load of all dissipative structures on the Indian environment, perhaps beyond capacity to sustain the required throughput?

The point of this speculation is to suggest that “solving” the population problem by relying on the demographic transition to lower birth rates could impose a larger burden on the environment rather than the smaller burden that would be the case with direct reduction in fertility. Of course reduction in fertility by automatic correlation with rising standard of living is politically easy, while direct fertility reduction is politically difficult. But what is politically easy may be environmentally destructive.

To put it another way, consider the I = PAT formula. P, population of human bodies, is one set of dissipative structures. A, affluence, or GDP per capita, reflects another set of dissipative structures — cars, buildings, ships, toasters, iPads, cell phones, etc. (not to mention populations of livestock and agricultural plants). In a finite world some populations grow at the expense of others. Cars and humans are now competing for land, water, and sunlight to grow either food or fuel. More nonhuman dissipative structures will at some point force a reduction in other dissipative structures, namely human bodies. This forced demographic transition is less optimistic than the voluntary one induced by chasing a higher standard of living more effectively with fewer dependents. In an empty world we saw the trade-off between artifacts and people as induced by desire for a higher standard of living. In the full world that trade-off seems forced by competition for limited resources.

The usual counter to such thoughts is that we can improve the efficiency by which throughput maintains dissipative structures — technology, T in the formula, measured as throughput per unit of GDP. For example a car that lasts longer and gets better mileage is still a dissipative structure, but with a more efficient metabolism that allows it to live on a lower rate of throughput.

Likewise, human organisms might be genetically redesigned to require less food, air, and water. Indeed smaller people would be the simplest way of increasing metabolic efficiency (measured as number of people maintained by a given resource throughput). To my knowledge no one has yet suggested breeding smaller people as a way to avoid limiting births, but that probably just reflects my ignorance. We have, however, been busy breeding and genetically engineering larger and faster-growing plants and livestock. So far, the latter dissipative structures have been complementary with populations of human bodies, but in a finite and full world, the relationship will soon become competitive.

Indeed, if we think of population as the cumulative number of people ever to live over time, then many artifact populations are already competitive with the human population. That is, more consumption today of terrestrial low entropy in non-vital uses (Cadillacs, rockets, weapons) means less terrestrial low entropy available for capturing solar energy tomorrow (plows, solar collectors, ecosystem regeneration). The solar energy that will still fall on the earth for millions of years after the material structures needed to capture it are dissipated, will be wasted, just like the solar energy that shines on the moon.

There is a limit to how many dissipative structures the ecosphere can sustain — more endosomatic capital must ultimately displace some exosomatic capital and vice versa. Some of our exosomatic capital is critical — for example, that part which can photosynthesize, the green plants. Our endosomatic capital cannot long endure without the critical exosomatic capital of green plants (along with soil and water, and of course sunlight). In sum, demographers’ interest should extend to the populations of all dissipative structures, their metabolic throughputs, and the relations of complementarity and substitutability among them. Economists should analyze the supply, demand, production, and consumption of all these populations within an ecosphere that is finite, non-growing, entropic, and open only to a fixed flow of solar energy. This reflects a paradigm shift from the empty-world vision to the full-world vision — a world full of human-made dissipative structures that both depend upon and displace natural structures. Growth looks very different depending on from which paradigm it is viewed.

Carrying capacity of the ecosystem depends on how many dissipative structures of all kinds have to be carried. Some will say to others, “You can’t have a glass of wine and piece of meat for dinner because I need the grain required by your fine diet to feed my three hungry children.” The answer will be, “You can’t have three children at the expense of my and my one child’s already modest standard of living.” Both have a good point. That conflict will be difficult to resolve, but we are not yet there.

Rather, now some are saying, “You can’t have three houses and fly all over the world twice a year, because I need the resources to feed my eight children.” And the current reply is, “You can’t have eight children at the expense of my small family’s luxurious standard of living.” In the second case neither side elicits much sympathy, and there is great room for compromise to limit both excessive population and per capita consumption. Better to face limits to both human and artifact populations before the terms of the trade-off get too harsh.

Uneconomic Growth Deepens Depression

by Herman Daly

Herman DalyThe US and Western Europe are in a recession threatening to become a depression as bad as that of the 1930s. Therefore we look to Keynesian policies as the cure, namely stimulate consumption and investment—that is, stimulate growth of the economy. It seemed to work in the past, so why not now? Should not ecological economics and steady-state ideas give way to Keynesian growth economics in view of the present crisis?

Certainly not! Why? Because we no longer live in the empty world of the 1930s — we live in a full world. Furthermore, in the 1930s the goal was full employment and growth was the means to it. Nowadays growth itself has become the goal and the means to it are off-shoring of jobs, automation, mergers, union busting, importing cheap labor, and other employment-cutting policies. The former goal of full employment has been sacrificed to the modern ideology of “growth in share holder value.”

Growth has filled the world with us and our products. I was born in 1938, and in my lifetime world population has tripled. That is unprecedented. But even more unprecedented is the growth in populations of artifacts — “our stuff” — cars, houses, livestock, refrigerators, TVs, cell phones, ships, airplanes, etc. These populations of things have vastly more than tripled. The matter-energy embodied in these living and nonliving populations was extracted from the ecosystem. The matter-energy required to maintain and replace these stocks also comes from the ecosystem. The populations or stocks of all these things have in common that they are what physicists call “dissipative structures” — i.e., their natural tendency, thanks to the entropy law, is to fall apart, to die, to dissipate. The dissipated matter-energy returns to the ecosystem as waste, to be reabsorbed by natural cycles or accumulated as pollution. All these dissipative structures exist in the midst of an entropic throughput of matter-energy that both depletes and pollutes the finite ecosphere of which the economy is a wholly contained subsystem. When the subsystem outgrows the regenerative capacity of the parent system then further growth becomes biophysically impossible.

But long before growth becomes impossible it becomes uneconomic — it begins to cost more than it is worth at the margin. We refer to growth in the economy as “economic growth,” — even after such growth has become uneconomic in the more basic sense of increasing illth faster than wealth. That is where we are now, but we are unable to recognize it.

Why this inability? Partly because our national accounting system, GDP, only measures “economic activity,” not true income, much less welfare. Rather than separate costs from benefits and compare them at the margin we just add up all final goods and services, including anti-bads (without subtracting the bads that made the anti-bad necessary). Also depletion of natural capital and natural services are counted as income, as are financial transactions that are nothing but bets on debts, and then further bets on those bets.

Also since no one wants to buy illth, it has no market price and is often ignored. But illth is a joint product with wealth and is everywhere: nuclear wastes, the dead zone in the Gulf of Mexico, gyres of plastic trash in the oceans, the ozone hole, biodiversity loss, climate change from excess carbon in the atmosphere, depleted mines, eroded topsoil, dry wells, exhausting and dangerous labor, exploding debt, etc. Standard economists claim that the solution to poverty is more growth — without ever asking if growth still makes us richer, as it did back when the world was empty and the goal was full employment, rather than growth itself. Or has growth begun to make us poorer in a world that is now too full of us, and all our products, counted or not in GDP?

Does growth now increase illth faster than wealth? This is a threatening question, because if growth has become uneconomic then the solution to poverty becomes sharing now, not growth in the future. Sharing is frequently referred to as “class warfare.” But it is really the alternative to the class warfare that will result from the current uneconomic growth in which the dwindling benefits are privatized to the elite, while the exploding costs are socialized to the poor, the future, and to other species.

Finally, I eagerly submit that even if we limit quantitative physical throughput (growth) it should still be possible to experience qualitative improvement (development) thanks to technological advance and to ethical improvement of our priorities. I think therefore we should urge policies to limit the quantitative growth of throughput, thereby raising resource prices, in order to increase resource efficiency, to force the path of progress from growth to development, from bigger to better, and to stop the present folly of continuing uneconomic growth. A policy of quantitative limits on throughput (cap-auction-trade) will also block the erosion of initial resource savings resulting from efficiency improvements (the rebound effect or Jevons paradox). In addition the auction will raise much revenue and make it possible to tax value added (labor and capital) less because in effect we will have shifted the tax base to resource throughput. Value added is a good, so stop taxing it. Depletion and pollution, the two ends of the throughput, are bads, so tax them. If you are a technological optimist please have the courage of your convictions and join us in advocating policies that give incentive to the resource-saving technologies that you believe are within easy reach. You may be right — I hope you are. Let’s find out. If you turn out to be wrong, there is really no downside, because it was still necessary to limit throughput to avoid uneconomic growth.

A New View of Work

by Christian Williams

Many of us have been raised according to the “Protestant work ethic.” That is to say, we were encouraged to work hard and thus become a successful and productive member of society. But what if this advice is wrong? As the economy reaches and breaches the limits to growth, working long hours causes market failures, giving weight to the idea that governments should intervene to reduce average working hours.

In the “empty world” of the past, hard work was a public good with few negative externalities on society. In today’s “full world,” work has become a common-pool resource, vulnerable to over-exploitation. In the absence of social or cultural norms to take care of this common-pool resource, governmental intervention is the best option for preventing market failure and encouraging an optimal amount of work. Unfortunately, our work ethic is worsening the situation.

Doesn't a shorter work week seem like a good idea?

Technological development over the past few centuries has allowed for a combination of reduced hours of work and increased consumption. Indeed, these are the only options for dealing with higher labor productivity (and labor productivity has consistently risen) while still maintaining high employment rates. But as the economy hits the limits to growth, the option to maintain employment through further increases in consumption becomes unavailable, meaning that work sharing becomes necessary. But OECD statistics reveal that over the past three decades there has been very little reduction in the amount of time people spend at work. Instead, consumption has risen drastically while unemployment has remained unacceptably high. If governments in high-consuming nations shift their focus from economic growth to wider sustainability objectives, they will quickly see that there are many benefits of a shorter work week.[1]

Here are some of those benefits:

  • Energy consumption would decrease, especially energy spent on getting to and from work;
  • Resource consumption would decrease as people trade some of their wages for more time;
  • With extra time, people could make more sustainable lifestyle choices (e.g., bike, walk, exercise, eat well, garden etc);
  • People would have more time for family and friends, less stress and better health;
  • Fewer people would be unemployed, and they could make an easier transition to retirement;
  • There would be more time for democratic participation, education, and exploration of other avenues to personal and community enrichment;
  • A better-rested workforce is likely to be more productive;
  • Both employers and employees could take advantage of more flexible employment circumstances.

Despite these and other potential benefits, we need a stronger case to justify government intervention. And that case begins with the recognition that “free” labor markets are far from free. Employees, even if they are aware of the benefits of working less, are often unable to reduce their working hours. Previous work time reductions have not originated through individual choice, but through strong union influence or state legislation, such as the Ten Hours Act (1847) in the UK or the Fair Labor Standards Act (1938) in the U.S. Juliet Schor and other scholars have suggested that a rising imbalance of power between employers and employees over recent decades has led people to work longer hours than they would otherwise choose. Most workers simply can’t ask their boss for a four-day week.[2] Other analysts have suggested that the power of marketing has led people to spend above their means and then work more to pay their debts. Furthermore, in times of economic crisis, people feel anxious about losing their jobs. Such anxiety can drive them to work harder to protect themselves, resulting in a work intensification that contributes to the tragic “jobless recovery.”

If people will not or cannot choose to work less, what are the implications? Society suffers from three market failures:

  1. We have an overworked workforce, resulting in social costs from broken families to higher healthcare costs.
  2. We have a large, disenfranchised group of people who can no longer find work, a breach of their human right to work (Article 23 of the Universal Declaration of Human Rights).
  3. Long hours contribute to greater production and, in turn, consumption, with a larger ecological burden being placed on future generations and other species.

These failures are the result of a rush to secure a share of a depleting common-pool resource. But as the amount of work becomes increasingly scarce, it is natural that people try to maintain and enhance their share — a “tragedy of the commons” scenario as described by Garrett Hardin. We can’t deal with this tragedy using outdated, empty-world tactics. In the empty world, we responded to technological improvements by increasing consumption. Moving forward, we must either learn to work less and be content with an excess of leisure, or reject the technological innovations that replace human labor — that is, reject the focus on efficiency and labor productivity.

To ensure that we do not contribute to the impending tragedy, we must all aim to work less. This also requires a social overhaul of the work ethic, and a new respect for idleness and leisure. Keynes, writing some eighty years ago, saw that adjusting to a life of leisure was the primary challenge for coming generations (us), as opposed to meeting basic needs as had been the challenge for all of human history. “To those who sweat for their daily bread, leisure is a longed-for sweet — until they get it”.[3] Personally, a shorter work week sounds fine to me.

[1] See for example, the report from the New Economics Foundation in the UK titled 21 Hours.

[2] For an interesting discussion on individual labor supply curves and hypotheses, see David George (2000): “Driven to Spend: Longer Work Hours as a Byproduct of Market Forces” in Working Time: International Trends, Theory and Policy Perspectives, (eds.) Lonnie Golden and Deborah Figart, Routledge, London. George refers to Schor’s book The Overworked American (1991) among others.

[3] Keynes, John M., 1963, “Economic Possibilities for our Grandchildren” in Essays in Persuasion, (first published 1930), W. W. Norton & Co., New York.

Christian Williams recently completed a Master’s in Sustainable Development at Uppsala University (Sweden). His thesis focused on the shorter work week as part of a transition towards a steady state economy, including a case study and political analysis from New Zealand. If you would like an electronic copy of his thesis (with a more comprehensive version of the above argument), please contact him by email.

A Shift in the Burden of Proof

by Herman Daly

Preface for Sustainable Welfare In The Asia-Pacific: Studies Using the Genuine Progress Indicator, by Philip Lawn and Matthew Clarke, 2008

It is no small thing to shift the burden of proof. Yet that is what Lawn and Clarke, and their colleagues, have done in this remarkable study. The presumption in the “empty world” has been that growth in GDP is “economic” in the sense that it increases benefits faster than costs, as well as in the sense that this thing we call the economy is getting physically bigger. It was not previously considered necessary to distinguish the two meanings of “economic” growth. Lawn and Clarke have shown that in a large part of today’s “full world” growth in GDP often costs more than it is worth at the margin, and thus should be called “uneconomic” growth. (In this book’s language uneconomic growth occurs after a threshold at which the Genuine Progress Indicator (GPI) levels off or declines while GDP keeps on increasing). Advocates of GDP growth, who generally point to Asia as their best success story, heretofore were never asked to prove that such growth was in truth economic. Now, after the theoretical demonstration that uneconomic growth in the macroeconomy is quite possible, followed by the empirical demonstration that it is in fact often the case, the burden of proof in policy arguments must shift from the shoulders of growth critics to the shoulders of growth advocates. This is quite an accomplishment and needs to be strongly claimed and emphasized.

For many years I have worked with ideas that are used in this book — steady state economy, Index of Sustainable Economic Welfare, contradictions between comparative advantage and international capital mobility, and others. It is a pleasure to see these ideas not only applied, but sharpened and polished as well. Although I have very little knowledge of Asia, I cannot resist recounting one relevant episode out of my limited experience. Around 1992 I was part of a World Bank mission to Thailand. This was at the end of a decade in which Thailand’s GDP had doubled. Now doubling is a big change, and ten years was within the easy memory of most adult Thais. In conversations I began to ask people how much their lives had been improved over that decade. Many said that life had been better ten years ago. I suggested that maybe life always feels better when you are ten years younger. They assured me that they had corrected for that! Some thought things were a little better, but the suggestion that life might be twice as good was considered laughable by all. This experience led me to suggest to my bosses at the World Bank that we finance a study — a scientific survey asking people how much life had improved over the decade in which GDP doubled, and to give the main reasons for their answer. History had given us a unique experiment, and we should take advantage of it and learn something. My proposal was turned down, I think because the World Bank, the prime pusher of growth, was worried that it might learn an “inconvenient truth.” In 1992 the burden of proof was on me. Now, with Lawn and Clarke to appeal to I think the burden of proof will be on the World Bank.

The study I had proposed to the World Bank was to look at what is now called “self-evaluated happiness,” whereas Lawn and Clarke look at a more objective index of welfare, the GPI. Studies of self-evaluated happiness have now come into fashion, and generally support the same conclusions that Lawn and Clarke reach on the basis of more objective data. The finding is that self-evaluated happiness rises with absolute income up to a threshold beyond which increases in absolute income do not increase happiness. The emphasis in these studies is on psychological phenomena of satiation and relative position with its self-canceling effects, rather than biophysical phenomena of rising external costs imposed by a full world. The two approaches are not in conflict but in fact are quite complementary. The fact that they yield broadly similar conclusions regarding the futility of growth to increase welfare beyond a threshold is a devastatingly important point worthy of intense study and reflection. But beware; we may have to conclude that growth is becoming uneconomic and that we need a new principle and new policies by which to organize our separate national commonwealths and their international federation. That is a very big problem. Thanks to Lawn and Clarke for suggesting many specific policies rooted in a clear analysis of that very big problem.