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Eight Fallacies about Growth

by Herman Daly

Herman DalyOne thing the Democrats and Republicans will agree on in the current U.S. presidential campaign is that economic growth is our number one goal and is the basic solution to all problems. The idea that growth could conceivably cost more than it is worth at the margin, and therefore become uneconomic in the literal sense, will not be considered. But, aside from political denial, why do people (frequently economists) not understand that continuous growth of the economy (measured by either real GDP or resource throughput) could in theory, and probably has in fact, become uneconomic? What is it that confuses them?

Here are eight likely reasons for confusion.

1. One can nearly always find something whose growth would be both desirable and possible. For example, we need more bicycles and can produce more bicycles. More bicycles means growth. Therefore growth is both good and possible. QED.

However, this confuses aggregate growth with reallocation. Aggregate growth refers to growth in everything: bicycles, cars, houses, ships, cell phones, and so on. Aggregate growth is growth in scale of the economy, the size of real GDP, which is a value-based index of aggregate production and consequently of the total resource throughput required by that production. In the simplest case of aggregate growth everything produced goes up by the same percentage. Reallocation, by contrast, means that some things go up while others go down, the freed-up resources from the latter are transferred to the former. The fact that reallocation remains possible and desirable does not mean that aggregate growth is possible and desirable. The fact that you can reallocate the weight in a boat more efficiently does not mean that there is no Plimsoll Line. Too much weight will sink a boat even if it is optimally allocated. Efficient reallocation is good; the problem is aggregate growth.

Reallocation of production away from more resource-intensive goods to less resource-intensive goods (“decoupling”) is possible to some degree and often advocated, but is limited by two basic facts. First, the economy grows as an integrated whole, not as a loose aggregate of independently changeable sectors. A glance at the input-output table of an economy makes it clear that to increase output of any sector requires an increase in all the inputs to that sector from other sectors, and then increases of the inputs to those inputs, etc. Second, in addition to the input-output or supply interdependence of sectors there are demand constraints — people are just not interested in information services unless they first have enough food and shelter. So trying to cut the resource-intensive food and shelter part of GDP to reallocate to less resource-intensive information services in the name of decoupling GDP from resources, will simply result in a shortage of food and shelter, and a glut of information services.

Aggregate growth was no problem back when the world was relatively empty. But now the world is full, and aggregate growth likely costs more than it is worth, even though more bicycles (and less of something else) might still be possible and desirable. That should not be too hard to understand.

2. Another confusion is to argue that since GDP is measured in value terms, it is therefore not subject to physical limits. This is another argument given for easy “decoupling” of GDP from resource throughput. But growth refers to real GDP, which eliminates price level changes. Real GDP is a value-based index of aggregate quantitative change in real physical production. It is the best index we have of total resource throughput. The unit of measure of real GDP is not dollars, but rather “dollar’s worth.” A dollar’s worth of gasoline is a physical quantity, currently about one-fourth of a gallon. The annual aggregate of all such dollar’s worth amounts of all final commodities is real GDP, and even though not expressible in a simple physical unit, it remains a physical aggregate and subject to physical limits. The price level and nominal GDP might grow forever (inflation), but not real GDP, and the latter is the accepted measure of aggregate growth. Most people can grasp this, and do not conceive of real GDP as trillions of dollar bills, or as ethereal, abstract, psychic, aggregated utility.

3. A more subtle confusion results from looking at past totals rather than present margins. Just look at the huge net benefits of past growth! How can anyone oppose growth when it has led to such enormous benefits? Well, there is a good reason: the net benefits of past growth reach a maximum precisely at the point where the rising marginal costs of growth equal the declining marginal benefits — that is to say, at precisely the point at which further growth ceases to be economic and becomes uneconomic! Before that point wealth grew faster than illth; beyond that point illth grows faster than wealth, making us poorer, not richer. No one is against being richer. No one denies that growth used to make us richer. The question is, does growth any longer make us richer, or is it now making us poorer?

To understand the question requires that we recognize that real GDP has a cost, that illth is a negative joint product with wealth. Examples of illth are everywhere and include: nuclear wastes, climate change from excess carbon in the atmosphere, biodiversity loss, depleted mines, eroded topsoil, dry wells and rivers, the dead zone in the Gulf of Mexico, gyres of plastic trash in the oceans, the ozone hole, exhausting and dangerous labor, and the exploding un-repayable debt from trying to push growth in the symbolic financial sector beyond what is possible in the real sector. Since no one buys these annually produced bads (that accumulate into illth), they have no market prices, and since their implicit negative shadow values are hard to estimate in a way comparable to positive market prices, they are usually ignored, or mentioned and quickly forgotten.

The logic of maximization embodied in equating marginal cost with marginal benefit requires a moment’s thought for the average citizen to understand clearly, but surely it is familiar to anyone who has taken Econ 101.

4. Even if it is theoretically possible that the marginal cost of growth has become greater than the marginal benefit, there is no empirical evidence that this is so.  On the contrary, there is plenty of empirical evidence for anyone who has not been anesthetized by the official party line of Madison Avenue and Wall Street. As for empirical evidence of the statistical type, there are two independent sources that give the same basic answer. First are the objective measures that separate GDP sub-accounts into costs and benefits and then subtract the costs from GDP to approximate net benefits of growth. The Index of Sustainable Economic Welfare (ISEW) and its later modifications into the General Progress Indicator (GPI) both indicate that, for the US and some other wealthy countries, GDP and GPI were positively correlated up until around 1980, after which GPI leveled off and GDP continued to rise. In other words, increasing throughput as measured by real GDP no longer increased welfare as measured by GPI. A similar disconnect is confirmed using the different measure of self-evaluated happiness. Self-reported happiness increases with per capita GDP up to a level of around $20,000 per year, and then stops rising. The interpretation given is that while absolute real income is important for happiness up to some sufficient point, beyond that point happiness is overwhelmingly a function of the quality of relationships by which our very identity is constituted. Friendships, marriage and family, social stability, trust, fairness, etc. — not per capita GDP — are the overwhelming determinants of happiness at the present margin, especially in high-income countries. If we sacrifice friendships, social stability, family time, environmental services, and trust for the sake of labor mobility, a second job, and quarterly financial returns, we often reduce happiness while increasing GDP. Relative income gains may still increase individual happiness even when increases in absolute income no longer do, but aggregate growth is powerless to increase everyone’s relative income because we cannot all be above average. Beyond some sufficiency, growth in GDP no longer increases either self-evaluated happiness or measured economic welfare, but it continues to increase costs of depletion, pollution, congestion, stress, etc. Why do most economists resist the very idea that we might have reached this point? Why do they resist measuring the costs of growth, and then claim that “there is no empirical evidence” for what is common experience? Read on.

5. Many believe that the way we measure GDP automatically makes its growth a trustworthy guide to economic policy.  To be counted in GDP, there must be a market transaction, and that implies a willing buyer and seller, neither of whom would have made the transaction if it did not make them better off in their own judgment. Ergo, growth in GDP must be good or it would not have happened. The problem here is that there are many third parties who are affected by many transactions, but did not agree to them. These external costs (or sometimes benefits) are not counted in GDP. Who are these third parties? The public in general, but more specifically the poor who lack the money to express their preferences in the market, future generations who cannot bid in present markets, and other species who have no influence on markets at all.

In addition, GDP, the largest component of which is National Income, counts consumption of natural capital as income. Counting capital consumption as income is the cardinal sin of accounting. Cut down the entire forest this year and sell it, and the entire amount is treated as this year’s income. Pump all the petroleum and sell it, and add that to this year’s income. But income in economics is by definition the maximum amount that a community can produce and consume this year, and still be able to produce and consume the same amount next year. In other words income is the maximum consumption that still leaves intact the capacity to produce the same amount next year. Only the sustainable yield of forests, fisheries, croplands, and livestock herds is this year’s income — the rest is capital needed to reproduce the same yield next year. Consuming capital means reduced production and consumption in the future. Income is by definition sustainable; capital consumption is not. The whole historical reason for income accounting is to avoid impoverishment by inadvertent consumption of capital. By contrast our national accounting tends to encourage capital consumption (at least consumption of natural capital), first by counting it in GDP, and then claiming that whatever increases GDP is good!

As already noted we fail to subtract negative by-products (external costs) from GDP on the grounds that they have no market price since obviously no one wants to buy bads. But people do buy anti-bads, and we count those expenditures. For example, the costs of pollution (a bad) are not subtracted, but the expenditures on pollution clean-up (an anti-bad) are added. This is asymmetric accounting — adding anti-bads without having subtracted the bads that made the anti-bads necessary in the first place. The more bads, the more anti-bads, and the greater is GDP — wheel spinning registered as forward motion.

There are other problems with GDP but these should be enough to refute the mistaken idea that if something is not a net benefit it would not have been counted in GDP, so therefore GDP growth must always be good. Lots of people have for a long time been making these criticisms of GDP. They have not been refuted — just ignored!

6. Knowledge is the ultimate resource and since knowledge growth is infinite it can fuel economic growth without limit.  I am eager for knowledge to substitute physical resources to the extent possible, and consequently advocate both taxes to make resources expensive and patent reform to make knowledge cheap. But if I am hungry I want real food on the plate, not the knowledge of a thousand recipes on the Internet. Furthermore, the basic renewability of ignorance makes me doubt that knowledge can save the growth economy. Ignorance is renewable mainly because ignorant babies replace learned elders every generation. In addition, vast amounts of recorded knowledge are destroyed by fires, floods, and bookworms. Modern digital storage does not seem to be immune to these teeth of time, or to that new bookworm, the computer virus. To be effective in the world, knowledge must exist in someone’s mind (not just in the library or on the Internet) — otherwise it is inert. And even when knowledge increases, it does not grow exponentially like money in the bank. Some old knowledge is disproved or cancelled out by new knowledge, and some new knowledge is discovery of new biophysical or social limits to growth.

New knowledge must always be something of a surprise — if we could predict its content then we would have to know it already, and it would not really be new. Contrary to common expectation, new knowledge is not always a pleasant surprise for the growth economy — frequently it is bad news. For example, climate change from greenhouse gases was recently new knowledge, as was discovery of the ozone hole. How can one appeal to new knowledge as the panacea when the content of new knowledge must of necessity be a surprise? Of course we may get lucky with new knowledge, but should we borrow against that uncertainty? Why not count the chickens after they hatch?

7. Without growth we are condemned to unemployment. The Full Employment Act of 1946 declared full employment to be a major goal of U.S. policy. Economic growth was then seen as the means to attain full employment. Today that relation has been inverted — economic growth has become the end.  If the means to attain that end — automation, off-shoring, excessive immigration — result in unemployment, well that is the price “we” just have to pay for the supreme goal of growth. If we really want full employment we must reverse this inversion of ends and means. We can serve the goal of full employment by restricting automation, off-shoring, and immigration work permits to periods of true domestic labor shortage as indicated by high and rising wages. Real wages have been falling for decades, yet our corporations, hungry for cheaper labor, keep bleating about a labor shortage. They mean a shortage of cheap labor in the service of growing profits. Actually a labor shortage in a capitalist economy with 80% of the population earning wages is not a bad thing. How else will wages and standard of living for that 80% ever increase unless there is a shortage of labor? What the corporations really want is a surplus of labor, and falling wages. With surplus labor wages cannot rise and therefore all the gains from productivity increases will go to profit, not wages. Hence the elitist support for uncontrolled automation, off-shoring, and immigration.

8. We live in a globalized economy and have no choice but to compete in the global growth race. Not so! Globalization was a policy choice of our elites, not an imposed necessity. Free trade agreements had to be negotiated. Who negotiated and signed the treaties? Who has pushed for free capital mobility and signed on to the World Trade Organization? Who wants to enforce trade-related intellectual property rights with trade sanctions? The Bretton Woods system was a major achievement aimed at facilitating international trade after WWII. It fostered trade for mutual advantage among separate countries. Free capital mobility and global integration were not part of the deal. That came with the WTO and the effective abandonment by the World Bank and IMF of their Bretton Woods charter. Globalization is the engineered integration of many formerly relatively independent national economies into a single tightly bound global economy organized around absolute, not comparative, advantage. Once a country has been sold on free trade and free capital mobility it has effectively been integrated into the global economy and is no longer free not to specialize and trade. Yet all of the theorems in economics about the gains from trade assume that trade is voluntary. How can trade be voluntary if you are so specialized as to be no longer free not to trade? Countries can no longer account for social and environmental costs and internalize them in their prices unless all other countries do so, and to the same degree. To integrate the global omelet you must disintegrate the national eggs. While nations have many sins to atone for, they remain the main locus of community and policy-making authority. It will not do to disintegrate them in the name of abstract “globalism,” even though we certainly require some global federation of national communities. But when nations disintegrate there will be nothing left to federate in the interest of legitimately global purposes. “Globalization” (national disintegration) was an actively pursued policy, not an inertial force of nature. It was done to increase the power and growth of transnational corporations by moving them out from under the authority of nation states and into a non-existent “global community.” It can be undone, as is currently being contemplated by some in the European Union, often heralded as the forerunner of more inclusive globalization.

If the growth boosters will make a sincere effort to overcome these eight fallacies, then maybe we can have a productive dialogue about whether or not what used to be economic growth has now become uneconomic growth, and what to do about it. Until these eight fallacies have been addressed, it is probably not worth extending the list. It is too much to hope that the issue of uneconomic growth will make it into the 2012 election, but maybe 2016, or 2020, …or sometime? One can hope. But hope must embrace not just a better understanding regarding these confusions, but also more love and care for our fellow humans, and for all of Creation. Our decision-making elites may tacitly understand that growth has become uneconomic. But they have also figured out how to keep the dwindling extra benefits for themselves, while “sharing” the exploding extra costs with the poor, the future, and other species. The elite-owned media, the corporate-funded think tanks, the kept economists of high academia, and the World Bank — not to mention GoldSacks and Wall Street — all sing hymns to growth in harmony with class interest and greed. The public is bamboozled by technical obfuscation, and by the false promise that, thanks to growth, they too will one day be rich. Intellectual confusion is real, but moral corruption fogs the discussion even more.

Renewable Ignorance

by Herman Daly

Herman DalyWe are all born pig-ignorant. Upon having accumulated a lifetime of knowledge we all promptly die. Ignorant babies replace learned elders. Knowledge is a depleting resource; ignorance is renewable. Yes, libraries and data banks grow, but knowledge finally has to exist in the minds of living people to be effective and evolve — unread books, unseen videos, and un-accessed hard drives are inert.

Like Sisyphus we push the rock up the hill only to have it roll back down again. Progress is not completely illusory. However, it is 3 steps up followed by 2.5 steps backward. Successive generations repeat earlier mistakes. They also invent new ones. Any solution to a given mistake is usually forgotten within 2 or 3 generations and we have to learn it again. But it is not all bad — after all, babies are delightful and happy while old people are grumpy — ignorance is bliss. Life consists of more than knowledge. Life expectancy has increased, so the old know more when they die, leaving the babies with still more to learn.

A massive transfer of knowledge each generation is an unavoidable necessity. This transfer is not automatic. It requires two decisions. The old must decide what knowledge is worth their effort to teach, and the young must decide what is worth their effort to learn. Some knowledge passes both filters and becomes the basis for guiding the future and for discovering new knowledge. Other knowledge fails to pass one or both filters and is lost. Just as the world is always only one failed harvest away from mass hunger, so it is always only one failed generational transfer away from mass ignorance.

What do we know about these two generational knowledge filters? What do they let pass and what do they filter out? I really don’t know the answer, but I have one speculation, taken from E. F. Schumacher’s reflections on Thomas Aquinas and Rene Descartes. Aquinas said that even uncertain knowledge of the highest things is worth more than certain knowledge of the lowest things. Descartes believed otherwise, that only knowledge that had the certainty of geometry was worth retaining, and uncertain knowledge should be abandoned even if it pertained to higher things. These two filters have very different selection biases. In their extreme forms they represent opposite errors of judgment about what knowledge to keep and what to jettison.

Which error are we most likely to commit today? I believe we overemphasize Descartes and pay too little attention to Aquinas. I take Aquinas’s “higher things” to mean purposes, knowledge about right purposes. Lower things I take to refer to techniques — how to efficiently do something, assuming it should be done in the first place. We have overdeveloped our relatively certain knowledge of technique, and left underdeveloped our less certain but more important knowledge of right purpose. The old seem more interested in teaching technique than purpose, and the young obligingly seem more interested in learning technique than purpose. So we develop more and more power, subject to less and less purpose. As physicist Steven Weinberg says, the more science makes the universe comprehensible and subject to our control, the more it also seems to render it pointless, and the less our control is guided by purpose.

These thoughts remind me of a public debate I participated in at LSU in the 1970s regarding the construction of the River Bend Nuclear Power Plant near Baton Rouge. I presented economic and safety reasons for believing that the plant should not be built, that there were cheaper and safer alternative sources of electricity, etc. After my presentation a nuclear engineering consultant from MIT made his rebuttal on behalf of Gulf States Utilities. It consisted entirely of presenting a scale model of the reactor core and explaining how it worked. He never replied to any of my arguments or said a word about why the reactor should be built. But his exposition of technique easily won the public debate. Afterwards everyone crowded around his model pointing to this and that, asking how it worked. “How to” questions of technique totally displaced “what for” questions of purpose. Maybe I needed a scale model meltdown of a reactor core! Maybe I needed a course in public relations. I might as well have been whistling Dixie.

Also I am reminded of a conversation with a friend who was the film curator for the Library of Congress. He told me that digital recording techniques were now so advanced and cheap that the Library would soon be recording and preserving everything that appeared on TV, or YouTube, or the radio, or Twitter, etc. Historians and scholars could then decide what was important and valuable. Librarians would avoid this difficult qualitative decision, and at the same time feel good about themselves for not imposing their value judgments on future historians. While I understand this point of view I cannot share it because it seems to me yet another example of “how to” questions displacing “what for” questions — a displacement likely to be continued by the “value–free” future scholars for whose benefit this almost infinite attic of junk is to be saved.

Knowledge is offered as a panacea these days. Young people are urged to go deeply into debt to “get a degree,” and are assured that the growth economy will allow them to pay it back with interest and still come out ahead. Many have been disappointed. As one who has spent over forty years in universities I am doubtful about this exaltation of knowledge, even though in arguing for a steady-state economy I have appealed to physical limits, not knowledge limits, leaving open the question of how much qualitative development could be supported within a biophysical steady state without quantitative growth. Also the “knowledge limits” I have appealed to are themselves knowledge — knowledge of physical limits, mainly the laws of thermodynamics, rather than any inherent limits to knowledge itself.

Although I am eager for knowledge to substitute physical growth to the extent possible, the basic renewability of ignorance makes me doubt that knowledge can save the growth economy. Furthermore, knowledge, even when it increases, does not grow exponentially like money in the bank. Some old knowledge is disproved or cancelled out by new knowledge, and some new knowledge is discovery of new biophysical or social limits to growth. New knowledge must always be something of a surprise — if we could predict its content then we would have to know it already and it would not really be new. Contrary to common expectation, new knowledge is not always a pleasant surprise for the growth economy — frequently it is bad news. For example, climate change from greenhouse gasses was recently new knowledge, as was discovery of the ozone hole.

One thing I have learned about universities is that much of what is taught in them today is based on the labor theory of value — “It was hard for me to learn this, so it must be worth teaching it to you.” This is a poor generational filter, and is even found in economics, which of all disciplines should know better! Also, much abandoned knowledge should have made the cut but did not. Indeed the whole field of history of economic thought has been cut from the curriculum to make room for more econometrics — the art of pretending to measure ephemeral and tenuous correlations among ill-defined variables in a world where the relationships to be measured change faster than the data for estimating them accumulates. The classical economists’ concept of the stationary state economy did not totally disappear, but almost.

Is just trying to save everything a solution? No. Do I have a solution? No. So I will stop here and simply ask that we all, young and old, pause, and calmly consider the proper balance between the “what for” and the “how to” questions as filters for the generational transfer of knowledge. Let’s help the babies deal better with the perennial problem of renewable ignorance.

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.