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A Not-So-Nobel Prize for Growth Economists

William Nordhaus shaping vulnerable minds in his Yale classroom – Oct. 8, 2018.  (Photo credit: Yale/ ©Mara Lavitt)

by Brian Czech

How ironic for the Washington Post to opine “Earth may have no tomorrow” and, two pages later, offer up the mini-bios of William Nordhaus and Paul Romer, described as Nobel Prize winners.

Without more rigorous news coverage, few indeed will know that Nordhaus and Romer are epitomes of neoclassical economics, that 20th century occupation isolated from the realities of natural science. Nordhaus and Romer may deserve their prizes for economic modeling, but each gets an F in advanced sustainability.

Nordhaus won his prize (actually the “Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel”— not the Nobel Prize per se) for his mastery of mathematical modeling. He applied his skills to carbon taxes for lowering greenhouse gas emissions. All along he prescribed economic growth – the key driver in greenhouse gas emissions—as the way to afford such taxes!

In 1991 Nordhaus uttered one of the most iconic sentences in the history of unsustainability: “Agriculture, the part of the economy that is sensitive to climate change, accounts for just 3% of national output. That means that there is no way to get a very large effect on the US economy” (Science, September 14, 1991, p. 1206).  Think about that. He must have set a graveyard’s worth of classical economists (Adam Smith, David Ricardo, John Stuart Mill…) to rolling. They’d be rolling in laughter if the folly of Nordhaus wasn’t so dangerous.

No follow-up should be needed to expose the ludicrous nature of Nordhaus’s statement, but just in case: Agriculture is the very foundation of the economy. No agriculture, no anything else. Think about it. Any hit on agriculture—whether from climate change, bad luck, or stupid policies—has a magnified effect on the entire, integrated economy. Nordhaus’s “3%” statement was a classic case of ivory-tower cluelessness.

Too many trees for seeing the forest?

Romer, meanwhile, deserves some credit for his elegant theory of “endogenous technological change,” which took the work of Robert Solow (the father of economic growth theory) to the next level by describing in nuanced detail how R&D leads to technological progress. That said, there has never been a bigger forest missed for so many trees. For him, all that mattered was capital and labor; he said nothing about land, natural resources, or the environment.

Some readers may recall Julian Simon, the ultimate Pollyanna who claimed in the 1980s (and I paraphrase after thoroughly reviewing his 813 page Ultimate Resource II during my post-doc studies), “Sure, there are environmental problems caused by growth, but the more people we have, the more brains we have to solve the problems. Therefore, the more people we have the better, without limit forever.” Romer’s work amounted to a highly nuanced repetition of Simon’s self-christened “grand theory.”

Romer said in a nutshell: We have capital and labor. Part of the labor force is devoted to research and development (R&D). As limits arise, we get over them with more R&D. So we need ever more people, with ever more devoted to R&D, to keep raising the bar for GDP.

For Romer, it was as if ideas alone could overcome water shortages, biodiversity loss, mineral depletion, soil erosion, pollution, and climate change. As if ideas could be perpetually borne out of human minds struggling in a degrading environment, a warming climate, and an imperiled agricultural base (not to mention a crowded, noisy, and stressed out society). Romer was like a cook thinking up recipes with no idea where the ingredients would come from.

A generation and then some of economists and business students have been led to the exceedingly dangerous myth that there is no limit to either population or economic growth. Nordhaus and Romer have done as much as anyone to lead them into such a fallacy. Yet politicians and publics heed their advice, while the media regurgitates their fallacious notions.

Does Earth have “no tomorrow,” as the Washington Post wondered? One thing is for sure: Any hope for a happy tomorrow on Earth means rejecting the neoclassical economics of today. Even when such economics wins the “Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel.”

 


The Guardian and Monbiot versus Forbes and Worstall

Dalyby Herman Daly

In his Guardian column, criticizing growth as “The Insatiable God,” George Monbiot writes:

Is it not also time for a government commission on post-growth economics? Drawing on the work of thinkers like Herman Daly, Tim Jackson, Peter Victor, Kate Raworth, Rob Dietz and Dan O’Neill, it would investigate the possibility of moving towards a steady state economy: one that seeks distribution rather than blind expansion; that does not demand infinite growth on a finite planet…

It is no surprise that we at CASSE strongly agree with Monbiot. Nor does it come as a surprise that a columnist for Forbes, Tim Worstall, would disagree. What is surprising is that Worstall uses me in support of his position (with which I disagree) and against Monbiot (with whom I agree). How does he manage such a reversal? By conflating growth (quantitative physical increase) with development (qualitative improvement), and claiming that 80% of GDP increase is due to qualitative “growth” (total factor productivity), and is therefore independent of increase in physical resource use–when in reality the “total” factor productivity increase in question is mainly caused by an increase in physical resource throughput. This requires further explanation.

In a previous article, also criticizing Monbiot, Worstall states his position more completely, as quoted below, [my brackets inserted].

Value add [added] is economic growth, not more stuff. And we can take this insight to an extreme as well, that extreme being the steady state economy proposed by Herman Daly. In this world resources are only abstracted from the environment if this can be done sustainably. And we recycle everything of course [not energy or highly dispersed materials]. So, in such a world can we still have economic growth? We have no more access to more stuff to make stuff out of: so is growth still possible? Yes, of course it is. For we can still discover new methods of adding value to those resources that we do have available to us through our recycling. Daly calls this qualitative growth rather than the quantitative growth that we cannot have. [Actually I speak of “qualitative improvement” to emphasize that technology is not a cardinally measurable quantity that can properly be said to grow]. But there’s absolutely no difference at all between this and the more conventional economic descriptions of growth. Qualitative growth is akin to growth through an increase in total factor productivity as opposed to growth via the use of more inputs [only remember that “more inputs” should include natural resources, but does not]. And Bob Solow once pointed out that 80% of the growth in the market economies in the 20th century came from tfp (total factor productivity) growth, not the consumption of more resources. We’re just using different words to describe exactly the same thing here [not really].

Now if this were true we could keep resource throughput constant, avoiding most of the increasing environmental costs of growth, and still have 80% of historical GDP growth. Once matter-energy throughput is stabilized at an ecologically sustainable level we could presumably have significant GDP growth forever with minimal environmental costs, thanks to increasing total factor productivity. I would be happy if that were true, but I am pretty sure that it is not. Nevertheless, if Forbes believes it, maybe they would then endorse a policy of limiting resource throughput (cap-auction-trade or carbon tax), and be content with still significant GDP growth based only on total factor productivity increase? Don’t hold your breath. Worstall explicitly discounts any notion of resource scarcity, so why limit throughput? But, just for good measure, he argues here that even with resource scarcity, technology can, by itself, provide most of our accustomed growth, as it supposedly has in the past.

Worstall’s source for the 80% figure is the “Solow Residual,” which is commonly misinterpreted as a measure of total factor productivity. As calculated, it is a measure of “two-factor” productivity, the two factors being labor and capital. The Cobb-Douglas production function that underlies this calculation omits natural resources, the classical third factor. This means that it cannot possibly be an accurate analytical representation of production. It is like a recipe that includes the cook and the oven, but omits the list of ingredients.

Photo Credit: Claire.Ly

As natural resources becomes increasingly scarce, can we afford to ignore their contributions to increases in production? Photo Credit: Claire.Ly

Value added has to be added to something, namely natural resources, by something, namely labor and capital. The cook and the oven add value to the ingredients, but nothing happens without the ingredients. Our empty-world economic accounting attributes all value to labor and capital, and treats natural resources in situ as superabundant free gifts of nature. But in today’s full world, resources are not only scarce but have become the limiting factor. Leaving the limiting factor out of the analysis makes the Cobb-Douglas production function not only incomplete, but also actively misleading.

Nevertheless, Worstall’s 80% figure comes from respected economists who have used the Cobb-Douglas production function in a statistical correlation–an exercise to see how much of increased production can be statistically explained by increases in labor and capital. The residual, what is not explained by labor and capital increase, is attributable to all causes other than labor and capital, including, for example, technology improvement and increased material and energy throughput (natural resource use).

A large residual indicates weak explanatory power of the theory being tested–in this case the Cobb-Douglas theory that production increase is due only to capital and labor increase. But instead of being embarrassed by a large unexplained residual, some economists were eager to “explain” it as an indirect measure of technological progress, as a measure of improvement in total factor productivity. But is technology the only causative factor reflected in the residual? No, there are surely others, most especially the omitted yet rapidly increasing flow of natural resources, of energy and concentrated minerals. The contribution of energy and materials from nature to production is also part of the residual, likely dwarfing technological improvement. Yet the entire residual is attributed to technology, to total factor productivity, or more accurately “two-factor” productivity, in the absence of natural resources, the classical third factor.

As the natural resource flow greatly increases, and capital and labor transform that growing resource flow into more products, then of course the measured productivity of capital and labor increases. This increased “total” factor productivity, due mostly to increase in the ignored factor of natural resources, is then appealed to as evidence of the unimportance of natural resources, given the “empirical finding” that total factor productivity improvement (technology) “explains” so much of the observed increase in production. This reasoning is clearly specious. It is the increased resource use that explains the increase in total factor productivity (i.e. two-factor productivity), which cannot then be used as a reason to discount the importance of its own cause, namely an increased flow of natural resources. Indeed, the unimportance of natural resources could not possibly be an empirical finding of any statistical analysis based on the Cobb-Douglas production function, because that function assumes the unimportance of natural resources from the beginning by omitting them as a factor of production. This is a big confusion and Worstall is not the only one misled by it.

In conclusion, I think the Guardian and Monbiot’s position is not in the least weakened by the criticism from Forbes and Worstall, but that reliance on the Cobb-Douglas production function should certainly be weakened.

Integrating Ecology and Economics

by Herman Daly

Herman DalyAttempts to integrate economics and ecology have been based on one of three strategies: (1) economic imperialism; (2) ecological reductionism; (3) steady-state subsystem. Each strategy begins with the picture of the economy as a subsystem of the finite ecosystem. Thus all three recognize limits to growth. The differences concern the way they each treat the boundary between the economy and the rest of the ecosystem, and that has large policy consequences for how we accommodate to limits.

Ecology & Economy

 

Economic Imperialism

Economic imperialism seeks to expand the boundary of the economic subsystem until it encompasses the entire ecosphere. The goal is one system, the macro-economy as the whole. This is to be accomplished by complete internalization of all external costs and benefits into prices. Those myriad aspects of the biosphere not customarily traded in markets are treated as if they were by imputation of “shadow prices”–the economist’s best estimate of what the price of the function or thing would be if it were traded in a competitive market. Everything in the ecosphere is theoretically rendered comparable in terms of its priced ability to help or hinder individuals in satisfying their wants. Implicitly, the end pursued is ever-greater levels of consumption, and the way to effectively achieve this end is growth in marketed goods and services.

Economic imperialism is basically the neoclassical approach. Subjective individual preferences, however whimsical, uninstructed, or ill-considered, are taken as the ultimate source of value. Since subjective wants are thought to be infinite in the aggregate, as well as sovereign, there is a tendency for the scale of activities devoted to satisfying them to expand. The expansion is considered legitimate as long as “all costs are internalized.”

But many of the costs of growth we have experienced have come as surprises. We cannot internalize them if we cannot first imagine and foresee them. Furthermore, even after some external costs have become visible to all (e.g., climate change), internalization has been very slow and partial. Profit maximizing firms have an incentive to externalize costs. As long as the evolutionary fitness of the environment to support life is not perceived by economists as a value, it is likely to be destroyed in the imperialistic quest to make every molecule in creation pay its way according to the pecuniary rules of present value maximization.

Ironically, this imperialism sacrifices the main virtue of free market economists, namely their antipathy to the arrogance of central planners. Putting a price tag on everything in the ecosphere requires information and calculating abilities vastly beyond any imagined capacity.

There is no doubt that once the scale of the economy has grown to the point that formerly free environmental goods and services become scarce, it is better that they should have a positive price reflecting their scarcity than to continue to be priced at zero. But there remains the prior question: Are we better off at the new larger scale with formerly free goods correctly priced, or at the old smaller scale with free goods also correctly priced (at zero)? In both cases, the prices are right. This is the suppressed question of optimal scale, not answered, indeed not even asked, by neoclassical economics.

Ecological Reductionism

Ecological reductionism begins with the true insight that humans and markets are not exempt from the laws of nature. It then proceeds to the false inference that human action is totally explainable by, reducible to, the laws of nature. It seeks to explain whatever happens within the economic subsystem by exactly the same natural laws that it applies to the rest of the ecosystem. It subsumes the economic subsystem indifferently into the natural system, erasing its boundary. Taken to the extreme, in this view all is explained by a materialist deterministic system that has no room for purpose or will. This is a sensible vision from which to study the ecology of a coral reef. But if one adopts it for studying the human economy, one is stuck from the beginning with the important policy implication that policy makes no difference.

The reductionist vision frequently appeals to the Maximum Entropy Production Principle (often capitalized to elevate it to the same level as the Second Law of Thermodynamics). It says that whatever competing system maximizes entropy production will be competitively selected. Indeed one can appreciate the logic of this principle. The system that can monopolize and most rapidly degrade available sources of low entropy will displace competing systems by depriving them of their energy source. This insight should be taken seriously as a natural tendency. But when we apply it to the human economy it gives us an absurd policy implication. Namely, that the economy maximizes entropy production. Since maximizing entropy is the same as maximizing waste, that hardly offers a sensible rule for either understanding or directing the human economy!

The maximum entropy principle is more like the tragedy of open access commons than like the Second Law of Thermodynamics. That is, it is a trap–a competitive race to the bottom in the absence of collective action. The Second Law by contrast is an inevitability that we must recognize and adapt to; it has no known exceptions. The maximum entropy production principle is not a physical law. No action, collective or individual, can avoid the Second Law. Like the tragedy of the commons, the tragedy of entropy maximization is a detrimental competitive tendency that we must overcome by collective action. But if we mistakenly consider it a physical law on the level of the Second Law of Thermodynamics, then there is nothing to do but give up.

Economic imperialism and ecological reductionism have in common that they are monistic visions, albeit rather opposite monisms. It is the monistic quest for a single substance or principle by which to explain everything that leads to excessive reductionism on both sides. Certainly one should strive for the most reduced or parsimonious explanation possible without ignoring the facts. But respect for the basic empirical facts of natural laws on the one hand, and self-conscious purpose and will on the other hand, should lead us to a kind of practical dualism. After all, that our world should consist of two fundamental elements offers no greater inherent improbability than that it should rest on one only. How these two fundamental elements of our world (material cause and final cause) interact is a venerable mystery–precisely the mystery that the monists of both kinds are seeking to avoid. But economists are too much in the middle of things to adopt either extreme. Economists are better off denying the tidy-mindedness of either monism than denying the facts that point to an untidy dualism.

The Steady-State Subsystem

We must pay attention to the optimal scale of the human economy to protect the ecosystem we depend on. Photo Credit: Elisa Bracco

We must pay attention to the optimal scale of the human economy to protect the natural ecosystem we depend on. Photo Credit: Elisa Bracco

The remaining strategy is the steady-state subsystem. It does not attempt to eliminate the subsystem boundary, either by expanding it to coincide with the whole system or by reducing it to nothing. Rather, it affirms both the interdependence and the qualitative difference between the human economy and the natural ecosystem. The boundary must be recognized and drawn in the right place. The scale of the human subsystem defined by the boundary has an optimum, and the throughput by which the ecosphere physically maintains and replenishes the economic subsystem must be ecologically sustainable. That throughput is indeed entropic, but rather than maximizing entropy the goal of the economy is to minimize low entropy use needed for a sufficient standard of living–by sifting low entropy slowly and carefully through efficient technologies aimed at important purposes. The economy should not be viewed as an idiot machine dedicated to maximizing waste. Its final cause is not the maximization of waste but the maintenance and enjoyment of life.

The idea of a steady-state economy comes from classical economics, and was most developed by John Stuart Mill (1857), who referred to it as the “stationary state.” The main idea was that population and the capital stock were not growing, even though the art of living continued to improve. The constancy of these two physical stocks defined the scale of the economic subsystem. Birth rates would be equal to death rates and production rates equal to depreciation rates. Today we add that both rates should be equal at low levels rather than high levels because we value longevity of people and durability of artifacts, and wish to minimize throughput, subject to maintenance of sufficient stocks for a good life.

Ecological economics should seek to develop the steady-state vision, and get beyond the dead ends of both economic imperialism and ecological reductionism.

Do We Have the Courage to Bring the 800-lb Gorilla out of the Corner?

by Jimmy Fox

Jimmy FoxThe planet’s ability to provide useful materials and absorb wastes (its biocapacity) is deemed essential to sustain human life. Yet consumption of those useful materials (our ecological footprint) per person is rising at an alarming and unsustainable rate. According to the Global Footprint Network, humanity currently uses the equivalent of 1.5 planets worth of biocapacity per year. Stated another way, it takes the Earth 1.5 years to regenerate what we use and waste in a year. Here in the USA the average person’s ecological footprint in 2010 was approximately 8 soccer fields per person per year — the largest of any nation — while the global capacity in the same year was estimated to be about 2 per person. What this tells us is we Americans are not living within our means. In addition to deficit spending we are, in fact, deficit living. And other countries are not far behind.

ecological footprint scenarios

Our ecological footprint — which path will we take? (Image courtesy of Global Footprint Network).

Today this reality is a conundrum for anyone with an ecological conscious, particularly an American in the field of conservation. Current production and consumption of energy (for our bodies and machines) directly and indirectly create a suite of problems from loss of habitat to pollution. For conservationists, the 800-lb gorilla in the room is our society’s pursuit of economic growth fueled by conspicuous consumption. Quite simply our country’s gross domestic product (GDP) serves as a self-evident indicator for loss of nature and liquidation of our shrinking resource base. As conservationists, we need to bring this gorilla out of the corner and help friends and neighbors understand the problem. It’s time to have frank conversations about the need for intelligent consumption, recycling and reusing, and stabilizing human population.

Some will say this is too radical and not an issue a conservationist should be wading into. I would argue nothing is more important or in need of leadership. In the past Olaus Murie, Aldo Leopold, and Rachel Carson spoke to the matter. In 1948, articulating the need for a land ethic, Aldo Leopold wrote, “Our bigger-and-better society is now like a hypochondriac, so obsessed with its own economic health as to have lost the capacity to remain healthy.” Approximately ten years later, Olaus Murie pressed for the establishment of the Arctic National Wildlife Refuge and believed it was emblematic of, “the real problem of what the human species is to do with this Earth.”

Today, Dr. Curt Meine (author of Correction Lines), Dr. Julianne Warren (author of Aldo Leopold’s Odyssey), and Dr. Brian Czech (author of Shoveling Fuel for a Runaway Train and Supply Shock: Economic Growth at the Crossroads and the Steady State Solution) are Americans in the field of science writing and speaking passionately about the real problem. I encourage you to follow their work. If reading books isn’t your cup of tea or you’re short of time, check out the Aldo Leopold Foundation’s documentary, Green Fire and Rob Dietz and Dan O’Neill’s call for a steady state economy in Enough is Enough, or if you’re into Hollywood entertainment, watch Wall-E with the kids for an exploration of where we could be headed.

Of course there are critics inside and outside the conservation community. The status quo is tenacious. Calling for change is uncomfortable. We have to be prepared for the allegations. Like Thomas Jefferson’s efforts to abolish slavery while being a slave owner, we have to acknowledge we own a piece of this mess while we move humanity forward. We must admit we conservationists are contributing to the problem with every aerial survey, vehicle, item of clothing, glass of wine, or electronic device we buy (even the six-year old MacBook Pro I’m using to write this post). Acknowledging our contribution to the problem isn’t enough — otherwise it’s just rhetoric. We must act and model the behavior we hope for ourselves and others. Consider these three broad actions to get started:

1. Break the problem down. Become familiar with what contributes to the problem of an oversized ecological footprint. There is a mountain of literature on the unsustainability of human population growth and consumption of natural resources. Figure out the myriad connections between the nation’s pursuit of higher GDP and the conservation challenges we face today.

2. Identify solutions. There are so many ways we can lessen our ecological footprint from the individual level to the national pursuit of a steady state economy. Start at home and the workplace. Make an inventory of the wasteful practices and figure out how to make life and work more sustainable. Don’t overlook local, state, national and international solutions that could use our support and advocacy.

3. Exhibit leadership. The solution to this problem will require all of us to adapt. There are no technical fixes that will save us, no easy remedies and no authority figures leading the way. Solutions will be found through our interactions and relationships with others. Find the courage to share your concerns about the current reality and speak passionately about your aspirations. Talk about what we can do to close the gap between our unsustainable lifestyle and a sustainable one — and do it.

I realize this issue isn’t much fun to think or talk about. It’s personal. It calls into question what we do and our devotion to nature. It forces us to think about how our actions today will negatively affect future generations. As a conservationist, it’s much easier and more socially acceptable to treat the injury than call for a cure. We can busy ourselves with species protections and habitat restoration. But if we value nature — if we value humanity — business as usual is unacceptable. As conservationists we are documenting the outfall of the problem and have a moral obligation to sound the alarm. Ask yourself, would Rachel Carson ignore the gorilla in the room were she alive today? Ask yourself, if we won’t act, why should we expect anyone to? Now is the time for leadership. Leadership means having the courage to address the ultimate source of our conservation problems.

Bringing the 800-lb gorilla into a public forum isn’t easy. But like most hard work, it’s useful.

Jimmy Fox advocates for intelligent consumption as a citizen of Fairbanks, Alaska. He is a Fellow of the National Conservation Leadership Institute and serves his country as a distinguished manager in the U.S. Fish and Wildlife Service. He also promotes leadership in conservation at cognizantfox.com.

Ending the Insanity of Ecocide

by Amelia Womack, Villo Lelkes and Prisca Merz

“You never change things by fighting the existing reality. To change something, build a new model that makes the existing model obsolete.” –Buckminister Fuller

We live in the age of ecocide. Defined as the extensive damage, destruction or loss of ecosystems of a given territory, ecocide is the result of the way people, corporations, and governments are running their affairs all around the globe. But ecocide doesn’t have to be the status quo. A new law being proposed in the European Union would protect ecosystems by giving them legal standing. Under such a law, the Earth would no longer exist purely as property or a set of resources to be exploited. Instead people and institutions would acknowledge the intrinsic value of ecosystems and accept the legal duty to protect them.

Ending ecocide requires nothing short of a paradigm shift. This shift, in turn, requires a cultural change — a movement away from exploitation and toward stewardship of nature. The cultural shift is unfolding as people, especially the younger generation, internalize the evidence of ecocide and its devastating consequences constantly being issued in reports about global warming, species extinctions, and natural resource depletion. But we need more than just a cultural shift. We need specific and revolutionary changes in two subsystems of society: the legal framework and the economy.

The Legal Shift to End Ecocide

The concept of ecocide has been discussed since the 1950s, and it has even been codified as a war crime. According to Article 8.2 of the Rome Statute of the International Criminal Court, it is illegal to cause “widespread, long-term and severe damage to the natural environment” in acts of war. But the same damage caused in peacetime is legal. In 2010, building on a history of attempts to criminalize ecocide, Polly Higgins submitted a proposal to the United Nations to include ecocide as the Fifth Crime Against Peace.

At the core of the law of ecocide prevention is the idea that decision-makers in business and politics should be held personally and criminally liable for damages caused to the environment. Contrary to the existing system in which fines often fail to cover the cost of cleanup, companies and decision-makers under the law of ecocide prevention would be held criminally accountable and would have to pay the costs of restoring ecosystems to the extent possible.

Today many laws and regulations are in place to protect certain parts of the natural environment, such as soil, water, and endangered species. However, existing legislation treats each of these elements separately, fragmenting the overall body of environmental law. In contrast, the law of ecocide prevention takes a holistic approach by establishing a broad framework for conserving ecosystems and the services they provide.

The main aim of this legislation is not the imprisonment of decision-makers but the creation of incentives and a legal framework for achieving environmentally sound behavior, especially within corporations. Imagine all investments flowing into non-ecocidal activities and the resultant innovations driven by resource efficiency and waste minimization. With strict enforcement, businesses would make the necessary adjustments to comply with the new legal framework. If accompanied by subsidies to facilitate the transition to a new business model, the law of ecocide prevention has the potential to trigger a transition to a different sort of economy — one that operates in harmony with the ecosystem.

The Economic Shift to End Ecocide

Logo (tree) for End EcocideThe economic goal of continuous growth sets the stage for ecocide. With their primary focus on more and more growth, businesses contribute to the global environmental catastrophe by externalizing the environmental costs of their profit-maximizing actions. As moral philosopher Michael Sandel puts it, we have moved from a market economy that is valuable for organizing productive activity to a market society where everything is up for sale. The problem with a market society is that it corrodes or crowds out important, non-market-based values and de-emphasizes public goods at a time when inequality is dramatically rising.

Instead of a growth-obsessed economy focused on maximizing profits and producing more and more goods and services, we need a steady state economy focused on maximizing well-being and producing sufficient goods and services within ecological boundaries. As described by Herman Daly, a steady state economy uses the “lowest feasible flows of matter and energy from the first stage of production to the last stage of consumption.” The idea is to maintain a non-growing throughput of low-entropy resources and energy through the economy. In short, instead of getting bigger, the focus shifts to getting better.

We may have already arrived at a major economic inflection point. The rate of global economic growth is decreasing, and some economists are discussing whether we have reached the end of economic growth and the limits of global capitalism. 2008 marked the beginning of the most severe economic crisis since the Great Depression. With the old system failing, there is potential for the North and eventually the South to make the turn toward a steady state economy that is based on the principles of sustainable development.

Even though the old system of continuous growth is failing, we need to create the conditions for a steady state economy to emerge. Unfortunately, the principles of sustainable development are mostly missing from today’s environmental law and policy. That’s why the steady state economy goes hand in hand with the law of ecocide prevention. It’s exactly the kind of economy that will materialize when businesses are legally bound to protect ecosystems.

The law of ecocide prevention and the steady state economy constitute two paradigm shifts, a legal and an economic one. These two shifts reinforce one another and move society in the same direction — placing people and planet ahead of profit. But how can people who recognize the necessity of this two-pronged shift help make it happen?

A group of volunteers has proposed a law to the European Union to make ecocide a crime if it is committed in EU territory, or by companies registered in the EU, or by EU citizens. The proposed legislation would also apply to the import of any goods or services resulting from activities causing ecocide in the EU and the financing of ecocide by EU banks or financial institutions. If one million EU citizens support this proposal by January 21st, 2014, the European Commission will be legally bound to propose an action. We would like to invite EU citizens to vote today for a law to protect our future. Ecocidal tendencies have no place in either our legal or our economic institutions.

Amelia Womack, Villo Lelkes and Prisca Merz are volunteers for End Ecocide, a European citizens initiative aiming to criminalize ecocide. They need to collect 1 million signatures for a law to be considered by the EU. Amelia is a Green Party candidate for the European Parliament and has completed a MSc in environmental technology — her thesis addressed the impact of the law of ecocide prevention on business. Villo is an environmental lawyer who previously worked for the European Commission as a policy officer on sustainability. Prisca has a background in public policy and human development and heads the End Ecocide team as a volunteer.

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A Question of Scarcity

by Andrew Fanning

Andrew Fanning‘Tis the season for untold numbers of undergraduate students around the world to receive their first exposure to “Principles of Economics.” During the first couple of lectures, economic terms and concepts are thrown at impressionable young minds at a dizzying pace: opportunity costs, rational choice, marginal change, market economies, and the mother of them all, scarcity.

The conventional economic meaning of “scarcity” appears on the first page of virtually every first-year economics textbook. Here’s the version from the textbook I use: “Although we have boundless wants, our resources are limited.” The perceived battle between unlimited wants and limited means forces us to make tough choices about how to manage scarce resources. Conventional economists assure us that their “science” provides the proper instructions for making these tough choices. Thus, the “scarcity principle,” besides having intuitive appeal, provides the justification for the very existence of neoclassical economics.

The scarcity principle, however, is just an assumption, and it appears to be a dangerous one. Maybe in the empty world of the 18th century classical economists, it was mostly harmless to assume that people have unlimited wants because the vast majority of people had so little. But now that we live in a full world where the global economy is bumping against ecosystem limits, it’s time for economists to stop assuming that everyone always wants more and start accepting that it’s possible to have too much.

Still, questioning the relevance of scarcity in driving human behavior is a no-no in a conventional economics class. The student doing the questioning is likely to be shut down by the accursed phrase, “That’s not economics.”

The first reason why it’s tough to argue the point with conventional economists is that they only concern themselves with the scarcity of resources relative to other resources in a market, neglecting the reality of absolute scarcity. Philip Lawn shows the difference between relative and absolute scarcity clearly by asking, on the one hand, what happens to the price of a non-renewable resource like oil as the stock is depleted? Most people see that stock depletion leads to an increase in absolute scarcity and predict that the price would increase. On the other hand, he asks, what will happen to oil prices if OPEC significantly increases extraction rates and floods the market? Here, most people would predict that the price of oil would decrease as the increased flow of oil makes it less scarce relative to substitutes like coal. Of course, these scenarios are two sides of the same coin. In an empty world, the flow effects of relative scarcity on prices have dominated the stock effects of absolute scarcity, but this cannot continue indefinitely on a finite planet. In his book, Steady-State Economics, Herman Daly writes:

Absolute scarcity increases as growth in population and per capita consumption push us ever closer to the carrying capacity of the biosphere. The concept presupposes that all economical substitutions will be made. While such substitutions will certainly mitigate the burden of absolute scarcity, they will not eliminate it nor prevent its eventual increase.

If there is no choice to substitute one scarce resource for another, then there is no relative scarcity, and conventional economists will often concede the point, holding that such a situation lies outside the domain of economic analysis. Without choices it’s easy, they say — you just do what you gotta do. It’s not big-E economics. Case closed.

Dry Lake Bed with Cattle Skeleton

Neoclassical notions of scarcity differ from the absolute scarcity seen in a full world (credit Kiel Bryant).

A second reason it’s hard to argue with conventional economists about scarcity is because they disregard two features of human behavior. The first feature is that people prioritize some wants above others. Economists often ignore the fact that some goods and services are fundamentally more important and sought earlier than others. No, they cry, this would introduce unacceptable value judgements to our “positive” theory! As John K. Galbraith wryly noted, “Nothing in economics so quickly marks an individual as incompetently trained as a disposition to remark on the legitimacy of the desire for more food and the frivolity of the desire for a more expensive automobile.” The second behavioral feature is susceptibility to advertising and other marketing techniques. Despite the omnipresent sheen of the $500 billion global advertising industry sparkling on modern society, mainstream economists maintain that consumers know exactly what they want because, well, they just do. It’s not big-E economics if people don’t know what they want. Case closed. Again.

Economists often make strange assumptions about the scarcity of resources, but maybe their assumption about wants is stranger. Do people actually have unlimited wants, and has anyone bothered to test this hypothesis? Toward an answer, I recently came across a couple of studies that provide compelling evidence demonstrating people don’t have unlimited wants ingrained in their DNA.

The first is a fascinating book edited by John Gowdy titled Limited Wants, Unlimited Means about the economics of nomadic hunter-gatherer societies. As the title makes abundantly clear, the authors argue that our society of mass consumption has much to learn from members of these highly mobile societies who do not want to carry material possessions beyond those which they can make and replace from resources readily available.

The second study is an experiment whereby researchers team up with a Chinese fast-food restaurant in the United States to test a number of strategies for reducing calorie consumption among unsuspecting customers. They find that a much better strategy than calorie labeling is to simply ask people if they would like to “down-size” their meals during the ordering process. In particular, the researchers found that more than 30% of customers accepted the opportunity to receive less food, regardless of whether or not they received a discount! Although this result does not reject the unlimited wants hypothesis outright, the question of why calorie labelling is less effective than a verbal offer cannot be explained under neoclassical assumptions.

An alternative explanation is that people have difficulties controlling themselves. The best part of the fast-food study is that a substantial portion of customers readily recognized that they wouldn’t be able to stop consuming food once it had been placed on their plates, so they opted for less when given a nudge at a strategic point in their consumption decision. Clearly, finding these strategic points to encourage “right-sized” consumption is an urgent challenge on a full planet. Hopefully researchers can help us find more of them.

Andrew Fanning grew up on the blustery east coast of Canada where he eventually earned a master’s degree in economics. His interests include lots of things, especially the capacity of the planet to support life.

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.”

Three More Growth Fallacies

by Herman Daly

Herman DalyIn a previous essay I identified eight fallacies about growth. Well, at the risk of starting a growth industry, here are three more.

1. As natural resources become scarce we can substitute capital for resources and continue to grow. Growth economists assume a high degree of substitutability between factors of production. But if one considers a realistic analytic description of production, as given in Georgescu-Roegen’s fund-flow model, one sees that factors are of two qualitatively different kinds: (1) resource flows that are physically transformed into flows of product and waste and (2) capital and labor funds, the agents or instruments of transformation that are not themselves physically embodied in the product. There are varying degrees of substitution between different resource flows, and between the funds of labor and capital. But the basic relation between resource flow on the one hand, and a capital (or labor) fund on the other, is complementarity. You cannot bake a hundred-pound cake with only one pound of ingredients, no matter how many cooks and ovens you have. Efficient cause (capital) does not substitute for material cause (resources). Material cause and efficient cause are related as complements, and the one in short supply is limiting. Complementarity makes possible the existence of a limiting factor, which cannot exist under substitutability. In yesterday’s empty world the limiting factor was capital; in today’s full world remaining natural resources have become limiting.

This fundamental change in the pattern of scarcity has not been incorporated into the thinking of growth economists. Nor have they paid sufficient attention to the fact that capital is itself made from and maintained by natural resource flows. It is hard for a factor to substitute for that from which it is made! And consider yet another oversight. Substitution is reversible — if capital is a good substitute for resources, then resources are a good substitute for capital. But then why, historically, would we ever have accumulated capital in the first place if nature had already given us a good substitute? In sum, the claim that capital is a good substitute for natural resources is absurd.

In reply to these criticisms, growth economists point to modern agriculture, which they consider the prime example of substitution of capital for resources. But modern, mechanized agriculture has simply substituted one set of resource flows for another, and one set of funds for another. It has partially replaced soil, sunlight, rainfall, and manure, with other resources, namely fossil fuels, chemical fertilizers, pesticides, and water pumped from rivers and aquifers. The old resource flows (soil, sunlight, rain, manure) were to a significant degree replaced by new resource flows (fossil fuels, chemicals, irrigation water), not by capital! The old fund factors of labor, draft animals, and hand tools were replaced by new fund factors of tractors, harvesters, etc. In other words new fund factors substituted for old fund factors, and new resource flows substituted for old resource flows. Modern agriculture involves the substitution of capital for labor (both funds), and the substitution of nonrenewable resources for renewable resources (both flows). In energy terms it was largely the substitution of fossil fuels for solar energy, a move with short-term benefits and long-term costs. But there was no substitution of capital funds for resource flows. The case of mechanization of agriculture does not contradict the complementarity of fund and flow factors in production.

2. Space, the high frontier, frees us from the finitude of the earth, and opens unlimited resources for growth. In a secular age where many have lost faith in the spiritual dimension of existence, and where the concept of “man as creature” is eclipsed by that of “man as creator,” it is to be expected that science fiction might be called on to fill the dead void of space with a happy population of “survivors.” The spiritual insights of millennia are replaced by technocratic projections of the “Singularity” in which mankind attains the final goal of (random?) evolution and becomes a new and immortal species, thanks to the salvific power of exponential growth in information processing technology. Moore’s Law promises eternal silicon-based life for the new elect who can stay alive until the Singularity; oblivion for those who die too soon! And this comes from materialists who think that they have outgrown religion!

Space tourism: a silly reason to believe in infinite economic growth.

Of course many technical space accomplishments are real and impressive. But how do they free us from the finitude of the earth and open up unlimited resources for growth? Space accomplishments have been extremely expensive in terms of terrestrial resources, and have yielded few extra-terrestrial resources — useless moon rocks that some fledgling astronaut managed to steal from NASA in a bungled attempt to sell them for their collector’s value, plus some space tourism for a few billionaires to take orbital joyrides. On the positive side of the ledger we can list communications satellites, but they are oriented to earth, and while they can help us use earth’s resources more efficiently, they do not bring in new resources. And apparently some orbits are getting crowded with satellite carcasses.

Robotic space exploration is a lot cheaper than manned space missions, and may (or may not) yield knowledge worth the investment to a society that cannot afford basic necessities and elementary education for many. The opportunity cost of indulging the expensive curiosity of a few is to leave undeveloped the capacities of many. Were it not for the heavy military connection (muted in the official NASA propaganda) we would probably be spending much less on space. Cuts in NASA’s budget have led to the over-hyped reaction by the “space community” in proclaiming a pseudo-religious technical quest to discover “whether or not we are alone in the universe,” as opposed to how to zap other earthlings with laser beams from space. Another major goal is to find a planet suitable for colonization by earthlings. The latter is sometimes justified by the observation that since we are clearly destroying the earth we need a new home — to also destroy?

The numbers — astronomical distances and time scales — effectively rule out dreams of space colonization. But another consideration is equally daunting. If we are unable to control population and production growth on earth, which is our forgiving and natural home, out of which we were created and with which we have evolved and adapted, then what makes us think we can live as aliens within the much tighter and unforgiving discipline of a space colony on a dead rock in a cold vacuum? There we would encounter limits to growth raised to the hundredth power. Sorry for being such a “pessimist!”

3. Without economic growth all progress is at an end. On the contrary, without growth (now actually uneconomic growth if correctly measured), true progress finally will have a chance. As ecological economists have long argued, growth is quantitative physical increase in the matter-energy throughput, the metabolic maintenance flow of the economy beginning with depletion and ending with pollution. Development, in contrast, is qualitative improvement in the capacity of a given throughput to provide for the maintenance and enjoyment of life in community. The main ways to develop are through technical improvement in resource efficiency, and ethical improvement in our wants and priotities.

Development without growth beyond the earth’s carrying capacity is true progress. Growth means larger jaws and a bigger digestive tract for more rapidly converting more resources into more waste, in the service of unexamined and frequently destructive individual wants. Development means better digestion of a non-growing throughput, and more worthy and satisfying goals to which our life energies could be devoted.

Occupy the G-8

by Brent Blackwelder

This is the text of an address delivered by Brent Blackwelder to the Occupy Movement, in Frederick, Maryland, May 18, 2012 on the occasion of the annual meeting of the G-8 at Camp David.

Terrible economic times are facing billions of people worldwide. Where are the jobs? Roughly half of new college graduates in the U.S. cannot find work. Who’s getting all the money? The gap is widening between the one percent and the 99 percent.

At the same time, the world’s oceans are being devastated by overfishing, forests are being obliterated, mountains are being blown apart to get at the coal, and rivers around the world are being dammed, diverted, and drained of their water. A quarter of the species on the planet are headed toward extinction. Compounding these effects, the earth’s climate is being destabilized by emissions of greenhouse gases.

Driving this fiasco are casino economics, cheater economics, and futureless economics. It’s not a pretty picture. Why can’t we do better? What can we do about it? Are the powerful leaders of the G-8 nations gathered here going to provide the solutions?

If the past record of the G-8 is any guide, promises will be made, the World Bank will be assigned the role of savior, but monetary pledges won’t be fulfilled, and nothing major will happen to shift the status quo.

I propose to you today a bold paradigm shift in our economy — away from the futureless economics, away from the casino economics, and away from the cheater economics that run the global economy. We need an economics for the earth, its people, and all the life on this planet.

I suggest that the Occupy Movement could bring about an economic paradigm shift by adopting the steady state economy as its macroeconomic policy goal. That means an economy with stabilized levels of production and consumption, which means stabilizing population and per-person consumption. It means an economy that operates within the carrying capacity of the Earth and does not threaten present and future generations with its overbearing, bloating size.

Cheater Economics, Casino Economics, Futureless Economics

The global economy treats natural resources as if the Earth were a business in a liquidation sale. The global economic system of today is undermining the life-support systems of our planet.

One major shortcoming of capitalism is that it does not reveal the real ecological costs of commercial products. Furthermore, today’s capitalism allows corporations to externalize the damaging health and environmental costs of their activities. Today’s capitalism also tolerates massive taxpayer handouts to highly polluting corporations.

In the Casino Economy billions in profits are made without providing any goods or services — they are made with complex financial instruments sometimes referred to as derivatives. Complex financial instruments enable the avoidance of taxes. The financial sector in today’s U.S. economy is now about three times as large as the manufacturing sector.

In the aftermath of the big bank bailouts and the passage of the Dodd-Frank law to curtail high-risk lending, JP Morgan Chase recently announced a loss of $2 billion from its risky trading (now the bank says it’s over $3 billion). Hand-in-hand with cheater economics, many huge corporations put their profits in offshore tax havens and escape paying an estimated $100 billion to the U.S. Treasury.

In current economic practice, corporations are evaluated on their quarterly returns. There is little long-range thinking. Mainstream economists tell us 100 years from now is not worth worrying about. (One dollar a century from now is only worth pennies today.)  But such thinking runs counter to the values of most people. Parents are concerned about what kind of world their children and grandchildren will live in.

Futureless economics, casino economics, and cheater economics have no place in a steady state economy. But here are some examples of the damage they cause in the current economic sectors of energy extraction, agriculture, mining, and forestry.

1) Fossil fuels. Extractive industries are going to the most remote and riskiest places, such as the Arctic Ocean, to obtain oil. Uncleanable spills will be the inevitable result. Some of the most biologically diverse regions, such as the tropical rainforests, are being decimated by oil drilling. Oil and gas companies are extracting the dirtiest of fuels, such as tar sands in Alberta, Canada. Coal companies are using techniques like mountain-top removal to get at the coal in West Virginia. In the process they are creating a Martian landscape by obliterating the forested green mountains and destroying the entire hydrologic cycle.

Most extractive industries enjoy substantial handouts from governments. The U.S. is set to provide $110 billion over the next decade to the oil and coal industries. That’s right — some of the world’s richest companies enjoy taxpayer handouts, and some do not even pay income tax.

The health and environmental costs of oil extraction in places like Nigeria over the last 50 years are huge, but oil and gas companies like Shell have not cleaned up the more than 5,000 spills that have wrecked fisheries, polluted drinking water, and harmed the health of local people who have borne the brunt of the contamination.

2) Agricultural lands. Powerful agribusiness giants like Monsanto are trying to patent all seeds and control agriculture from top to bottom. Major meat companies like Smithfield operate gigantic animal factory slums that cause serious water pollution and load the air with noxious fumes that harm people’s health and displace local family farms.  As with fossil fuels, governments subsidize the polluters. Time Magazine showed that some of the biggest animal factory farms receive all sorts of handouts from state and local governments.

3) Forests: the world’s forests are rapidly being destroyed. The U.S. has set a horrible example going back to the 1800s when, for example, the state of Michigan was almost totally deforested. Instead of creating sustainable logging operations for the state, the timber industry abandoned Michigan and kept moving west. After seeing some of the horrendous logging along the West Coast, President Franklin Roosevelt said, “I hope the bastards who did this are roasting in Hell.”

The U.S. Forest Service is notorious for providing “below cost timber” sales in our National Forests. Corruption and bribery characterize logging operations around the world.

Friends of the Earth England and Friends of the Earth Ghana combined efforts to show that lumber in Ghana was being extracted, but taxes were not being paid on the real volume of timber being cut.

4) Minerals. Leonardo DiCaprio’s film Blood Diamond illustrates a typical problem with mining operations that seek gold, copper, diamonds, and other minerals. The use of cyanide to extract gold causes major pollution all over the world. The mining lobby in the U.S. has been so strong that the 1872 Mining Law and its subsidies have not been changed. The “pollute-and-run” practices of the past continue today on steroids.  As with oil, coal, and gas extraction, the damages to health, crops, and the air, land, and water are externalized on the public.

Elements of an Economics for the Earth: A Steady State Economy

There is no magic formula that can move the world to a sustainable, steady state economy. However, by pursuing any of the following actions, countries and localities can move in the right direction and set the stage for a paradigm shift to occur.

1) Get rid of polluter subsidies.  Give subsidies only to clean energy; no more subsidies for fossil fuels, agribusiness, and the like. About half the states exempt pesticides from their sales tax. Senator Sanders (I-VT) and Congressman Ellison (D-MN) have introduced legislation to eliminate all subsidies to the fossil fuel industry — a measure that would save $110 billion over the next decade.

2) Shift to a clean-energy basis for the global economy. It is technically feasible to run the global economy on a carbon-free and nuclear-free basis. Amory Lovins has a new eloquent description of his plan. Arjun Makhijani in Carbon Free, Nuclear Free provides another. California physicists Jacobson and Delucchi offer a slightly different plan in Scientific American (Nov, 2009) as does Lester Brown in World on the Edge.

3) Adopt the measures proposed by Senator Levin on tax dodging. Senator Levin (D-Michigan) is chairman of the Senate’s Permanent Investigation Subcommittee and has exposed a wide range of scandalous tax-dodging activities by corporations in American that deprive the Treasury of over $100 billion annually. A miniscule tax on global financial transactions and on currency transactions would yield hundreds of billions, while forcing players in the casino economy to pay at least something.

4) Change the indicators. The gross domestic product (GDP) is taken as a measure of society’s well-being, but in reality it measures how fast a nation is converting its natural resources into waste. It fails to account for the depletion of natural resources. Some states, including Maryland, have adopted the genuine progress indicator. And Bhutan has adopted Gross National Happiness as a better measure of well-being.

5) Restructure jobs. Adopting a four-day workweek can help reduce unemployment, spread the work, and provide time for people to spend with their families. The clean energy strategies described above would provide vastly more jobs per dollar than the fossil fuel industry. These jobs can materialize from dispersed renewable energy projects while our energy dollars remain in the community.

6. Support local investing. Michael Shuman’s new book Local Dollars, Local Sense: How to Shift Your Money from Wall Street to Main Street provides evidence that local investment does better than Wall Street stock purchases. The book presents a variety of examples of opportunities for investing in local businesses, local banks, and local exchanges. About two dozen studies have shown that such local spending and investments can provide several times as many jobs compared to investments in nationwide business. For example, for every $100 spent in a national book chain about $13 would remain in the local economy, whereas with $100 spent at a local bookstore, about $45 would remain.

Is a steady state economy just an idle utopian dream? Tim Jackson’s report, Prosperity Without Growth, prepared for the UK Sustainable Development Commission, provides a detailed discussion that makes a convincing case. Canadian economist Peter Victor has shown how the transition to a new economy can be accomplished in such a way that per capita income increases, unemployment declines, and poverty decreases.

In a world where propaganda and big money have undermined governance and the media, the Occupy Movement has a vital role to play by confronting decision makers, protesting polluting corporations, calling for an economic paradigm shift, and giving visibility to the paths for a healthier future.

What Is the Limiting Factor?

by Herman Daly

Herman DalyIn yesteryear’s empty world capital was the limiting factor in economic growth. But we now live in a full world.

Consider: What limits the annual fish catch — fishing boats (capital) or remaining fish in the sea (natural resources)? Clearly the latter. What limits barrels of crude oil extracted — drilling rigs and pumps (capital), or remaining accessible deposits of petroleum — or capacity of the atmosphere to absorb the CO2 from burning petroleum (both natural resources)? What limits production of cut timber — number of chain saws and lumber mills, or standing forests and their rate of growth? What limits irrigated agriculture — pumps and sprinklers, or aquifer recharge rates and river flow volumes? That should be enough to at least suggest that we live in a natural resource-constrained world, not a capital-constrained world.

Economic logic says to invest in and economize on the limiting factor. Economic logic has not changed; what has changed is the limiting factor. It is now natural resources, not capital, that we must economize on and invest in. Economists have not recognized this fundamental shift in the pattern of scarcity. Nobel Laureate in chemistry and underground economist, Frederick Soddy, predicted the shift eighty years ago. He argued that mankind ultimately lives on current sunshine, captured with the aid of plants, soil, and water. This fundamental permanent basis for life is temporarily supplemented by the release of trapped sunshine of Paleozoic summers that is being rapidly depleted to fuel what he called “the flamboyant age.” So addicted are we to this short-run subsidy that our technocrats advocate shutting out some of the incoming solar energy to make more thermal room for burning fossil fuels! These educated cretins are also busy chemically degrading the topsoil and polluting the water, while tinkering with the genetic basis of plants, all toward the purpose of maximizing short-run growth. As Wes Jackson says, agricultural plants now have genes selected by the Chicago Board of Trade, not by fitness to the ecosystem of surrounding organisms and geography.

What has kept economists from recognizing Soddy’s insight? An animus against dependence on nature, and a devotion to dominance. This basic attitude has been served by a theoretical commitment to factor substitutability and a neglect of complementarity by today’s neoclassical economists. In the absence of complementarity there can be no limiting factor — if capital and natural resources are substitutes in production then neither can be limiting — if one is in short supply you just substitute the other and continue producing. If they are complements both are necessary and the one in short supply is limiting.

Economists used to believe that capital was the limiting factor. Therefore they implicitly must have believed in complementarity between capital and natural resources back in the empty-world economy. But when resources became limiting in the new full-world economy, rather than recognizing the shift in the pattern of scarcity and the new limiting factor, they abandoned the whole idea of limiting factor by emphasizing substitutability to the exclusion of complementarity. The new reason for emphasizing capital over natural resources is the claim that capital is a near perfect substitute for resources.

William Nordhaus and James Tobin were quite explicit (“Is Growth Obsolete?,” 1972, NBER, Economic Growth, New York: Columbia University Press):

The prevailing standard model of growth assumes that there are no limits on the feasibility of expanding the supplies of nonhuman agents of production. It is basically a two-factor model in which production depends only on labor and reproducible capital. Land and resources, the third member of the classical triad, have generally been dropped… the tacit justification has been that reproducible capital is a near perfect substitute for land and other exhaustible resources.

The claim that capital is a near perfect substitute for natural resources is absurd. For one thing substitution is reversible. If capital is a near perfect substitute for resources, then resources are a near perfect substitute for capital — so why then did we ever bother to accumulate capital in the first place if nature already endowed us with a near perfect substitute?

It is not for nothing that our system is called “capitalism” rather than “natural resource-ism.” It is ideologically inconvenient for capitalism if capital is no longer the limiting factor. But that inconvenience has been met by claiming that capital is a good substitute for natural resources. Ever true to its basic animus of denying any fundamental dependence on nature, neoclassical economics saw only two alternatives — either nature is not scarce and capital is limiting, or nature’s scarcity doesn’t matter because manmade capital is a near perfect substitute for natural resources. In either case man is in control of nature, thanks to capital, and that is the main thing. Never mind that manmade capital is itself made from natural resources.

The absurdity of the claim that capital and natural resources are good substitutes has been further demonstrated by Georgescu-Roegen in his fund-flow theory of production. It recognizes that factors of production are of two qualitatively different kinds: (1) resource flows that are physically transformed into flows of product and waste; and (2) capital and labor funds, the agents or instruments of transformation that are not themselves physically embodied in the product. If one finds a machine screw or a piece of a worker’s finger in one’s can of soup, that is reason for a lawsuit, not confirmation of the metaphysical notion that capital and labor are somehow “embodied” in the product!

There are varying degrees of substitution between different natural resource flows, and between the funds of labor and capital. But the basic relation between resource flow on the one hand, and capital (or labor) fund on the other, is complementarity. Efficient cause (capital) does not substitute for material cause (resources). You can’t bake the same cake with half the ingredients no matter if you double or triple the number of cooks and ovens. Funds and flows are complements.

Further, capital is current surplus production exchanged for a lien against future production — physically it is made from natural resources. It is not easy to substitute away from natural resources when the presumed substitute is itself made from natural resources.

It is now generally recognized, even by economists, that there is far too much debt worldwide, both public and private. The reason so much debt was incurred is that we have had absurdly unrealistic expectations about the efficacy of capital to produce the real growth needed to redeem the debt that is “capital” by another name. In other words the debt that piled up in failed attempts to make wealth grow as fast as debt is evidence of the reality of limits to growth. But instead of being seen as such, it is taken as the main reason to attempt still more growth by issuing more debt, and by shifting bad debts from the balance sheet of private banks to that of the public treasury, in effect monetizing them.

The wishful thought leading to such unfounded growth expectations was the belief that by growth we would cure poverty without the need to share. As the poor got richer, the rich could get still richer! Few expected that aggregate growth itself would become uneconomic, would begin to cost us more than it was worth at the margin, making us collectively poorer, not richer. But it did. In spite of that, our economists, bankers, and politicians still have unrealistic expectations about growth. Like the losing gambler they try to get even by betting double or nothing on more growth.

Could we not take a short time-out from growth roulette to reconsider the steady-state economy? After all, the idea is deeply rooted in classical economics, as well as in physics and biology. Perpetual motion and infinite growth are not reasonable premises on which to base economic policy.

At some level many people surely know this. Why then do we keep growth as the top national priority? First, we are misled because our measure of growth, GDP, counts all “economic activity” thereby conflating costs and benefits, rather than comparing them at the margin. Second, the cumulative net benefit of past growth is a maximum at precisely the point where further growth becomes uneconomic (where declining marginal benefit equals increasing marginal cost), and past experience ceases to be a good guide to the future in this respect. Third, because even though the benefits of further growth are now less than the costs, our decision-making elites have 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 Gold Sacks and Wall Street — all sing hymns to growth in perfect unison, and bamboozle average citizens.

What is going to happen?