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What Kind of Economy Says OK to Tar Sands Oil?

by Brent Blackwelder

BlackwelderOn Sunday, February 17, I marched in the largest climate change protest in U.S. history. About 35,000 people gathered on the Washington Monument grounds for a rally and then marched past the White House, calling on President Obama to deny permission for the construction of the Keystone XL pipeline that would transport oil from Canada’s tar sands through the heart of the U.S. to the Gulf Coast.

Two of the victims of tar sands development in Alberta, Chief Jackie Thomas of the Saik’uz First Nation and Crystal Lameman of the Beaver Lake Cree First Nation, spoke of the contamination of their lands and people. Even without the pipeline, the gigantic oil extraction operation is already causing plenty of harm.

If carried to completion during the next several decades, over the objections of the indigenous people who have been stewards of this land, tar sands mining will have transformed an area the size of Florida or Wisconsin. A land teeming with fish and wildlife will have been turned into a grotesque zone of toxicity where the lakes will act as predators as they entice unsuspecting waterfowl to land in their polluted waters.

What kind of economy would find such an activity acceptable? At the very least, the economy must be making some perverse calculations to justify such devastation.

As if the direct devastation of the land and water were not enough, the utilization of tar sands oil by the U.S. and other countries means “game over” for the global climate, according to NASA scientist James Hansen. In other words, the energy-intensive extraction followed by the burning of tar sands oil will put so much carbon pollution into the atmosphere that we will enter an era of radical climate destabilization.

The exploitation is proceeding on Cree lands against their consent and in violation of the Canadian Constitution. It represents a blatant refusal to abide by Article 32 of the U.N. Declaration on the Rights of Indigenous Peoples that says: “States shall consult and cooperate in good faith with the indigenous peoples… in order to obtain their free and informed consent prior to the approval of any project affecting their lands particularly in connection with the development, utilization or exploitation of mineral, water or other resources.”

President Obama appears poised to give permission to build the pipeline and contribute to this industrial nightmare. So what can we do in the aftermath of the big protest?

The time has come to reject the premises of today’s economy, because it is not a true-cost economy, and it undermines good governance. It is an economy set up for cheaters and gamblers. It is also an economy that exploits those lacking political clout and that disrespects international law, except when it comes to trade agreements that enable polluters to enter special secret courts (see the Chevron trade case against Ecuador for one recent example).

A true-cost, sustainable economy would not countenance commercial activities like tar sands mining that are tantamount to an all-out war against the natural environment and a form of industrial genocide. The genocide is underway not because of racial hatred, but because tribal people have stood in the way of a major money-making venture. Furthermore, the indigenous people lacked political power to stop the transnational corporations from ruining their lands.

Protests of the Keystone XL pipeline should blossom into protests of our unsustainable economy.

Protests of the Keystone XL pipeline should blossom into protests of our unsustainable economy.

A true-cost economy would exemplify resilience. It would be less susceptible to disruptions from speculation, violent weather events, and terrorism. Such an economy would not pursue activities that generate or are likely to generate irreversible pollution. No one has to worry about a “solar spill” or a “wind spill” ruining their drinking water.

Today’s economy, on the other hand, is permitting all sorts of damaging activities that violate the criterion of reversibility and bequeath a legacy of poison. Consider the contrast between renewable energy projects and coal mining.

If a wind farm or solar rooftop array is causing problems, it can easily be removed without leaving centuries of pollution behind. The roof or the land can be returned to other uses. In fact, wind farms are fully compatible with agricultural production around the wind turbines. One wind farm I visited near Dodge City, Kansas, consisted of 150 turbines in a 20-square-mile area, and the land requirements were just seven acres.

In contrast, coal mining in West Virginia through mountain-top removal is converting biologically diverse, forested mountains into a Martian landscape. In the words of former Congressman Ken Heckler, reclamation amounts to “putting lipstick on a corpse.” Such mining projects violate the principle of reversibility, just like tar sands oil extraction. What will be available to people in the future who want to live in and explore places like West Virginia’s formerly bountiful mountains and valleys?

Whenever concerns are raised over the destructive impacts of big extractive projects, the predicament of joblessness always comes up. But joblessness cannot be solved with the current economic strategy that allows temporary construction jobs to destroy permanent jobs and livelihoods. Big extraction projects cannot create the volume of jobs that can be had by pursuing renewable energy. In fact, the oil industry generates the fewest jobs of almost any industry in the federal government’s database.

It is time to start demanding a true-cost economy that will create diverse jobs without creating no-go zones of carcinogenic and mutagenic wastes.

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?

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.


In Search of Answers about Economic Growth

by Rob Dietz

The latest issue of the journal Nature contains an article by Peter Victor with this quote (see “Questioning Economic Growth,” vol. 468, pp. 370-371): “The idea that governments of developed countries should no longer pursue economic growth as a primary policy objective is widely regarded as heresy.” It’s certainly not a heresy at the Center for the Advancement of the Steady State Economy (CASSE), but we’re not exactly a mainstream organization. Still, you have to wonder why the pursuit of growth goes largely unquestioned in a world facing climate destabilization, mounting environmental damages from ill-conceived business decisions (e.g., BP’s oil spill in the Gulf of Mexico), and sometimes violent competition over limited energy and material resources. Why are nations so committed to increasing production and consumption? Why are they so taken with the idea of growing bigger economies?

The answer has to do with the dilemma of economic growth, which Tim Jackson has described superbly in his book, Prosperity without Growth. On one side of the dilemma, economic growth is undermining ecological systems – the very systems that support life on the planet (and in so doing, form the foundation of the economy). On the other side, failure to grow the economy leads to job losses and causes instability in social systems.


Side A

Economic growth
is unsustainable

Side B

Failure to grow
is destabilizing.

The Dilemma of Economic Growth


By definition, there is no simple route to escape from a dilemma. The main strategy for coping with a dilemma is to accept one side of it as fixed, and then work on changing the other side. Politicians, conventional economists, journalists, and just about everyone else tend to choose Side B in the economic growth dilemma, and then they go about trying to modify Side A. That’s why seemingly oxymoronic expressions like “green growth” and “sustainable growth” are relatively commonplace. Most people have accepted the idea that failure to grow destabilizes society, so they struggle to find ways to maintain environmental health despite increasing population and consumption. But maybe we’ve chosen the wrong side in this dilemma. To find out, we have to consider two basic questions:

  1. Which side of the dilemma is more likely to hold true moving forward?
  2. Do we have better prospects for achieving sustainable growth or building a non-growing economy that is socially stable?

In assessing this first question, there is widespread agreement that when growth ceases in today’s economy, serious problems arise. The most pressing problem is evaporation of jobs – a slowdown in production typically means that we need fewer producers. When large numbers of people become unemployed, social ills are usually not far behind. Furthermore, personal income and wealth are often tied to economic growth. Investors fear a cessation of growth, as strong returns on their assets depend on faith in future growth (e.g., a company’s stock price rises when people believe the company’s revenue will grow). With the way the economy is structured, failure to grow certainly puts people on edge. But suppose the economy were structured differently. Suppose we could change certain economic institutions and relationships and build a healthy and resilient steady state economy.

That is largely the premise of CASSE’s new report, Enough is Enough. The report summarizes research on the desirability of transitioning to a steady state economy and explores a collection of policy ideas for doing so in a healthy way. This cohesive report casts doubt on the notion that a non-growing economy must be socially unstable.

Turning to the plausibility of Side A, the CASSE Position on Economic Growth succinctly describes the fundamental conflict between growing the economy and protecting the environment. This conflict is rooted in the laws of physics and ecology. Thermodynamic and ecological principles, such as entropy, competitive exclusion and trophic levels, confirm that the economy grows at the expense of natural ecosystems. The decision about whether to back Side A or Side B boils down to deciding which are more likely to hold: the laws of physics and ecology, or “economic laws.”

Turning to the second question, the main argument in favor of pursuing “sustainable growth” revolves around technological progress. The idea is to use technological means to decouple economic growth from the use of energy and materials – to increase production and consumption while decreasing physical inputs. Although this is an appealing idea, historical evidence is not encouraging. We have been able to increase the efficiency with which we can produce a dollar’s worth of economic output (i.e., we use less energy and material per dollar of output), but growth has swamped any savings that we might have been able to realize. Overall material and energy use have increased even as we’ve gotten more efficient (the so-called “rebound effect” or “Jevon’s paradox”).

Regarding the prospects for building a socially stable steady state economy, Peter Victor’s model of the Canadian economy shows that with the right policies, we can achieve a non-growing economy that maintains full employment, virtually eliminates poverty, reduces greenhouse gas emissions, and maintains fiscal balance. The feasibility, then, rests on whether societies can generate the political will to adopt such policies (e.g., reducing the working week and year, changing the business structures, and shifting taxation to limit resource use).

Returning to the article in Nature, Peter remarks on the changes that need to occur:

As long as economic growth remains so important to global policymakers, humanity is hopelessly constrained: the environmental policies we need face the unreasonable political hurdle that they must also be shown to promote economic growth. This must change. At grass-roots level, many people in the developed world are already directing their energies towards enhanced wellbeing, in part by turning to local producers for their food, clothing and other needs. Institutions of all kinds — financial, political, legal, educational, religious and social — that have evolved to thrive in a fast-growing economy will have to adapt.

The scope of change required is daunting, but the first step is to reconsider the dilemma of economic growth. In doing so, real answers about the desirability of economic growth will emerge. By refusing to consider the steady state economy as an alternative to continuously increasing production and consumption, nations of the world risk missing out on the best means of achieving sustainable and equitable well-being for all people.