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Guess What Trudeau Said About Growth?

By James Magnus-Johnston

James Magnus-JohnstonIn an appeal to Mr. Trudeau’s philosophical musings, I’ve written a letter to him listing five ways Canada can foster a better, more sustainable economy.

 

 

“There are a lot of people out there, environmental thinkers like Herman Daly and others, who talk about the fact that maybe endless growth within a finite system is not either possible or even desirable. Maybe we have to talk about shifting our focus so that instead of just growing, we’re actually developing and improving.” Maclean’s, “In conversation: Justin Trudeau” 2012

Justin Trudeau.Canadian Pacific

Canadian Prime Minister, Justin Trudeau. Photo Credit: Canadian Pacific.

Dear Prime Minister Trudeau,

Congratulations on winning a majority government. While most of the world appears to be fixated on your admirable hair and bone structure, I’m caught reflecting on these words you uttered a few years ago. I’m not surprised that I haven’t heard you repeat them recently, since very few world leaders adopt the rhetoric of the post-growth paradigm. But it’s clear that you have some fundamental knowledge of alternatives to growth.

If your handlers wouldn’t dare let you say such things on the campaign trail, it’s perhaps unlikely to think that you’ll adopt a steady state agenda during your term in office. On the other hand, what you said wasn’t printed in some obscure blog, taken out of context, or overheard in conversation. It was in a national platform, Maclean’s magazine, one of Canada’s largest newsmagazines. Your remarks appear to reveal some sincerity about your view of the world we’re currently inhabiting—a world with definable environmental limits to growth, like climate change.

Of course, the norms of the majority and rhetoric of the status quo can overwhelm the greatest idealists, especially in a centrist big-tent party like Canada’s liberal party. So I’m going to appeal to your not-so-long-lost philosophy by reminding you that many young folks are facing a bleak future. And I don’t just mean low-wage jobs. I mean a fear of catastrophic environmental breakdown, as evidenced by rapid methane releases in the Arctic and ocean acidification—both characteristics of climate change—as well as mass extinction. These are real, tangible manifestations of the limits to growth.

It’s going to be very hard to turn our atmosphere around, but we could adopt policies immediately to shift our focus “so that instead of just growing, we’re actually developing and improving.” Here are five practical ways to move us towards a better, more sustainable economy. After all, you’re the one that keeps reminding us that “in Canada, better is always possible.”

  1. Start counting some of the costs associated with GDP growth (formally or informally). Tar sands growth, for instance, has myriad costs associated with its expansion, including insured losses due to extreme weather, droughts, and floods, among other things. At the community level, some indigenous communities have no trouble getting funding for incarceration and diabetes treatments but can’t get funding for healthy food and community development. You could help turn this around.
  2. Finish what your father started experimenting with in Dauphin in 1978 and implement a basic income for all Canadians. Senator Hugh Segal has made a great case for why this is a practical idea.
  3. Consider a formal, nationwide price on carbon. You mentioned that you’d leave it to the provinces, but the only reason different provinces have different carbon pricing systems is because it’s taken so long for the federal government to get started on this in the first place. Much like the emergence of a national healthcare system, you could learn from the provincial early adopters and go nationwide.
  4. We have a central bank. Let’s start using it again for low-cost or even no-interest borrowing. If you have an ambitious infrastructure agenda, and want to do it without creating long-term debt, borrow from your own bank rather than the private banks. The debt-based private banking system has rather stupidly inflated the prices of commodities and housing for folks under the age of 40. That’s called “uneconomic growth,” and it’s fostering a generation of exploited Canadians.
  5. Help free up the working day, week, and year by encouraging greater work flexibility, like some European models. Full time employment for everyone is impossible to provide with low growth rates (like the present). Young people are the ones getting the shaft, and we’re well beyond the need for everyone to spend their lives toiling in low-wage jobs.

So, Mr. Trudeau, if you truly believe (as you said) that “maybe we have to talk about shifting our focus so that instead of just growing, we’re actually developing and improving,” I’ve just provided five examples of how your government can start doing that right away.

We recognize that the devil is in the details, and we’re here to help sort through them with you.

For a thriving, sustainable future,

James Magnus-Johnston

Canadian Director, Center for the Advancement of the Steady State Economy (CASSE)

 

War and Peace and the Steady-State Economy

by Herman Daly

DalyMy parents were children during WW I, the so-called “war to end all wars.” I was a child in WW II, an adolescent in the Korean War, and except for a physical disability would likely have been drafted to fight in the Vietnam War. Then came Afghanistan, Iraq, the continuous Arab-Israeli conflict, ISIS, Ukraine, Syria, etc. Now as a senior citizen, I see that war has metastasized into terrorism. It is hard to conceive of a country at war, or threatened by terrorism, moving to a steady state economy.

Peace is necessary for real progress, including progress toward a steady state economy. While peace should be our priority, might it nevertheless be the case that working toward a steady state economy would further the goal of peace? Might growth be a major cause of war, and the steady state a necessity for eliminating that cause? I think this is so.

More people require more space (lebensraum) and more resources. More things per person also require more space and more resources. Recently I learned that the word “rival” derives from the same root as “river.” People who get their water from the same river are rivals–at least when there are too many of them each drawing too much.

War and Peace - Jayel Aheram

Contrary to popular belief, growth in a finite and full world is not the path to peace, but to further conflict. Photo Credit: Jayel Aheram

For a while, the resource demands of growth can be met from within national borders. Then there is pressure to exploit or appropriate the global commons. Then comes the peaceful penetration of other nations’ ecological space by trade. The uneven geographic distribution of resources (petroleum, fertile soil, water) causes specialization among nations and interdependence along with trade. Are interdependent nations more or less likely to go to war? That has been argued both ways, but when one growing nation has what another thinks it absolutely needs for its growth, conflict easily displaces trade. As interdependence becomes more acute, then trade becomes less voluntary–more like an offer you can’t refuse. Unless trade is voluntary, it is not likely to be mutually beneficial. Top down global economic integration replaces trade among separate interdependent national economies. We have been told on highest authority that because the American way of life requires foreign oil, we will have it one way or another.

International “free trade pacts” (NAFTA, TPP, TAFTA) are supposed to increase global GDP, thereby making us all richer and effectively expanding the size of the earth and easing conflict. But growth in the full world has become uneconomic–increasing costs faster than benefits. It now makes us poorer, not richer. These secretly negotiated agreements among the elites are designed to benefit private global corporations, often at the expense of the public good of nations. Some think that strengthening global corporations by erasing national boundaries will reduce the likelihood of war. More likely we will just shift to feudal corporate wars in a post-national global commons, with corporate fiefdoms effectively buying national governments and their armies, supplemented by already existing private mercenaries.

It is hard to imagine a steady state economy without peace; it is hard to imagine peace in a full world without a steady state economy. Those who work for peace are promoting the steady state, and those who work for a steady state are promoting peace. This implicit alliance needs to be made explicit. Contrary to popular belief, growth in a finite and full world is not the path to peace, but to further conflict. It is an illusion to think that we can buy peace with growth. The growth economy and warfare are now natural allies. It is time for peacemakers and steady staters to recognize their natural alliance.

It would be naïve, however, to think that growth in the face of environmental limits is the only cause of war. Evil ideologies, religious conflict, and “clash of civilizations” also cause wars. National defense is necessary, but uneconomic growth does not make our country stronger. The secular west has a hard time understanding that religious conviction can motivate people to both to kill and die for their beliefs. Modern devotion to the Secular God of Growth, who promises heaven on earth, has itself become a fanatical religion that inspires violence as much as any ancient Moloch. The Second Commandment, forbidding the worship of false gods (idolatry) is not outdated. Our modern idols are new versions of Mammon and Mars.

The Puzzling Flattening of Carbon Emissions and the Problem of Global Growth

by Kurt Cobb

Editor’s Note: the below was originally published by Resource Insights.

Kurt CobbLast week we learned that maybe, just maybe, global carbon emissions were flat in 2014 even though the global economy supposedly grew by 3 percent. As Brad Plumer of Vox (whose work I greatly respect) points out, carbon emissions have moved up almost in lockstep with economic growth for the entire industrial age except during recessions and one year of growth 40 years ago.

This is why I use “supposedly” when referring to the global economic growth number. It’s because there is another obvious and plausible explanation for the flat carbon emissions, namely, that the global economy did not grow by the stated percentage, that it may have grown only a fraction of that amount or not at all.

Economic measures are constantly being revised, and I think it is very likely that the global economic growth number for 2014 will be revised downward. Probably not to zero, but downward nonetheless. It’s also possible that estimates of carbon emissions are too low. Plumer cites “notoriously unreliable” Chinese emission numbers as one reason to be skeptical.

But, even if 2014 turns out to be a year of growth without rising emissions, we shouldn’t get particularly exercised. Nor should we be particularly excited if it continues for a time. This is because the only trend that will actually address climate change is a RAPID DECLINE in worldwide emissions (as Plumer rightly points out).

Plumer makes one very telling statement in this regard:

If we ever hope to stop global warming, we’ll have to sever that relationship [of economic growth to emissions] — and figure out how to have economic growth while reducing emissions. (Alternatively, we could halt economic growth, but no one wants that.)

“Alternatively, we could halt economic growth, but no one wants that.” Two questions arise from this observation: Is it true that “no one wants that”? Who specifically wants economic growth to continue and why?

The answer to the first question is no; there is, in fact, a small minority of people advocating an end to growth. Herman Daly, former World Bank senior economist, is the acknowledged dean of the steady state economy movement. In a September 2005 Scientific American piece, “Economics in A Full World,” he outlined his case for why there is little room for economic growth and why growth in recent decades has been uneconomic, that is, the cost of such growth has outweighed the benefits.

There are also the deep ecologists who value other species on the planet as much as our own, a view which implies not only an end to economic growth but a serious rollback of industrial civilization. Perhaps Derrick Jensen is the best known of the deep ecologists whose views about how to achieve the proper role for humans on planet Earth varies greatly.

Given that there are people who want to halt or even reverse economic growth, we must now ask the second question: Who wants growth and why?

If we follow Herman Daly’s logic, we have long since passed the point of economic growth and now have “uneconomic growth,” growth that imposes costs greater than the growth is worth: social costs in terms of inequality and environmental costs that undermine the long-term sustainability of human society.

So, who benefits from such growth? We now have a name for this group, the one percent. Those with the highest incomes and greatest financial wealth continue to benefit from such growth since they can both reap disproportionate rewards from it and insulate themselves from the costs associated with it–leaving others to bear them.

When Plumer says that no one wants economic growth to end, what he is unwittingly saying is that the power elite in the world does not want to face the grand implication of a steady state economy–namely, that lower-income groups cannot be assured of a better material existence through economic growth and so such betterment would, of necessity, have to come from the redistribution of wealth.

As long as the chimera of perpetual growth can be sold to the masses, no one will have to deal with the thorny issue of redistribution as the primary method for the economic betterment of the middle and lower classes.

And yet, growth ended for many people around the globe in 2008. According to the International Labour Organization (ILO), if you earn the median wage in Kenya, your real income has declined 26 percent from 2008 through 2013. For Greece, the decline has been 24 percent. For prosperous Singapore and Japan the number is minus 1 percent. Egyptian real median income declined 10 percent; the United Kingdom declined 7 percent; Iceland and Italy, 6 percent; Taiwan, 5 percent; Spain and the Netherlands, 3 percent; Ireland, 2 percent; Austria, Luxembourg and the Philippines, all hovered around zero percent growth.

Of course, some prospered. Median wages in Romania, Panama, Paraguay, Norway, Jordan, Poland, Vietnam and Morocco all rose more than 10 percent from 2008 onward. There were standouts: The Brazilian median wage grew by 21 percent; Thailand by 26 percent; China by 74 percent; Mongolia by 75 percent. Ukrainian workers enjoyed a media wage increase of 43 percent through 2013 though it is likely that much of that has since been wiped out by the war and currency crisis there. In the United States, the median wage registered a one percent increase according to the ILO, though homegrown analysis suggests a decline.

The metaphorical tide of economic growth that is supposed to lift all boats is lifting far fewer people much more selectively than before.

On the other hand, if you possess substantial financial assets, you have prospered quite nicely as financial markets post daily records in the face of ever more precarious economic growth numbers around the world. But, only a small portion of the world’s people have any financial assets at all. The fate of a large number of the others has been stagnant or falling incomes or unemployment in an increasingly uncertain world.

Whether economic growth for all the world’s people will return is an open question. The system by which we’ve governed the world economy, a system dependent on central banking, central government spending, the build-up of huge and unsustainable debt, and the ever more rapid depletion of fossil fuels and other resources is showing its decrepitude.

Six years of pedal-to-the-metal monetary policy and government deficit spending have barely nudged world growth forward while levitating financial markets to unsustainable levels (and thereby exacerbating inequality). Such policies in the past would have had the world economy quickly overheating with central bankers responding by hoisting interest rates sky high to rein in inflation and financial excesses.

Instead, the economy remains so weak that the U.S. Federal Reserve had to reassure the world that despite language in its recent public statement that would indicate an imminent increase in interest rates for the first time in 10 years (that’s not a typo), the central bank really wouldn’t be raising them anytime soon after all.

So, maybe flat carbon emissions are actually telling us something “no one” wants to hear: that economic growth has faltered or even halted for a large portion of the world’s people and that we are going to have to deal with the consequences of that until we design a new system that can either grow for the benefit of everyone–a difficult proposition–or that can sustainably, equitably and successfully manage a steady state economy–an even more difficult proposition.

Kurt Cobb is an authorspeaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Three Limits to Growth

by Herman Daly

Herman DalyAs production (real GDP) grows, its marginal utility declines, because we satisfy our most important needs first. Likewise, the marginal disutilitiy inflicted by growth increases, because as the economy expands into the ecosphere we sacrifice our least important ecological services first (to the extent we know them). These rising costs and declining benefits of growth at the margin are depicted in the diagram below.

3 Limits Graph

From the diagram we can distinguish three concepts of limits to growth.

1. The “futility limit” occurs when marginal utility of production falls to zero. Even with no cost of production, there is a limit to how much we can consume and still enjoy it. There is a limit to how many goods we can enjoy in a given time period, as well as a limit to our stomachs and to the sensory capacity of our nervous systems. In a world with considerable poverty, and in which the poor observe the rich apparently still enjoying their extra wealth, this futility limit is thought to be far away, not only for the poor, but for everyone. By its “non satiety” postulate, neoclassical economics formally denies the concept of the futility limit. However, studies showing that beyond a threshold self-evaluated happiness (total utility) ceases to increase with GDP, strengthen the relevance of the futility limit.

2. The “ecological catastrophe limit” is represented by a sharp increase to the vertical of the marginal cost curve. Some human activity, or novel combination of activities, may induce a chain reaction, or tipping point, and collapse our ecological niche. The leading candidate for the catastrophe limit at present is runaway climate change induced by greenhouse gasses emitted in pursuit of economic growth. Where along the horizontal axis it might occur is uncertain. I should note that the assumption of a continuously and smoothly increasing marginal cost (disutility) curve is quite optimistic. Given our limited understanding of how the ecosystem functions, we cannot be sure that we have correctly sequenced our growth-imposed sacrifices of ecological services from least to most important. In making way for growth, we may ignorantly sacrifice a vital ecosystem service ahead of a trivial one. Thus the marginal cost curve might in reality zig-zag up and down discontinuously, making it difficult to separate the catastrophe limit from the third and most important limit, namely the economic limit.

3. The “economic limit” is defined by marginal cost equal to marginal benefit and the consequent maximization of net benefit. The good thing about the economic limit is that it would appear to be the first limit encountered. It certainly occurs before the futility limit, and likely before the catastrophe limit, although as just noted that is uncertain. At worst the catastrophe limit might coincide with and discontinuously determine the economic limit. Therefore it is very important to estimate the risks of catastrophe and include them as costs counted in the disutility curve, as far as possible.

From the graph it is evident that increasing production and consumption is rightly called economic growth only up to the economic limit. Beyond that point it becomes uneconomic growth because it increases costs by more than benefits, making us poorer, not richer. Unfortunately it seems that we perversely continue to call it economic growth! Indeed, you will not find the term “uneconomic growth” in any textbook in macroeconomics. Any increase in real GDP is called “economic growth” even if it increases costs faster than benefits.

Earth -

The macro-economy is not the Whole, but rather Part of the finite Whole. Photo Credit: Beth Scupham

Economists will note that the logic just employed is familiar in microeconomics—marginal cost equal to marginal benefit defines the optimal size of a microeconomic unit, be it a firm or household. That logic is not usually applied to the macro-economy, however, because the latter is thought to be the Whole rather than a Part. When a Part expands into the finite Whole, it imposes an opportunity cost on other Parts that must shrink to make room for it. When the Whole itself expands, it is thought to impose no opportunity cost because it displaces nothing, presumably expanding into the void. But the macro-economy is not the Whole. It too is a Part, a part of the larger natural economy, the ecosphere, and its growth does inflict opportunity costs on the finite Whole that must be counted. Ignoring this fact leads many economists to believe that growth in GDP could never be uneconomic.

Standard economists might accept this diagram as a static picture, but argue that in a dynamic world technology will shift the marginal benefit curve upward and the marginal cost curve downward, moving their intersection (economic limit) ever to the right, so that continual growth remains both desirable and possible. However, the macroeconomic curve-shifters need to remember three things. First, the physically growing macro-economy is still limited by its displacement of the finite ecosphere, and by the entropic nature of its maintenance throughput. Second, the timing of new technology is uncertain. The expected technology may not be invented or come on line until after we have passed the economic limit. Do we then endure uneconomic growth while waiting and hoping for the curves to shift? Third, let us remember that the curves can also shift in the wrong directions, moving the economic limit back to the left. Did the technological advances of tetraethyl lead and chlorofluorocarbons shift the cost curve down or up? How about nuclear power? Adopting a steady state economy allows us to avoid being shoved past the economic limit. We could take our time to evaluate new technology rather than letting it blindly push growth that may well be uneconomic. And the steady state gives us some insurance against the risks of ecological catastrophe that increase with growthism and technological impatience.

Gross Domestic Problem: Don’t Shoot the Measurement

by Brian Czech

BrianCzechA battle is brewing on the outskirts of the general public. A rising tide of quixotic activists is trying to overthrow a time-tested American institution. Like the Battle in Seattle, where the IMF was put on public trial, this new struggle will get a lot of attention, but the institution will remain.

The “institution” in this case is a metric: GDP, or Gross Domestic Product. But GDP isn’t any old metric, like widgets assembled or the price of potatoes. GDP is thoroughly institutionalized at the center of our domestic policy arena. When fiscal and monetary policies are crafted, each is judged according to the likely effects on GDP. If something will increase GDP, it must be good and will likely be adopted. GDP growth is the king of policy goals.

The central logic of pursuing GDP growth is “a rising tide lifts all boats.” As long as GDP continues to grow, it is mathematically possible to have more jobs and increase the amount of GDP available per person. In other words, the “standard of living” can increase with GDP.

The rising tide logic made perfect sense during most of the 20th century, when there was a lot of open water and plenty of boat-building material. But such is not the case in the 21st century. Growing the GDP entails population growth or growth in consumption per person; usually both. Trying to grow the GDP these days causes as many problems as it solves. Biodiversity loss, climate change, and pollution are some of the obvious ones. Noise, congestion, and stress are too. It doesn’t look like GDP growth increases the standard of living after all, unless your idea of living standards is particularly anal.

Keystone Protest

GDP measures environmental impact and the size of our economy, not its health. Photo Credit: Stephen Melkisethian

A more nuanced problem is that GDP growth is addictive, kind of like NFL football or World Cup soccer. It has societies and governments all over the world scrambling like hamsters to keep “the score” from shrinking. Crazy things are done in the name of GDP growth: huge rivers are dammed, Keystone pipelines are built, Supreme Courts kick people out of their homes. (Remember Kelo vs. New London?) A society hell-bent on GDP growth is like a junkie doing whatever nasty thing it takes for the next high, rather than doing the right thing for himself and his family.

Yet the realization is gradually spreading that GDP growth can’t continue forever. This reality is causing societal angst and discomfort. For many, especially in the economics profession and business world, the response is denial. “The world can, in effect, get along without resources” is how Robert Solow, the Nobel prize-winning economist, put it.

But among those with their feet firmly on the ground, seeing the limits to growth materialize, the responses aren’t always prudent either. One such response has been to shoot the measurer, or to be more metaphorically accurate, to shoot the measurement of GDP. The politics of this makes for some exceptionally strange bedfellows. From tree-hugging Earth Firsters to staid Austrian-school economists to think tanks funded by the Rockefeller Brothers fund, performing an exorcism of GDP from the spirit of our political economy is all the rage.

The motives of the GDP antagonists differ wildly, reminiscent of the NRA joining the ACLU to fend off the NSA. Pro-growth, free-market economists don’t like government getting any credit for anything, and GDP calculations include government spending, so GDP must be an evil spirit. On the other end of the spectrum, no-growth proponents who see the government as a force to defeat the pro-growth capitalists (and economists) think… something quite odd. They think that, if we refuse to even acknowledge GDP, we’re less likely to be obsessed with its growth, and we can focus more on healthier goals such as better education and healthcare.

It’s shoddy logic at best. It’s akin to an alcoholic thinking, “If I don’t count those beers I drink, I’m not as likely to drink so many. Then I can focus more on my book-learning and health.”

Shall we have a toast? Let’s drink to not counting those beers!

No, the fact is that the alcoholic needs to count those beers more than ever. The diabetic needs to monitor that blood sugar. The obese patient needs to monitor that scale. You get the picture: As our economy exceeds the capacity of the planet to sustain us and future generations, we need to monitor the size of our economy more closely than ever. And there is no better measurement of the size of our economy than GDP.

Due to the fundamental structure of the economy, the size of the economy – as measured by GDP – is a perfectly valid indicator of environmental impact. Agricultural and extractive sectors form the base, which must expand to support the growth of manufacturing and service sectors – yes even the “information economy.” This structure, which is the closest thing in economics to an inescapable law of physics, gives us the “trophic theory of money,” which says that the level of expenditure (GDP, in other words) is proportionate to environmental impact including such tangibles as biodiversity loss, climate change, and pollution in the aggregate.

Those who think technological progress can somehow decouple GDP growth from environmental impact haven’t thought hard enough about the relationship between technological progress and the GDP growth that was based on pre-existing levels of technology. The two go hand in hand, which again in the 20th century was a fine thing. The two going hand in hand in the 21st century tells us nothing except that technological progress cannot reconcile the conflict between economic growth and environmental protection.

So let’s not shoot the measurer or the measurement. Let our friends in the Bureau of Economic Analysis calculate GDP as consistently as they’ve done for over 80 years. They perform a valuable service, and GDP is an invaluable metric. Instead of shooting it, let’s help to ensure the appropriate attitude toward ever-growing GDP: that is, a growing sense of alarm and a concomitant determination to stabilize the size of this economic ship before it sinks as surely as the Titanic.

Krugman’s Growthism

by Herman Daly

Herman Daly

 

Paul Krugman often writes sensibly and cogently about economic policy. But like many economists, he can become incoherent on the subject of growth. Consider his New York Times piece, published earlier this month:

 

…let’s talk for a minute about the overall relationship between economic growth and the environment.

Other things equal, more G.D.P. tends to mean more pollution. What transformed China into the world’s largest emitter of greenhouse gases? Explosive economic growth. But other things don’t have to be equal. There’s no necessary one-to-one relationship between growth and pollution.

People on both the left and the right often fail to understand this point…On the left, you sometimes find environmentalists asserting that to save the planet we must give up on the idea of an ever-growing economy; on the right, you often find assertions that any attempt to limit pollution will have devastating impacts on growth…[Krugman says both are wrong]…But there’s no reason we can’t become richer while reducing our impact on the environment [emphasis mine].

Krugman distances himself from “leftist” environmentalists who say we must give up the idea of an ever-growing economy, and is himself apparently unwilling to give it up. But he thinks the “right-wingers” are wrong to believe that protecting the environment will devastate growth. Krugman then advocates the more sensible goal of “becoming richer,” but fails to ask if growth in GDP is any longer really making us richer. He seems to equate, or at least fails to distinguish, “growing GDP” from “becoming richer.” Does he assume that because GDP growth did make us richer in yesterday’s empty world it must still do so in today’s full world? The usual but unjustified assumption of many economists is that a growing GDP increases measured wealth by more than it increases unmeasured “illth” (a word coined by John Ruskin to designate the opposite of wealth).

To elaborate, illth is a joint product with wealth. At the current margin, it is likely that the GDP flow component of “bads” adds to the stock of “illth” faster than the GDP flow of goods adds to the stock of wealth. We fail to measure bads and illth because there is no demand for them, consequently no market and no price, so there is no easy measure of negative value. However, what is unmeasured does not for that reason become unreal. It continues to exist, and even grow. Since we do not measure illth, I cannot prove that growth is currently making us poorer, any more than Krugman can prove that it is making us richer. I am just pointing out that his GDP growthism assumes a proposition that, while true in the past, is very doubtful today in the US.

To see why it is doubtful, just consider a catalog of negative joint products whose value should be measured under the rubric of illth: climate change from excess carbon in the atmosphere; radioactive wastes and risks of nuclear power plants; biodiversity loss; depleted mines; deforestation; eroded topsoil; dry wells, rivers and aquifers; the dead zone in the Gulf of Mexico; gyres of plastic trash in the oceans; the ozone hole; exhausting and dangerous labor; and the un-repayable debt from trying to push growth in the symbolic financial sector beyond what is possible in the real sector (not to mention military expenditures to maintain access to global resources).

Deforestation–one of the many “illths” created by continual GDP growth

These negative joint products of GDP growth go far beyond Krugman’s minimal nondescript category of “pollution.” Not only are these public bads un-subtracted, but the private anti-bads they make necessary are added to GDP! For example, the bad of eroded topsoil is not subtracted, but the anti-bad of fertilizer is added. The bad of Gulf and Arctic oil spills is not subtracted, but the anti-bad of clean-up is added. The natural capital depletion of mines, wells, forests, and fisheries is falsely accounted as income rather than capital draw-down.

Such asymmetric accounting alone is sufficient to refute growthism, but for good measure note that the growthists also neglect the most basic laws of economics, namely, the diminishing marginal benefit of income and increasing marginal cost of production. Why do they think these two curves will never intersect? Is Krugman just advocating temporary growth up to some level of optimality or sufficiency, or an ever-growing economy? If the latter, then either the surface of the Earth must grow at a rate approximating the rate of interest, or real GDP must become “angel GDP” with no physical dimension.

Krugman is correct that that there is no necessary “one-to-one relationship between growth and pollution.” But there certainly is a very strong positive correlation between real GDP growth and resource throughput (the entropic physical flow that begins with depletion and ends with pollution). Since when do economists dismiss significant correlations just because they are not “one-to-one”?

Probably we could indeed become richer (increase net wealth) while reducing our impact on the environment, as Krugman hopes. But it will be by reducing uneconomic growth (in throughput and its close correlate, GDP) rather than by increasing it. I would be glad if this were what Krugman has in mind, but I doubt that it is.

In any case, it would be good if he would specify whether he thinks current growth in real GDP is still economic in the literal sense that its benefits exceed its costs at the margin. What specifically makes him think this is so? In other words, is GDP growth currently making us richer or poorer, and how do we know?

Since GDP is a conflation of both costly and beneficial activity, should we not separate the cost and benefit items into separate accounts and compare them at the margin, instead of adding them together? How do we know that growth in GDP is a sensible goal if we do not know if the associated benefits are growing more or less rapidly than the associated costs? Mainstream economists, including Krugman, need to free their thinking from dogmatic GDP growthism.

Tensions in Ukraine: A Scramble for Growth?

by James Magnus-Johnston

The situation in Ukraine is undoubtedly complex, but it may be as much about a scramble for growth and fossil fuel as it is about ethno-cultural identity.

In a statement issued last week, Ukrainian Prime Minister Arseniy Yatsenyuk focused heavily upon energy politics. He accused Russia of using energy as a “new nuclear weapon.” The cold war reference is clear: just as the former Soviet Union used its nuclear arsenal to hold the world hostage to conflict, today it’s fossil fuel that’s used as a bargaining chip in the geopolitical game.

Europe’s dependence upon Russian fossil fuel helps explain why the Russian leadership has been able to act without fear of retribution. Over 50 percent of Russian gas exports to Europe pass through Ukraine, and Europe relies on Russia for 40 percent of its imported fuel.

The energy sector drives the European economy as well as the world’s high-finance casino, in which speculative claims on fossil fuel inflate dividends to inequitable heights. Yatsenyuk acknowledges that “[the Russians] sell oil and gas mainly to the EU and then take Euros, dollars and pounds — and buy weapons [and] military equipment.” This creates a vicious cycle in which super-inflated fossil fuel dividends can be leveraged to buy even more military equipment, which is in turn used to control fossil fuel infrastructure. And voila — uneconomic growth.

Danger in Ukraine

Pursuit of cheap energy and unending growth spell danger in Ukraine and elsewhere around the world (photo credit: Trey Ratcliff).

The resulting concentration of wealth in the hands of the few appears to feed nationalist fervor at home just as it buys political favor abroad. Russia’s biggest players have been investing around the world for years, but references to Russian power and influence belie the extent of Russian inequality. Russia “has the highest level of wealth inequality in the world, apart from small Caribbean nations with resident billionaires,” according to a 2013 report by Credit Suisse. In Russia, 110 billionaires hold a shocking 35% of all wealth; globally, billionaires collectively account for only 1-2% of total household wealth.

My intent is not to characterize Russia as the classic American villain. In fact, Ukrainian nationalists are, by some accounts, as menacing to Ukraine’s future as Putin’s Russia, and there is plenty of Western hypocrisy for a second editorial. What we need to consider is that the remaining Russian carbon should not be removed from the ground, and all of the supposed spinoff benefits — the military buildup, the further fuel extraction, the super-inflated dividends — generate harmful growth that benefits only a few.

Yet according to the outdated neoclassical script for economic success, growth is signalling to some that Russia is somehow on the right track — a display of power, progress, and innovation. Like other present-day examples, including nationalistic rhetoric surrounding tar-sands production in Canada, dogmatic support of growth is more accurately characterized as hubris, stagnation, and ill-advised development.

The planet’s life support system doesn’t have time for a rehearsal of twentieth-century nationalism fed by a rush for cheap oil; nor will the “victors” in any contemporary power struggle have the opportunity to cash in their casino winnings. Without embracing a post-growth paradigm shift, we’ll all be in for a gruesome ride. With cheap oil and the casino economy fading into history, we need to adopt a steady-state economy and give everyone a chance at winning; otherwise we’ll have to accept senseless land and resource grabs in which everyone loses.

James Magnus-Johnston is the Canadian Director of CASSE and a professor of political studies and economics at Canadian Mennonite University.

The Negative Natural Interest Rate and Uneconomic Growth

by Herman Daly

Herman DalyIn a recent speech to the International Monetary Fund economist Larry Summers argued that since near zero interest rates have not stimulated GDP growth sufficiently to reach full employment, we probably need a negative interest rate. By this he means a negative monetary rate set by the Fed to equal the “natural” rate, which he believes is now negative. The natural rate, as Summers uses the term, means the rate that would equalize planned saving with planned investment, and thereby, as Keynes taught us, result in full employment. With near zero monetary rates, current inflation already pushes us to a negative real rate of interest, but that is still insufficiently negative, in Summers’ view, to equalize planned investment with planned saving and thereby stimulate GDP growth sufficient for full employment. A negative interest rate is a stunning proposal, and it takes some effort to work out its implications.

Suppose for a moment that GDP growth, economic growth as we gratuitously call it, entails uneconomic growth by a more comprehensive measure of costs and benefits — that GDP growth has now begun to increase counted plus uncounted costs by more than counted plus uncounted benefits, making us inclusively and collectively poorer, not richer. If that is the case, and there are good reasons to believe that it is, would it not then be reasonable to expect, along with Summers, that the natural rate of interest is negative, and that maybe the monetary rate should be too? This is hard to imagine, but it means that savers would have to pay investors (and banks) to use the funds that they have saved, rather than investors and banks paying savers for the use of their money. To keep the GDP growing sufficiently to avoid unemployment we would need a growing monetary circular flow, which would require more investment, which, in turn, would only be forthcoming if the monetary interest rate were negative (i.e., if you lost less by investing your money than by holding it). A negative interest rate “makes sense” if the goal is to keep on increasing GDP even after it has begun to make us poorer at the margin — that is after growth has already pushed us beyond the optimal scale of the macro-economy relative to the containing ecosphere, and thereby become uneconomic.

A negative monetary interest rate means that citizens will spend rather than save, so savings will not be available to finance the investments that produce the GDP growth needed for full employment. The new money for investment comes from the Fed. Quantitative easing (money printing) is the source of the new money. The faith is that an ever-expanding monetary circulation will pull the real economy along behind it, providing growth in real income and jobs as previously idle resources are employed. But the resulting GDP growth is now uneconomic because in the full world the “idle” resources are not really idle — they are providing vital ecosystem services. Redeploying these resources to GDP growth has environmental and social opportunity costs that are greater than production benefits. Although hyper-Keynesian macroeconomists do not believe this, the micro actors in the real economy experience the constraints of the full world, and consequently find it difficult to follow the unlimited growth recipe.

Summers (along with other mainstream growth economists), does not accept the concept of optimal scale of the macro-economy, nor the possibility of uneconomic growth in the sense that growth in resource throughput could reduce net wealth and wellbeing. Nevertheless, it is at least consistent with his view that the natural rate of interest is negative.

A positive interest rate restricts the total volume of investment but allocates it to the most productive projects. A negative interest rate increases volume, but allows investment in practically anything, increasing the probability that growth will be uneconomic. Shall we become hyper-Keynesians and push GDP growth to maintain full employment, even after growth has become uneconomic? Or shall we back off from growth and seek full employment by job sharing, distributive equity, and reallocation toward leisure and public goods?

Why would we allow growth to carry the macro-economy beyond the optimal scale? Because growth in GDP is considered the summum bonum, and it is heresy not to advocate increasing it. If increasing GDP makes us worse off we will not admit it, but will adapt to the experience of increased scarcity by pushing GDP growth further. Non-growth is viewed as “stagnation,” not as a sensible steady state adaptation to objective limits. Stimulating GDP growth by increasing consumption and investment, while cutting savings, is the only way that hyper-Keynesians can think of to serve the worthy goal of full employment. There really are other ways, and people really do need to save for security and old age, as well as for maintenance and replacement of the existing capital stock. Yet the Fed is being advised to penalize saving with a negative interest rate. The focus is on what the growth model requires, not on what people need.

A negative interest rate seems also to be the latest advice from Paul Krugman, who praises Summers’ insights. It is understandable from their viewpoint because in their vision the economy is not a subsystem, or if it is, it is infinitesimal relative to the total system. The economy can expand forever, either into the void or into a near infinite environment. It does not grow into a finite ecosphere, and therefore has no optimal scale relative to any constraining and sustaining environment. Its aggregate growth incurs no opportunity cost and can never be uneconomic. Unfortunately, this tacit assumption of the growth model is seriously wrong.

Larry Summers and other growth-obsessed economists are calling for negative interest rates.

Larry Summers and other growth-obsessed economists are calling for negative interest rates.

Welcome to the full-world economy. In the old empty-world economy, assumed in the macro models of Summers and Krugman, growth always remains economic, so they advocate printing more and more dollars to expand the economy to take over ever more of the “unemployed” sources and sinks of the ecosystem. If a temporary liquidity trap or zero lower bound on interest rates keeps the new money from being spent, then low or even negative monetary interest rates will open the spending spigot. The empty world assumption guarantees that the newly expanded production will always be worth more than the natural wealth it displaces. But what may well have been true in yesterday’s empty world is no longer true in today’s full world.

This is an upsetting prospect for growth economists — growth is required for full employment, but growth now makes us collectively poorer. Without growth we would have to cure poverty by redistributing wealth and stabilizing population, two political anathemas, and could only finance investment by reducing present consumption, a third anathema. There remains the microeconomic policy of reallocating the same GDP to a more efficient mix of products by internalizing external costs (getting prices right). While this certainly should be done, it is not macroeconomic growth as pursued by the Fed.

These painful choices could be avoided if only we were richer. So let’s just focus on getting richer. How? By growing the aggregate GDP, of course! What? You repeat that GDP growth is now uneconomic? That cannot possibly be right, they say. OK, that is an empirical question. Let’s separate costs from benefits in the existing GDP accounts, and develop more inclusive measures of each, and then see which grows more as GDP grows. This has been done (ISEW, GPI, Ecological Footprint), and results support the uneconomic growth view. If growth economists think these studies were done badly they should do them better rather than ignore the issue.

The leftover Keynesians are correct in pointing out that there is unemployed labor and capital. But natural resources are fully employed, indeed overexploited, and the limiting factor in the full world is natural resources, not labor or capital as used to be the case in the empty world. Some growth economists think that the world is still empty. Others think there is no limiting factor — that capital is a good substitute for natural resources. This is wrong, as Nicholas Georgescu-Roegen has shown long ago. Capital funds and natural resource flows are complements, not substitutes, and the one in short supply is limiting. Increasing a non-limiting factor doesn’t help. Growth economists should know this.

Although the growthists think quantitative easing will stimulate demand they are disappointed, even in terms of their own model, because the banks, who are supposed to lend the new money, encounter a “lack of bankable projects,” to use World Bank terminology. This of course should be expected in the new era of uneconomic growth. The new money, rather than calling forth new wealth by employing all these hypothetical idle resources from the empty world era, simply bids up existing asset prices in the full world. Most asset prices are not counted in the consumer price index, (not to mention exclusion of food and energy) so economists unconvincingly claim that quantitative easing has not been inflationary, and therefore they can keep doing it. And even if it causes some inflation, that would help make the interest rate negative.

Aside from needed electronic transaction balances, people would not keep money in the bank if the interest rate were negative. To make them do so, the alternative of cash would basically have to be eliminated, and all money would be electronic bank deposits. This intensifies central bank control, and the specter of “bail-ins” (confiscations of deposits) as occurred in Cyprus. Even as distrust of money increases, people will not immediately revert to barter, in spite of negative interest rates. Barter is so inconvenient that money remains more efficient even if it loses value at a rapid rate, as we have seen in several hyperinflations. But transactions balances will be minimized, and speculative and store-of value-balances will be diverted to real estate, gold, works of art, tulip bulbs, Bitcoins, and beanie babies, creating speculative bubbles. But not to worry, say Summers and Krugman, bubbles are a necessary, if regrettable, means to boost spending and growth in the era of newly recognized negative natural interest rates — and still unrecognized uneconomic growth.

A bright silver lining to this cloud of confusion is that the recognition of a negative natural interest rate may be the prelude to recognition of the underlying uneconomic growth as its cause. For sure this has not yet happened because so far the negative natural interest rate is seen as a reason to push growth with a negative monetary interest rate, rather than as a signal that growth has become a losing game. But such a realization is a reasonable hope. Perhaps a step in this direction is Summers’ suggestion that the old Alvin Hansen thesis of secular stagnation might deserve a new look.

The logic that suggests negative interest also suggests negative wages as a further means of increasing investment by lowering costs. To maintain full employment via GDP growth, not only must the interest rate now be negative, but wages should become negative as well. No one yet advocates negative wages because subsistence provides an inconvenient lower positive bound below which workers die. On this “other side of the looking glass” the logic of uneconomic growth pushes us in the direction of a negative “natural” wage, just as with a negative “natural” rate of interest. So we artificially lower the wage costs to “job creators” by subsidizing below-subsistence wages with food stamps, housing subsidies, and unpaid internships. Negative interest rates also subsidize investment in job-replacing capital equipment, further lowering wages. Negative interest rates, and below-subsistence wages, further subsidize the uneconomic growth that gave rise to them in the first place.

The leftover Keynesians tell us, reasonably enough, that paying people to dig holes in the ground and then fill them up, is better than leaving them unemployed with no income. But paying people to deplete and pollute the Creation on which our lives and welfare ultimately depend, in order to expand the macro-economy beyond its optimal or even sustainable scale, is surely worse than just giving them a minimum income, and some leisure time, in exchange for doing no harm.

An artificial monetary rate of interest forced down by quantitative easing to equal a negative natural rate of interest resulting from uneconomic growth is not a solution. It is just baling wire and duct tape. But it is all that even our best and brightest economists can come up with as long as they are imprisoned in the empty world growth model. The way out of this trap is to recognize that the growth era is over, and that instead of forcing growth into uneconomic territory we must seek to maintain a steady-state economy at something approximating the optimal scale. Since we have overshot the optimal scale of the macro-economy, this will require a period of retrenchment to a reduced level, accompanied by much more equal sharing, frugality, and efficiency. Sharing means putting limits on the range of inequality that we permit; it has huge moral and social benefits, even if politically difficult. Frugality means using less resource throughput; it results in less depletion and pollution and more recycling and efficiency. Efficiency means squeezing more life-support and want-satisfaction from a given throughput by technological advance and by improvement in our ethical priorities. Economists need to replace the Keynesian-neoclassical growth synthesis with a new version of the classical stationary state.

Nationalize Money, Not Banks

by Herman Daly

Herman DalyIf our present banking system, in addition to fraudulent and corrupt, also seems “screwy” to you, it should. Why should money, a public utility (serving the public as medium of exchange, store of value, and unit of account), be largely the byproduct of private lending and borrowing? Is that really an improvement over being a by-product of private gold mining, as it was under the gold standard? The best way to sabotage a system is hobble it by tying together two of its separate parts, creating an unnecessary and obstructive connection. Why should the public pay interest to the private banking sector to provide a medium of exchange that the government can provide at little or no cost? And why should seigniorage (profit to the issuer of fiat money) go largely to the private sector rather than entirely to the government (the commonwealth)?

Is there not a better away? Yes, there is. We need not go back to the gold standard. Keep fiat money, but move from fractional reserve banking to a system of 100% reserve requirements on demand deposits. Time deposits (savings accounts) would have zero or minimal reserve requirements and would be available to lend to borrowers. The change need not be abrupt — we could gradually raise the reserve requirement to 100%. Already the Fed has the authority to change reserve requirements but seldom uses it. This would put control of the money supply and seigniorage entirely with the government rather than largely with private banks. Banks would no longer be able to live the alchemist’s dream by creating money out of nothing and lending it at interest. All quasi-bank financial institutions should be brought under this rule, regulated as commercial banks subject to 100% reserve requirements for demand deposits.

Banks cannot create money under 100% reserves (the reserve deposit multiplier would be unity), and banks would earn their profit by financial intermediation only, lending savers’ money for them (charging a loan rate higher than the rate paid to savings or “time-account” depositors) and charging for checking, safekeeping, and other services. With 100% reserves every dollar loaned to a borrower would be a dollar previously saved by a time account depositor (and not available to the depositor during the period of the loan), thereby re-establishing the classical balance between abstinence and investment. With credit limited by saving (abstinence from consumption) there will be less lending and borrowing and it will be done more carefully — no more easy credit to finance the leveraged purchase of “assets” that are nothing but bets on dodgy debts.

Why are private banks controlling this public utility? Photo credit: Steve Rhodes

Why are private banks controlling this public utility? Photo credit: Steve Rhodes

To make up for the decline and eventual elimination of bank-created, interest-bearing money, the government can pay some of its expenses by issuing more non interest-bearing fiat money. However, it can only do this up to a strict limit imposed by inflation. If the government issues more money than the public voluntarily wants to hold, the public will trade it for goods, driving the price level up. As soon as the price index begins to rise the government must print less and tax more. Thus a policy of maintaining a constant price index would govern the internal value of the dollar.

The external value of the dollar could be left to freely fluctuating exchange rates. Alternatively, if we instituted Keynes’ international clearing union, the external value of the dollar, along with that of all other currencies, could be set relative to the bancor, a common denominator accounting unit used by the payments union. The bancor would serve as an international reserve currency for settling trade imbalances — a kind of “gold substitute.”

The United States opposed Keynes’ plan at Bretton Woods precisely because under it the dollar would not function as the world’s reserve currency, and the U.S. would lose the enormous international subsidy that results from all countries having to hold large transaction balances in dollars. The payments union would settle trade balances multilaterally. Each country would have a net trade balance with the rest of the world (with the payments union) in bancor units. Any country running a persistent deficit would be charged a penalty, and if continued would have its currency devalued relative to the bancor. But persistent surplus countries would also be charged a penalty, and if the surplus persisted their currency would suffer an appreciation relative to the bancor. The goal is balanced trade, and both surplus and deficit nations would be expected to take measures to bring their trade into balance. With trade in near balance there would be little need for a world reserve currency, and what need there was could be met by the bancor. Freely fluctuating exchange rates would also in theory keep trade balanced and reduce or eliminate the need for a world reserve currency. Which system would be better is a complicated issue not pursued here. In either case the IMF could be abolished since there would be little need for financing trade imbalances (the IMF’s main purpose) in a regime whose goal is to eliminate trade imbalances.

Returning to domestic institutions, the Treasury would replace the Fed (which is owned by and operated in the interests of the commercial banks). The interest rate would no longer be a target policy variable, but rather left to market forces. The target variables of the Treasury would be the money supply and the price index. The treasury would print and spend into circulation for public purposes as much money as the public voluntarily wants to hold. When the price index begins to rise it must cease printing money and finance any additional public expenditures by taxing or borrowing from the public (not from itself). The policy of maintaining a constant price index effectively gives the fiat currency the “backing” of the basket of commodities in the price index.

In the 1920s the leading academic economists, Frank Knight of Chicago and Irving Fisher of Yale, along with others including underground economist and Nobel Laureate in Chemistry, Frederick Soddy, strongly advocated a policy of 100% reserves for commercial banks. Why did this suggestion for financial reform disappear from discussion? The best answer I have found is that the Great Depression and subsequent Keynesian emphasis on growth swept it aside, because limiting lending (borrowing) to actual savings (a key feature of 100% reserves) was considered too restrictive on growth, which had become the big panacea. Saving more, even with the intent to invest more, would require reduced present consumption, and that too has been deemed an unacceptable drag on growth. As long as growth is the summum bonum then we will find ways to borrow against future wealth in order to finance the present investment needed to maximize growth.

Why would full reserve banking not crash on the rock of the growth obsession again, as it did before? One answer is that we might recognize that aggregate growth today increases unmeasured illth faster than measured wealth, thereby becoming uneconomic growth. How can loans be repaid out of the net illth they generate? Should we not welcome full reserve banking as a needed financial restraint on growth (uneconomic growth)? Another answer is that, thanks to financial meltdowns, the commercial banks’ private creation of money by lending it at interest has now become more obvious and odious to the public. More than in the 1930s, fractional reserve banking has become a clear and present danger, as well as a massive subsidy to commercial banks.

Real growth has encountered the biophysical and social limits of a full world. Financial growth is being stimulated ever more in the hope that it will pull real growth behind it, but it is in fact pushing uneconomic growth — net growth of illth. Quantitative easing of the money supply does nothing to counteract the quantitative tightening of resource limits on the growth of the real economy.

The original 100% reserve proponents mentioned above were in favor of aggregate growth, but wanted it to be steady growth in wealth, not speculative boom and bust cycles. One need not advocate a steady-state economy to favor 100% reserves, but if one does favor a steady state then the attractions of 100% reserves are increased. Soddy was especially cautious about uncontrolled physical growth, but his main concern was with the symbolic financial system and its disconnect from the real system that it was supposed to symbolize. As he put it: “You cannot permanently pit an absurd human convention, such as the spontaneous increment of debt [compound interest], against the natural law of the spontaneous decrement of wealth [entropy].” Wealth has a physical dimension and is subject to physical limits; debt is a purely mathematical quantity and is unlimited.

How would the 100% reserve system serve the steady-state economy?

First, as just mentioned it would restrict borrowing for new investment to existing savings, greatly reducing speculative growth ventures — for example the leveraging of stock purchases with huge amounts of borrowed money (created by banks ex nihilo rather than saved out of past earnings) would be severely limited. Down payment on houses would be much higher, and consumer credit would be greatly diminished. Credit cards would become debit cards. Long term lending would have to be financed by long term time deposits, or by carefully sequenced rolling over of shorter term deposits. Equity financing would increase relative to debt financing. Growth economists will scream, but a steady-state economy does not aim to grow, for the very good reason that aggregate growth has become uneconomic.

Second, the money supply no longer has to be renewed by new loans as old loans are repaid. A continuing stream of new loans requires that borrowers expect to invest in a project that will grow at a rate greater than the rate of interest. Unless that expectation is sustained by growth, they will not borrow, and in a fractional reserve system the money supply will shrink. With 100% reserves a constant money supply is neutral with respect to growth; with fractional reserves a constant money supply imparts a growth bias to the economy.

Third, the financial sector will no longer be able to capture such a large share of the nation’s profits (around 40%!), freeing some smart people for more productive, less parasitic, activity.

Fourth, the money supply would no longer expand during a boom, when banks like to loan lots of money, and contract during a recession, when banks try to collect outstanding debts, thereby reinforcing the cyclical tendency of the economy.

Fifth, with 100% reserves there is no danger of a run on a bank leading to a cascading collapse of the credit pyramid, and the FDIC could be abolished, along with its consequent moral hazard. The danger of collapse of the whole payment system due to the failure of one or two “too big to fail” banks would be eliminated. Congress then could not be frightened into giving huge bailouts to some banks to avoid the “contagion” of failure because the money supply is no longer controlled by the private banks. Any given bank could fail by making imprudent loans in excess of its capital reserves (as opposed to demand deposit reserves), but its failure, even if a large bank, would not disrupt the public utility function of money. The club that the banks used to beat Congress into giving bailouts would have been taken away.

Sixth, the explicit policy of a constant price index would reduce fears of inflation and the resultant quest to accumulate more as a protection against inflation. Also it in effect provides a multi-commodity backing to our fiat money.

Seventh, a regime of fluctuating exchange rates automatically balances international trade accounts, eliminating big surpluses and deficits. U.S. consumption growth would be reduced without its deficit; Chinese production growth would be reduced without its surplus. By making balance of payments lending unnecessary, fluctuating exchange rates (or Keynes’ international clearing union) would greatly shrink the role of the IMF and its “conditionalities.”

To dismiss such sound policies as “extreme” in the face of the repeatedly demonstrated colossal fraudulence of our current financial system is quite absurd. The idea is not to nationalize banks, but to nationalize money, which is a natural public utility in the first place. The fact that this idea is hardly discussed today, in spite of its distinguished intellectual ancestry and common sense, is testimony to the power of vested interests over good ideas. It is also testimony to the veto power that our growth fetish exercises over the thinking of economists today. Money, like fire and the wheel, is a basic invention without which the modern world is unthinkable. But today out-of-control money is threatening to “burn and run over” more people than both out-of-control fires and wheels.

The Populations Problem

by Herman Daly

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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