Rethinking Growth

Archive / by Maywa Montenegro /

Herman Daly applies a biophysical lens to the economy and finds that bigger isn’t necessarily better.

Herman Daly is an ecological economist and co-founder and associate editor of the journal Ecological Economics. As the World Bank’s senior environmental economist from 1988 to 1994, Daly focused on Latin American poverty and development and helped to establish the discipline of ecological economics. Today, based at the School of Public Policy at the University of Maryland, Daly spoke with Seed editor Maywa Montenegro about growth, technology, happiness, and the steady-state economy.

Seed: When did you first start thinking about a steady-state economy?
As an undergraduate, taking a course in the history of economic thought and reading Malthus. Then in graduate school I studied under Nicholas Georgescu-Roegen, a pioneer in relating the entropy law to economic theory. Elementary economic theory describes something called a circular flow diagram: Firms supply goods and services to households, which in turn supply labor and capital factors of production back to the firms. This flow goes around and around, and money flows in the opposite direction to pay for it. The way it’s usually depicted is as a closed circulatory system. What’s ignored is the economy’s digestive system: the input of low-entropy raw materials from the environment and the expulsion of high-entropy waste products back into the environment. A fundamental assumption of those who treat the economy like a totally circular exchange is that the environment is infinite relative to us, that natural resources and space to absorb our waste are not scarce. The assumption is no longer valid.

Seed: So what does this mean for growth?
What is growth? Is it a temporary process to arrive at a state that we will then want to maintain? Or is growth a process which is itself desirable and is supposed to go on forever? Right now nobody defines a state of sufficiency. For example, in a recent growth report financed by the World Bank, experts took great hope from the fact that several countries had managed to grow at 7 percent for 25 years. Their goal—7 percent growth for another 25 years—will lead to a quintupling of the global economy and all that flows into it. And come 2033, will we be satisfied, or will the goalposts move once again? The idea of steady-state economics is that growth really should be a temporary process to arrive at some level of sufficiency.

Seed: How will we know when that level is reached? Is there a way to measure it?
Well, we don’t measure it because our GDP, our national accounting system, does not separate costs and benefits of growth. Pollution, for instance, is not subtracted as a cost of growth. In fact, the expenditures and efforts to clean up pollution are added as a benefit. This is a strange, asymmetric entry into the accounts, because if you’re not going to count the cost of pollution, then you shouldn’t count its cleanup as a benefit.

Seed: How would you change the system of accounting?
What we tax mostly now is income from the input of labor and capital, what economists called “value added.”
Value added to what? To the resources extracted from nature, which are treated as zero. So, the idea is to shift our tax base away from value added and toward the resources themselves. If we want to increase efficiency, then we have to begin by making things more expensive. We’re careful how we use gold. We’re not so careful how we use aluminum.

If you start with a vision of the economy as a subsystem of the larger biosphere, as it grows, it takes into itself more and more of the total system. Assuming people do things intelligently, as the economy gets bigger, it absorbs the least vital environmental services first. So the costs of growth are inevitably going to go up as you exploit ever more valuable resources. At some point, the expansion will not be worth the costs.That’s the optimal scale from the point of view of human concerns.

But this doesn’t mean the end of development. Growth is more and more of the same stuff. Development is the same amount of better stuff.

Seed: But what if scientists are able to improve recycling to the point that we can endlessly reuse existing materials? Or suppose that they genetically engineer a microbe, for example, that converts solar energy into ethanol. Could growth then continue indefinitely?
You can certainly increase the efficiency of recycling, but you can’t, from a physical point of view, perfect it. And even microbes are subject to the laws of thermodynamics. They’re not going to make this energy—ethanol—out of nothing. They’re going to
need raw material inputs and solar energy in order to make those inputs, and, of course, they’re going to generate waste products. So I’m not saying it’s not a good adaptation, but it wouldn’t eliminate limits. Technology is successful in so far as it respects the laws of physics; it’s not magic.

Seed: What underpins your optimism that people might eventually embrace a no-growth economy?
We’re encouraged by a number of studies by economists and psychologists on happiness—almost all show that beyond a certain threshold, further increases in GDP really do not increase self-evaluated happiness. They do, of course, continue to increase environmental costs. That gives us some idea of what’s enough. Whatever that amount is, it’s a lot less than average per capita GDP in the United States. And this, of course, is a highly contentious point. People really don’t like to talk about limits to income. We’re now willing to talk about a minimum income, but we’re not quite willing to talk about a maximum yet. Yet if the total amount of economic growth is limited, then that should be on the agenda as well.

Seed:What would you say is the just and proper range, the limit to inequality?
If you look around at various institutions such as the government, the military, or universities, they have a factor of around 20 between the richest and the poorest. In US corporations it’s 500 or more. I think you could probably reward all real differences
of contribution within a range of 25. But let’s just start with a factor 100, get some experience, and work down.

Seed:How, if at all, does steady-state economics apply to the current financial crisis?
Finance is based heavily on things called “present value maximization models”—which means, essentially, that you’re discounting the future by a presumed rate of growth. You run an exponential growth equation backward to get a present value. So via the discount rate, growth is fundamentally built into finance. Well, that’s a very big assumption because the biosphere of which we’re a part is not growing.

One of my intellectual heroes, the Nobel Prize– winning chemist Frederick Soddy, put it another way. He said the problem in our economy is the one thing that economists have in their system which does not obey the laws of physics. And that is money. Money is the symbol of wealth, and yet it operates on laws which contradict the laws that wealth operates on. It’s very strange to have a symbol system that operates in ways that are fundamentally different from the thing being symbolized.

Seed: Do you think that in the future all economics will necessarily be ecological economics?
That’s what I expect. I mean, we’re faced with two impossibilities. On the one hand, it’s politically impossible to stop growth. On the other hand, it’s biophysically impossible to continue it ad infinitum. So, which impossibility is fundamentally impossible? Well, you know, I’ll take my chances with trying to change the politically impossible, because I don’t think I can change the biophysically impossible. ∞

Read more of Daly’s thoughts on Homo Economicus, the thermodynamics roots of economics, population, and more at the Center for Advancement of a Steady State Economy. The Encyclopedia of Earth has also gathered an extensive collection in this E-book tribute to Herman Daly.


Originally published April 26, 2011

Tags ecology economics politics scale scarcity

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