To: seminar Colleagues
From: H. Daly
Thanks to all who participated in , or just tuned in to , this seminar. I
have enjoyed it--it reminded me of the years I spent working in my father's
hardware store while in high school--meeting the general public, different
kinds of people with different ideas. Like a hardware store this kind of
communication is very democratic--with all the virtues and vices , delights
and frustrations of democracy. Many thanks to organizers and moderators as
well. I' sorry I couldn't answer all the questions--but I'm sure no one
expected me to. Got to grade mid term exams now, make a trip to Canada, and
get ready for my daughter's wedding!--Below are further thoughts in closing:
Uneconomic Growth: Empty-World vs Full-World Economics
by Herman E. Daly
"That which seems to be wealth may in verity be only the
gilded index of far-reaching ruin....."
---John Ruskin, Unto this Last, 1862.
I. Uneconomic Growth in Theory
Growth in GNP is so favored by economists that they call it "economic"
growth, thus ruling out by terminological baptism the very possibility of
"uneconomic" growth in GNP. But there is no a priori reason why, at the
margin, the environmental and social costs of growth in GNP could not be
greater than the production benefits. In fact, economic theory leads us to
expect that at some point. The law of diminishing marginal utility of income
tells us that we satisfy our most pressing wants first, and that each
additional unit of income (production) is dedicated to the satisfaction of a
less pressing want. So the marginal benefit of growth declines. Similarly,
the law of increasing marginal costs tells us that we first make use of the
most productive and accessible factors of production--the most fertile land,
the most concentrated and available mineral deposits, the best workers-- and
only use the less productive (more costly) factors as necessary.
Consequently, marginal costs of growth increase. When rising marginal costs
equal falling marginal benefits then we are at the optimal level of GNP, and
further growth would be uneconomic--would increase costs more than it
increased benefits, making us poorer, not richer.
Why is this application of the basic logic optimization, so fundamental to
microeconomics, treated as inconceivable in the domain of macroeconomics?
Mainly because microeconomics deals with the part, and expansion of a part
is limited by the opportunity cost inflicted on the rest of the whole by the
growth of the part under study. Macroeconomics deals with the whole, and the
growth of the whole does not inflict an opportunity cost, because there is
no "rest of the whole" to suffer the cost. Ecological economists have
pointed out that the macroceconomy is not the relevant whole, but is itself
a subsystem, a part of the ecosystem, the larger economy of nature. Some
growth economists accept this view in principle, but claim that the
subsystem is so small relative to the total system, and to mankind's
technical capacities to manipulate that system, that we might as well
consider our demands on the total system as infinitesimal--just as when the
world was relatively empty of us and our furniture. In their view, growth of
the macroeconomy inflicts no opportunity cost because the rest of the whole
(the total ecosystem) is so vast. The empty-world view of the economy argues
that growth of the macroeconomy gives benefits without costs. In that view
uneconomic growth may be conceptually imaginable, but not practically
relevant in an empty world.
II. Uneconomic Growth in Fact
Boulding's Law states that "when something grows, it gets bigger"! As the
economic subsystem has grown, the total ecosystem has remained the same
size, with the result that the world has become relatively full of the
economy. Consequently, we must move from empty-world to full-world
economics. But we have not yet made that adjustment. Economists all agree
that GNP was not designed to be a measure of welfare, but only of activity.
Nevertheless they assume that welfare is positively correlated with activity
so that increasing GNP will increase welfare, even if not on a one-for-one
basis. This is equivalent to believing that the marginal benefit of GNP
growth is greater than the marginal cost. This belief can be put to an
empirical test. More work is needed, but some initial results turn out not
to support the belief.1
III. Uneconomic Growth in Two Paradigms
Within the standard neoclassical paradigm uneconomic growth is an
anomalous category. You will not find it mentioned in any
macroeconomics textbook. But within the paradigm of ecological
economics it is an obvious possibility. Let us consider why in each
case.
The preanalytic vision of standard neoclassical economics is that the
economy is the total system, and that nature, to the extent that it is
considered at all, is a sector of the economy--e.g. the extractive sector
(mines, wells, forests, fisheries, agriculture). Nature is not seen, as in
the ecological economics vision, as an envelope containing, provisioning,
and sustaining the entire economy, but as one sector of the economy similar
to other sectors. If the products or services of the extractive sector
should become scarce, the economy will presumably "grow around" that
particular scarcity by substituting the products of other sectors. If the
substitution is difficult, new technologies will be invented to make it
easy. If this view fails to convince, the economist has recourse to the
second line of defense, the empty-world vision.
The unimportance of nature, in either of the views just mentioned, finds
empirical support in the declining share of the extractive sector in total
GNP. Beyond the initial provision of indestructible building blocks, nature
is simply not important to the economy in the view of neoclassical
economics. Ecological economics considers the percentage of GNP represented
by resources to be a misleading indication of their importance. One might as
well claim that a building's foundation is unimportant because it represents
only five percent of the height of the skyscraper erected above it. GNP is
the sum of value added. Resources are that to which value is added--the
foundation or base upon which the skyscraper of value added is resting. A
foundation's importance does not diminish with the growth of the structure
that it supports! If GNP growth resulted only from increments in value added
to a nongrowing resource throughput, then it would remain economic growth.
But that is not what happens.
What happens, according to ecological economics, is that the economy grows
mainly by transforming its environment (natural capital) into itself
(manmade capital). This process of transformation takes place within a total
environment that is finite, nongrowing, and materially closed. A throughput
of solar energy powers biogeochemical cycles, but that energy throughput is
also finite and nongrowing. As the economic subsystem grows it becomes
larger relative to the total system, and therefore must conform itself more
to the limits of the total system--finitude, nongrowth, and entropy.
Subsystem growth is ultimately limited by the size of the total system, even
under neoclassical assumptions of easy substitution of manmade for natural
capital. But if manmade and natural capital are complements rather than
substitutes, as ecological economics claims, then expansion of the economic
subsystem would be much more stringently limited by that complementarity.
There would be no point in transforming natural capital into manmade capital
beyond the capacity of remaining natural capital to complement and sustain
it. What good are more fishing boats when the fish population has
disappeared? The fish catch used to be limited by number of fishing boats
(manmade capital) but is now limited by the remaining populations of fish in
the sea (natural capital) .
When factors are complements the one in short supply is limiting. If
factors are substitutes then there cannot be a limiting factor. Economic
logic says that we should economize on and invest in the limiting factor.
Economic logic stays the same, but as we have moved from an "empty" world to
a "full" world, the role of limiting factor has gradually shifted from
manmade to natural capital, --e.g. from fishing boats to remaining fish in
the sea; from saw mills to remaining forests; from irrigation systems to
aquifers or rivers; from oil well drilling rigs to pools of petroleum in the
ground; from engines that burn fossil fuel to the atmosphere's capacity to
absorb CO2, etc.
The optimal scale of the economy is smaller, the greater is: (a) the degree
of complementarity between natural and manmade capital; (b) our desire for
direct experience of nature; and (c) our estimate of both the intrinsic and
instrumental value of other species. The smaller the optimal scale of the
economy, the sooner its physical growth becomes uneconomic.
IV. From Permitting Growth, to Mandating Growth, to Limiting Growth
The neoclassical paradigm permits growth forever, but does not mandate it.
Historically the growth mandate came from the answer given to the problems
raised by Malthus, Marx, and Keynes. Growth was the common answer to all
three problems. Overpopulation, unjust distribution, and involuntary
unemployment would all be solved by growth. Overpopulation would be cured by
the demographic transition initiated by growth. Unjust distribution of
wealth between classes would be rendered tolerable by growth, the rising
tide that lifts all boats. Unemployment would yield to increasing aggregate
demand which merely required that investment be stimulated, which of course
implies growth. Continuing this time-honored tradition the World Bank's 1992
World Development Report argued that more growth was also the solution to
the environmental problem. But of course the assumption in all cases is that
growth is economic, that it is making us richer rather than poorer. But now
growth is becoming uneconomic. Uneconomic growth will not sustain the
demographic transition and cure overpopulation. Neither will it help redress
unjust distribution, nor cure unemployment. Nor will it provide extra wealth
to be devoted to environmental repair and clean-up.
We now need more radical and direct solutions to the problems of Malthus,
Marx, and Keynes : population control to deal with overpopulation;
distributive limits to deal with excessive inequality; and ecological tax
reform to raise resource productivity and employment. These must be national
policies. It is utopian (or dystopian) to think of them being carried out by
a world authority. Many nations have made progress in controlling their
population growth, in limiting domestic income inequality, in reducing
unemployment. They have also improved resource productivity by internalizing
environmental and social costs into prices. These significant national gains
are now being undercut by the ideology of globalization. Global economic
integration by free trade and free capital mobility (and in some countries
easy immigration) effectively erases the policy significance of national
boundaries, turning the federated community of nations into a cosmopolitan
noncommunity of globalized individuals. Some of these "individuals" are
giant transnational corporations, treated as individuals by legal fiction.
Under globalization, each country seeks to expand beyond the limits of its
own ecosystem and market by growing into the ecological and economic space
of all other countries, as well as into the remaining global commons. It is
a last-gasp attempt to restore the empty world conditions. Globalization
operates by standards-lowering competition to bid down wages, to externalize
environmental costs, and reduce social overhead expenses for public goods.
But it is far worse than an unrealistic global dream--it actively undercuts
the ability of nations to continue dealing with their own problems of unjust
distribution, unemployment, external costs, and overpopulation. It is hard
to imagine any country continuing to limit its birth rate or internalize its
environmental and social costs when the results of overpopulation and cost
externalization in other countries freely spill over into it.
Globalization by export-led growth is the new philosopher's stone that
turns lead into gold by the alchemy of free trade. With the revival of
alchemy comes a return to the logic of Mercantilism: wealth is gold, and the
way for countries without mines to get gold is to export more goods than
they import, and receive payment for the difference in gold. The way to
export more than you import is to reduce costs--cut wages and externalize
environmental and social costs. The way to keep wages low is to have an
oversupply of labor, attained by easy immigration or high birth rates among
the working class. Globalization requires, therefore, that for a nation to
be rich, the majority of its citizens must be poor, increase in number, and
live in a deteriorating physical and social environment.
Truly, John Ruskin foresaw the era of uneconomic growth, a time when :
"That which seems to be wealth may in verity be only the gilded index of
far-reaching ruin....."
Herman E. Daly
Senior Research Scholar
School of Public Affairs
University of Maryland
College Park, MD 20742-1821
Ph (301) 405 6360
Fax (301) 403 4675
Email HDaly@puafmail.umd.edu