Saturday, May 12, 2007

The steady-state economy

I'm mostly recovered from my carpal tunnel surgery. While I was busy being incapacitated, I got quite a few books read, including two books by an economist named Herman Daly, called For the Common Good and Steady State Economics. I highly recommend the first, as well as the first half of the second (the second half, consisting of several essays where Daly interacted with various critics, were a bit repetititititive, and therefore only recommended to the hardcore).

So, what is The Steady State Economy? I think the best way to start is by describing the neoclassical model, to which the SSE is intended to be an alternative. In the standard model, you have consumption and production, with an arrow going from production to consumption, and another going from consumption to production. When you buy something that has been produced, you're consuming, and the money you pay goes to finance more production. It's kind of like The Circle of Life you saw in The Lion King, if Disney had hired Milton Friedman to write the screenplay.

The first thing that Daly points out is that the diagram shows a perpetual motion machine, which thing cannot exist according to the Second Law of Thermodynamics. The Second Law says that you can never get as much useful work out of a system as you put into it[1]. So if you find a system that gives the appearance of running forever, you have to look and figure out where new useful energy is being fed into it, and where the waste energy is being deposited.

The Steady State model does exactly that, adding two more arrows and two more nodes. An arrow points from resources to production (because you need to obtain natural resources from the environment in order to produce), and another points from consumption to "waste sinks", because you cannot consume any service without some amount of waste to the environment.
These two additions don't just save the model from charges of blasphemy by physicists; it also returns the concept of "environment" to the field of economics, which has otherwise been sluggish to pay attention to the ecological supports that prop up our economic activity.

In the neoclassical picture, economic growth is an easy sell; why have less when you can have more? Choosing less economic activity is tantamount to choosing poverty. Resource limits are unimportant, because a lack of natural capital can always be offset by greater intellectual capital. In other words, if there is a shortage of some resource X, we can overcome it merely by devoting more study to the problem of making Y perform the same function.

This is the core of the problem: while relative prices is a great mechanism for optimally distributing a given set of resources among a set of people, it has no way of regulating the total resources to be distributed. Say you have an ocean that can produce a thousand tons of herring every year without impacting future catches. What happens to the price of an additional ton of herring once the quota is caught? The price goes down a bit, but certainly nothing in the price of ton 1001 indicates that any sort of important limit has been reached.

To put it another way: if there were but one breeding pair of Bengal tigers left in the world, if there was just one acre of forest left, there would still be a market-induced incentive for harvesting them.

Daly compares the economy to a cargo ship. The market distributes resources relatively efficiently, which is akin to loading the ship evenly to prevent it from tipping and capsizing. But no matter how perfectly the weight is distributed, the ship can only carry so much.

The main question that needs to be asked is: which of the two economic visions can best provide for human happiness? Daly argues that his model is better, and I'm inclined to agree simply because it better represents the physical reality of our situation. But he made one point that really drove me to his side on this question: future people cannot bid in current markets. No matter how useful a member of the graduating class of 2107 might find a certain barrel of oil in the ground (say they'd be willing to pay $500 for it) they can't actually make that exchange, because somebody from the present bought it out from under them for $50.

For any given resource that future humans might need, the only way to ensure that it will be there for them is for present humans to draw from the resource pool at a rate that can be sustained into the indefinite future.

But that leaves us with far fewer resources to work with in the here and now, and that will have a huge impact on our current standards of living. I see that as a problem with the lifestyle itself, not for the economic theory. Still, Daly proposes the beginnings of a solution, which derives from his distinction between growth (aggregate size of the economy, as measured by resource use) and development (an increase in the fulfillment of human desires). Using a given resource stream, development occurs when manufacturers find ways to make their goods more durable, more recyclable, and more efficient at delivering the intended service. The circle in the middle of the diagram is still expanded, but without altering the flows that enter or leave the system.

Unlike the neoclassical model, the steady-state economy requires that an upper limit be placed on the number of people that can be allowed to share the globe at the same time. Just like the last paragraph, this fact makes steady state a tougher sell, but doesn't alter its fundamental truthfulness. Daly supports a plan by one of his fellow travelers, which suggests that each woman be given a certain number of credits, each bestowing the ability to bear one tenth of a child. Collect ten, and The Man won't give you any grief about your spawn.

It's certainly better than, say, a strict "one child per family" policy, which doesn't make any allowances for personal preferences. It also encourages the blessed state of affairs where children are being raised by the people who most want to take on the role. But lots of people find any sort of government meddling intolerable when it comes to such deeply personal choices. Of course it's a deeply personal choice with society-wide implications. I certainly sympathize. However, if population limits are needed (and it's hard to argue otherwise), this plan seems to offer the best hope for allowing people to make the choices that best suit them.

Steady-state Economics is an amazing book, and I don't think I'll look at economics quite the same way again.[2]


[1] I don't remember where I read it, but I once came across a very handy shorthand for the Laws: 1) You can never win. 2) You can never break even. 3) You can never leave the game.

[2] For the Common Good also touches on this topic, but in addition it provides interesting material about politics and community. I should probably address it in another post.

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