Wednesday, 26 March 2008
A Herman Daly Reader
'That which seems to be wealth may in verity be only the gilded index of far-reaching ruin'. John Ruskin
'The fish catch is no longer limited by the manmade capital of fishing boats, but by the natural capital of remaining fish stocks and suitable habitats. Efficiency requires that investment should focus on the limiting factor.' Herman Daly (5)
Okay so I did my amateur economist post, now the proper research starts. Here's adbusters' more complete list of economists who challenge the neoclassical status quo
From that list the source Jules has been on about me reading is Herman Daly 'the father of ecological economics. In the course of browsing some of his thoughts I thought I'd stick them here for future reference & discussion, in case anyone else is interested.
Will have to get my hands on some of his books (just the titles give you a flavour of what he's about)
1977, Steady-State Economics
1989, For the Common Good, with theologian John B. Cobb, Jr.:
1993, Valuing the Earth
1996, Beyond Growth
1999, Ecological Economics and the Ecology of Economics
2003, Ecological Economics: Principles and Applications, with Joshua Farley: an economics textbook.
2007, The Economics of Happiness: Building Genuine Wealth with Mark Anielski
So what are some of the pillars of his school of thought? The following are some chunks of his thinking/writing (which I am posting here as a kind of raw material for me to refer back to) over the last 15 years. This way of thinking used to be dismissed out of hand in social sciences as 'Malthusian' like the fact that someone once made a bad prediction about specific limits to growth proved that there are no limits to growth.
***EVERYTHING FROM HERE ON IS QUOTED IN A 'BLOG ALL DOG-EARED PAGES' STYLEE REFERENCES AT THE BOTTOM***
YOU CANT GROW YOUR WAY TO A SUSTAINABLE WORLD
My question to you then would be—After you grow your way to an environmentally sustainable world, then what? Would you then be willing to stop growing? Or would you want to keep on growing? Is it a state of the world, or the process of economic growth, that you want to sustain? I think the World Bank wants to sustain growth—that is, a process, not a state of the world. I would like to sustain that subsystem of the world called the “economy” in a state compatible with human well-being. I contend that the attempt to sustain growth will be inimical to that end.
What economists usually mean by “growth” is growth in GNP. And GNP is the difficult case—is it physical or non-physical; quantitative or qualitative? It is the conflation of both. GNP is measured in value units. Value is price times quantity—P x Q. Now Q is certainly physical—goods are physical, and even services are always of some thing or some body for some period of time, and therefore have a physical dimension. Relative price changes can reflect qualitative improvement in particular goods, but not for goods in general, since the relative price of all goods cannot increase. The absolute price level could increase forever with a constant Q, but that would be inflation, and I am sure no one wants to count inflation as growth. Economists take pains to calculate real GNP in order to eliminate aggregate changes in P and capture only changes in Q.
In general ecological economists think the throughput–GNP coupling is relatively tight, while neoclassicals tend to think it is loose. Indeed, neoclassicals frequently omit natural resources altogether from their production functions—implying no coupling at all! The coupling may well be a bit loose at the margin in rich countries, but in poor countries (most relevant to World Bank) the throughput intensity of GNP is likely to remain high for some time, since food, clothing, and shelter are resource-intensive. The Global South needs food on the plate—not 10,000 recipes on the Internet.
The other important growth coupling is the one between GNP and welfare. Here neoclassicals think the coupling is relatively tight, while ecological economists think it is loose, or even non-existent beyond a sufficiency threshold. Beyond that threshold welfare is overwhelmingly a function of relative income, and of quality of social relationships and ecological services, not a function of the absolute quantity of commodities consumed. GNP growth reflects only the last, the least important component of welfare beyond the threshold.
What is environmental sustainability? To be an operational concept it has to be defined in terms of throughput—the metabolic flow through the economy from environmental sources of useful, low entropy matter-energy to environmental sinks for waste, high entropy matter-energy.
Neoclassicals try to define sustainability in terms of non-declining utility between generations. This is a non-operational non-starter for three reasons: first, it is throughput, not utility, that directly impinges on the environment; second, utility is unmeasurable; and third, utility cannot be bequeathed. Even if we could measure utility well enough to judge whether it is non-declining, we still could not pass it on from one generation to the next. As any parent knows you can only pass on things, not happiness. Future generations are always free to make themselves miserable or content with whatever we give them.We do not owe the future their happiness, but we do owe them an intact resource base.
A more reasonable and operational definition of environmental sustainability requires that the throughput be within the regenerative capacities of renewable natural resources, and within the assimilative capacities of natural sinks. For non-renewable resources there is no regenerative capacity, and strictly speaking no ecologically sustainable use rate. However, quasisustainability may sometimes be attained by depleting non-renewables at a rate equal to the development of renewable substitutes.What is bequeathed is not utility, but productive capacity, capital in the broad sense, including especially natural capital. Sustainability means maintaining capital intact, ***avoiding the mistake of consuming capital and counting it as income.*** (5)
(*** JG Note: for me this is the key fallacy of 'rope trick' economics)
Let me begin then with the question, can growth in GDP - that's usually what we mean by economic growth, growth in GDP - can growth in GDP in fact be uneconomic? Well, I think before answering that we should ask a similar question in micro economics. Can growth in micro-economic activity - that is, an activity in the firm or the household - can that be uneconomic? Of course it can. The whole idea of micro economics is seeking an optimal level of some activity. As the amount of the activity increases, eventually increasing marginal costs will intersect diminishing marginal benefit. If you grow beyond that it's uneconomic. Optimisation is the essence of micro economics and that implies stopping . So the marginal cost equal marginal revenue rule, which you're all to familiar with if you've had the first course in economics, is aptly called in some textbooks the 'when to stop rule'. I like that term, the 'when to stop' rule.
Well you've taken your course in micro economics. Here's the next course in macro economics. No more equating of marginal costs to marginal revenue, no more win to stop rule, you just aggregate everything into GNP and this is supposed to grow forever. This is a curious thing. At the foundation level of economics, micro economics, the idea of uneconomic growth is fundamental, non controversial really, but when you get to macro economics you just aggregate everything. Oops, all of a sudden there's no longer a when to stop rule, no longer any question of an optimal level of overall economic activity. So, let me try to speculate a little bit on why that's the case and in order to do that, let me go back to that idea of a pre-analytic vision or paradigm that I mentioned.
With regard to the question of uneconomic growth in theory, we started with a pre-analytic vision. Let's take a first step towards analysis of that vision. The continuous curve represents welfare or marginal utility or the benefits of growth. Q on the horizontal axis is, let's say, GDP. As we go out the horizontal axis we have diminishing marginal utility. I think that's a very fundamental law of economics which is well established.
I've put a dotted curve in the bottom which is the cost of GNP growth - in other words, the social and environmental sacrifices made necessary by that growing encroachment on the eco-system. I've named that a Jevonian view in honour of William Stanley Jevons, a great economist of around 1870 or so, who used that kind of diagram for a different problem but the logic is very much the same. In this diagram what is uneconomic growth? Well, economic growth is out to point B on the horizontal axis. At point B, line AB is equal to BC. The marginal benefits of further growth are just equal to the marginal costs. Growth beyond point B is uneconomic growth. It is growth for which the distance from the horizontal down to the dotted curve is greater than the distance up to the continuous curve, growth which makes you poorer than richer. And so there's the definition of uneconomic growth, growth beyond point B.
I've distinguished several different limits to growth. One is Point B, the economic limit where marginal utility equals marginal disutility. Another is Point E, where marginal utility falls to zero. I've called this the futility limit because when you are there you have so many goods to enjoy you that don't have time to enjoy any of them Consequently, adding more isn't going to do you any good because you can't use all the stuff you've already got. It's just futile no matter how little they cost. The third is Point D, where the dotted curve takes a nose dive straight down to infinity. I call this the catastrophe limit, the ecological catastrophe limit. That's the nice scenario where you invent some marvellous new product which has an unpredicted side effect which absolutely ruins the capacity of all green plants to photosynthesise and suddenly zap. Well, the nice thing about economic limit is that it is the limit we encounter first.
The other two limits don't necessarily have to happen in the order that I've shown them. I think the catastrophe limit could occur sooner than the futility limit. However, I think the economic limit is going to come first although in the worst case scenario it might coincide with the catastrophe limit.
...This to me is a very sobering conclusion. It seems to me that the reason we have emphasised growth politically, put it in first place, is that it would solve all these really crushing problems: overpopulation, unemployment, unjust distribution without being radical. It gives a win-win solution to all of these totally bone crushing problems. Take that away, and you have to go back to the really radical solutions and the politicians don't want to do that, the public is not ready to support them in that. If growth really is uneconomic now, then we have to face very radical kinds of solutions to fundamental problems. All the more temptation to assume "Well of course growth has to be economic" and so on. (2)
STEADY STATE ECONOMICS
Our first task, Daly persuasively argues, is to stop growth. Only after we have stabilized the economy at or near its present size should we determine, and move to, an optimum scale. For one thing, since our survival depends on stopping growth, it is imperative that we do so as soon as possible. Besides, settling such issues as the optimal levels of population and per capita resource use will be difficult, as it will entail searching public debate over such fundamental questions as the present generation's obligations to posterity and reproductive freedom. Achieving consensus on them will be time-consuming. Meanwhile the economy would still be growing and further damaging the ecosystem. Also, making the economy smaller can't be done without halting growth first. Lastly, before optimizing, it would be useful to gain experience and know-how in setting up and running an SSE.22
While excellent resource allocators, markets have their limits. As Daly observed, and as Part I confirms, "The market cannot, by itself, keep aggregate throughput below ecological limits, conserve resources for future generations . . . or prevent overpopulation." It cannot, then, answer the all-important question of how big the economy should be relative to the environment.23
Accordingly, the steady-state economy would supplement the market with three institutional arrangements to reduce our burden on the environment to what it can bear long-term:
(1) Maximum and minimum limits on personal income, and a ceiling on personal wealth. If growing inequality in income and wealth is not reversed, Daly argues, private property and markets will become morally dubious. This will make extending the market to include birth licenses and depletion quotas politically difficult. Moreover, curbing these inequalities would make for more modest, and environmentally supportable, consumption. Daly is committed to social justice as well as sustainability, and income and wealth limits obviously serve that goal.24
Since Daly made this proposal, income and wealth inequalities have exploded. Many large incomes were acquired by gaming the system, e.g., corporation executives paying themselves opulently. This threatens to delegitimize our economic system. What's more, such rapacity sets the wrong kind of example in a limited world.
(2) Transferable birth licenses. Obviously, population growth is a major force driving resource depletion and waste generation. Stabilizing population is therefore crucial. Daly's suggestion, first propounded by economist Kenneth Boulding in 1964, is to issue each person, or perhaps each woman, a quantity of reproduction licenses equal to the replacement fertility rate of 2.1 births per woman. Each woman would get 2.1 licenses, which she could buy or sell depending on how many children she wants to have.25
Daly acknowledged that the directness of the birth license plan might put people off. "It frankly recognizes that reproduction must henceforth be considered a scarce right and logically faces the issue of how best to distribute that right and whether and how to permit voluntary reallocation." Because limiting reproduction is a forbidden subject for many people, they prefer indirect discouragement of reproduction through expanding women's social roles, encouraging consumption of commodities over having more children, and so on. Birth licenses, however, are more efficient. What's more, in his view, "the direct approach requires clarity of purpose and frank objectives, which are politically inconvenient when commitment to the objective is halfhearted to begin with."
(3) Depletion quotas for resources. The best way to control throughput, Daly argues, is to control the rate at which resources, especially nonrenewables such as fossil fuels, are depleted. Limiting the quantity of resources that enters the economy necessarily also limits how much waste and pollution leaves it. Moreover, since the stock of manmade capital is made from resources, and since the human population depends on resources, controlling the rate of depletion necessarily controls how big the population and capital stock can get.
Taxing resource depletion is one way to limit it. Setting depletion quotas is better, Daly persuasively argues, because it imposes a direct, quantitative control on the throughput level, whereas the impact of taxes is less certain, depending on how demand responds to the augmentation of prices by taxes. The depletion quota scheme would entail auctioning quotas to resource purchasers, who would then buy the resources they need. The total price the resource user pays would be raised, since he would have to first buy the quota and then buy the resource. Resource buyers would have to be more efficient and thrifty in using resources. So would the consumers of their products, which would be more expensive due to higher input costs. Although he prefers quotas, Daly acknowledges that taxes would be easier to administer, and might be politically easier to implement (4)
"One of the more disingenuous arguments against the SSE [Steady State Economy] was put forward by the editors of Fortune, who stated that "the country has just gone through a real life tryout of zero growth" (1976, p. 116). This was the period 19731975, a period remembered "not as an episode of zero growth but as the worst recession since the 1930s."
Fortune identifies a SSE with a failed growth economy. A condition of nongrowth can come about in two ways: as the failure of a growth economy, or as the success of a steady-state economy. The two cases are as different as night and day. No one denies that the failure of a growth economy to grow brings unemployment and suffering. It is precisely to avoid the suffering of a failed growth economy (we know growth cannot continue) that we advocate a SSE. The fact that an airplane falls to the ground if it tries to remain stationary in the air simply reflects the fact that airplanes are designed for forward motion. It certainly does not imply that a helicopter cannot remain stationary. A growth economy and a SSE are as different as an airplane and a helicopter. Growthmania reigns supreme when even the failures of a growth economy become arguments in its defense! (3)
COMMUNITY NOT INDIVIDUAL
"The first thing the canonical assumptions abstract from is any notion of community - nothing but isolated individuals, Homo economicus. Community both in the social sense of our identities being made up of interrelationships, and community in the ecological sense of mutual dependence of species in the natural world. So in the core of economics, those things are abstracted from." (1)
ECOSYSTEM AND ECONOMICS IN RELATIONSHIP
"you have to shift from Homo economicus as the isolated individual to the idea of person in community, whose identity is largely a function of his relationships in community with others and with the ecosystem. So that this community perspective of social and ecological interdependence is critical - and for the future. Economists say 'Oh yeah, well we dealt with that.' But you go and you look at the basic textbooks and you get the standard isolated circular flow of firms to households, of exchange value going around and around. There's no environment. The theorems of underlying supply and demand are purely individualistic. There's no social element in any of it. And so some people will say, 'Oh you're just criticizing bad elementary textbooks. I mean, the profession has gone way beyond that.' Well, wait a minute. Where do people learn their economics? All our congressmen, whatever they know they got out of some basic elementary textbook, and what good is it ... Should the elementary textbook be consistent with more advanced economics? And if advanced economics discovers something is wrong, shouldn't that be reflected in the next edition of the textbook? So I don't accept that. I think the textbooks really show you what are the most fundamental positions that the public accepts so that it is quite fair to... I would say that we have to work into economic theory not only the circular flow of exchange value which is important but also this one-way throughput of matter and energy - the digestive tract as well as the circulatory system - because it's that that ties us to the environment. The sources of low-entropy matter-energy, and the sinks for absorption of high-entropy matter-energy. And that has to be built into the very foundation of Economics, Chapter 1. No tacked on at the end of a chapter on Depletion and Pollution as Externalities like 'Oh gee, we never expected this to happen but it did so now we have to say something about it.' It's built into the very functioning of the economic process that we have to deplete, we have to pollute, that we have to keep those two activities within some sort of ecological constraint and what those constraints are affects the optimal scale or size of the total economy relative to the environment. And that big question has been completely left out. There's no concept of an optimal scale of a total macro-economic system relative to the larger ecosystem. And that fundamentally we have to bring into economics along with the standard questions of allocation and distribution. Some people are beginning to see that, others are really resisting it. So it's strange." (1)
AGAINST FREE TRADE
My problem with free trade is partly due to the environment - but it's larger than that. I think it's a bad social policy and bad environmental policy. By free trade, what I mean is deregulated international commerce. So the opposite of free trade is not autarky or no trade. The opposite is not state trade or total monopolization of trade. The opposite of free trade, which is deregulatory, is regulated trade. Trade which is regulated in the national interest by governments involved. And the notion that there should be no national interest [in] this trade across national boundaries, that the state has no interest in this, that this should be left entirely to the mutual benefit of the trading parties ... I mean imagine if this logic were applied say to corporations - individuals within corporations just trade with each for their own mutual advantage - nonsense! ... Every deal that corporation people make has to be vetted up through higher authorities to make sure that it's really in the interest of the larger entity. And so I think the same thing is the case with trade across national boundaries. The reason again goes back to community because if you have the free flow of goods and capital and, increasingly, labour across national boundaries, then you really lose any possibility of policy at the national level. You can't have an interest rate policy that's different from your neighbour because capital is mobile. You can't have environmental cost internalization standards that are different from other people because if you have higher standards that'll raise your prices higher than your trading partners', and you put your own people at a disadvantage. So you have to have some equalizing kind of tariff. So the argument is not that there should be no trade. Trade can be very beneficial. But the argument is that trade should not be based on standards-lowering competition. You have to maintain certain standards. And standards-lowering competition can be weakening the environmental standards to give cheapness, weakening social insurance standards and safety standards to get cheapness. Weakening standards of child labour ... throwing in prison labour even, [about] which even GATT says, 'Prison labour is too much, we'll retaliate against that.' So I think maintaining these social standards which have been actually hard-won over many years - I mean the length of working day, that's been limited; child labour, these sorts of things. You can make products cheaper if you lengthen the working day, if you employ children ... and so I think there has to be this national community protection of basic standards. We can't allow that to be competed away in the name of free trade. (1)
"I think economics has been very successful in one very important area: allocative efficiency. So that [regarding] the efficiency of allocation of scarce resources among competing ends, economists have preached the importance of decentralized decision-making coordinated by markets and the price system. This has historically dramatically proven to be much better than central planning in this collapse of the former Soviet Union and so forth, [and] is something that needs to be recognized and taken seriously. As far as market control of allocation of resources [goes], I think economics has provided a whole lot. And good reasons were given for why this is so. Now, my problem is that allocation is only one fundamental economic problem. It's important, but it's only one. There are two others, which I mentioned briefly before: there's distribution and scale. So allocation is about how resources get divided up among different users - how much goes to produce bicycles, how much to cars, how much to houses. You know, is that efficient given what people want and their ability to pay. You end up giving people the most that you can get of what they want with the resources available. That's a question of efficiency - are allocations efficient or inefficient? The distribution question is a question of justice. Who gets all the stuff that was produced. Does it go to you or me. And that's a question of justice - is it fair, is it a fair distribution? And then the third question of scale - the total amount that gets produced in all of the resources and the depletion and pollution generated by the use of those resources. Is that at a total scale which is within the absorptive and regenerative capacity of the ecosystem? Or are you destroying natural capital at a rate which is too great? The welfare effects of destroying natural capital may be greater than the welfare benefits of what you produced. And whose products required the destruction of that national capital? So just from a purely anthropocentric view, not giving any value to other species or nature intrinsically, just as an instrument for human betterment, you still run into this limit of scale."
the best thing that we can pray for is ecological tax reform. Shift the tax base from income, labour, value-added onto that to which value is added - namely the resource flow. So tax throughput, tax depletion and pollution, tax the resource flow - that to which you are adding value. That is what's causing depletion and pollution. Those are 'bads'. Tax bads, stop taxing goods. That's the basic idea. You don't want to tax what you want more of. You do want to tax what you want less of. This could be sold as a revenue-neutral shift. We're not going to tax more, we're going to tax differently, we're going to tax different things to instil different incentives. And the incentives that result from this would be not to dampen the incentive to work or to accumulate capital or to improve it, but to dampen the incentive to use more resources. So we would then collect money from the resource flow, which is what is tightly associated with depletion and pollution. And that would I think be a move toward efficiency, and standard economists agree with that to a large extent. It's kind of a political movement. In Europe, in Germany, Ernst von Weizsäcker and others have pushed this idea very strongly and I think convincingly. So it seems to be kind of the one policy I can think of now which in a conservative political time might have some political chance of being considered, and yet which could still have some real bite, some real effect. Now, some people would immediately say that it's very optimistic to think that it's politically feasible ... given our recent experience here [in the US] with an attempt to pass a gasoline tax. So this would be kind of [a] gasoline tax writ large on all resources. Well you know, maybe so. It wouldn't be politically easy, but it does seem to me that it's in the realm of feasibility. There's so much logic to it, and I think your neo-classical economist [and] your ecological economist pretty much are in agreement that this would be a good sort of thing. It would be revenue-neutral only in an aggregate sense that the government raises the same amount of revenue. By raising it differently it would impinge on different groups differently so that you might say that everyone would benefit by a reduction in income tax and everyone would pay more in resource taxes. However the next balance in each case is going to be different. Some people or some interests may consume a whole lot of resources, and so there would [be] a shifting incidence - the incidence would fall differently, so I think that probably initially to gain political acceptance there would have to be some compensation for the differing incidence. So maybe corporations who are adversely affected by the shift would ... maybe they would get a little greater forgiveness on income taxes or something. But those are important questions that have to be worked out, it's pretty hard to know exactly what this incidence would be. And one would have to move towards it gradually, a certain amount each year. We couldn't just do an abrupt, all-at-once shift. It would have to be a gradual thing which would give people a chance to see what's coming and adapt to it before it hits, and make their adjustments.
THERE ARE SIMPLER WAYS TO THINK ABOUT CLIMATE CHANGE
The recent increase in attention to climate change is very welcome. Most of the attention seems to be given to complex climate models and their predictions, however. It is useful to back up a bit and remember an observation by physicist John Wheeler: "We make the world by the questions we ask." What are the questions asked by the climate models, and what kind of world are they making? What other questions might we ask that would make other worlds?
The climate models ask: Will CO2 emissions lead to atmospheric concentrations of 500 parts per million? And will that raise temperatures by 2 or 3 degrees Celsius, or more, by a certain date? And what will be the likely physical consequences in climate and geography, and in what sequence, and according to what probability distributions? And what will be the damages inflicted by such changes, as well as the costs of abating them? And what are the ratios of the present values of the damage costs compared to abatement expenditures at various discount rates, and which discount rate should we use, and how much new information we will learn in the meantime?
What kind of world is created by such questions? Surely a world of such enormous uncertainty and complexity as to paralyze policy. Scientists will disagree on the answers to every one of these empirical questions.
Could we ask a different question that creates a different world? Why not ask, can we systematically continue to emit increasing amounts of CO2 and other greenhouse gases into the atmosphere without eventually provoking unacceptable climate changes? Scientists will overwhelmingly agree that the answer is no. The basic science, first principles, and directions of causality are very clear. Focusing on them creates a world of relative certainty, at least as to basic thrust and direction of policy. Only the rates and sequences, timing, trajectories, and valuations are uncertain and subject to debate.
As long as we focus on measuring inherently uncertain empirical consequences, rather than on the certain first principles that cause them, we will overwhelm the consensus to "do something now" with the second order uncertainties of "first knowing the exact consequences of what we might someday do."
To put it another way, if you bail out of an airplane, you need a crude parachute more than an accurate altimeter. And if you also happen to take an altimeter with you, at least don't become so bemused in tracking your descent that you forget to pull the ripcord on your parachute.
The next question we should ask is, what is it that is causing us to systematically emit ever more CO2 into the atmosphere? It is the same thing that causes us to emit more and more of all kinds of waste into the biosphere: namely, our irrational commitment to exponential growth forever on a finite planet. Again we ask the wrong question. For example, can my firm emit more CO2 without causing any identifiable harm to any specified person? Yes, no doubt it can. Can all firms do this without causing much harm to many people with a high degree of probability? No, certainly not. Also, instead of asking, when will we be rich enough to afford the cost of protecting the environment? we might instead ask, does growth in GDP at the current margin and scale in the U.S. really make us richer? Might it not be increasing environmental and social costs faster than it increases production benefits, thereby making us poorer? It is clear that we need an aggregate limit on CO2 emissions to avoid this "uneconomic growth." It is easy to preach the traditional dogma of economic growth. It is something else to demonstrate that growth in GDP has not in fact become uneconomic. Economists have so far run away from this challenge.
Is it hard to come up with a reasonable policy? Not really -- a stiff severance tax on carbon, levied at the well head, mine mouth, or port of entry, would go a long way by both reducing carbon use and giving an incentive for developing alternative carbon-free technologies. Yes, but how do we know what is the optimal tax rate, and wouldn't it be regressive, etc.? Once again, we make the world by the questions we ask. We need to raise public revenue somehow, so why not tax carbon extraction heavily and compensate by taxing income lightly? (6)