Steady-State Economics, Daly and the Fallacy of Perpetual Growth

– Penned by Anjaney Sudhakaran

Growth is a fascinating phenomenon to evaluate.

Over the course of history, any conversation about Economy eventually ends up leading to questions and opinions about where growth stems from, how it is constrained, and, most importantly, how to best achieve it. Policy is deemed a failure if the growth of income takes a beating, and lauded with accolades if the GDP per capita numbers seem to be climbing upward. Recently, however, there’s been a growing tide of scientists and economists who’ve started questioning whether our obsession with growth is indeed justified. Pointing towards the rising negative externalities generated by production, these individuals question whether the means – what they consider to be overproduction – justify the ends – economic growth at all costs – and, going one step further, whether “growth” itself is as pertinent as once held to be.

Leading this pack of revisionists is the emeritus professor at the University of Maryland School of Public Policy, Herman E. Daly. Daly pioneers a school of thought known as “Steady-State Economics.” The steady-state being mentioned here, very simply put, refers to an economy where economic growth is deprioritised in favour of a more sustainable amount of production that does not disturb ecological processes outside the economy and moves towards a fairer form of distribution and exchange within the economy.

An Introduction to Theory

A comprehensive analysis of this idea is beyond the scope of this article. However, the basic theoretical reasoning behind the model could be explicated as follows:

Nature: Considered to be the Supersystem
The Economy: A Subsystem within Nature.

Daly believes that considering economics as an isolated system is an outdated yet prevalent concept in academics. He points out that to say that a system is isolated is to say that it is unconstrained by external factors. But this is untrue about the economy as it directly depends on nature for resources and sustenance.

The economic subsystem – historically – has always been prone to expansion. As it expands, it assimilates larger and larger swathes of the ecosystem – thus putting an ending to, or significantly curbing, the bio-geochemical processes that sustain the natural supersystem. Since we derive the resources required for further expansion of the economy from nature, continuous expansion may regress development or even harm the overall environment within which we live.

Therefore, it follows that unbridled economic growth will lead to detrimental effects that make the costs of growth outweigh the benefits.

Motivation

Steady-state economics is largely an academic criticism of the economic system from the perspective of sustainable development. The school believes that while academic economics has dealt amply with the question of efficient and optimal allocation of resources, it speaks nothing regarding the optimal size of the economy with respect to the natural supersystem.

Therefore, apart from the insights drawn from academics at present, it seeks to answer three pertinent questions:

How large is the subsystem relative to the total system?
How large can it be?
How large should it be?

Nuances

1) Sustainable Development and the Steady-State

Naturally, there are multiple complexities within the arguments advanced and the solutions proposed by Daly and his school. For instance, the reader might point out that steady-state economics is merely a rehash of the old idea of “sustainable development.” This is a reductionist view. Steady-state economics stands for not just a curb in production by market participants – it argues for strong government intervention in this regard rather than letting the markets decide for themselves the “optimal” amount of abstinence they should take. That is, it is asserted that the scale of the economic subsystem relative to that of nature, currently left to the markets to decide, should be a matter of public policy.

2) Growth, Development and the Steady-State

Care must also be taken not to equate a steady-state economy with a stagnant one. It is one in dynamic equilibrium with the processes of the environment – curbing consumption when the load on nature is too high and maintaining consumption patterns steady when the burden is low. Daly explains this best using a delightful analogy:

“The failure of a growth economy to grow is a disaster. The success of a steady-state economy not to grow is not a disaster. It’s like the difference between an airplane and a helicopter. An airplane is designed for forward motion. If an airplane has to stand still, it’ll crash. A helicopter is designed to stand still, like a hummingbird.”

In other words, while the quest for perpetual growth is forsaken, development within the existing economy – which naturally involves the reallocation of essential resources, a certain degree of redistribution and sharing, large amounts of public investment, and considerable political will – must be the target of the government in a steady-state economy.

3) On Differentiated Privileges of Varied Nations

Daly recognises that developing countries cannot afford to sacrifice growth at so nascent a stage in their development – the pie can only be enjoyed if it is big enough. His theory of a steady-state world economy necessarily took these factors into consideration. It is so that he proposes that different countries possess different privileges and responsibilities. In his own words:“Certainly for some other country that’s struggling for subsistence then, by all means, GDP growth increases welfare. They need economic growth. That means that the wealthy part of the world has to make ecological room for the poor to catch up to an acceptable standard of living. That means cutting back on per capita consumption, that we [the developed nations] don’t hog all the resources for trivial consumption.”

4) On a Way Forward

Daly, therefore, puts forward a vast array of public policy prescriptions, including establishing minimum and maximum income limits, setting limits on natural-resource use and even going so far as to propose stabilising the population by ensuring “births plus immigration equals deaths plus emigration.”

Comments and Counter-Arguments

This author firmly believes that the steady-state economy has firm theoretical grounds. However, as far as an implementation of such an economy is concerned, Daly’s work is largely silent. While the Georgist economist offers policy recommendations, and there is a strong case made against prevalent priorities in neo-liberal economic literature, there seem to be no structural changes proposed within the existing economy.

This is a grave omission as, without any structural change, there is nothing stopping private firms from returning to their old objective of maximising profits without considering the adverse environmental effects of their actions. Their excessive lobbying influence coupled with financial power will eventually lead to the old status quo. For Engels, Marx and other socialists, for example, the structural change that leads to a socialist society is the abolition of the present mode of production and exchange. This crucial move realigns incentives and political will within an economy. A similar call for change is not present in Daly’s arguments.

There are also other macroeconomic criticisms one may advance against the steady-state. For example, the change Daly proposes has to be pan-global. Nations will not become steady-state economies if fellow nations refuse to follow suit because rival countries may undercut them in trade to improve their Balance of Payments.

These are but two fundamental criticisms levied against the paradigm of many.

Conclusion

All in all, the steady-state economy is an exciting idea to consider. It has obvious benefits, is more ethical, and possesses a scientifically sound rationale. However, a hypothetical model of such an economy – answering questions about how it shall come to be and how it shall be sustained – is, as of yet, absent. Therefore, it remains an elusive theory and an untested proposition. Nonetheless, the never-ending quest for better living conditions has inevitably brought us to this juncture wherein we have to consider such an alternative seriously.

Our resource pool is shrinking rapidly – and arguments for a steady-state economy may just be one of our best bets to stay the advance of malevolent growth-mania.