Tag Archives: Economic growth

Limits to Growth III: The Steady State

If there are limits to growth and therefore how far our economies can grow what can be done about it? Economist Herman Daly has a possible answer in the Steady State Model.

“An economy with constant stocks of people and artifacts, maintained at some desired, sufficient levels by low rates of maintenance ‘throughput’, that is, by the lowest feasible flows of matter and energy from the first stage of production to the last stage of consumption.”

Daly, Herman. 1991. Steady-State Economics, 2nd edition. Island Press, Washington, DC. p.17.

What Daly is describing is an economy that has reached a stable population level and a low-level of consumption. For most of human history our struggle has been about getting enough resources to survive but now we have surpassed that need. We have more than enough for everyone and are reaching the point where continuing to produce is a danger to us all.

The Steady State would be smaller in size, consumption and environmental impact as it would need less to sustain itself.  It’s as much a new form of economics as it is a new way of evaluating progress and value.  GDP would no longer be an adequate measurement  as production and consumption are not the pillars of progress in the Steady State.

The massive accumulation of wealth needn’t be the focus of a society and in face the Steady State requires that it not be.  Money could exist but massive accumulation tends to promote inequality which breeds an unstable society.

Achieving a steady state economy requires adherence to four basic rules or system principles:

  1. Maintain the health of ecosystems and the life-support services they provide.
  2. Extract renewable resources like fish and timber at a rate no faster than they can be regenerated.
  3. Consume non-renewable resources like fossil fuels and minerals at a rate no faster than they can be replaced by the discovery of renewable substitutes.
  4. Deposit wastes in the environment at a rate no faster than they can be safely assimilated.

The Steady State is a simple concept but politically is extremely difficult.  We’re not just discussing a policy change but instead a changing of principles and values.

Limits to Growth II: The Myth of Infinite Growth

stateofworldMore and more people have begun to question the possibility of human economies ability to grow forever.  The overuse of Earth’s natural resources as well as the destruction regional ecosystems and global ecosystems should tell us that something is wrong.  However many mainstream economists seem to not be concerned with these facts.  They are still claiming that economic growth is not only possible, it’s necessary to improve our well-being.  This maybe true in some cases–no one would argue that Uganda or Pakistan should not work for more economic growth but this distinction should not be generalized.

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The problem is that the whole model of macro-economic growth is built on a fatal flaw–we assume that we can grow forever. The theory states that the resources are fungible and substitutable simply put: “Natural resources are not an issue as long as our technology is improving.” This is not only irresponsible, it’s insane.

What will technology use if we run if we run out of the resource which we use to build the resources? Herman Daly put it nicely  “You can not build the same wooden house with half the wood just because you have more or better saws.”

The question now is one of responsibility: do we want to proceed with “business as usual” and naively assume that technology will solve all our problems and run the risk of a catastrophe? Or shall we back pedal and think about the development and balance of Western economies versus those of the developing world?

Sustainable Economic Growth VS Sustained Economic growth

Africa-manufacturing-hubMaking lives of poor people better is not the same as fighting poverty. Many aid projects in Africa have been built for sustainability but are rarely sustained once the project timeline ends.   Thus the difference between investing in the productive capacity of the poorest and providing the economic benefits of development to the poorest. If the project designed invests directly in the community’s capacity then the project itself becomes apart of the way of life and will therefore be sustained. Giving away goods that the poor need may alleviate some of the hardships of poverty but it does little to build an stronger and sustainable economy.

The gains that this model of aid creates are real, but rarely outlive the project’s timeline. As aid workers leave the village life quickly returns to what is was before.  Water wells dug by well meaning NGO’s run dry for lack of spare parts, and clean burning cook stoves sit in the corners of huts unused.

Dani Rodrik points out that one of the main factors slowing the anti-poverty fight in Africa is the slow growth of the manufacturing sector.  Rapid and sustained growth which leads to the higher incomes and thus anti-poverty policies is achieved on the back of industrialization.  In Africa, manufacturing is still around 10.1% of annual output. For comparison,  Thailand is about 34% South Korea is 31%.  Making matters worse, manufacturing in Africa has actually been on the decline over the last 40 years, so what we are seeing is are not slow gains but declines of the manufacturing sector.

Asking Africa’s poor to be entrepreneurial with high interest micro loans and building their way out of poverty as a national policy will not work.  Development agencies and African politicians may preach about technological leaps that the African countries can make and while that is largely true, sustained growth and reduction of poverty will only come when Africa’s poor have access to higher paying jobs.  This means that the 70% of Africans citizens that depend on subsistence farming need the means to transition to the higher paying manufacturing economy.

Investments in education and human capital are beginning to lay the ground work for an investment friendly environment however.  Hopefully, African politicians will begin focusing on mass job creation and less on “pro-poor” policies.  Just remember making the lives of poor people better is a noble cause…but it’s not the same as fighting poverty.

D is for Debt Part II: US Debt and Generational Justice

us-debt-sinkingship2Policy makers in the U.S. love to talk about the burden of debts that they will leave behind for future generations.  One example often cited by debt hawks a family that has borrowed too large a mortgage and will have a hard time making the payments.  While it certainly paints strong visual, its wrong in two ways.

First, families have to pay back their debt–governments do not.  They need to make sure that the debt grows slower than their tax base.  The U.S. never repaid the debt from World War II, the debt just became irrelevant as the economy continued to grow and grow.  What policy makers need to focus on is not the debt, but strengthening the tax base and that includes getting people back to work…more likely by government driven Keynesian policies.

Second, an over borrowed family owes money to someone else, however the US debt is largely owed to the U.S.  This was clearly true of the debt incurred by winning WWII, which was much larger as a percentage of GDP, but that debt was owned by taxpayers in the form of war bonds.  That debt didn’t make the U.S. poorer in fact the post war generation experienced the greatest economic boom in wages and living standards in the nation’s history.

In the wake of the debt debates austerity is now in vogue and at stake is the U.S. economic future.  A part of the austerity fashion wave is the idea of generational justice.  It is said that the U.S. is passing on its children and grandchildren and as the debts become payable, future generations will be burdened by rising interest rates and lower living standards.

The economics of this are misleading.  The well-being of children and grandchildren in 2023 and 2033 is not a function of debt reduction but instead about putting economic growth back on track. If The U.S. reduces debt by cutting social spending and “tightening its belt” the economy will fall stagnate and lower wages.  The debt will out pace growth and there will be little money to invest in education, research and job-training.

Real generational justice would entail making sure that wages are adjusted for inflation, college loans rates are reduced and investment in growing markets needs to be maintained.  The next generation can and will produce for the U.S., they just want the same opportunities their parents enjoyed.