Beyond Growth: The Economics of Sustainable Development - Herman E. Daly I finished this last week and have been dithering since then with notes and possible angles for addressing the arguments in the book.

Well, no more delay - I will post the review. Eventually. Just not today :-)

Anyone who has followed my recent nonfiction reading may have seen a theme – a focus on the deteriorating conditions for life on this planet. While the subject has been of interest for a long time, my latest venture into it began with Derrick Jensen’s Endgame (both volumes). Jensen is angry and radical. Not only does he predict the imminent end of industrial civilization but he wants people to actively bring it about since the longer we maintain it, the worse the aftermath. My reading continued with Spencer Wells’ Pandora’s Seed, where the author traced many of the problems we’re dealing with today to the Agricultural Revolution, which fundamentally transformed how humans lived and interacted with their environment. Unlike Jensen, Wells finds cause for hope in technology that could ameliorate or reverse the damage we’re inflicting on the ecosystem. Herman Daly’s Beyond Growth deals with the same problems from an economist’s POV. He’s not angry and he’s radical only to the extent that he believes the current, neoliberal, growth-oriented economic consensus makes no sense and has reached a point of rapidly diminishing returns. I don’t think he would advocate blowing up dams or toppling cell-phone towers á la Jensen. Rather, like Wells, Daly sees hope that we can contrive a way of life that preserves a decent standard of living for everyone.

The assumption of most economists from all schools is that the economy is an open-ended system capable of eternal growth. There may be disputes about how best to distribute wealth and to allocate resources efficiently but that wealth would always increase and that there would be sufficient resources to fuel it were givens. In a pre-industrial and early industrial world this was a defensible position. The scale of human activity was such that the ecosystem it was a part of could renew itself or absorb the waste and there were plenty of niches yet to be exploited. The “golden age” of industrial civilization is coming to an end. Scale – the heretofore ignored third leg of the economy – is making considerations of allocation and distribution irrelevant. It’s simply not possible to grow into greater prosperity for the near 7 billion people who are living on the planet at the time of this review (2011). It wasn’t possible for the 5 billion living at the time of the book’s writing (1996). And it won’t be possible for the 9 billion who’ll be here by 2050. As Daly might phrase it: There is not enough low-entropy input and too much high-entropy output to support an American-style quality of life for the entire planet, and even within developed nations, many are slipping below even that level.

Daly wants to convince readers that we have to contemplate (and implement) a fundamental shift away from a growth economy to a development economy, one that focuses on qualitative improvements instead of quantitative ones, and balances exploitation of resources with the need of future generations. In this book, Daly doesn’t discuss the details of such an economy. Here he wants to prove that the current model is unsustainable, and describe an overall framework for sustainable development (SD) which “meets the needs of the present without sacrificing the ability of the future to meet its needs.” (p. 1)

The introduction distills Daly’s conception of SD into 15 principles, which he elaborates upon subsequently:

1. Preserve and restore natural ecosystems (reduce humanity’s footprint on the planet).
2. Economic development, environmental protection and social equity must be balanced against each other.
3. Private markets can efficiently solve the problem of allocation but they must operate within boundaries of scale and equitable distribution that can only be resolved by communities in their political and social institutions.
4. Population growth must be controlled
5. Consumption must be reduced. Limit (halt) growth to force the development of greater efficiencies.
6. Reducing poverty is impossible without a more equitable distribution of wealth and a significant reduction in the number of consumers.
7. All segments of society must share environmental costs and benefits.
8. All economic and environmental decision making must consider future generations and preserve for them the same (or greater) range of choices as the present.
9. Where there is damage to public health or the environment, the costs should be borne by the consumer of the commodity, not the public at large.
10. SD acknowledges that depreciation of natural capital is just as much a cost as the classical idea of depreciating human-made capital.
11. Countries pursuing SD policies are less likely to go to war. Countries operating under the classical paradigm will inevitably come into conflict with others as they compete for dwindling natural capital.
12. SD is easiest to achieve in a free society.
13. SD policies must be debated by an informed public.
14. Technologies that reduce consumption and/or increase efficiencies are beneficial and should be encouraged. Not all technologies are beneficial.
15. SD must be tied to national policy and resists “globalization”: Unrestricted free trade promotes a race to the bottom in terms of wages and environmental abuse, and it weakens a nation’s ability to govern itself. Multinationals, with no interest in local concerns and focused on short-term maximization of profit, take over.

The final chapters of the book are a departure from the relatively soul-less analysis of the preceding pages. In these final pages, Daly suggests that the only way to convince enough people of the need for SD is to appeal to their spirituality – their sense of purpose. Science is excellent at accumulating data and explaining process but it can’t make any claims toward an ultimate purpose. On the contrary, most scientists actively eschew such a role. It’s only by making the preservation of life – and not just human life – a sacred obligation that we can hope to bring civilization within sustainable boundaries and hope to ensure a reasonably good quality of life for everyone and their descendants.

Economic Theory and Sustainable Development
Part one discusses the outlines of what Daly calls the “steady-state economy” (SSE). SSEs grow to the sustainable limits of their ecosystem, at which point any enhancements to productivity are qualitative rather than quantitative. Dale shies away from the details of a SSE except to say that it would maximize a “good life” for everyone that is indefinitely sustainable. There are two arguments for preferring a SSE to a growth economy (GE). The first is based on physical law, especially the second law of thermodynamics. A GE extracts resources and produces waste. Technological innovation has, so far, managed to keep ahead of resource depletion but only by substituting one resource for another and/or at the expense of the ecosystem (e.g., the Green Revolution expanded crop yield but at the cost of chemical pollution, limiting seed choice, erosion, destruction of vital ecosystems and population growth that is now outstripping carrying capacity). There is also an ethical argument against GEs. The desirability for growth in the present is based on the theft of resources for the future. Growth crowds out other species whose existence is vital for environmental health (e.g., mounting evidence that marine phytoplankton upon which the entire oceanic food chain depends is failing). A third consideration is that while absolute wants (food, shelter, health, etc.) are limited (i.e., a consensus of what is sufficient is possible), relative wants (access to more of what everyone else has) are not, and the driving demand for aggregate growth corrodes moral standards by encouraging the baser instincts in the human soul.

A final consideration arguing against a GE is the “cult of money” – which manifests as in increasing distance between money, the symbol of production, and the commodities it’s meant to represent. Daly traces four stages in the development of an economy. The first is the barter stage, a simple exchange of commodities (C > C’). At some point, as economies grow, money becomes a medium for exchange but it still represents something real (C > M > C’). The third stage is capital circulation. Theoretically, the money changing hands represents real or future wealth but the transaction focuses on the exchange of money (M > C > M’). As long as the cash economy doesn’t overwhelm its ecosystem, stage 2 and 3 look a lot alike. But the former inevitably reaches a physical limit; a limit that doesn’t restrain money. The final stage – the paper economy – cuts the ties between reality and exchange, and profit is measured by the manipulation of figures (M > M’). The system can stumble along fairly well as long as the participants have confidence in the future productivity of the economy. When that’s lost, however, you have “hiccups” (the Great Depression, the ‘70s oil shock, the financial collapses of the Asian Tigers and Mexico in the ‘90s, the dotcom implosion at the turn of the century and the ongoing meltdown that began in 2008). The hiccups are coming more frequently, are of greater scope and the recoveries benefit fewer and fewer people as the human economy continues to crowd out the overarching ecosystem.

There are a few more points Daly makes that he’ll elaborate on in future chapters. The first is that gross national product (GNP) – the chief metric of economic health (at least in the media and in political debate) – is hokum. It’s a measure of capital consumption and a poor reflection of reality. So poor, in fact, that Daly advocates abandoning it entirely. The second point is that by ignoring scale in their economic fantasies, free-market enthusiasts and classical economists make the command/centralized economies they abhor inevitable as resources (natural capital) become scarcer and the actors scramble to secure them (e.g., the mounting tensions among the nations bordering the Arctic Sea as melting ice makes its resources more accessible). The final point is that in a SSE the ultimate goal of policy should be to minimize production and consumption in order to maintain the capital stock.

Operational Policy and Sustainable Development
In this section, Daly shows that natural capital has become the limiting factor in the production of wealth, and argues that pro-growth policies that refuse to recognize this are becoming increasingly uneconomical and destructive. In their place, he presents four new policies:

1. Stop counting the consumption of natural capital as income. It should, rather, be treated as a cost in so far as they are nonrenewable and/or over-exploited.
2. Tax labor and income less and resource throughput more; thus, shifting the cost of manmade exploitation closer to the source.
3. Maximize productivity of natural capital (qualitative development).
4. Abandon free-trade ideology in favor of local/regional development.

This last point is Daly’s most radical as it flies in the face of 30 years of global economic policy but it’s necessary to restore some measure of control to communities that have lost it to multinationals, and it strengthens institutions capable of (and interested in) carrying out policies for the common good. He quotes Keynes:

“I sympathize therefore, with those who would minimize, rather than those who would maximize, economic entanglement between nations. Ideas, knowledge, art, hospitality, travel – these are the things which should of their nature be international. But let goods be homespun whenever it is reasonably and conveniently possible; and, above all, let finance be primarily national.” (p. 93)

National Accounts and Sustainable Development
One of the Daly’s least attractive features as a writer is that he too often writes like the World Bank bureaucrat he once was. Thus a reader must endure acronyms and formulae – lots of acronyms, lots of formulae. In this section we are introduced to yet another one – ISEW – the index of sustainable economic welfare, which is meant to replace GNP as a measure of economic health. It would incorporate measures of consumption, income distribution, depletion of natural resources and debt levels, among other measures. While not a perfect reflection, ISEW still more accurately reflects the quality of life vs. GNP. Measuring economic health by the ISEW, Daly charts a parallel rise with GNP through the mid-‘70s. In the ‘70s, the GNP continued to grow but ISEW flattened out, and from the ‘80s, it has declined relative to GNP.

ISEW’s decline illustrates the overgrowth of the developed world – it can only sustain itself by exploiting natural capital from abroad (not only denying them to the future but denying them to many in the present). The outcome (quoted from Global 2000 Report to the President from 1980) is that “if present trends continue the world in 2000 will be more crowded, more polluted, less stable ecologically, and more vulnerable to disruption than the world we live in now…. Despite greater material output the worlds’ people will be poorer in many ways than they are today.” Daly notes that in order to provide an American lifestyle to the 5 billion living at the time of writing (1995) would involve a seven-fold increase in the exploitation of natural resources.

Population and Sustainable Development
Daly looks at carrying capacity in section 4 – the optimum number of people in a SSE. Beyond the moral quandaries of population control, human carrying capacity is difficult to determine because four relatively constant controlling factors among other animals become variables with us. Among nonhumans:

1. Standards of living are relatively stable over time.
2. Relatively uniform per capital resource consumption.
3. Technologies are endosomatic and adapted to the environment (by and large, chimpanzees, for example, are known to use tools).
4. The level of exchange between species is constant.

The import of humans being able to control or strong influence these factors has been a population explosion that long ago passed the point of sustainability, and now impoverishes the majority, consuming natural capital like a cancer.

As with his position on global trade (of which more below), Daly’s on population is 180 degrees from the current “wisdom” (at least in America): Any rational population policy would promote zero, if not negative, growth – a diminution of the human presence. Such a policy would also preserve or increase carrying capacity by more appropriate uses of land, redistribution of resources to satisfy basic needs and investment in moving to renewable resources. A first step in limiting population, is the democratization of birth control – from education, to contraception, to abortion. The best options have to be available to everyone.

International Trade and Sustainable Development
In this section Daly returns to the baleful impact of free trade and expands on the case against. To begin, there is the cost of transportation, which consumes nonrenewables to move commodities over enormous distances. Where communities come to depend upon distant markets, they become more vulnerable to developments outside their control. Globalizing economies reduces the range of livelihoods within a community and entail a social cost hard to quantify (and thus ignored in economic analyses). And finally there is a standards-lowering competition to externalize costs. The proverbial “race to the bottom” in environmental standards, workings conditions and wages. The two objections to this analysis that Daly considers the most serious are that growth will compensate and Ricardo’s law of comparative advantage. To the first, he recaps all that has come before to show that “growth” will not compensate as there’s no place to growth into. To the second, which suggests that countries should specialize, Daly points out that Ricardo assumed that capital was immobile. In a free-trade world, capital if free moving and follows the law of absolute advantage.

And just as free capital weakens community control and social cohesion, so too does free labor. Both free labor and capital might make sense in a global economy with global standards on wages, environmental protection, etc., but there are no such things and no acceptable enforcement mechanism is there were.

Free trade conflicts with getting prices “right” as more responsible nations that internalize costs lose business to those less responsible. Open trade equalizes profit and labor – the former upward, the latter downward. Free trade removes ownership control from regional concerns. A true international community – as opposed to the current, footloose class of money managers who make up short-term coalitions of economic interest – would be a federation of regionally focused economies. Free trade results in huge trade imbalances and unsustainable debt (Europe 2011; America 2012?). Free trade violates scale. Participating GEs preserve consumption by importing/exporting among themselves but inevitably run up against environmental limits. By globalizing the scale of economic activity, every country hits the limits at the same moment, causing unmanageable, catastrophic problems worldwide as opposed to (hopefully) manageable local ones.

Daly concludes with the observation that SD demands an economic sophistication we’re not capable of at the moment, and we may have reached a point where we have little luxury for experimentation.

Two Pioneers in the Economics of Sustainable Development
Part six comprises two essays about Daly’s intellectual mentors – Frederick Soddy (1877-1956, major work: Wealth, Virtual Wealth, and Debt) and Nicholas Georgescu-Roegen (1906-1994, major work: The Entropy Law and the Economic Process).

Soddy was originally a chemist but became interested in economics when he contemplated how atomic energy would be used – primarily for war – and wondered why the economic system made that inevitable and how that could be changed. He argued that economists ignored the physical basis of the economy – that all life depends upon using energy. Up to the Industrial Revolution, humans relied upon energy “revenue,” immediately available and difficult to store. The industrial age allowed massive exploitation of energy “capital.” Economists also confuse “wealth” with “debt.” Wealth is a positive, physical quantity. Debt is a mathematical abstraction. Wealth is limited by the ecosystem. Debt is unlimited (as long as people trust each other to continue paying it). At some point wealth reaches its physical limit but debt continues to grow. The result is debt repudiation: inflation, bankruptcy and confiscatory taxation.

Soddy concluded that allowing wealth and debt to get a divorce (my analogy, not Soddy’s) has led to an ultimately unsustainable situation that promotes violence, instability and inequitable social/economic hierarchies. (Concluded in the Comments section)