Daly’s steady-state economics

October 9, 2011

In this post I’d like to begin to review Herman Daly’s notion of how to build a steady-state economy (which were ahead of their time—the first edition was written in 1977). His ideas are both deep and simple at the same time, and should be a foundation for any future economic system.

Daly makes a point at the beginning of the second edition that is both “obvious” and true. (I use quotes because I’ve found that sometimes things that are obvious are either not so, or not true, for a variety of reasons.) Using Schumpeter’s term “preanalytic vision”—the premise upon which a theory is built—he describes the basis for both standard and steady-state economics (emphasis mine):

What is the preanalytic vision of standard economics? Of stead-state economics? For standard economics, it is that the economy is an isolated system in which exchange value circulates between firms and households. Nothing enters from the environment, nothing exits to the environment. It does not matter how big the economy is relative to its environment. For all practical purposes an isolated system has no environment.

Contrast this with steady-state economics:

For steady-state economics, the preanalytic vision is that the economy is an open subsystem of a finite and nongrowing ecosystem (the environment). The economy lives by importing low-entropy matter-energy (raw materials) and exporting high-entropy matter-energy (waste). Any subsystem of a finite nongrowing system must itself at some point also become nongrowing.

The logic is so simple, yet somehow it isn’t the basis for today’s dominant economic thinking. Daly comments that the discipline of economics is not so keen on creative destruction when applied to the discipline of economics itself.

I’ve found Daly’s insights incredibly valuable. Over the past few years I have internalized the idea that growth cannot continue and that contraction is likely. However, I had not seen or understood a vision for how an economic system can function without growth or contraction. Partly that’s because our current economic system requires growth to even stay at a steady state. The fact that there is such a thing as a stall speed highlights this: it’s estimated that if GDP growth drops below 2% (which is “stall speed”) the U.S. economy is likely to enter recession. I’ve long been bothered by this fact (that we need growth even to stay flat), but the pieces never came together in my mind.

The book is filled with all sorts of wise turns of phrase. Consider (in the context of conventional economic thinking and the over-mathematization of economics):

Separation of ‘is’ from ‘ought’ is an elementary rule of clear thinking.

Here I’m reminded of the expectation that while high prices ought to yield more oil, in the face of dramatically higher prices, oil production has remained flat for seven years, and so it is the latter we need to focus on.

One of the essential ways of obscuring reality is through language (though I’m not sure I’m well qualified to expand upon this point given my lack of knowledge in linguistics and related fields). Daly strips many economic terms of their cloaks and in doing so makes the obvious visible. Take for example the ideas of consumption and production:

But production and consumption are not the precise words, since man can neither produce nor destroy matter and energy but only transform them from one state to another. Man transforms raw materials into commodities and commodities into garbage.

Again, this is something well known to those aware of such issues, but I’d never stepped back to think about how common terms like consumption and production were hiding what’s really going on.

The problems with GDP and GNP are well known (and we’re still interested in exploring alternatives like the DOM index further); Daly again explains the problem in simple language, in part citing Schumacher:

As more people transform more raw materials per person into commodities, we experience higher rates of depletion; as more people transform more commodities into waste, we experience higher rates of pollution. We devote more effort and resources to mining poorer mineral deposits and to cleaning up increased pollution, and then we count many of these extra expenses as an increase in GNP and congratulate ourselves on the extra growth! The problem with GNP is that it counts consumption of geological capital as current income.

After laying some groundwork, Daly establishes what exactly it means for an economy to be steady state:

What is it precisely that is not growing, or held in a steady state? Two basic physical magnitudes are to be held constant: the population of human bodies and the population of artifacts (stock of physical wealth)…Of equal importance is what is not held constant. The culture, genetic inheritance, knowledge, goodness, ethical codes, and so forth embodied in human beings are not held constant. Likewise, the embodied technology, the design, and the product mix of the aggregate total stock of artifacts are not held constant. Nor is the current distribution of artifacts among the population taken as constant. Not only is quality free to evolve, but its development is positively encouraged in certain directions. If we use “growth” to mean quantitative change, and “development to refer to qualitative change, then we may say that a steady-state economy develops but does not grow, just as the planet Earth, of which the human economy is a subsystem, develops but does not grow.

Daly also makes clear the differences between a growth economy and a steady-state economy (SSE):

However, the SSE is defined in terms of constant stocks (a quantity measured at a point in time, like an inventory), not flows (a quantity measured over an interval of time, like annual sales). GNP is a flow and is logically irrelevant to the definition of an SSE… The steady-state perspective seeks to maintain a desired level of stocks with a minimum throughput, and if minimizing the throughput implies a reduction in GNP, that is totally acceptable. The steady-state paradigm assumes some sufficient level of stocks, an assumption that is absent from the growth paradigm.

While written in the dry language of an economist, Daly hits on an important point here: that there is no notion of “enough” in a growth-based economy (and by extension, a growth-based culture). Again, this is well known, but he distills it to its essence.

But why can’t technology solve these problems and free us from the economic constraints imposed by diffuse solar energy? Daly addresses this nicely:

But have we not given insufficient credit to the marvelous power of technology in our discussion of ultimate means? Is not technology itself an infinite resource? No, it is not. Improved technology means using the entropic flow more efficiently, not reversing the direction of the flow. Efficiency is subject to thermodynamic limits. All existing and currently conceivable technologies function on an entropy gradient, converting low entropy into high entropy, in net terms.

That is, the best that new energy technologies can do is find marginally more efficient ways of transforming the existing (mostly solar-derived) energy flows on the planet; technology cannot replace energy.

Daly eventually arrives at a nice summation of what a steady-state economy is, and what its high-level objective is:

Service comes from two sources: the stock of artifacts and the natural ecosystem. The stock of artifacts requires throughput for its maintenance, which requires depletion and pollution of the ecosystem. In other words the structure and order (low entropy) of the economy is maintained by imposing a cost of disorder on the ecosystem. From the entropy law we know that the entropy increase in the ecosystem is greater than the entropy decrease in the economy. As the stock and its maintenance throughput grow, the increasing disorder exported to the ecosystem will at some point interfere with its ability to provide natural services. As we add artifacts we gain services from them, but beyond some point we pay a price in terms of diminished natural services from the ecosystem.

From this perspective it is clear that we can define an optimum stock as one for which total service (the sum of services from the economy and the ecosystem) is maximized. In other words, the goal in a steady-state economy is to maximize the benefits rendered to society by both the economic system and the natural ecosystem in which it is embedded, and to do so, the economy’s rate of consumption (“replacement of stocks”) must be limited by both what the ecosystem can provide as constant income (e.g. solar energy) and by what it can accept as waste.

The discussion thus far helps clarify what steady-state economy is and isn’t, but doesn’t address three important questions: a) how would a steady-state economy actually work, b) if thrown out of equilibrium by a shock of some kind, would the system converge back to its steady-state behavior, and c) how can today’s growth-based economies be transitioned to steady-state operation? I plan to explore Daly’s ideas on these in the next post.

Early on, Daly discusses means and ends: what is the ultimate purpose of the economy, anyway? Is it to increase industrial production, or is that simply another means to some higher goal, like increasing human happiness or health? I’d like to end on his analogy:

Our refusal to reason about the ultimate end merely assures the incoherence of our priorities, at both an individual and a social level. It leads to the tragedy of Captain Ahab, whose means were all rational, but whose purpose was insane. We cannot lend rationality to the pursuit of a white whale across the oceans merely by employing the most advanced techniques of whaling. To do more efficiently that which should not be done in the first place is no cause for rejoicing.

Barath Raghavan

Barath Raghavan is a computer scientist who writes about the intersection of energy, environmental, and technological issues.

Tags: Electricity, Fossil Fuels, Oil, Renewable Energy, Resource Depletion