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Beyond growth: The economics of sustainable development

Book cover

by Herman E. Daly, Beacon Press, 1996.


Traditional economics believes that economic growth can go on forever. Herman Daly, the dean of ecological economics, warns that "growthmania" is leading us to consume the earth’s resource beyond its sustainable capacities of renewal. In one of the most important books of our times, he calls for a move towards a "steady-state economy" – and for an end to free trade without adopting protectionism!

(Reviewed by Kevin Barham in June 2007)

(These book reviews offer a commentary on some aspects of the contribution the authors are making to management thinking. Neither Ashridge nor the reviewers necessarily agree with the authors’ views and the authors of the books are not responsible for any errors that may have crept in.

We aim to give enough information to enable readers to decide whether a book fits their particular concerns and, if so, to buy it. There is no substitute for reading the whole book and our reviews are no replacement for this. They can give only a broad indication of the value of a book and inevitably miss much of its richness and depth of argument. Nevertheless, we aim to open a window on to some of the benefits awaiting readers of management literature.)

Is economic growth always a good thing?

Herman Daly resigned in 1994 after six years as Senior Economist in the Environment Department of the World Bank, commenting that unrealistic visions of development in the third world, or South as he normally calls it, were an attempt to transfer over-consumption in the North to the rapidly multiplying masses of the South. In this book he challenges the view that growth is always good. He calls for a new economics that includes in its accounting the wealth of nature, the value of community and the necessity for morality.

One reviewer said of his book that for a non-economist, reading Beyond Growth was likely to feel like a hike through the mountains, some fog and heavy going, broken now and then by spectacular views and insights. "Mumble as you stumble through the jargon of the economist, but don’t give up or you’ll miss the summits." We hope this review will give a feel for the main arguments, perhaps to prepare the way for an attempt on the book itself.

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One or two definitions, right at the start, may help the mountain hike, while we are still at base camp.

Microeconomics studies how individuals, households and firms make decisions to allocate scarce resources, typically in markets where goods are bought and sold, and doing so largely by the price mechanism.

Macroeconomics concerns the sum total of all economic activity, studying the performance, structure and behaviour of the economy as a whole, including such issues as growth, inflation, unemployment and related economic policies. It includes economic activity to provide services as well as material goods, but Daly emphasises that services depend on material provision; the providers of services have to eat, be transported, have buildings for their activities and use energy. This leads Daly to define the whole macro-economy as limited by the ecosystem and to regard the ecosystem as the overriding system within which the macro-economy operates.

The ecosystem is the term used to describe the provision of nature for all the material we use, either as its source or as its sink (into which all waste left over is absorbed). As source, nature provides in two ways:

  • by non-renewable matter, such as oil, coal etc, which if we use it now there will be less left for future generations
  • by renewable means, such as forests and ongoing flow of photosynthesis from the sun which renews all animal and plant life on which we depend; such renewal has to be awaited at nature’s pace, or in some cases hastened by technology.

As sink, natural resource can absorb waste emissions to a limited degree; exceed these limits and we have carbon emissions, leading to climate change or pollution or even destruction of the habitat of the plants and animals which are the source of the renewable resources.

Income from nature is treated by conventional economists as free – e.g. the black stuff, oil, is there for the taking; the recognised costs are of capital to build drilling rigs, refineries and transport, and of the labour to operate and maintain them. But the matter is non-renewable – once it has been used it can only be replaced by substitutes if they can be developed from other natural capital; Daly insists that it is not therefore free and should be accounted for. In other words, value added is not only the result of applying labour and capital, but should also include a price of the original natural matter.

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The macroeconomy related to the total ecosystem

Daly puts the Earth and its diminishing resources at the centre of concern, considering the major question of our time to be the proper relationship of our macro-economy relative to our ecosystem. He sees Earth’s resources as the limiting factor in how far an economy or the world economy can grow.

There is an optimal scale which requires that the economy’s throughput – the flow beginning with raw material inputs, followed by their conversion into commodities, and finally into waste outputs – must be within the regenerative and absorptive capacities of the ecosystem. If the economy is subordinate to the eco-system, how big can it become without disrupting the eco-system to the point where further growth is anti-economic and costs exceed benefits?

Once you draw the boundary of the environment around the economy, you have said that the economy cannot expand forever. Populations of humans and accumulations of capital goods cannot grow forever. At some point, quantitative growth must give way to qualitative development as the path of progress. Daly believes that we are that point today.

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Quantitative expansion versus qualitative development

Daly argues that the demands of human activities on the ecosystem for raw material "inputs" and "absorption of waste" outputs must be kept at an ecologically sustainable level.

Sustainable development became a mantra after the UN-sponsored report of 1987 Our Common Future which defined it as development which meets the needs of the present without sacrificing ability meet future needs. There is scope for giving content and analytical cutting power to this general concept.

Daly advances the concept of a steady-state economy – a condition of zero growth in population and physical capital stock but with continued improvement in technology and ethics. He was surprised when he worked for the World Bank (1988-1994) to see a similar idea, now called "sustainable development", become the dominant ideal for lesser-developed countries ("the South"), but not for the mature, developed countries ("the North"). In his view, sustainability is certainly relevant to the South, but the critical issue is for the North to attain sustainability, i.e. a level of resource use that is both sufficient for a good life for its population and within the "carrying capacity" of the world environment. Population growth and production growth must not push us beyond the sustainable environmental capacities of resource generation and waste absorption. Once that point is reached, production and reproduction should be for replacement only. Physical growth should cease, while qualitative improvement continues.

But current Northern levels and patterns cannot be applied to the developing world, even with the most advanced technology, without exceeding ecological carrying capacity, i.e. without consuming natural capital and thereby diminishing the capacity of the earth to support life and wealth in the future. We need only to imagine 1.2 billion Chinese with automobiles, refrigerators, washing machines, etc to get a picture of the ecological consequences of generalising Northern resource consumption levels across the globe. And as Chinese eat higher up the food chain – more meat and less grain – the situation becomes critical. Each pound of meat requires diversion of roughly ten pounds of grain from humans to livestock with similarly increased pressure on grasslands and the conversion of forests to pasture. Such expansion might well destroy the ecological capacity of the earth to support life.

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Growth and making poverty history

Daly believes the World Bank is the proper institution to recognise the ecological contradictions in the world’s economic development plans. It should call attention to the need for the North to stop growth in resource throughput in order to reserve for the people of the South the remaining ecological space needed for growth at a level which will satisfy their essential needs.

According to Daly, however, the World Bank’s 1992 report on Development and the Environment failed to address the biggest question. Environmental deterioration was held to be mainly the consequence of poverty and the solution it proposed was more growth – not only in the South but also in the North (because the South needed to export to the North and receive foreign investments from it). The world was seen to be full of win-win opportunities for both increasing growth as usual, and improving the environment. It was a reaffirmation of the Bank’s faith in economic growth and a denial of the existence of any fundamental ecological limits to that growth.

How can we lift poor people out of poverty? The answer, says Daly, is "painfully simple": by population control, by redistributing wealth and income, and by technical improvements in resource productivity. Not by growth, but by development.

However, population control and redistribution are generally considered politically impossible. Resources are, therefore, the limiting factor in the long run and yet are the very factor whose productivity, according to economic orthodoxy, should be maximised.

When we draw a containing boundary around the economy, we move from "empty-world" economics to "full-world" economics – from a world where inputs to and outputs from the economy are unconstrained, to a world in which they are increasingly constrained by the depletion and pollution of a finite environment. The perceived pattern of scarcity changes radically – the limiting factor shifts from man-made capital to our remaining natural capital – from fishing boats to the population of fish remaining in the sea.

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Northern growth pre-empting Southern growth

One view is that growth in the North increases markets for Southern exports, as well as funds for aid and investment by the North in the South. Daly’s view, in contrast, is that Northern growth makes things worse by pre-empting the remaining resources and ecological space needed to support economic growth in the South up to a sufficient level, and therefore it also increases global income inequality and world political tensions.

The term "economic growth" has in practice meant growth in gross national product (GNP). All problems are to be solved or ameliorated by an ever growing GNP. It is expected to grow forever, never to reach an economic limit at which the marginal costs of further growth become greater than the marginal benefits. In micro-economics every enterprise has an optimal scale beyond which it should not grow. But when we aggregate all micro-economic units into the macro-economy, the notion of an optimal scale, beyond which further growth becomes anti-economic, disappears completely! This is because the macro-economy is not seen as a part of anything larger – it is seen as the whole. It can grow forever and by so doing remove any temporary constraints on each of its sectors.

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Can information replace material resources?

Daly claims that any notion that we can keep the idea of "growth forever" by "dematerialising" the economy – decoupling it from physical resources, or substituting information for resources – is fantasy. Even service industries still need material flows. We have to distinguish growth (quantitative expansion) from development (qualitative improvement) and develop as much as possible, while ceasing to grow, once the regenerative and absorptive capacities of the ecosystem are reached (sustainable development).

We can’t mine the solar flow, tomorrow’s sunlight, today. But we can mine terrestrial deposits and use up tomorrow’s petroleum (for example) today.

The solar source is stock-abundant but flow-limited. The terrestrial source is stock-limited but temporarily flow-abundant. Peasant societies lived off the abundant solar flow, industrial societies have come to depend on enormous supplements from the limited terrestrial stocks (mines, oil wells, overuse of forests, soils and oceans). Reversing this dependence will be an enormous revolutionary shift.

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Moving to a steady-state economy

What, Daly asks, are the practical failures of the growth economy, viewed from the objective of achieving a steady state economy (SSE), where resources and consumption are in balance?

Unlimited population growth defeats SSE. Too many people alive at the same time would be forced to consume ecological "capital" and thereby lower the carrying capacity of the environment and the cumulative total of future lives. An SSE would maximise cumulative life for all species by imposing the constraint of a constant throughput at a sustainable level, thereby halting the growing takeover of habitats of other species and slowing the rate of drawdown of geological capital otherwise be available to future generations.

The economy, in its physical dimensions, is dependent on the finite and closed ecosystem, which is both the supplier of its raw materials and the recipient of its wastes.

Not everything can be recycled, environmental resources and sinks are both finite. The loss of these services ought to be counted as a cost of growth to be weighed against benefits at the margin, but our national accounts do not do this. Standard growth economics ignores finitude.

Everyone, including economists, knows perfectly well that the economy takes in raw material from the environment and gives back waste. But, says Daly, it is highly unreasonable to ignore the finitude of these services after the scale of the economy has grown to the point where sources and sinks for the throughput are obviously scarce.

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Living off the future

As Daly describes it, the desirability of growth financed by the drawdown of geological capital is limited by the cost imposed on future generations and by the extinction or reduction of living species whose habitat disappears. It is also limited by its self-cancelling effects on welfare – growth used to be about satisfying absolute wants (those we feel independently of the condition of others) but is now (in rich countries) about satisfying relative wants, glorifying self interest and demanding ever increasing luxury, with corrosive moral effect.

We are far from moving away from "growthmania" to a steady state. The arms race, excessive population growth, toxic wastes, acid rain, climate change, devastation of rain forests and the loss of "ecosystem services" resulting from these aggressions against the environment are case studies in growth failure.

"Money fetishism" has also obscured the realities of the situation. This is the belief that since money in the bank can grow forever, so can real wealth and welfare. It is the result of emphasising "exchange value" over "use value", which has diverted attention from the real issues towards seeing growth in the media of exchange as wealth creation.

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Towards a measure of sustainable net national product

One of Daly’s central arguments is that reliance on GNP in accounting for growth further warps our understanding of the meaning of wealth and welfare. GNP does not reveal whether we are living off income or capital, off interest or principal. Depletion of fossil fuels, minerals, forests and soils is capital consumption, yet such unsustainable consumption is treated no differently from sustainable yield production (true income) in GNP. We count the costs of growth as more growth. We accumulate both positive capital (wealth) and negative capital ("illth") in the form of toxic-waste deposits and nuclear dumps. Both require transactions (like road accidents and dealing with the injured and the damage both being counted as growth) and are thus added to GNP, which is an index of throughput, not welfare: in a finite world with a fully-employed carrying capacity: throughput is a cost, not a benefit. National policies to maximise GNP are equivalent to maximising depletion and pollution.

The purpose of making income calculations is, and always has been (in theory at least), to give people an indication of the amount they can consume without pauperising themselves. Measuring national income should provide a guide to the maximum amount that can be consumed by a nation without eventual impoverishment. Therefore we subtract depreciation and get net national product (NNP).

Two adjustments are needed to NNP to make it a better guide to prudent behaviour. One is simply to extend the principle of depreciation to cover consumption of natural capital stocks depleted through production. The other is to subtract "defensive expenditures" – "regrettable expenditures necessary to defend ourselves from the unwanted side effects of our aggregate production and consumption".

These include defensive costs such as over-exploitation of environmental resources in the general course of economic growth; spatial concentration, centralisation of production and associated urbanisation (housing, commuting, etc);increased risks from the maturation of the industrial system and expenditures for protection against accident, technical failure, crime, etc; negative side effects of car transport, e.g. traffic accidents and associated repair and medical expenses; unhealthy consumption and behavioural patterns from poor working and living conditions (including drug addiction, smoking, alcohol abuse). All these, and more, reduce the true national product, which could be available for consumption without eventual impoverishment.

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Measuring overdevelopment and underdevelopment

Daly suggests a concept of "overdevelopment" as a correlate to "underdevelopment". An overdeveloped country might be defined as one whose level of per capita resource consumption is such that, if generalised to all countries, could not be sustained indefinitely. Correspondingly, an under-developed country is one whose per capita resource consumption is less than what could be sustained indefinitely if all the world consumed at that level.

This requires a reformulation of the national accounts in terms in which development is defined. Daly suggests we need to consider three basic "magnitudes" when calculating GNP:

  1. Accumulation: the total inventory of consumers’ goods, producers’ goods and human bodies. Stocks get "used up" and funds get "worn out"; both must be replaced.
  2. Service: the satisfaction experienced when wants are satisfied.
  3. Throughput: the physical flow of matter and energy from nature’s sources, through the human economy, and back to nature’s sinks. This is the flow that that is accumulated into stocks and funds and out of which stocks and funds are replaced.

Service is the final benefit. Throughput is final cost. Accumulation is throughput "frozen" in structured forms and inventories in shapes and amounts appropriate to our purposes and to the duration required for their satisfaction. Replacement of stocks and funds requires more throughput. For any given accumulation, we want maximum service and minimum throughput.

Instead of one account, GNP, there ought to be three accounts, one for each basic magnitude:

  • A "benefit account" to measure the value of services yielded by all accumulations.
  • A "cost account" to measure the value of depletion, pollution, etc.
  • A "capital account", an inventory of the accumulation of stocks and funds, including not only produced stocks and funds, but also natural capital such as mines, wells, and ecosystem infrastructure.

Currently, we count present consumption, financed by geological and ecological de-capitalisation no differently from present consumption financed by sustainable production. Hence, for example, a significant part of Kuwait’s very high per capita GNP is based on geological de-capitalisation. The three accounts approach highlights this de-capitalisation and invite the question as to how far petroleum earnings should be tied to compensating capital investments and how far they should be used to finance current consumption.

Ideally, accumulation should continue up to the point where the marginal benefit of services rendered by the extra stocks and funds is equal to the marginal costs of the extra throughput required to maintain the extra stocks and funds. Once the optimal accumulation was reached, further growth would cease. However, in the real world, we are likely to resort to "satisficing", seeking a sufficient or satisfactory accumulation level rather than the optimal level.

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The wisdom economy

As Daly points out, technology and resource substitution cannot outrun depletion and pollution. Technology and substitution mean only that one form of low matter/energy is substituted for another within a finite and diminishing set of sources. Human ingenuity may be limitless but matter and energy are not. The appeal of the limitless ingenuity argument lies not in its scientific grounding or its logic, but rather in the fact that the concept of limits to growth threatens vested interests and power structures.

What Daly calls the "much-touted" information economy is often presented as a strategy for escaping biophysical limits. But information does not exist apart from physical brains, books and computers – brains require the support of bodies, books require library buildings, computers run on electricity, etc. Information needs knowledge if it is to add value. Knowledge is structured, organised information that renders it intelligible and understandable. Knowledge is required for qualitative improvement of products – an understanding of the purpose of the item, the nature of the materials, and possible alternative designs.

We need to push, not just to a knowledge economy, but all the way to a "wisdom economy" – wisdom involves knowledge of techniques plus an understanding of purposes and their relative importance, along with an appreciation of the limits to which technique and purpose are subject. To distinguish a real limit from a temporary bottleneck and a fundamental purpose from a mere wish requires wise judgement. Growthmania cannot be checked without wise judgement. Technology may be the father of wealth, but nature is the mother. Physical laws are not subject to repeal by man – and of all the laws of economics, the law of diminishing returns is closest to a physical law.

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The economic Plimsoll Line

In recent years, environmental concerns have been taken up by some economists in the theme of "the internalisation of externalities". Internalisation of externalities is the incorporation of an externality (such as pollution, negative health costs, and financial burdens placed on future generations) into the decision making process through pricing or regulatory interventions. In the case of pollution, for example, internalisation is achieved by charging polluters with the damage costs of the pollution generated by them.

Daly gives us a striking metaphor for thinking about the macroeconomy’s relationship with the ecosystem. He suggests that the optimal scale of the whole economy relative to the ecosystem is analogous to allocating optimally a given amount of weight in a boat. Arrangement of weight in a boat is a question of allocation; the absolute amount of weight the boat should carry is a question of scale. If the weight is badly allocated, the water line will touch the Plimsoll Line sooner than if it were allocated properly. The Plimsoll Line is the load line painted on the side of ships indicating the maximum safe depth and therefore the maximum amount of loading for the vessel. As the absolute load capacity is reached, the watermark will reach the Plimsoll Line, even for a boat whose load is optimally allocated. Even optimally loaded boats will sink under too much weight.

The major task of environmental macro-economics is to design an economic institution analogous to the Plimsoll line – to keep the weight, the absolute scale, of the economy from sinking our "biospheric ark".

The market puts three values in conflict: allocation (efficiency), distribution of income (justice), and scale (sustainability). The micro-economic price system does not have any inbuilt tendency to grow only up to the scale of aggregate resource use that is optimal (or even merely sustainable) in its demands on the biosphere. The limit is defined either by regenerative or absorptive capacity of the ecosystem to act as a source or sink, whichever is less – an economic "Plimsoll Line" must be drawn.

Even the tradable pollution permits scheme does not tackle the root problem. Permitting polluters to buy from non polluters the right to pollute has to operate within the overall limits of the ecosystem. Much discussion of carbon trading seems to ignore this.

Environmentalists have condemned the tradable permits scheme as "giving away licences to pollute" but the point is that it limits the total scale of pollution, need not give away anything and can sell the rights for public revenue, yet allows reallocation among individuals in the interests of efficiency. But polluters buying pollution permits from non polluters still have to operate within the limits of the ecological system.

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Measuring absorptive capacity

As long as the human economy was infinitesimal relative to the natural world, then sources and sinks could be considered infinite, and therefore not scarce. There was no reason, says Daly, to consider the larger system since it imposed no scarcities. But the economy, of course, has become much bigger. So how big has the economy become relative to the ecosystem?

The best index of the scale of the human economy as a part of the biosphere is the percentage of human appropriation of the total world production of photosynthesis (the process by which plants use sunlight, water and carbon dioxide to manufacture their food and generate oxygen as a by-product). Net primary production (NPP) is the amount of solar energy captured in photosynthesis by primary producers, less the energy used in their own growth and reproduction. NPP is thus the basic food resource for everything on earth not capable of photosynthesis. It is estimated that 25% of potential global NPP is now appropriated by human beings. This means that two more doublings of the human scale will give 100%. Since this would mean zero energy left for all non-human and non-domesticated species, and since humans cannot survive without the services of ecosystems (which are made up of other plant and animal species), it is clear that two more doublings of the human scale is an ecological impossibility. Total appropriation of the NPP can occur in only a bit over one doubling time.

Assuming a constant level of per capita resource consumption, the doubling time of human scale would be equal to the doubling time of population, which is about 40 years. But, economic growth aims to increase per capita resource consumption. The problems of climate change are evidence that we have already passed a prudent Plimsoll Line for the scale of the macro-economy.

Those who want to take advantage of the "invisible hand" of self-managing ecosystems have to recognise that the invisible hand of the market, while wonderful for allocation, is unable to set limits to the scale of the macro-economy. Our limited managerial capacities should be devoted to institutionalising an economic Plimsoll line that limits the scale of the market economy to a scale such that the invisible hand can function in both domains (the economic and the ecological) to the maximum effect.

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Value added redefined

Daly’s fundamental belief is that we are consuming the Earth’s resource beyond its sustainable capacities of renewal. We are consuming natural capital while calling it income. We therefore need to look at another set of key topics in economic theory: consumption, value added and welfare.

Why should the South control its population if the resources thereby saved are merely gobbled up by Northern over-consumption? Why should the North control its over-consumption, if the saved resources merely allow a larger number of poor people to subsist at the same level of misery. The North must get serious about consumption control. So we must reconsider the meaning of consumption.

Man does not create material things – he cannot consume the material building blocks of which commodities are made – he changes the form or arrangement of matter to adapt it better for the satisfaction of his wants. The "useful structure" added to matter by labour and capital is called "added value". Added value is what is "consumed" i.e. used up in consumption. New value needs to be added again by labour and capital before it can be consumed again. That to which value is being added is the flow of natural resources, the indestructible building blocks of nature. According to the standard economist’s vision of the isolated circular flow of value between firms (production) and households (consumption), we consume only that value which we added in the first place.

That to which value is added is "inert, undifferentiated, interchangeable, and superabundant – very dull stuff indeed compared to the value-adding agents of labour, with all its human capacities, and capital, which embodies the marvels of human knowledge". In the economist’s "tight little abstract world" value added by labour and capital is by definition the source of all value added, and consequently of all value consumed. In the standard economic textbook view, we consume only that value which we have added to natural resource flows.

While this vision is consistent with the first law of thermodynamics – that matter is not produced or consumed – only transformed – matter is arranged in production, disarranged in consumption, rearranged in production, etc. All this rearranging and recycling of material building blocks takes energy; that energy itself is not recycled and on each cycle some energy is dissipated beyond recall. We don’t consume matter/energy but we do consume and irrevocably use up the capacity to rearrange matter/energy. If the economic system is to keep going, it cannot be an isolated circular flow; it must be an open system, receiving matter and energy from outside to make up for that which is dissipated to the outside.

What is outside? The environment. And what is the environment? It is a complex ecosystem that is finite, non-growing, and materially closed, while open to a non-growing, finite flow of solar energy.

We irrevocably use up not only the value we added by rearrangement, but also the pre-existing arrangement originally imparted by nature. We not only consume the value we add to matter, but also the value that was added by nature before we imported it into the economic system and the value that was necessary for it to be considered a resource in the first place.

"That to which value is added" is not composed of inert, indifferent, uniform building blocks or atoms. Value cannot be easily added to all forms of matter/energy. Value is added to that matter/energy which is most capable of receiving and embodying the value being added to it by human economic activity. Daly calls that receptivity "value added by nature". Carbon atoms in a tree, for instance, can be arranged more easily than those scattered in the atmosphere. Energy concentrated in a lump of coal can be more easily exploited than that in the ocean. The more work done by nature, the more concentrated and receptive the resource is to having value added to it, the less labour and capital will be expended in rearranging it to suit our purposes.

The larger the natural "subsidy", the lower its price and the faster we use it up. Thanks partly to this natural subsidy, the economy has grown relative to the total ecosystem to such an extent that the basic pattern of scarcity has changed. It used to be that adding value was limited by the supply of agents of transformation: labour and capital. Today, adding value is limited more by the availability of resources that have been "subsidised" by nature to the point that they can receive value added.

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Trees into tables!

The physical growth of the economic subsystem is the transformation of natural capital into man-made capital. Daly illustrates the point with the simple example of furniture. A tree is cut and turned into a table; we gain the service of the table, we lose the service of the tree. In a relatively empty world with a small economic subsystem, the service lost from a few trees was nil and the service from more tables was significant. In today’s relatively full world, fewer trees mean loss of significant services and more tables are not so important if most households already have several (at least in the North). Continued population growth will keep the demand for tables up and means we will incur ever greater sacrifices of natural services by cutting more and more trees.

The size or scale of the economic system is best thought of as per capita resource consumption times population (= total resource consumption). The point is that there is both a cost and a benefit to increasing the scale of the system. The benefit is economic services gained (more tables); the cost is ecosystem services sacrificed (fewer trees to sequester carbon dioxide, provide wildlife habitat, erosion control, local cooling, etc).

As scale increases, marginal costs tend to rise, marginal benefits tend to fall As we come to an optimal, or mature, scale, production is no longer for growth but for maintenance. A mature economy, like a mature ecosystem, shifts to a regime of maintenance efficiency. Production is the maintenance cost of the stock and should be minimised.

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Fostering environmentally sustainable development

In the light of the above reasoning, Daly defines sustainable development as "development without growth – without growth in throughput beyond environmental regenerative and absorptive capacities."

He makes four suggestions for better serving the goal of economically sustainable development through World Bank policy and action:

  • Stop counting the consumption of natural capital as income. Income is defined as the maximum amount that a society can consume this year and still be left with enough to be able to consume the same amount next year. Sustainability is built into the very definition of income. But, traditionally, the productive capacity that must be maintained intact has been thought of as man-made capital only, excluding natural capital. We have counted natural capital as a free good.
  • Tax labour and income less, and tax resource throughput more. It would be better to economise on throughput because of the high external costs of its associated depletion and pollution and at the same time use more labour because of the high social benefits from reducing unemployment (in the developing world high use of labour is an advantage). Shifting the tax base to throughput induces greater throughput efficiency and internalises the externalities from depletion and pollution.
  • This shift should be pioneered in the North. It is absurd, says Daly to expect any sacrifice in the interests of sustainability in the South if similar measures have not been taken in the North. The major weakness in the World Bank’s ability to foster environmentally sustainable development is that it has leverage only over the South, not the North
  • Maximise the productivity of natural capital in the short run, and invest in increasing its supply in the long run. In the short run, raising the price of natural capital by taxing throughput will give the incentive to maximise natural capital productivity. Long run investment is also needed but how do we invest in something which we cannot make? For renewable resources, we can "wait" – allowing this year’s increment to be added to next year’s growing stock rather than consuming it. We don’t have this option for non-renewables; we can only liquidate them. The question is: how fast do we liquidate and how much of the proceeds can we count as income if we invest in the best available substitute? How much of the "correctly" counted income do we then consume and how much do we invest? For both renewable and non-renewable resources, investments in enhancing throughput productivity are needed.
  • Move away from the ideology of global economic integration by free trade, free capital mobility, and export-led growth – and toward a more nationalist orientation that seeks to develop domestic production for internal markets as the first option, having recourse to international trade only when clearly much more efficient. At the present time, global interdependence is "celebrated as a self-evident good" and the word "nationalist" is pejorative. Cosmopolitan globalism weakens national boundaries and the power of national and sub-national communities, while increasing the relative power of transnational corporations.

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International trade and sustainable development

Daly also considers the free trade issue in the context of the adjustment policies urged on developing countries by the International Monetary Fund (IMF) and shows that free trade is an obstacle to achievement of other goals in the adjustment package. If the way that countries adjust to IMF conditions is by cutting down forests, pumping up petroleum, mining minerals and depleting topsoil as fast as possible in order to increase exports, then it is disingenuous for the IMF to pretend there is no connection between macro-economics and the environment, especially when free trade is a key part of macro-economic adjustment.

Daly presents a case against the overall policy of global economic integration by free trade and free capital mobility.

  • Transport costs, dependence and reduced choice of occupation. For trade to be mutually beneficial assumes that the gains from international trade and specialisation are not cancelled by the disadvantages of higher transport costs, increased dependence on distant supplies and markets, and a reduced range of choices of ways for citizens to make a living. Transport costs are energy intensive and, if energy is subsidised, as it often is today, then so is trade. Charging full-cost energy prices would reduce the gains from long-distance trade. The loss of independence resulting from specialisation weakens a country’s control over its livelihood; it is no longer free not to trade, and can become vulnerable to hard bargains.

The reduced range of choice of occupations is seldom mentioned as a welfare cost but is important. People’s enjoyment of life depends as much on how they earn their living as on how they spend their earnings. There is a community dimension to welfare that is lost in the one-dimensional argument that, if free trade increases per capita availability of commodities, it must be good.

  • Standards-lowering competition. The increased competition resulting from free trade does indeed promote cheaper products but there are two ways to make products cheaper: by improving real efficiency or by simply externalising costs.

Internalised costs within nations are enormous: workplace safety, minimum wage, social security, medical insurance, pollution control, to name but a few. All of these social and environmental measures raise costs and cannot withstand the standards-lowering competition induced by free trade. A consequence is that a greater share of total world production will move to those countries with lower standards. We therefore need a compensatory tariff to correct for differences in internalisation of costs among nations. This is not protectionism, nor is the motive to impose one country’s moral standards on another – rather it is to be true to one’s own standards by not letting them be undercut by standards-lowering competition.

National borders porous to the movement of goods and capital (and increasingly labour as well) mean that nations lose control over their economic life and cease to be viable communities. Nations weakened by economic erasure of their borders are in a poor position to carry out domestic policies, including those policies they may have to undertake in support of international environmental treaties they have signed.

Transnational corporations have escaped the national obligations of community by becoming international. We can either leave transnational capital free of community constraint, or create an international government capable of controlling it (unlikely), or renationalise capital and put it back under the control of the national community. Daly favours the last alternative.

With national borders permeable to the free flow of goods and services and capital, and increasingly labour as well, there will be one global market for each of these and therefore one world price for each commodity. A single country can no longer follow a separate wage or interest rate, or full-cost pricing or population control policy. Instead of hundreds of separate national "experiments", there will just one big global experiment, which given the reality of standards-lowering competition, is almost "designed to fail".

  • Natural capital as limiting factor. Many nations have grown to the point where the limiting factor in their further growth and development is no longer man-made capital but remaining natural capital. (For example, the fish catch is limited by the natural capital of remaining fish, not the man-made capital of fishing boats, many of which are idle.) Such countries seek to appropriate whatever natural capital remains in the "international commons" and to trade for natural capital with those less developed countries still able and willing to supply it. Trade makes it possible for some countries to live beyond their geographic carrying capacity by importing that capacity – natural capital – from other countries. And all countries cannot be net importers of natural capital.

Free trade also introduces greater geographic separation between the production benefits and the environmental costs of throughput growth, communities have over their local environments and their livelihoods.

Free trade, specialisation and global integration mean that nations are no longer free not to trade.

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IMF adjustments to developing countries

The IMF usually requires developing countries to make three adjustments to their economic policies as a condition of lending to them:

  1. Rationalising prices. Adjustment of prices to make them better measures of full social marginal opportunity costs (internalisation of social costs and the removal of subsidies and addition of taxes).
  2. Dealing with debt and deficit. Adjustment of macro-economic conditions to achieve monetary stability so that correct prices can be properly expressed in reliable monetary units of constant value over time. This means controlling inflation by eliminating fiscal deficits and restraining the money supply.
  3. Liberalising international trade. Adjustment of national markets and prices to world markets and prices so as to integrate the nation into the world trading system in order to increase productivity by specialisation according to comparative advantage, (a dubious concept in days of mobile capital) and to reap the further advantages of specialisation made possible by expanding the extent of the market beyond national boundaries. Tariffs and quotas and any other restrictions on international trade are considered "distortions".

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Free trade versus sustainable development

Why, in Daly’s view, does free trade conflict with sustainable development? International free trade, he argues, conflicts sharply with the national policies of (1) getting prices right; (2) moving toward a more just distribution; (3) fostering community; (4) controlling the macro-economy; and (5) keeping scale within ecological limits.

Prices force its producers to internalise those costs, with the result that firms in the second country will have lower prices and will drive competing firms in the first country out of business. External costs are now so important that we need tariffs to protect not an inefficient industry but an efficient national policy of internalising costs into prices. If all nations agreed to rules for defining and internalising external costs, the objection to free trade would disappear, but such an agreement is highly unlikely. Even if an agreement was reached, two further problems would arise from capital mobility and wage differentials.

Distribution. Wage levels vary enormously between countries and are largely determined by the supply of labour which depends on population size and growth rates. Overpopulated countries are naturally low-wage countries and, if population growth is rapid, they will remain low-wage countries because the demographic rate of increase of the lower class (labour) is often twice that of the upper class (capital). For most traded goods, labour is still the largest item of cost and consequently the major determinant of price. Cheap labour means low prices and a comparative advantage in trade. Traditionally, economists believe that free trade between high-wage and low-wage countries is mutually advantageous due to comparative advantage.

But the doctrine of comparative advantage assumes that capital is immobile internationally. The theory is supposedly that in international competition, relatively inefficient activities lose out and jobs are eliminated. At the same time, relatively efficient activities (those with the comparative advantage) expand, absorbing both the labour and capital that were employed in activities with a comparative disadvantage. Capital and labour are reallocated within the country, specialising according to that country’s comparative advantage. However, when capital is mobile, it will follow advantage to the low-wage country rather than reallocate itself according to comparative advantage within its own country. It will follow the highest absolute profit which is usually determined by the lowest absolute wage.

Once capital becomes mobile, the doctrine of comparative advantage becomes irrelevant. The consequence of capital mobility is to equalise wages throughout the world and, because of existing population and the high demographic growth of the third world, the equalisation will be downward. Returns to capital will also be equalised by free trade and capital mobility, but equalisation will be at a higher level than at present. US capital will benefit from cheap labour abroad, followed by cheap labour at home – at least until checked by a crisis of insufficient demand due to a lack of worker purchasing power resulting from low wages. That can be forestalled by efficient reallocation to serve the new pattern of demand resulting from the greater concentration of income. More luxury goods will be produced and fewer basic-wage goods. Efficiency is attained, but distributive equity is sacrificed.

The standard theory argues that wages will be equalised worldwide at high levels thanks to the enormous increase in production made possible by free trade. This increase in production will presumably trigger the automatic demographic transition to lower birth rates. But this ignores the question of scale. For all 5.4 billion people presently alive (at the time of Daly’s writing) to consume resources and absorptive capacity at the same per capita rate as Americans or Europeans is ecologically impossible.

Development as it is currently understood on the US model is only possible for a minority of the world’s population over a few generations – neither is that sustainable. The goal of sustainable development is, by changes in allocation, distribution and scale, to move the world toward a state in which "development" (however it is eventually defined) will be for all people in all generations.

Community. Even if uniformly high wages were made possible by universal population control and redistribution, and with uniform internalisation of external costs, free trade and free capital mobility still increase the separation of ownership and control and the forced mobility of labour which are so inimical to community. Foreign owners are very far removed from the life of the community that is significantly affected by their decisions. Your life and community can be disrupted by decisions and events over which you have no control or voice. People are not self-contained individuals infinitely mobile and equally at home everywhere, as assumed by traditional economists. People live in communities and these determine their identities. Community is not a disposable commodity. The true road to international community is that of a federation of communities, not the destruction of local and national communities in the service of a "single, cosmopolitan world of footloose money managers" driven by short-term interests.

Macroeconomy. Free trade and free capital mobility have interfered with macroeconomic stability by permitting huge international payment imbalances and capital transfers resulting in debts that are unrepayable in many cases and excessive in others. Efforts to service these debts can lead to unsustainable rates of exploitation of exportable resources, and an eagerness to make new loans to pay old loans, with a consequent disincentive to take a hard look at the real productivity of the project for which the new loan is being made. Efforts to pay back loans and still meet domestic obligations lead to government budget deficits and monetary creation with resulting inflation. Inflation and the need to export to pay off loans lead to currency devaluations, giving rise to foreign currency speculation, capital flight, and hot money movements, disrupting the macroeconomic stability that adjustment was supposed to foster.

To summarise so far: Free trade sins against allocative efficiency by making it difficult for nations to internalise external costs. It sins against distributive justice by widening the disparity between labour and capital in high-wage countries. It sins against community by demanding more mobility and by further separating ownership and control. And it sins against macro-economic stability. Finally, it sins against sustainable scale.

Scale. The economy is an open system working within a materially-closed, non-growing and finite ecosystem with a limited throughput of solar energy. Free trade has obscured the scale limit. Sustainable development means living within environmental constraints of absorptive and regenerative capacities. The constraints are both global (e.g. greenhouse effect) and local (e.g. deforestation, soil erosion). Trade between regions or nations offers a way to loosen local constraints by importing environmental services (including waste absorption) from elsewhere. When carried to extremes in the name of free trade, it eventually becomes destructive. It leads to a situation where each country is trying to live beyond its absorptive and regenerative capacities from elsewhere. It is only the fact that some have not yet reached their limits that allows other countries to import carrying capacity. Free trade does not remove the constraint, it guarantees that nations will hit that constraint simultaneously rather than sequentially. It converts a set of local problems, some of which are manageable, into one big, global unmanageable problem.

For all these reasons, Daly believes that free trade must be abandoned.

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Development, not growth

The basic vision underlying sustainable development is that of the economy as a physical system limited by the ecosystem. The economy cannot grow beyond the scale of the total system of which it is a part. The scale of the economy must remain below the capacity of the ecosystem to supply sustainably services such as photosynthesis, pollination, purification of air and water, climate maintenance, filtering of excessive ultraviolet radiation, recycling of wastes, etc. Growthmania has pushed us beyond a sustainable scale.

To maintain the present scale of population and per capita consumption, we are consuming natural capital and calling it income. The effort to overcome poverty by further growth of scale in throughput is self-defeating once we have reached the point where growth in scale increases environmental costs faster than it increases production benefits. Beyond this point, which we have already probably passed, further growth makes us poorer, not richer.

The alternative is to stop growth in scale and seek to overcome poverty by redistribution and qualitative improvement in efficiency of resource use. A policy of limiting throughput will automatically redirect energies toward increasing the efficiency with which it is used. Technology might ease the transition, but whether or not technology helps, it has to be done.

The term "sustainable growth", as used by some people, is a misnomer. It implies that growth just needs to be a bit more environmentally friendly. Growth implies quantitative increase in physical size by assimilation or accretion of materials. Rather, we should talk of "sustainable development" – development refers to qualitative change, realisation of potentialities, and transition to a better state.

Sustainable development, development without growth, does not imply the end of economics; it is an economics of maintenance, sharing, frugality, and adaptation to natural limits. It is an economics of better, not bigger.

Sustainable development will require a change of heart, a renewal of the mind, and a healthy dose of "repentance". These are all religious terms, and that is no coincidence, because a change in the fundamental principles we live by is a change so deep that it is essentially religious whether we call it that or not.

We are creatures endowed with creativity but also subject to limits. We have an obligation to maintain the world’s capacity to support life and wealth, to act so as to maximise cumulative lives to be lived over time in a state of efficiency. This means not destroying carrying capacity and this implies that sustainability, not growth, should become the ruling ethic for a "Creation-centred economy". Along with sustainability, the associated values of sufficiency, equity and efficiency become the central organising principles of the economy. Growth in population or per capita resource use would be encouraged or discouraged according to their favourable or unfavourable effects on sustainability, sufficiency, equity, and efficiency.

The technical and economic problems involved in achieving sustainability are not that that difficult. The hard problem is overcoming our addiction to growth.

Daly points to the absurdity of this addiction in a slogan adopted by an energy company which boasted in big letters "We Are Growing With The Planet."!

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