Learning Objectives Self-Check
Read through the following statements/questions. You should be able to answer all of these after reading through the content on this page. I suggest writing or typing out your answers, but if nothing else, say them out loud to yourself.
If you haven't done this already, the next time you hear or read an economic report, or hear a politician discuss economics policy, pay attention to how much focus is on growth. The tax cuts passed at the end of 2017 in the U.S. provide a great example of this. "Economic growth" was often cited as the main purpose of the bill. This is not an aberration! We hear the phrase "economic growth" so much that the attempt to achieve it is taken as a given. This cuts across political (Republican, Democrat, Independent, etc.) and international boundaries, by the way.
But have you ever thought about what the implications of a permanent state of economic growth are, or if it is even possible? Renowned economist Herman Daly - who, among other accolades receieved the prestigious Right Livelihood Award, aka "the alternative Nobel prize", in 1996 - provides a concise explanation of the inadequacies of the notion of "sustainable growth" in the article below.
In general, the most acceptable type of information source is peer-reviewed research, which appears in journals. There are thousands of scholarly/academic journals, and to be fair not all of them are regarded with equal esteem. But, by and large, if you find information in a journal, there is good reason to believe that there is at least relatively solid scientific backing behind it, and often very solid scientific basis (again, this depends somewhat on the journal).
"Peer-reviewed" means that the article was reviewed by experts in the field of research addressed in the article, i.e., the author's peers. This is usually a very rigorous process, and it is rare to find major errors in peer-reviewed research, particularly for well-regarded journals. There are some exceptions - for example, you have to be careful who funds research. Authors are supposed to disclose who funded their research (research can be very costly, if nothing else to compensate the authors), but there are instances of this not happening. Funders are not supposed to influence research outcomes. In fact, that entirely contradicts the principle of the scientific research process. But results are often open to some interpretation, and methods are never perfect, so there is room for subtle influence. For example, you may want to take energy research funded by energy companies or energy advocacy organizations with a grain of salt (i.e., really use your critical thinking skills!). This is much more important for non-peer reviewed research. This is usually oil- and/or natural gas-related - mostly because they are some of the wealthiest corporations in the world and stand to gain (or lose) significantly due to changing scientific and policy understanding - but this stands for renewables as well.
All that said, peer-reviewed research is considered the best type of information to use. The article below is from the peer-reviewed journal Development. Note that many non peer-reviewed articles use peer-reviewed information as source material, which is important to consider when analyzing the reliability of information.
To Read Now
Before reading the article, a short note on terminology: Gross Domestic Product (GDP) is the "value of all finished goods and services produced within a country's borders in a specific time period" (source: Investopedia: gdp). Gross National Product (GNP) is the same as GDP, but includes money made overseas by domestic residents, and does not include money made domestically by foreign residents (source: Investopedia: gnp). I recommend at least watching the videos on the GDP an GNP Investopedia pages.
So, GDP is the dollar value of every new product and service bought and sold within a country's borders, plus things like government spending and net exports. Say a Chinese company sells products within the U.S.'s physical borders. All income counts toward the U.S.'s GDP, but not China's GDP. But that income does not count toward the U.S.'s GNP, instead, counting toward China's GNP. It used to be more common to use GNP, but now GDP is much more commonly used. For the purposes of this course, it is not important to spend time distinguishing between the two, but to understand that they are both measurements of overall economic activity.
Economists use GDP as a sign of general economic health, particularly whether it is growing (considered a good thing) or shrinking (not good). Another important term is GDP per capita (GDP/capita). This is a measure of GDP divided by the number of people living in a country.
- Read "Sustainable Growth, an Impossibility Theorem," by Herman Daly, located in the Modules tab in Canvas under Lesson 2. This is a pretty dense reading. There's no shame in reading it more than once!
The Steady State Economy
There are a lot of good points made in the article, but the overarching one is:
"An economy in sustainable development...stops at a scale at which the remaining ecosystem...can continue to function and renew itself year after year" (p. 45)
This should sound very familiar! It coincides neatly with the concept of ecological footprint. (I'll leave you to think about what this means in terms of global ecological footprint, i.e. 1 earth, less than 1 earth, etc.) He describes this point (an economy in sustainable development) as the optimal scale for the economy, and that optimal scale is never addressed when discussing macroeconomics (p. 46). In other words, economists (and by extension, politicians) do not discuss the best (optimal) size of the economy, only focusing on growing it as large as possible. Think about this next time you read or hear a story regarding economic growth.
Another essential concept is that Daly is careful to point out the difference between growth (getting "bigger") and development (getting "different"). The economy and society can develop forever, but cannot grow forever. A developing economy is not stagnant, even if it is not growing. Money will change hands, services will be provided, goods will be made, etc. An economy cannot grow forever, however, because it is a subset of the earth, and is subject to the physical limitations that the earth's biocapacity provides. This is a fundamental principle that should be considered when discussing economic growth and economic sustainability, and it also aligns closely with the notion of ecological footprint.
The whole article is important, but a few other highlights I'd like to point out are:
- He states from the outset that "sustainable growth is impossible" (p. 45). Simply put, as long as the economy is based on the unsustainable use of natural resources, economic growth cannot be sustained indefinitely.
- Sustainable development is possible only if it exists within a system that is "maintained in a steady state by a throughput of matter-energy that is within the regenerative and assimilative capacities of the ecosystem" (p. 45). I.e. (again, this should sound familiar), we can only use resources at a rate no faster than they can be replenished, and cannot emit wastes any faster than they can be safely absorbed into/assimilated by the natural environment.
- He notes that growth has "almost religious connotations of ultimate goodness" (p. 45). This was addressed above. It is beyond rare to hear someone publicly state that growth is not necessary.
- On p. 46, he is clear that one of the primary goals of the economy should be to alleviate poverty, but that simply growing GDP (or GNP) will not make that happen without some guidance and/or policies.
- He offers a few relatively straightforward policy solutions on pp. 46 - 47:
- Tax resource extraction and use the money to reduce income tax, particularly at lower income levels. (Side note: This is referred to as a revenue-neutral tax, because all of the revenue is given back to the people, not the government. A revenue neutral carbon tax has been proposed by more than one bipartisan group. See this link to the Citizens' Climate Lobby, and this one to the Climate Leadership Council, if you are interested in learning more.)
- "Renewable resources should be exploited in a manner such that: (1) harvesting rates do not exceed regeneration rates; and (2) waste emissions do not exceed the renewable assimilative capacity of the local environment" (p. 47). Sorry to sound like a broken record, but these should sound familiar.
- Finally, he proposes that: "Non-renewable resources should be depleted at a rate equal to the rate of creation of renewable substitutes" (p. 47). For example, for every 1,000,000 Btu's of fossil fuel used, we should find a renewable source of 1,000,000 Btu's. He suggests supporting this by taxing non-renewables and using the funding to develop renewable substitutes.
All of the above summarizes the concept of the steady state economy.
To Watch Now
Please watch a video (5:07) featuring Herman Daly, himself, discussing the steady state economy:
Feel free to read a description of the steady state economy, as well as a brief historical background of the concept, by the Center for the Advancement of the Steady State Economy (CASSE). One thing to note that you will see in the article: Ecological Economics is a sub-field of Economics that essentially advocates for the application of the steady state economy concept (among other things). This should not be confused with Environmental Economics, which is more of a traditional Economics sub-field. Note that the "History of the Steady State Concept" section is less important than the others, but provides some good historical context.
- Steady State Economy Definition, by Center for the Advancement of the Steady State Economy
There are a few imporant/interesting things I'd like to note from the reading and video:
- First and foremost, a mature steady state economy requires a relatively constant population, supply of natural resources, use of natural resources, and economic throughput. Small fluctuations may occur, but each of these factors must remain relatively constant in order to sustain an economy and population over time.
- That stated, these factors are able to grow until a certin point - the point of "maturity" indicated above. CASSE states in the reading that "there is a maximum size at which a steady state economy may exist," based on the capacity of the earth to supply natural resources. Once this maximum is achieved, growth must stop, lest natural resource capacity be diminished.
- The authors are clear that a steady state economy can only be reached by regulating of the market, which is a primary reason that many economists are critical of them. BUT they also state that "ecological economists support many market strategies to accomplish efficient allocation of resources". They recognize that markets are very good at efficient resource use, but are only useful "after achieving sustainable scale and fair distribution."
- Proponents of the steady state economy have poverty alleviation as a primary concern, as well as ecological overshoot. The three main concerns of a steady state economy are "sustainability, equity, and efficiency."
- As Daly says in the video, achieving a steady state economy does not mean quality of life must decrease, or even stay the same at a certain point. Qualitative (type; character; quality) improvements can continue while quantitative (amount; quantity) increase stops. In fact, as you explore the CASSE website, you find out that they believe that achieving a steady state economy will improve the quality of life for current and future generataions, and that quality of life is a major goal of the steady state economy.
- To reiterate an earlier point, note that Daly and CASSE are not saying that economic growth has to stop now, but that it must stop at a point at which the earth is capable of renewing its natural resources indefinitely. If we can grow the economy while maintaining a steady state of natural resources, then hey, have at it! But at this point, all we have is one earth to pull resources from, so we must obey its laws.
- (Optional) The "history" section mentions more than a few well-known figures in the history of ecomomics, including Adam Smith, John Stuart Mill, John Maynard Keynes, Nicholas Georgescu-Roegen, and E.F. Schumacher. Some of them are seen as controversial in some circles, but all of them are notable. Worth looking into if you are interested in economic history and ideas.
- (Optional) Entropy is the measure of disorder in a system, and is the basis of the 2nd Law of Thermodynamics mentioned in the previous lesson. As the economy converts raw natural resources into other products, some waste is generated along the way. The waste is usually difficult, if not impossible, to convert back to its original form. Think of how difficult it would be to make sawdust back into a tree; carbon dioxide, water vapor, and heat back into coal; plastic back into oil; and a silicon microchip back into grains of sand. As the economy chugs along using resources faster than they can be replenished, the natural system degrades.
Make no mistake: being on record as saying that the economy must stop growing at some point is anathema to the core of mainstream thinking about how economies should work. It will not win you many friends in the policy or economic world, and certainly won't get you elected to public office (in the U.S., anyway). But the logic is hard to argue with.
Free Market Environmentalism
It should not be difficult to recognize that humans are subject to the physical constraints of planet earth. But how we make sure that we do not exceed our limit to the point of collapse (e.g., overshoot and collapse mentioned previously) is something that is debated, even by people with seemingly the same end goals. There is a branch of environmental (well, it's primarily economic) thought that is based on the power of free markets to most efficiently manage resources. This is often called free market environmentalism (FME). Those who advocate for FME believe that free markets (economic systems that are free from government regulation) are the best way to solve environmental problems. And, just as important, they believe that the government is much worse at managing resources than the market. This article from the Library of Economics and Liberty (a free market think tank) summarizes the school of thought pretty well.
As outlined in this article, this school of thought rests on three assumptions in order for markets to work for any environmental good (e.g., a forest, clean water, clean air, etc.): "Rights to each important resource must be clearly defined, easily defended against invasion, and divestible (transferable) by owners on terms agreeable to buyer and seller" (source: Library of Economics and Liberty). In other words, if a piece of property has:
- clear ownership, and
- those ownership rights are defensible in court (or elsewhere), and
- it can be bought and sold freely, it will be preserved.
I would add that (4) the author (and this is typical of FME) also assumes that the owner of property is motivated to protect the property in anticipation of future profits.
For example, if I own a lake and someone pollutes it, if the courts are just, the polluter will end up paying me because (s)he compromised my ability to enjoy my property. If these conditions are known, then the polluter in theory will decide not to pollute in order to avoid the extra cost. As you can see, all of this relies on using money as the motivating factor.
This is a very sound argument as long as those conditions are met, at least in terms of environmental protection. This situation, and variations of it, have been proven effective in a wide array of applications. It worked for water conservation in the Western U.S. And here are a number of case studies demonstrating that these principles can work.
But what if those four conditions are not met? With climate change, a fundamental question is:"Who owns the atmosphere?" (The answer: no one does.) If there is no clear ownership, the system may not work. Let's go back to my lake that got polluted, and think about a few plausible scenarios.
- What if it was impossible to prove where the pollution came from? If it was airborne pollution that is impossible to trace, I am out of luck. I have no one to sue. This is unfortunately the case for a lot of types of pollution.
- Even if I had a pretty solid case that the pollution came from a specific source, the owner of that source can probably afford better lawyers than me and could win a case.
- What if I can make more money destroying my lake than preserving it? I could fill it in and build an apartment on it. Or sell it to a chemical company to use as a dumping ground. If I place a certain economic value on my lake, then it stands to reason that I would be willing to destroy it if I could make more money by doing so. I could use the money to move on and buy more property. The case studies noted above hinge on a party or parties agreeing that conservation is necessary.
- This type of system is based on perceived value being real value, which can also cause problems. Biodiversity (which we will go over in the coming lessons) is something that very few people place value on, but is essential for human survival. Also, there are certain goods that are nearly impossible to accurately price, even using Willingness to Pay analysis. Negative impacts on future generations is one that is particularly sticky in this regard. (Remember intergenerational equity?)
- Finally, by basing everything on money, those without money will have less access to the resource. If you recall from Lesson 1, this fits squarely with one of the fundamental sustainability principles (social equity). If I charge people a lot of money to fish in my lake, that may help preserve the lake, but at the expense of equity.
This article from the Property and Environment Research Center - also an advocate for free market environmentalism - goes over a few of these and other examples where the system breaks down.
What is the Solution?
This is a really dense, complicated topic that would take a very long time to fully flesh out. But determining the solutions to critical energy and sustainability problems is not one of the goals of this course, however, recognizing the planet's ability to support life is. One of the main points that I want you to walk away with from this page is that our economy has physical limitations that we must adhere to. The steady state economy is a precondition for environmental sustainability. But it is useful for you to know - especially in terms of critical analysis - that there are multiple possible ways to address this goal. Many - Herman Daly among them - advocate for government policy to solve this problem. Many - like the free market environmentalists - believe that markets and private property are the answer. I am not here to say which school of thought is correct, but my belief based on the evidence is that it is somewhere in between. Perhaps this could be done by having the government cap consumption at sustainable levels and allowing the market to work from there ("cap and trade"), or by using some of Daly's suggestions regarding subsidies and taxes. Cap and trade worked well for the acid rain problem in the early 1990s, for example, and is often cited as a solution to carbon emissions.
There are pros and cons to each approach. Markets are really great at efficiently managing resources that can have economic value attached to them (e.g., copper, oil) but even the most devout free market believers realize that they don't always work. Externalities are a good example of this (e.g., environmental destruction from copper and oil mining, air pollution from burning gasoline). And placing an economic value on something is a double-edged sword - it can, and often does, lead to preservation because of its expense (e.g., private nature parks), but it can lead to destruction if it is not perceived as worth enough (e.g., converting rainforest into pasture land). Private ownership often leads to inequity as well, as those without means are priced out of the access to goods (private education being a prime example of this). But government is generally not good at efficiently managing resources (e.g., the federal government of the U.S.). Overall, it is very difficult to believe that the market, left to its own devices, will achieve the Steady State Economy, especially if history is any guide. This is evidenced by the fact that the global ecological footprint is already at unsustainable levels.
One of the goals of this course is to help you think critically about these issues, so my hope is that when thinking about the information presented here you do so with "clarity, accuracy, precision, consistency, relevance, sound evidence, good reasons, depth, breadth, and fairness" as you will read in the critical thinking section at the beginning of the next lesson (source: The Foundation for Critical Thinking). To do this, you must look at evidence and use sound logic, minimizing the influence of ideology as much as possible. But as we will also goover in the critical thinking lesson, the more you know about these topics, the better you are able to make sound critical analysis.
The following short article and web page describe somewhat competing views on this.
- "How Sad; George Monbiot Does Not Realise That a Steady State Economy Is Not A No Growth Economy." Tim Worstall, Forbes Magazine. Please read through the comments on the second page.
- "Myths and Reality." Center for the Advancement of a Steady State Economy.
Check Your Understanding - Free Market Environmentalism
If the social cost of carbon is applied to current emissions by the U.S. government, and thus integrated into the cost of goods, is that a Free Market Environmentalist solution?
(c) It depends
Click for answer.
Optional (But Strongly Suggested)
Now that you have completed the content, I suggest going through the Learning Objectives Self-Check list at the top of the page.