Steady state economy

Definition and vision

Herman Daly defines his concept of a steady-state economy as an economic system made up of a constant stock of physical wealth (capital) and a constant stock of people (population), both stocks to be maintained by a flow of natural resources through the system. The first component, the constant stocks, is similar to the concept of the stationary state, originally used in classical economics; the second component, the flow of natural resources, is a new ecological feature, presently also used in the academic discipline of ecological economics. The durability of both of the constant stocks is to be maximized: The more durable the stock of capital is, the smaller the flow of natural resources is needed to maintain the stock; likewise, a 'durable' population means a population enjoying a high life expectancy — something desirable by itself — maintained by a low birth rate and an equally low death rate. Taken together, higher durability translates into better ecology in the system as a whole.

Daly's concept of a steady-state economy is based on the vision that man's economy is an open subsystem embedded in a finite natural environment of scarce resources and fragile ecosystems. The economy is maintained by importing valuable natural resources from the input end and exporting valueless waste and pollution at the output end in a constant and irreversible flow. Any subsystem of a finite nongrowing system must itself at some point also become nongrowing and start maintaining itself in a steady-state as far as possible. This vision is opposed to mainstream neoclassical economics, where the economy is represented by an isolated and circular model with goods and services exchanging endlessly between companies and households, without exhibiting any physical contact to the natural environment.

In the early 2010s, reviewers sympathetic towards Daly's concept of a steady-state economy have passed the concurrent judgement that although his concept remains beyond what is politically feasible at present, there is room for mainstream thinking and collective action to approach the concept in the future.

Present background: Exceeding global limits to growth

The widening interest in the concept of a steady-state economy has a background in the world's mounting ecological problems: Since the 1990s, measurements have provided evidence that the volume of the world economy far exceeds critical global limits to economic growth already. According to the ecological footprint measure, the carrying capacity of Earth — that is, Earth's long-term capacity to sustain human populations and consumption levels — was exceeded by some twenty percent in 1990. By 2015, this figure had increased to some sixty percent. In effect, mankind is now confronted with the vicious dynamics of planetary overshoot-and-collapse. Furthermore, the concept of the anthropocene has been proposed by geologists as a new epoch to describe the significant impact of human activities on Earth's ecosystems. Specifically, the following issues have long been of general concern worldwide:

Human overpopulation
World population is expected to reach 9.3 billion by 2050, and continue growing thereafter. This massive number of people is already resulting in human overpopulation, putting excessive strain on all kinds of natural resources and wildlife habitats everywhere, increasing pollution levels and deteriorating human living conditions. Uncontrolled urbanisation is forcing people to live in congested shanty towns, and large cities swell to become megacities with slum areas ripe with high crime rates. Overpopulation may even lead to social conflict and violence, when too many people (especially young males) end up competing for too few employment opportunities in stagnating economies.

Air pollution and global warming
Air pollution emanating from motor vehicles and industrial plants is damaging public health and increasing mortality rates. The concentration of carbon dioxide and other greenhouse gases in the atmosphere is evidently the source of global warming and climate change. The extreme regional weather patterns and the rising sea levels caused by the warming may deteriorate future living conditions in many — if not all — parts of the world. The warming already poses a security threat to many nations and a 'threat multiplier' to geo-political stability.

Depletion of non-renewable minerals
Non-renewable mineral reserves are currently extracted at high and unsustainable rates from the Earth's crust. Hence, the remaining reserves are likely to become ever more costly to extract in the near future, and will reach depletion at some point. The era of (relatively) peaceful economic expansion that has prevailed globally since World War II may be interrupted by unexpected supply shocks; or simply be succeeded by the all-too-expected peaking depletion paths of oil and other valuable minerals.

Excessive use of renewable resources
Excessive use of otherwise renewable resources are undermining ecological stability worldwide. Between 2000 and 2012 alone, some fourteen percent of what amounts to Earth's original forest cover was deforested. Tropical rainforests have been subject to deforestation at a rapid pace for decades — especially in West and Central Africa and in Brazil — mostly due to subsistence farming, population pressure and urbanization. Population pressure is also exerting much strain on the world's soil systems, leading to land degradation, mostly in developing countries. Global erosion rates on conventional cropland are presently estimated to exceed soil creation rates by more than one order of magnitude. Widespread overuse of groundwater result in water deficits in many countries of the world. By 2025, the living conditions of two-thirds of the world's population could be stressed by water scarcity.

Endangered wildlife and loss of biodiversity
The destructive impact of human activity on wildlife habitats worldwide is accelerating the extinction of rare species, thereby substantially reducing Earth's biodiversity of plants and animals. The natural nitrogen cycle is heavily overloaded by industrial nitrogen fixation and use, thereby disrupting most known types of ecosystems. The accumulating pollution of plastic debris in the oceans leads to entanglement, suffocation and ingestion of aquatic life. The acidification of the oceans due to concentration of carbon dioxide in the atmosphere is resulting in coral bleaching and impedes oceanic calcifying organisms. Arctic sea ice decline caused by global warming is endangering the polar bear.

These mounting concerns have prompted an increasing number of philosophers, economists — besides Herman Daly — and natural scientists to point to obvious global limits to economic growth, and to question — or even oppose — the prevailing political orthodoxy of persistently pursuing growth.

Historical background

For centuries, economists from classical economists like Adam Smith down to present-day ecological economists have considered a transition from a growing economy to a stable (stationary, steady) one.

The stationary state in classical economics

From Adam Smith and onwards, economists in the classical period of economic theorising described the general development of society in terms of a contrast between the scarcity of arable agricultural land on the one hand, and the growth of population and capital on the other hand. The incomes from gross production were distributed as rents, profits and wages among landowners, capitalists and labourers respectively, and these three classes were incessantly engaged in the struggle for increasing their own share. The accumulation of capital (net investments) would sooner or later come to an end as the rate of profit fell to a minimum or to nil. At that point, the economy would settle in a final stationary state with a constant population size and a constant stock of capital.

Adam Smith's concept of the stationary state

Adam Smith's magnum opus on The Wealth of Nations, published in 1776, laid the foundation of classical economics in Britain. Smith thereby disseminated and established a concept that has since been a cornerstone in economics throughout most of the world: In a liberal capitalist society, provided with a stable institutional and legal framework, an 'invisible hand' will ensure that the enlightened self-interest of all members of society will contribute to the growth and prosperity of society as a whole, thereby leading to an 'obvious and simple system of natural liberty'.

Smith was convinced of the beneficial effect of the enlightened self-interest on the wealth of nations; but he was less certain this wealth would grow forever. Smith observed that any country in the world found itself in either a 'progressive', a 'stationary', or a 'declining' state: Although England was wealthier than its North American colonies, wages were higher in the latter place as wealth in North America was growing faster than in England; hence, North America was in the 'cheerful and hearty' progressive state. In China, on the other hand, wages were low, the condition of poor people was scantier than in any nation in Europe, and more marriages were contracted here because the 'horrid' killing of newborn babies was permitted and even widely practised; hence, China was in the 'dull' stationary state, although it did not yet seem to be declining. In nations situated in the 'melancholic' declining state, the higher ranks of society would fall down and settle for occupation amid the lower ranks, while the lowest ranks would either subsist on a miserable and insufficient wage, resort to begging or crime, or slide into starvation and early death. Bengal and some other English settlements in the East Indies possibly found themselves in this state, Smith reckoned.

Smith pointed out that as wealth was growing in any nation, the rate of profit would tend to fall and investment opportunities would diminish. In a nation that had thereby reached this 'full complement of riches', society would finally settle in a stationary state with a constant stock of people and capital. In an 18th-century anticipation of The Limits to Growth, Smith described the state as follows:

According to Smith, Holland seemed to be approaching this stationary state, although at a much higher level than in China. Smith was unable to provide any contemporary examples of a nation in the world that had in fact reached the full complement of riches and thus had settled in stationarity, because, as he conjectured, "... perhaps no country has ever yet arrived at this degree of opulence."

David Ricardo's concept of the stationary state

In the early 19th century, David Ricardo was the leading economist of the day and the champion of British laissez-faire liberalism. According to Ricardo, the limits to growth were ever present due to scarcity of arable agricultural land. In the aftermath of the Napoleonic Wars on the European continent, the British economy was approaching the stationary state as population was growing, plots of land with decreasing fertility were put into agricultural use, and the rents of the rural landowning class were crowding out the profits of the urban capitalists. This was the broad outline of Ricardo's controversial land rent theory, published in his On the Principles of Political Economy and Taxation in 1817.

Ricardo believed that the only way for Britain to avoid the stationary state was to increase its volume of international trade. The country should export more of its industrial products and start importing cheap agricultural products from abroad in turn. However, this course of development was impeded by the Corn Laws, a protectionist two-sided measure of subsidies on corn exports and tariffs on corn imports. These laws seemed to be hampering both the industrialisation and the internationalization of the British economy, but the laws were nonetheless upheld by a Parliament dominated by a landowning class only too eager to preserve its own position and income in society. In the 1820s, Ricardo and his followers — Ricardo himself died in 1823 — directed much of their fire at the Corn Laws in order to have them repealed.

The Corn Laws were not repealed before 1846. In the meantime, the British economy kept growing, a fact that effectively undermined the credibility and thrust of Ricardian economics in Britain; but Ricardo had by now established himself as the first stationary state theorist in the history of economic thought.

John Stuart Mill's concept of the stationary state

John Stuart Mill was the leading economist, philosopher and social reformer in the middle of 19th century Britain. His economics treatise on the Principles of Political Economy, published in 1848, attained status as the standard textbook in economics throughout the English-speaking world until the turn of the century.

A champion of classical liberalism, Mill believed that an ideal society should allow all individuals to pursue their own good without any interference from others or from government. Also a utilitarian philosopher, Mill regarded the 'Greatest Happiness Principle' as the ultimate ideal for a harmonious society:

Mill's concept of the stationary state was strongly coloured by these ideals. Mill conjectured that the stationary state of society was not too far away in the future:

Contrary to both Smith and Ricardo before him, Mill took an optimistic view on the future stationary state. Mill could not "... regard the stationary state of capital and wealth with the unaffected aversion so generally manifested toward it by political economists of the old school." Instead, Mill attributed many important qualities to this future state, he even believed the state would bring about "... a very considerable improvement on our present condition." According to Mill, the stationary state was at one and the same time inevitable, necessary and desirable: It was inevitable, because the accumulation of capital would bring about a falling rate of profit that would diminish investment opportunities and hamper further accumulation; it was also necessary, because mankind had to learn how to reduce its size and its level of consumption within the boundaries set by nature and by employment opportunities; finally, the stationary state was desirable, as it would ease the introduction of public income redistibution schemes, create more equality and put an end to man's ruthless struggle to get by — instead, the human spirit would be liberated to the benefit of more elevated social and cultural activities, 'the graces of life'.

Hence, Mill was able to express all of his liberal ideals for mankind through his concept of the stationary state. It has been argued that Mill essentially made a quality-of-life argument for the stationary state.

Main developments in economics since Mill

When the influence of John Stuart Mill and his Principles declined, the classical-liberalist period of economic theorising came to an end. By the turn of the 19th century, Marxism and neoclassical economics had emerged to dominate economics. This development led to the exclusion of any concern with natural resource scarcity in economic modelling and analysis:

Taken together, it has been argued that "... if Judeo-Christian monotheism took nature out of religion, Anglo-American economists (after about 1880) took nature out of economics." In effect, modern mainstream economics — and macroeconomics in particular — has been described as "ecologically illiterate." Almost one century later, nature was reintegrated into economics by Herman Daly in his concept of a steady-state economy (see below).

John Maynard Keynes's concept of reaching saturation

John Maynard Keynes was the paradigm founder of modern macroeconomics, and is widely considered today to be the most influential economist of the 20th century. Keynes rejected the basic tenet of classical economics that free markets would lead to full employment by themselves. Consequently, he recommended government intervention to stimulate aggregate demand in the economy, a macroeconomic policy now known as Keynesian economics. Keynes also believed that capital accumulation would reach saturation at some point in the future.

In his essay from 1930 on The Economic Possibilities of Our Grandchildren, Keynes ventured to look one hundred years ahead into the future and predict the standard of living in the 21st century. Writing at the beginning of the Great Depression, Keynes rejected the prevailing "bad attack of economic pessimism" of his own time and foresaw that by 2030, the grandchildren of his generation would live in a state of abundance, where saturation would have been reached. People would find themselves liberated from such economic activities as saving and capital accumulation, and be able to get rid of 'pseudo-moral principles' — avarice, exaction of interest, love of money — that had characterized capitalistic societies so far. Instead, people would devote themselves to the true art of life, to live "wisely and agreeably and well." Mankind would finally have solved "the economic problem," that is, the struggle for existence.

The similarity between John Stuart Mill's concept of the stationary state (see above) and Keynes's predictions in this essay has been noted. It has been argued that although Keynes was right about future growth rates, he underestimated the inequalities prevailing today, both within and across countries. He was also wrong in predicting that greater wealth would induce more leisure spent; in fact, the reverse trend seems to be true.

In his magnum opus on The General Theory of Employment, Interest and Money, Keynes looked only one generation ahead into the future and predicted that state intervention balancing aggregate demand would by then have caused capital accumulation to reach the point of saturation. The marginal efficiency of capital as well as the rate of interest would both be brought down to zero, and — if population was not increasing rapidly — society would finally "... attain the conditions of a quasi-stationary community where change and progress would result only from changes in technique, taste, population and institutions ..." Keynes believed this development would bring about the disappearance of the rentier class, something he welcomed: Keynes argued that rentiers incurred no sacrifice for their earnings, and their savings did not lead to productive investments unless aggregate demand in the economy was sufficiently high. "I see, therefore, the rentier aspect of capitalism as a transitional phase which will disappear when it has done its work."

Ecological economics

Nicholas Georgescu-Roegen recognized the connection between physical laws and economic activity and wrote about it in 1971 in his magnum opus on The Entropy Law and the Economic Process. His premise was that the second law of thermodynamics, the entropy law, determines what is possible in the economy. Georgescu-Roegen explained that useful, low-entropy energy and materials are dissipated in transformations that occur in economic processes, and they return to the environment as high-entropy wastes. The economy, then, functions as conduit for converting natural resources into goods, services, human satisfaction, and waste products. Increasing entropy in the economy places profound limits on the scale it can achieve and maintain.

Around the same time that Georgescu-Roegen published his magnum opus, many other economists, most notably E.F. Schumacher and Kenneth Boulding, were writing about the environmental effects of economic growth and suggesting alternative models to the neoclassical growth paradigm. Schumacher proposed Buddhist Economics in an essay of the same name in his book Small Is Beautiful. Schumacher's economic model is grounded in sufficiency of consumption, opportunities for people to participate in useful and fulfilling work, and vibrant community life marked by peace and cooperative endeavors. Boulding used the spaceship as a metaphor for the planet in his prominent essay, The Economics of the Coming Spaceship Earth. He recognized the material and energy constraints of the economy and proposed a shift from the cowboy economy to the spaceman economy. In the cowboy economy, success is gauged by the quantity and speed of production and consumption. In the spaceman economy, by contrast, "what we are primarily concerned with is stock maintenance, and any technological change which results in the maintenance of a given total stock with a lessened throughput (that is, less production and consumption) is clearly a gain."

Herman Daly, a student of Georgescu-Roegen, built upon his mentor's work and combined limits-to-growth arguments, theories of welfare economics, ecological principles, and the philosophy of sustainable development into a model he called steady-state economics (see below). He later joined forces with Robert Costanza, AnnMari Jansson, Joan Martinez Alier, and others to develop the field of ecological economics. In 1990, these prominent professors established the International Society for Ecological Economics. The three founding positions of the society and the field of ecological economics are: (1) The human economy is embedded in nature, and economic processes are actually biological, physical, and chemical processes and transformations. (2) Ecological economics is meeting place for researchers committed to environmental issues. (3) Ecological economics requires trans-disciplinary work to describe economic processes in relation to physical reality.

Ecological economics has become the field of study most closely linked with the concept of a steady-state economy. Ecological economists have developed a robust body of theory and evidence on the biophysical limits of economic growth and the requirements of a sustainable economy.

Herman Daly's concept of a steady-state economy

Since the 1970s, Herman Daly has been the world's leading proponent of a steady-state economy. Throughout his career, Daly has published several books and articles on the subject. He has also founded a center for the advancement of the steady-state economy.

According to two independent comparative studies of American Daly's steady-state economics versus the later, competing school of degrowth from continental Europe, no differences of analytical substance exist between the two schools; only, Daly's bureaucratic — or even technocratic — top-down management of the economy fares badly with the more radical grassroots appeal of degrowth, as championed by French political scientist Serge Latouche.

The premise underlying Daly's concept of a steady-state economy is that the economy is an open subsystem of a finite and non-growing ecosystem (Earth's natural environment). The economy is maintained by importing low-entropy matter-energy (resources) from nature; these resources are put through the economy, being transformed and manufactured into goods along the way; eventually, the throughput of matter-energy is exported to the environment as high-entropy waste and pollution. Recycling of material resources is possible, but only by using up some energy resources as well as an additional amount of other material resources; and energy resources, in turn, cannot be recycled at all, but are dissipated as waste heat. Out of necessity, then, any subsystem of a fixed nongrowing system must itself at some point also become nongrowing.

Daly argues that nature has provided basically two sources of wealth at man's disposal, namely a stock of terrestrial mineral resources and a flow of solar energy. An 'asymmetry' between these two sources of wealth exist in that we may — within some practical limits — extract the mineral stock at a rate of our own choosing (that is, rapidly), whereas the flow of solar energy reaches Earth at a rate beyond human control. Since the Sun will continue to shine on Earth at a fixed rate for billions of years to come, it is the terrestrial mineral stock — and not the Sun — that constitutes the crucial scarcity factor regarding man's economic future.

Daly points out that today's global ecological problems are rooted in man's historical record: Until the Industrial Revolution that took place in Britain in the second half of the 18th century, man lived within the limits imposed by what Daly terms a 'solar-income budget': The Palaeolithic tribes of hunter-gatherers and the later agricultural societies of the Neolithic and onwards subsisted primarily — though not exclusively — on Earth's biosphere, powered by an ample supply of renewable energy, received from the Sun. The Industrial Revolution changed this situation completely, as man began extracting the terrestrial mineral stock at a rapidly increasing rate. The original solar-income budget was thereby broken and supplemented by the new, but much scarcer source of wealth. Mankind still lives in the after-effect of this revolution.

Daly cautions that more than two hundred years of worldwide industrialisation is now confronting mankind with a range of problems pertaining to the future existence and survival of our species:

Following the work of Nicholas Georgescu-Roegen, Daly argues that the laws of thermodynamics restrict all human technologies and apply to all economic systems:

In Daly's view, mainstream economists tend to regard natural resource scarcity as only a relative phenomenon, while human needs and wants are granted absolute status: It is believed that the price mechanism and technological development (however defined) is capable of overcoming any scarcity ever to be faced on Earth; it is also believed that all human wants could and should be treated alike as absolutes, from the most basic necessities of life to the extravagant and insatiable craving for luxuries. Daly terms this belief 'growthmania', which he finds pervasive in modern society. In opposition to the dogma of growthmania, Daly submits that "... there is such a thing as absolute scarcity, and there is such a thing as purely relative and trivial wants". Once it is recognised that scarcity is imposed by nature in an absolute form by the laws of thermodynamics and the finitude of Earth; and that some human wants are only relative and not worthy of satisfying; then we are all well on the way to the paradigm of a steady-state economy, Daly concludes.

Consequently, Daly recommends that a system of permanent government restrictions on the economy is established as soon as possible, a steady-state economy. Whereas the classical economists believed that the final stationary state would settle by itself as the rate of profit fell and capital accumulation came to an end (see above), Daly wants to create the steady-state politically by establishing three institutions of the state as a superstructure on top of the present market economy:

The purpose of these three institutions is to stop and prevent further growth by combining what Daly calls "a nice reconciliation of efficiency and equity" and providing "the ecologically necessary macrocontrol of growth with the least sacrifice in terms of microlevel freedom and variability."

Among the generation of his teachers, Daly ranks Nicholas Georgescu-Roegen and Kenneth E. Boulding as the two economists he has learned the most from. However, both Georgescu-Roegen and Boulding have assessed that a steady-state economy may serve only as a temporary societal arrangement for mankind when facing the long-term issue of global mineral resource exhaustion: Even with a constant stock of people and capital, and a minimised (yet constant) flow of resources put through the world economy, the Earth's mineral stock will still be exhausted, although at a slower rate than is presently the situation.

Responding specifically to the criticism levelled at him by Georgescu-Roegen, Daly concedes that a steady-state economy will serve only to postpone, and not to prevent, the inevitable mineral resource exhaustion: "A steady-state economy cannot last forever, but neither can a growing economy, nor a declining economy". A frank and committed Protestant, Daly further argues that...

Later, other economists in the field have agreed that not even a steady-state economy can last forever on Earth.

Criticisms and rebuttals thereof

Critics of the idea of limits to growth present two main arguments:

1. Technological progress (however defined) can overcome the limits to growth.
2. The economy can be de-materialized so that it grows without using more and more resources.

These can be called the technological optimist and decoupling arguments respectively.

Decoupling means achieving higher levels of economic output with lower levels of material and energy input. Proponents of decoupling cite transition to an information economy as proof of decoupling. Evidence shows that economies have achieved some success at relative decoupling. As an example, the amount of carbon dioxide emitted per dollar of economic production has decreased over time. But those gains have come amidst the background condition of increasing GDP. Even with decreases in the resource intensity of GDP, economies are still using more resources. Carbon dioxide emissions from fossil fuels have increased by 80% since 1970.

Ecological economists also observe that an economy is structured like an ecosystem — it has a trophic structure that controls flows of energy and materials. In nature, the producers are plants, which literally produce their own food in the process of photosynthesis. Herbivores consume plants, and carnivores consume herbivores. Omnivores may eat plants or animals, and some species function as service providers, such as scavengers and decomposers. The human economy follows the same natural laws. The producers are the agricultural and extractive sectors, such as logging, mining, and fishing. Surplus in these sectors allows for the division of labor, economic growth, and the flow of resources to other economic sectors. Analogous to herbivores, some economic sectors, such as manufacturing, consume the raw materials of the producers. Higher level manufacturers are analogous to carnivores. The economy also features service providers, such as chefs, janitors, bankers, and purveyors of information. The key point is that the economy tends to grow as an integrated whole. More manufacturing and more services requires more agricultural and extractive surplus. The trophic structure of the economy puts limits on how much of an economy's resources can be dedicated to creating and distributing information.

Both technological optimists and proponents of decoupling cite efficiency of resource use as a way to mitigate the problems associated with economic growth. But history has shown that when technological progress increases the efficiency with which a resource is used, the rate of consumption of that resource actually tends to rise. This phenomenon is called the rebound effect (conservation) or Jevons paradox. A recent extensive historical analysis of technological efficiency improvements has conclusively shown that energy and materials use efficiency improvements were almost always outpaced by economic growth, resulting in a net increase in resource use and associated pollution. Furthermore, there are inherent thermodynamic (i.e., second law of thermodynamics) and practical limits to all efficiency improvements. For example, there are certain minimum unavoidable material requirements for growing food, and there are limits to making automobiles, houses, furniture, and other products lighter and thinner without the risk of losing their necessary functions.

Since it is both theoretically and practically impossible to increase resource use efficiencies indefinitely, it is equally impossible to have continued and infinite economic growth without a concomitant increase in resource depletion and environmental pollution, i.e., economic growth and resource depletion can be decoupled to some degree over the short run but not the long run. Consequently, Herman Daly and others in the ecological economics community have advocated that long-term sustainability require the transition to a steady-state economy in which total GDP remains more or less constant (see above).

Some critics of zero growth claim that it does not go far enough. They argue that degrowth and fundamental changes to our economic system are needed to attain sustainability.