Steady-state economy

A steady-state economy is an economy made up of a constant population size and a constant stock of
physical wealth (capital). The term typically refers to the national economy of a particular country, but it
is also applicable to the economic system of a city, a region, or the entire world. In the history of
economic thought, classical economist Adam Smith of the 18th century was the first economist to
theorise on the concept of a stationary state of an economy. Smith conjectured that any national
economy in the world would sooner or later settle in a final state of stationarity.
Since the 1970s, the concept of a steady-state economy has been associated mainly with the work of
leading ecological economist Herman Daly. As Daly's concept of a steady-state includes analyses of
natural resource flows through the economy, his concept differs from the earlier, classical concept of
a stationary state. One other difference is that Daly recommends immediate political action to establish
the steady-state economy by imposing permanent government restrictions on all resource use, whereas
Adam Smith and the other economists of the earlier, classical period of theorising believed that the
future stationary state of any economy would settle by itself without any government intervention.
The world's mounting ecological problems have brought about a widening interest in the concept of
a steady-state economy. Critics of the steady-state economy object to it by arguing that resource
decoupling,technological development, and the unrestrained operation of market mechanisms are fully
capable of overcoming any resource scarcity, any rampant pollution or any overpopulation ever to be
encountered on Earth. Proponents of the steady-state economy, on the other hand, rebut that these
objections remain insubstantial and mistaken and that the case for a steady-state economy is gaining
momentum every day.
Contents
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1Physical features

2Limits to economic growth

3History of the concept

3.1Classical economics

3.2John Maynard Keynes

3.3Ecological economics

4Herman Daly's concept of a steady-state economy

5Criticisms and rebuttals thereof

6See also

7References

8External links

Physical features

The steady-state economy is an entirely physical concept. Any non-physical components of an economy
(e.g. knowledge) can grow indefinitely. But the physical components (e.g. supplies of natural resources,
human populations, and stocks of human-built capital) are constrained and endogenously given. An
economy could reach a steady state after a period of growth or after a period of downsizing
or degrowth. The objective is to establish it at a sustainable scale that does not exceed ecological limits.
Economists use gross domestic product or GDP to measure the size of an economy in dollars or some
other monetary unit. Real GDPthat is, GDP adjusted for inflationin a steady-state economy remains
reasonably stable, neither growing nor contracting from year to year. Herman Daly, one of the founders
of the field of ecological economics and a critic of neoclassical economics,[1] defines a steady-state
economy as...

...an economy with constant stocks of people and artifacts, maintained at some desired,
sufficient levels by low rates of maintenance "throughput", that is, by the lowest feasible
flows of matter and energy from the first stage of production to the last stage of
consumption."[2]:17

A steady-state economy, therefore, aims for stable or mildly fluctuating levels in population and
consumption of energy and materials. Birth rates equal death rates, and saving/investment
equals depreciation.
Limits to economic growth
Development of steady-state economics (sometimes also called full-world economics) is a response to
the observation that economic growth may have limits. Macroeconomic policies in most countries,
particularly those with large economies, have typically been officially structured for economic growth
for decades.[3] Given the ecological costs associated with such policies (e.g. anthropogenic global
warming,widespread habitat loss and species extinctions, consumption of natural resources, pollution,
urban congestion, intensifying competition for remaining resources, and increasing disparity between
the wealthy and the poor), some economists, scientists, and philosophers have pointed to the
biophysical limits to growth, and questioned the desirability of continuous growth.
Economic growth consists of an increase in the production and consumption of goods and services. It is
facilitated by increasing population, increasing per capita consumption, and productivity gains, and it is
indicated by rising real GDP. For millennia most economies, in the current sense of the term, remained
relatively stable in size, or they exhibited such modest growth that it was difficult to detect. Proponents
of steady-state economics note that the general transition from hunter-gatherer societies to agricultural
societies resulted in population expansion and technological progress. From this they stress that
the Industrial Revolution and the ability to extract and use dense energy resources resulted in
unprecedented exponential growth in human populations and consumption.
The first serious doubts about the long run prospects for continuous growth in the industrial age are
commonly ascribed to Thomas Robert Malthus's work on An Essay on the Principle of Population from
1798.[4] Although many of Malthus's empirical claims and theoretical assumptions have since proved
wrong, his broader concerns have remained influential, from eugenics to more mainstream views. The
modern debate on the limits to growth was kicked off in 1972 by The Limits to Growth, a book produced

by the Club of Rome. The Club of Rome developed computer models and explored scenarios of
continuing economic growth and environmental impacts.[5] Their original analysis and several follow-ups
specified planetary limits to growth.
Additional studies and analytical tools corroborate much of the Club of Rome's work. For example,
the ecological footprint is a measure of how much land and water area a human population requires to
produce the resource it consumes and to absorb its wastes, using prevailing technology. The Global
Footprint Network calculates the world's ecological footprint to be the equivalent of 1.5 planets (as of
2014),[6]meaning that human economies are consuming 50% more resources than the Earth can
regenerate each year. In other words, it takes one year and six months to regenerate what we consume
in the course of merely one year. This sort of ecological accounting suggests that economic growth is
depleting resources at a rate that cannot be maintained in the longer run.
History of the concept
For centuries, economists have considered a transition from a growing economy to a stable (stationary,
steady) one, from classical economists like Adam Smith down to present-day ecological economists.
Classical economics
Adam Smith is famous for the ideas in his book The Wealth of Nations. A central theme of the book is
the desirable consequences of each person pursuing self-interest in the marketplace. He theorized and
observed that people trading in open markets leads to production of the right quantities of
commodities, division of labor, increasing wages, and an upward spiral of economic growth. But Smith
recognized a limit to economic growth. He predicted that in the long run, population growth would push
wages down, natural resources would become increasingly scarce, and division of labor would approach
the limits of its effectiveness. He incorrectly predicted 200 years as the longest period of growth,
followed by population stability.[7]
John Stuart Mill, a pioneer of economics and one of the most gifted philosophers and scholars of the
19th century,[8] anticipated the transition from economic growth to a "stationary state". In his magnum
opus,Principles of Political Economy, he wrote:
...the increase of wealth is not boundless. The end of growth leads to a stationary state. The stationary
state of capital and wealth would be a very considerable improvement on our present condition.
and
...a stationary condition of capital and population implies no stationary state of human improvement.
There would be as much scope as ever for all kinds of mental culture, and moral and social progress; as
much room for improving the art of living, and much more likelihood of it being improved, when minds
ceased to be engrossed by the art of getting on."[9]
John Maynard Keynes
John Maynard Keynes, one of the most influential economists of the twentieth century,[8] also
considered the day when society could focus on ends (happiness and wellbeing, for example) rather
than means (economic growth and individual pursuit of profit). He wrote:

...that avarice is a vice, that the exaction of usury is a misdemeanour, and the love of money is
detestable We shall once more value ends above means and prefer the good to the useful.[10]
and
The day is not far off when the economic problem will take the back seat where it belongs, and the
arena of the heart and the head will be occupied or reoccupied, by our real problems - the problems of
life and of human relations, of creation and behavior and religion.[11]
The Widow's Cruse is the name Keynes gave to a parable from the bible for a magical cup of oil, using
the biblical term "cruse" for "cup". It was first discussed in his Treatise on Money to help explain why at
the limits to growth, investing for economic expansion becomes unprofitable for all.[12] His way of
correcting this situation and create economic stability at the limits of growth we would now call a
"sustainable design" for capitalism. It was discussed as for some future time when increasing capital
investment would naturally meet diminishing returns for the system as a whole. Continuing increases in
investment by the wealthy would then cause over-investment and result in "conditions sufficiently
miserable" to bring the net savings rate of the economy to zero. He called the solution to the problem
"the widow's cruse", after a biblical parable of Elijah coming to stay with an old widow and making her
cup of oil inexhaustible.[13]
The Cambridge intellectuals trying to understand Keynes' Treatise on Money misunderstood and called it
"the fallacy" instead.[14] Though Keynes described it more clearly in The General Theory,[15] a
misunderstood idea is what it has remained. As a response to the natural over-investment crisis at the
climax of capitalism it would have relied on the good will of the wealthy in spending enough of their
own earnings to restore profitability to the rest of the economy. The original misinterpretation was that
it was intended to restore growth rather than to allow growth to end without conflict. The
misunderstanding has been generally repeated by other economists, except Kenneth Boulding who
frequently referred to the eventual necessity to limit investment growth in response to environmental
impacts and diminishing returns,[16] and later by P.F. Henshaw as a general principle of systems
ecology.[17] That Keynes' solution would stabilize the economy as conditions became miserable due to
over-investment, but at the expense of ending the automatic concentration of wealth, is likely to have
been one of the more confusing features to most economists who tried to understand it.
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.[18] 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 highentropy 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.[19]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."[20]
Herman Daly, a student of Georgescu-Roegen, built upon his mentor's work and combined limits-togrowth 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.[21] 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 steadystate 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.[22][23]
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.[24]:81f Throughout his career, Daly has published several books and articles on the
subject.[2][25][26]:117124 He has also founded a center for the advancement of the steady-state
economy.[27] 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.[28]:549 [29]:146148

Natural resources flow through the economy and end up as waste and pollution
According to Daly, the premise underlying his concept of a steady-state economy is that the economy is
an open subsystem of a finite and non-growing ecosystem (the 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.[2]:xiii
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.[2]:21f

Throughout most of his existence, man has subsisted primarily on Earth's biosphere
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 huntergatherers 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 warns that more than two hundred years of worldwide industrialisation is now confronting
mankind with a host of problems pertaining to the future existence and survival of our species:

The entire evolution of the biosphere has occurred around a fixed point the constant
solar-energy budget. Modern man is the only species to have broken the solar-income
budget constraint, and this has thrown him out of equilibrium with the rest of the
biosphere. Natural cycles have become overloaded, and new materials have been produced
for which no natural cycles exist. Not only is geological capital being depleted, but the basic
life-support services of nature are impaired in their functioning by too large a throughput
from the human sector.[2]:23

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

Entropy is the basic physical coordinate of scarcity. Were it not for entropy, we could burn
the same gallon of gasoline over and over, and our capital stock would never wear out.
Technology is unable to rise above the basic laws of physics, so there is no question of ever
'inventing' a way to recycle energy.[2]:36

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".[2]:41 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.
The economy could be put in balance, at least temporarily
Consequently, Daly recommends that a system of permanent government restrictions on the economy
is established as soon as possible, a steady-state economy. Whereas theclassical economists believed
that the 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 first institution is to correct inequality by putting minimum and maximum limits on incomes,
maximum limits on wealth, and then redistribute accordingly.

The second institution is to stabilise the population by issuing transferable reproduction licenses
to all fertile women at a level corresponding with the general replacement fertility in society.

The third institution is to stabilise the level of capital by issuing and selling depletion quotas that
put quantitative restrictions on the flow of resources in the economy. Quotas effectively
minimise the throughput of resources necessary to maintain any given level of capital (as
opposed to taxes, that merely alter the prevailing price structure).

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."[2]:69
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.[2]:xvi However, both Georgescu-Roegen
and Boulding have assessed that a steady-state economy may serve only as a temporary societal
arrangement 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.[30]:366369 [31]:165167
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".[25]:369 A frank and committed Protestant, Daly further argues that...

... the steady-state economy is based on the assumption that creation will have an end
that it is finite temporally as well as spatially. ... Only God can raise any part of his creation
out of time and into eternity. As mere stewards of creation, all we can do is to avoid wasting
the limited capacity of creation to support present and future life.[25]:370

Later, other economists have agreed that not even a steady-state economy can last forever.[32]:105
107 [33]:270 [34]:37

Criticisms and rebuttals thereof

Critics of the idea of limits to growth present two main arguments:
1. Technological progress and gains in efficiency 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.[35][36] 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.[37]
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.[38]
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.[39][40] 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.[41] 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 steadystate 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.[42]
Source: https://en.wikipedia.org/w/index.php?title=Steady-state_economy&printable=yes