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A Critique of ‘Steady State Economics’

February 15th, 2012 Posted in Uncategorized by

Here is a brief account of human history:

For the vast majority of human history, the size of the economy was small compared to the size of the biosphere. But over the last hundred years or so, this balance has changed remarkably due to the increase in the number of people in the world and the growth in each person’s consumption of goods and services. […] Due to economic growth, humanity now uses eleven times as much energy, and eight times the weight of material resources every year as it did only a century ago. The global economy is now so large that it is undermining the natural systems on which it depends. The result is a wide range of global environmental problems: climate change, biodiversity loss, stratospheric ozone depletion, deforestation, soil degradation, and the collapse of fisheries. The list goes on (O’Neill et al., 2010, pp. 23–26).

Here is another account of the same phenomenon:

From 2 million or 200,000 or 20,000 or 2,000 years ago until the 18th century there was slow growth in population, almost no increase in health or decrease in mortality, […] increase in wealth for a few, and mixed effects on the environment. Since then there has been rapid growth in population due to spectacular decreases in the death rate, rapid growth in resources, widespread increases in wealth, and an unprecedently clean and beautiful living environment in many parts of the world […] In the 19th century the planet Earth could sustain only one billion people. […] Now, 5 billion people are living longer and more healthily than ever before, on average. The increase in the world’s population represents our victory over death (Simon, 1994, pp. 22–23).

Unlikely as it may seem, both authors are really describing the same planet, representing two diametrically opposed sets of assumptions. The first view, ‘Malthusianism’ or ‘Steady State Economics’ (SSE), holds that the planet’s biosphere is highly fragile and can only cope with a low level of human economic activity. If the latter exceeds its ‘planetary boundaries’, it overstretches the biosphere’s carrying capacity, and thus depletes the world’s ecological capital: according to the SSE view, the lifestyle we have grown accustomed to is akin to the lifestyle of a prodigal heir, who squanders the family wealth in a mindless consumption frenzy. The only way to prevent disaster is to downsize the world economy to a level which the planet can absorb. Since this is deemed impossible in a capitalist economy, an economic system in which the state tightly controls all economic activity is advocated.

The second position, ‘rational optimism’ or ‘sceptical environmentalism’, rejects the SSE assumption that people are just passive consumers of the resources they stumble across. Rather, people are seen as potential problem-solvers, who can overcome resource constraints given the appropriate institutional setup: a system of secure property rights and the free formation of market prices.

Suppose demand for resource X was growing at a much faster rate than supply. A Steady State Economist would typically extrapolate this trend into the future, calculate the date we will ‘run out of X’, and describe the consequences in a melodramatic fashion. A sceptical environmentalist would argue that if this trend continues, the price of X will increase. This entices X-suppliers to look for ways of tapping into hitherto inaccessible X-deposits, and X-consumers to look for ways of making more with less X. Entrepreneurs, meanwhile, are enticed to look for ways of substituting X.

Whichever approach one finds intuitively more convincing, the empirical track record of the optimist position is vastly superior. Over the past 200 years, all kinds of resources have been predicted to run out and all kinds of ecological disasters have been predicted – next to none has ever materialised.

On the macro level, the long-term trend since the Industrial Revolution has been for the world to gradually become more populous and more prosperous. If the global ecosystem was in danger of bursting under the weight of our economic activity, it would have burst long ago. Instead, all kinds of social, health and environmental indicators have improved.

So what explains the continued fascination with doom-and-gloom theories? Most modern-day Malthusians make no attempt to hide their loathing of mass consumerism (e.g. New Economics Foundation, 2009). So there may be a predisposition, on their side, to ascribe negative consequences to a process which they are opposed to anyway. This highlights, once more, the danger of using economic analysis in order to seek confirmation for one’s preconceived intuitions.

Kristian Niemietz is the Poverty Research Fellow at the Institute of Economic Affairs, where he has been based since 2008. He studied Economics at the Humboldt Universität zu Berlin and the Universidad de Salamanca and is currently studying for a PhD in Public Policy at King’s College London. He has interned at the Central Bank of Bolivia and the National Statistics Office of Paraguay and worked for the Institute for Free Enterprise.

This article first appeared in the Economic Affairs Student and Teacher Supplement (Feb 2012) and is reproduced with the kind permission of the Institute for Economic Affairs.

8 Responses to “A Critique of ‘Steady State Economics’”

  1. George Potter Says:

    The problem is that both models aren’t mutually exclusive.

    Technological advances means that a greater number of people can be supported now than could be supported back when the pinacle of farming technology was the three field system.

    Similarly, a lot of the predicted resource crises have never occurred because we’ve switched to new resources or have found more resources elsewhere. For example, had we continued to depend on coal for our industrial processes then we would probably be facing economic collapse right now. But instead we switched to other energy sources such as oil. And, because we’ve so far continued to find ways to make formerly inaccessible oil deposits commercially viable, we have yet to run out of oil.

    So, it’s perfectly possible for modern civilisation to support a population in far greater conditions that nomadic civilizations could. But the point is that there is a limit. This is a finite planet – there is only so much fresh water available, for example. It might be possible to boost the carrying capacity through technological advancement but sooner or later you run into diminishing returns. So therefore the planet has some sort of carrying capacity.

    And there’s plenty of evidence of this in the past as well. We can see periods where civilizations have depleted their resources and have grown beyond their local environment’s carrying capacity as a result. And we can see with our own eyes that our own period of economic prosperity is not without cost – it has come at a mass depletion of natural resources and destruction of vital elements of the biosphere (such as rainforests and fish stocks).

    Yes, technological innovation can provide ways of getting more from less but that doesn’t change the fact that we do not have infinite resources on this planet and will therefore run out of them sooner or later. To say that, just because the ecosystem hasn’t imploded, means that it will never do so is not just idiotic but also incredibly dangerous.

    Switching to a more sustainable economic system does not mean downsizing or oppresive state intervention – what it means is creating economic incentives for market forces to provide solutions. For example, creating a framework which says that the Amazon rainforest has value in terms of its contribution to our biosphere means that businesses are forced to look at alternatives to clearing thousands of acres to create cheap farmland.

    To be honest, it seems to me like your entire post is based on dislike of the idea that some state intervention in the markets would be necessary to prevent environmental destruction – and in that you fall squarely into the trap that you identified of: “the danger of using economic analysis in order to seek confirmation for one’s preconceived intuitions”


  2. Kristian Niemietz Says:

    George,

    firstly, nobody is claiming resources were not scarce, on the contrary, economics is little else but the science of scarcity. But notice this qualification: “…given the appropriate institutional setup: a system of secure property rights and the free formation of market prices”. The examples that you mention – the rain forest, fisheries – are precisely characterised by the absence of property rights and scarcity signals. They are perfect illustrations of the tragedy of the commons, as the overuse of these resources is exactly what any undergraduate economics textbook would predict.

    Secondly, my argument is not that there will be no catastrophe just because there hasn’t been one in the past. The Steady Staters are the ones who extrapolate past/current trends. My point is that there are reasons why previous doomsayer prophecies have not come true – it was not just brute luck. I explain what these reasons are. Steady staters, in contrast, just jump on to the next apocalypse without ever asking themselves why the previous one has failed to materialise.

    And thirdly, just because you keep repeating that there are limits to growth and insist that this was self-evident, that does not make it so.


  3. George Potter Says:

    Kristian,

    First of all, thanks for replying to my comment.

    To address your first point, is not the example of the tragedy of the commons the precise reason why steady state economists advocate state intervention to create “the appropriate institutional setup: a system of secure property rights and the free formation of market prices”?

    With regards to your second point, if you didn’t mean to imply that there will be no catastrophe then what exactly did you mean to imply when you said “If the global ecosystem was in danger of bursting under the weight of our economic activity, it would have burst long ago”?

    And, with regards to your third point, the fact is that I never said that there were limits to growth. What I said was that there will be an eventual limit to carrying capacity – the population that this planet can support without environmental and societal catastrophe. You appear to be conflating this with a limit to growth. But, in reality, there’s no reason that growth can’t exist in the context of a sustainable economy.

    That’s because the fundamental drive of growth in our current economic system is the production of energy – which in turn allows us to solve other problems. For example, fresh water shortages can be overcome with sufficient energy for desalination plants, and food yields can be increased as long as there is energy for the production of fertiliser and for powering more efficient methods of agriculture. And there’s no reason that that kind of energy driven growth couldn’t continue within a sustainable economic system. In fact, I’d argue that the only context where that kind of growth can continue indefinitely is in one where there is a switch to sustainable energy sources, rather than finite fossil fuels.

    My point is that you seem to be arguing that there are only two options on the table: a) a SSE “in which the state tightly controls all economic activity” or b) the current way of doing things on the logic that it has yet to break down. But the description you provide of a) is a strawman – there are undoubtedly some sustainable economy advocates who want state control of absolutely everything (just as some “rational optimists” argue that we should consume natural resources without restraint in a giant, unfettered free-for-all) but that hardly typifies the sustainable economic argument.

    In fact, most advocates of a sustainable economy usually advocate the creation of a framework to allow markets themselves to provide solutions. And that, I would say, is about as far from your depiction of a) as it is from b).


  4. Jack Hughes Says:

    How about just leaving us alone to chart our own destiny?

    Freedom is the word.


  5. Jack Hughes Says:

    PS” “sustainability” is a crock.

    Just imagine if our grandparents had shivered and starved in the dark – but left us a stockpile of firewood and whale oil for our lanterns. And tripe to fill our bellies.


  6. Kristian Says:

    George:

    “is not the example of the tragedy of the commons the precise reason why steady state economists advocate state intervention to create “the appropriate institutional setup: a system of secure property rights and the free formation of market prices”?”
    -No, absolutely not. The Steady Staters do not distinguish between genuine market outcomes and tragedy of the commons problems, instead, they treat every human activity as a threat to the planet’s survival. If you’re concerned with tragedy of the commons problems, then you advocate specific solutions to those specific sectors where they exist, not state rationing of resources.

    “if you didn’t mean to imply that there will be no catastrophe”
    -I did mean to say (not just imply) that there will be no catastrophe. There will be none. But this is not based on an extrapolation from the past, it is based on an explanation of what happened in the past.

    “the description you provide of a) is a strawman”
    -Feel free to check my references, and you will see that I am accurately representing the Staedy State position. I wish it was a strawman, because I find it rather depressing that such misanthropic and authoritarian views are really being held, and even taken serious. But unfortunately they are.

    “the only context where that kind of growth can continue indefinitely is in one where there is a switch to sustainable energy sources, rather than finite fossil fuels”
    -Yes, and there will be eventually, guided by market prices.

    “you seem to be arguing that there are only two options on the table”
    -I’m not saying that. Of course there are less extreme variants of SSE around, but in this short article, I’m only going after the purists.


  7. Nicholas Treleaven Says:

    I am not an economist, I am an engineer and as such I am not going to challenge either point of view using economics as a basis. So here are some fundamental truthes about energy and I will leave it to those of you from economics backgrounds to argue over which theory accurately represents the situation and offers the best solutions.
    First truth: all human action requires an input of energy which is ultimately converted into infra-red radiation that leaves our planet.
    Second truth: all of this energy comes either from the sun, chemical deposits or nuclear material
    Third truth: the rate at which energy arrives at our planet from the sun is more or less unchanging.
    Fourth truth: the quantity of chemical and nuclear energy available to us can never increase, it is finite.
    Therefore there is a limit to how much human activity can occur on the planet earth.

    3 paths to redemption:
    1. Nuclear fusion: no one has any idea if it is really posible and optimistic estimates on time are in the range 25-50 years. And… More importantly, no one knows how much it will cost.
    2. Interplanetary exploration: mining resources and energy from nearby moons and planets. Once again, very expensive and relies on a very large resource input.
    3. Steady state economics: control of population and high unemployment leads to highly socialist government and heavy regulation.

    Any other solutions while presenting different time frames and living standards ultimately rely on existing energy and mineral resources.

    When will the world stop arguing and make a clear choice between these three alternatives?

    Despite the negatives I still believe that the steady state economic option is the best. I think the real challenge is in developing an economic theory that makes accurate provision for quality of life. The era of more is better is over, once it is accepted that energy scarcity is a reality. There will be an acceptance that it is impossible for the worlds poor to elevated from poverty.


  8. Tom Papworth Says:

    Nicholas,

    Thank you for your comments and I want to assure you that nobody is denying the law of conservation of energy. However, you must agree that we are at present – and into any conceivable future – only using a tiny fraction of that energy.

    If (and you can correct me if I am wrong, as you are the engineer) every single atom has the potential to be split (albeit not with current technology), and the amount of energy reaching our planet from the sun is vastly greater than the amount we are currently using, and if – as you say – the timeframe for solving the fusion question is measured in decades, surely there is, if not unlimited energy, at least a huge surplus.

    If the point of your comment is to suggest that at some point in the distant future we will reach a theoretical maximum of energy, that may be true, but it is not necessarily significant, as that point is very far away – I might hazard so far away that we will no longer exist as the same species by then.

    If, on the other had, you believe that we are already nearly at the point where we have reached the maximum possible consumption of energy, I would like to see some evidence for that, bearing in mind that there is clearly (indeed, visibly) plenty of solar energy to spare, and plenty of chemical and nuclear energy reserves as yet untapped.


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