Tue Dec 13th, 2005 at 02:20:37 PM EST
In a recent thread, rdf pointed out an excerpt, entitled Steady-state economics, in which Herman Daly criticises "growth economics".
When I complained that the excerpt's sub-title A Catechism of Growth Fallacies was a more apt description of the content of the article, as it did not contain any description of what steady state economics should be like, or how to get there from here, rdf replied that I should read Daly's books to get the whole picture.
Fortunately, in the speech Daly gave on the occasion of his retirement from the World Bank, there are some hints about how to start moving in the right direction. I suppose now I need to get ahold of one of his books to get an idea of what his vision of the steady state economy is, but I think I have a reasonable guess already. Anyway, that's a topic for another diary.
Daly's speech is excerpted below the fold, as a taster and to kick-start debate.
After six years at the World Bank and having at 55 finally reached the age of both reason and early retirement, I am now returning to academia-to teaching, researching, writing-and chasing after grants. While I am happy about that, I also feel a sense of loss at leaving, especially because I think the Bank will become, and is already becoming, much more environmentally sensitive and literate. It is also, of all places that I have worked, the one where I have had the best colleagues. The person who more than anyone else has fought for the environment in the Bank for over fifteen years is Robert Goodland. Trying to help him, Salah E1 Serafy, and others, to "green the Bank's economists" has been a high privilege and sometimes even fun. It is also unfinished business. The Vice Presidency for Environmentally Sustainable Development in its first year, under Ismail Serageldin's leadership, has been the most encouraging step forward during my time here. When the critical areas of population and energy are brought under the domain of ESD, it will be even more encouraging.
External Issues: Advice for Fostering Environmentally Sustainable Development
I have four prescriptions for better serving the goal of environmentally sustainable development through World Bank policy and action. The four prescriptions are presented in order of increasing generality and radicalism. That is, the first two are fairly specific and should, I think, be relatively noncontroversial. The third will be debated by many, and the fourth will be considered outrageous by most Bank economists.
#1. Stop counting the consumption of natural capital as income. Income is by definition the maximum amount that a society can consume this year and still be able to consume the same amount next year. Thus sustainability is built into the very definition of income. But the productive capacity that must be maintained intact has traditionally been thought of as manmade capital only, excluding natural capital. We have habitually counted natural capital as a free good. This might have been justified in yesterday's empty world, but in today's full world it is anti-economic. The error of implicitly counting natural capital consumption as income is customary in three areas: (1) the System of National Accounts; (2) evaluation of projects that deplete natural capital; and (3) international balance of payments accounting.
#2. Tax labor and income less. and tax resource throughput more. In the past it has been customary for governments to subsidize resource throughput to stimulate growth. Thus energy, water, fertilizer, and even deforestation, are even now frequently subsidized. To its credit the World Bank has generally opposed these subsidies. But it is necessary to go beyond removal of explicit financial subsidies to the removal of implicit environmental subsidies as well. By "implicit environmental subsidies" I mean external costs to the community that are not charged to the commodities whose production generates them.
#3. Maximize the productivity of natural capital in the short run, and invest in increasing its supply in the long run. Economic logic requires that we behave in these two ways toward the limiting factor of production -i.e. maximize its productivity and invest in its increase. Those principles are not in dispute. Disagreements do exist about whether natural capital is really the limiting factor. Some argue that manmade and natural capital are such good substitutes that the very idea of a limiting factor, which requires that the factors be complementary, is irrelevant. It is true that without complementarily there is no limiting factor. So the question is, are manmade capital and natural capital basically complements or substitutes? Here again we can provide perpetual full employment for econometricians, and I would welcome more empirical work on this, even though I think it is sufficiently clear to common sense that natural and manmade capital are fundamentally complements and only marginally substitutable.
#4. Move away from the ideology of global economic integration by free trade. free capital mobility. and export led growth-and toward a more nationalist orientation that seeks to develop domestic production for internal markets as the first option. having recourse to international trade only when clearly much more efficient.
It seems a little silly, but I think it is true that just be changing the way we count the wealth of an economy and shifting the tax burden around (without changing its aggregate amount) one could really create the necessary financial incentives to make the economy less wasteful and less damaging to the environment. So, it is all up to the accountants to do it, and to the economists to convince politicians that that is the right way to count one's wealth. Note, in particular, that Daly seems convinced that such changes in accounting and taxation would be noncontroversial among World Bank economists. One can always hope...