Who is Herman Daly

His vision of economics and the environment

Introductory chapter of "Beyond growth" by Herman Daly

Although there is an emerging political consensus on the desirability of something called sustainable development, this term -touted by many and even justitutionalized in some places- is still dangerously vague. Apparent agreement rnjsks a fight over what exactly "sustainable development" should mean-a fight in which the stakes are very high.

The power of the concept of sustainable development is that it both reflects and evokes a latent shift in our vision of how the economic activities of human beings are related to the natural world, an ecosystem which is finite, nongrowing, and materially closed. The demands of these activities on the containing ecosystem for regeneration of raw material "Inputs" and absorption of waste "outputs" must, I will argue, be kept at ecologically sustainable levels as a condition of sustainable development. This change in vision involves replacing the economic norm of quantitative expansion (growth) with that of qualitative improvement (developmcnt) as the path of future progress. This shift is resisted by most economic and political institutions, which are founded on traditional quantitative growth and legitimately fear its replacement by something as subtle and challenging as qualitative development. The economics of development without and beyond growth needs to be worked out much more fully. There are enormous forces of denial aligned against this necessary shift in vision and analytic effort, and to overcome these forces requires a deep philosophical clarification, even religious renewal.

Sustainable development is a term that everyone likes, but nobody is sure of what it means. At least it sounds better than "unsustainable nondevelopment." The term rose to the prominence of a mantra or a shibboleth following the 1987 publication of the U.N. sponsored Brundtland Commission report, "Our Common Future", which defined the term as development which meets the needs of the present without sacrificing the ability of the future to meet its needs. While not vacuous by any means, this definition was sufficiently vague to allow for a broad consensus. Probably that was a good political strategy at the time a consensus on a vague concept was better than disagreement over a sharply defined one. By 1995, however, this initial vagueness is no longer a basis for consensus, but a breeding ground for disagreement. Acceptance of a largely undefined term sets the stage for a situation where whoever can pin his or her definition to the term will automatically win a large political battle for influence over our future.

Some would like to abandon the concept of sustainable development altogether, arguing that it adds nothing to standard economics and is too vague to ever be useful. But most important concepts are not subject to analytically precise definition; think of democracy, justice, welfare, for example. Important concepts are more dialectical than analytic, in the sense that they have evolving penumbras which partially overlap with their "other." Analytic concepts have no overlap with their other, so the law of contradiction holds, that is, B cannot be both A and non A. But for dialectical concepts there are cases in which it makes sense to say that B is both A and non A. For example, there is an age at which we are both young and old; a tidal salt marsh is both land and sea; a credit card is both money and non money. If all our concepts were analytic we could not deal with change and evolution. Analytically defined species could never evolve if they had at no time and in no way overlapped with their other. All important concepts are dialectically vague at the margins. I claim that sustainable development is at least as clear an economic concept as money itself. Is money really M1 or M2, or is it M1a? Do we count Eurodollar based loans in the U.S. money supply? How liquid does an asset have to be before it counts as "quasi-money"? Yet the human mind is clever. Not only can we handle the concept of money, we would have a hard time without it. The same, I suggest, is true for the concept of sustainable development. If economists reject this concept because it is dialectical rather than analytical, then they should also stop talking about money.

While accepting the inherent overlap and vagueness of all dialectical concepts, there still remains much room for giving content to and sharpening the analytical cutting power of the idea of sustainable development. For one thing, the Brundtland definition tells us only that sustainable development means development which does not impoverish the future. This statement implies something about what "sustainable" means in this context, but it does not even try to define "development". Is there a difference between economic development and economic growth? Does growth mean growth in the total value of goods and services produced during a given time period (GNP, or gross national product)? Or does it mean growth in the rate of flow of matter and energy through a given economic system (physical throughput)? These are some of the issues to be addressed in this book. But before doing so it is useful to recognize that the issues addressed by the concept of sustainable development existed and were actively discussed long before the term itself became customary.

For over twenty-five years the concept of a steady-state economy has been at the center of my thinking and writing. John Stuart Mill, back in 1857, discussed this idea under the label "stationary state," by which he meant a condition of zero growth in population and physical capital stock, but with continued improvement in technology and ethics. Following John Stuart Mill and the classical economists, I have always thought that this concept was most relevant to "developed" or "mature" economies. During the six years that I worked for the World Bank (1988-1994), I was therefore surprised to see a very similar idea, now called "sustainable development", become the dominant ideal for the less developed countries (the South), but not for the mature, developed countries (the North). In my view, while sustainability is certainly relevant to the South, the critical issue is for the North to attain sustainability in the sense of a level of resource use that is both sufficient for a good life for its population and within the carrying capacity of the environment, if generalized to the whole world. Population growth and production growth must not push us beyond the sustainable environmental capacities of resource regeneration and waste absorption. Therefore, once that point is reached, production and reproduction should be for replacement only. Physical growth should cease, while qualitative improvement continues.

Sustainable Development and Classical Economics

The classical economists thought that the economy would naturally end up in the stationary state, with wages at a subsistence level and the surplus all going to land lords as rent, with nothing left over for the capitalist's profit, and therefore no motive for further growth. Most of the classical economists dreaded the stationary state as the end of progress, but John Stuart Mill welcomed it, recognizing that "a stationary condition of capital and population implies no stationary state of human improvement, and that in fact there would be more likelihood of improving the art of living ... when minds ceased to be engrossed by the art of getting on." Unlike many classical economists, John Stuart Mill believed that the laws governing production did not rigidly determine distribution, so that the subsistence level of wage was not a necessary feature of the stationary state. In today's jargon, Mill was arguing for sustainable development, development without growth-that is, qualitative improvement without quantitative increase. But Mill's writings on the stationary state were forgotten, and most economics PhDs from the past two decades have never heard of this concept because their teachers, who had heard of it, rejected it as unworthy of transmission.

The limits that the classical economists saw were basically demographic and ecological; Malthus's iron law of wages and Ricardo's law of increasing differential rent (resulting from the increased competition of a growing population for a fixed amount of land that differs in quality) combined to bid up the premium paid for superior land (rent) and keep wages at subsistence. In their era there was not such an awareness of overall ecological limits as there is today, although that factor was not entirely absent from their theories. There was more emphasis on a distributive limit as all the surplus ended up in the unproductive hands of landlords-but that accumulation itself resulted from demographic pressure of the growing laboring class and the ecological fact of the differential fertility of land that gave rise to increasing rent on lands of better quality.

Unlike that of the classical economists, today's standard (neoclassical) economic theory begins with non physical parameters (technology, preferences, and distribution of income are all taken as givens) and inquires how the physical variables of quantities of goods produced and resources used must be adjusted to fit an equilibrium (or an equilibrium rate of growth) determined by those non physical parameters. The non physical, qualitative conditions are given and the physical, quantitative magnitudes must adjust. In neoclassical theory this "adjustment" almost always involves growth. Today's newly emerging paradigm (steady state, sustainable development), however, begins with physical parameters (a finite world, complex ecological interrelations, the laws of thermodynamics) and inquires how the non physical variables of technology, preferences, distribution, and lifestyles can be brought into feasible and just equilibrium with the complex biophysical system of which we are a part. The physical quantitative magnitudes are what is given, and the non physical qualitative patterns of life become variables. This emerging paradigm is more like classical than neoclassical economics in that adjustment is by qualitative development, not quantitative growth.

With the Industrial Revolution, the idea of a stationary state, and classical economics in general, was retired to history. Neoclassical economics, with its subjectivist theory of value, shifted attention away from resources and labor and onto utility, exchange, and efficiency. The subjectivist and marginalist revolution, with its marginal utility theory of value, was certainly an improvement in the understanding of prices and markets. But that gain came at the cost of pushing physical factors too far into the background. Classical considerations of the "real cost" dimension of value (labor and resources) were eclipsed. Today the classical ghost of the stationary state has returned to the ball, uninvited, in the costume of "sustainable development". Like John Stuart Mill, I welcome its presence. And, like Mill, I am in the minority among economists, most of whom resist the very idea, as will be seen in the discussions that follow.

If development means anything concretely it means a process by which the South becomes like the North in terms of consumption levels and patterns. But current Northern levels and patterns are not generalizable to the whole world, assuming anything remotely resembling even our best existing technology, without exceeding ecological carrying capacity, that is, without consuming natural capital and thereby diminishing the capacity of the earth to support life and wealth in the future. It is clear that we already consume natural capital and count it as current income in our national accounts. One need only try to imagine 1.2 billion Chinese with automobiles, refrigerators, washing machines, and so on, to get a picture of the ecological consequences of generalizing advanced Northern resource consumption levels across the globe. Add to that the ecological consequences from agriculture when the Chinese begin to eat higher on the food chain, more meat, less grain. Each pound of meat requires diversion of roughly ten pounds of grain from humans to livestock, with similarly increased pressure on grasslands and the conversion of forests to pasture.

Might such expansion destroy the ecological capacity of the earth to support life in the future? Perhaps, because such a "liquidation" can be "optimal" in the economists' models. The dominant model excludes ecological costs altogether, but even those models that recognize ecological costs, if they are based on present value maximization, also can lead to "optimal" liquidation. The higher the discount rate, the sooner the liquidation. This anomaly sometimes makes neoclassical economists uneasy, but not always. Their usual assumption is that additional man-made capital substitutes for liquidated natural resources. One place where reality is forcing reconsideration of these models is in the World Bank, probably the world's largest and most generous employer of economists.

Sustainable Development and the World Bank

Certainly the World Bank would be the proper institution to recognize the ecological contradictions in the world's economic development plans, and to call attention to the need for the North to stop growth in resource throughput in order to both reserve for the people of the South the remaining ecological space needed for growth to satisfy their vital needs and set a generalizable and replicable example of sustainable development. The World Bank's best opportunity to date for doing this was through its 1992 "World Development Report", entitled "Development and the Environment". I worked in the Environment Department of the World Bank during that time, and although I was not part of the team that wrote the report, I did have an opportunity to comment on various early drafts and to observe the whole effort from close range.

While the 1992 report made a number of contributions, especially in calling attention to the public health consequences of the environmental degradation of water and air, it nevertheless failed to address the biggest question. Environmental deterioration was held to be mainly a consequence of poverty, and the solution proposed was the same as the World Bank's solution to other economic problems, namely more growth. And this meant not only growth in the South, but also in the North, for how else could the South grow if it could not export to Northern markets and receive foreign investments from the North? And how could the North provide foreign investment and larger markets for the South if it in turn did not grow? While the World Bank's report acknowledged a few conflicts between growth and environment here and there, the world was seen to be full of "win-win" opportunities for both increasing growth as usual and improving the environment. The message was both a reaffirmation of the Bank's faith in economic growth and a denial of the existence of any fundamental ecological limits to that growth: problems reside mainly in the South, solutions are to be found mainly in the North. This formulation is politically convenient, at the very least, since the Bank is creditor to the South and debtor to the North. It is always easier to preach to your debtors than to your creditors.

The evolution of the manuscript of Development and the Environment is revealing. An early draft contained a diagram entitled "The Relationship Between the Economy and the Environment." It consisted of a square labeled "economy," with an arrow coming in labeled "inputs" and an arrow going out labeled "outputs", nothing more. I suggested that the picture failed to show the environment, and that it would be good to have a large box containing the one depicted, to represent the environment. Then the relation between the environment and the economy would be clear specifically, that the economy is a subsystem of the environment and depends upon the environment both as a source of raw material inputs and as a "sink" for waste outputs.

The next draft included the same diagram and text, but with an unlabeled box drawn around the economy like a picture frame. I commented that the larger box had to be labeled "environment" or else it was merely decorative, and that the text had to explain that the economy is related to the environment as a subsystem within the larger ecosystem and is dependent on it in the ways previously stated. The next draft omitted the diagram altogether.

By coincidence, a few months later the chief economist of the World Bank, Lawrence H. Summers, under whom the report was being written, happened to be on a conference panel at the Smithsonian Institution, discussing the book "Beyond the Limits" by (Donella H. Meadows et al.), which Summers considered worthless. In that book there was a diagram showing the relation of the economy to the ecosystem, a diagram exactly like the one I had suggested (see this diagram). During the question and answer time I asked the chief economist if, looking at that diagram, he felt that the question of the size of the economic subsystem relative to the total ecosystem was an important one, and whether he thought economists should be asking the question, What is the optimal scale of the macro economy relative to the environment? His reply was immediate and definite: "That's not the right way to look at it."

Reflecting on these two experiences has reinforced my belief that the main issue in the sustainable development controversy truly does revolve around what economist Joseph Schumpeter called "preanalytic vision". My preanalytic vision of the economy as subsystem leads immediately to the questions, How big is the subsystem relative to the total system? How big can it be without disrupting the functioning of the total system? How big should it be? What is its optimal scale beyond which further growth would be antieconomic, would cost more than it's worth? The World Bank's chief economist had no intention of being sucked into addressing these subversive questions, so he dismissed the viewpoint that gave rise to them.

Summers's dismissal was rather peremptory, but so, in a way, was my response to the diagram showing the economy receiving inputs from nowhere and exporting wastes to nowhere. That is not the right way to look at it, I felt, and any questions arising from that incomplete picture-say, how to make the economy grow as fast as possible by speeding up the flow of energy and materials through it, were not the right questions. Unless one has the preanalytic vision of the economy as subsystem, the whole idea of sustainable development, of a subsystem being sustained by a larger system whose limits and capacities it must respect, makes no sense whatsoever. On the other hand, a preanalytic vision of the economy as a box floating in infinite space allows people to speak of "sustainable growth" a clear oxymoron to those who see the economy as a subsystem. The difference between these two visions could not be more fundamental, more elementary, or more irreconcilable.

It is interesting that such a huge issue should be at stake in a simple picture. Once you draw the boundary of the environment around the economy, you have said that the economy cannot expand forever. You have said that John Stuart Mill was right, that populations of human bodies and accumulations of capital goods cannot grow forever, that at some point, quantitative growth must give way to qualitative development as the path of progress.

I believe we are at that point today. See diagram depicting this. But the World Bank cannot say that, at least not yet. It cannot acknowledge limits to growth because growth is seen as the solution to poverty. Historically there is a lot of truth in this view. If we now recognize that growth is physically limited, or even economically limited in that it is beginning to cost more than it is worth at the margin, then how will we lift poor people out of poverty? The answer is painfully simple: by population control, by redistribution of wealth and income, and by technical improvements in resource productivity. In sum, not by growth, but by development. However, in most circles population control and redistribution are considered politically impossible. Increasing resource productivity is considered a good idea until it conflicts with capital and labor productivity, until we realize that in the developed countries we have bought high productivity and high incomes for capital and labor, and thus a reduction in class conflict by using resources lavishly, in other words, by sacrificing resource productivity. Yet resources are the limiting factor in the long run, and therefore they are the very factor whose productivity economic logic says should be maximized. The temptation to denial becomes politically overwhelming.

When we draw that containing boundary of the environment around the economy we move from "empty-world" economics to "full-world" economics from a world where inputs to and outputs from the economy are unconstrained, to a world in which they are increasingly constrained by the depletion and pollution of a finite environment. Economic logic stays the same, economize on the limiting factor. But the perceived pattern of scarcity changes radically the identity of the limiting factor shifts from man-made capital to our remaining natural capital, from fishing boats to the populations of fish remaining in the sea, therefore policies must change radically. That is why there is such resistance to a simple picture. The fact that the picture is both so simple and so obviously realistic explains why it cannot be contemplated by the growth economists, why they must continue to insist, "That's not the right way to look at it!"

In the end, the World Bank's report Development and the Environment proved unable to face the most basic question: Is it better or worse for the South if the North continues to grow in its own resource use? The standard answer is that it is better because growth in the North increases markets for Southern exports, as well as funds for aid and investment by the North in the South. The alternative view is that Northern growth makes things worse by preempting the remaining resources and ecological space needed to support economic growth in the South up to a sufficient level, and that it also increases global income inequality and world political tensions. This view urges continued development in the North, but not growth. These two answers to the basic question cannot both be right. And the absence of that fundamental question from World Bank's policy research represents a failure of both nerve and intellect, as well as a continuing psychology of denial regarding limits to growth.

A small environmental resistance movement within the Bank tried to get the above question into Development and the Environment, not in any central way, because that was clearly impossible, but just as a half page box raising the issue for future reflection. We were not successful because the orthodox economists correctly realized that reflection on this question was much too dangerous to their whole enterprise. It was as if we were building a skyscraper and, having reached the twentieth floor, some of us were pointing out that the whole structure was out of plumb and that if we were to go up another twenty stories it would fall. Architects and investors hate redoing foundations. Orthodox economists have solved all the foundational problems of development theory, they believe, and they have made their professional reputations on the basis of those solutions. They now wish to focus on advanced, "cutting-edge" issues and build this leaning tower of Babel ever higher, making ad hoc corrections as we go. Forget that silly diagram, that's not the right way to look at it.

Having failed to fundamentally influence Development and the Environment, our environmental resistance group put together its own alternative statement, which we tried unsuccessfully to publish within the Bank and then published with UNESCO. Among our contributors were two Nobel Laureate economists (Jan Tinbergen and Trygvc Haavelmo), and the preface was an endorsement by the environment ministers of two of the Bank's major borrowing countries José Lutzenburger of Brazil, and Emil Salim of Indonesia). But the Bank could not possibly publish it because it was based on that simple but threatening diagram. I mention the two Nobel Laureate economists not to suggest that counting Nobelites on each side of an issue is the way to resolve it by that criterion the World Bank's position would easily win but just to show that not all economists are unwilling to rethink the assumptions of their discipline. The Norwegian version of the little book even had a nice foreword by Prime Minister Gro Harlem Brundtland, chairman of the famous Brundtland Commission, which had put the whole idea of sustainable development on the agenda. But the World Bank simply could not take it seriously.

Although the World Bank was on record as officially favoring sustainable development, the near vacuity of the phrase made this a meaningless affirmation. Attempts of the environmental resistance group to give the concept a clear definition were vigorously countered. The party line was that sustainable developmcnt was like pornography: we'll know it when we see it, but it's too difficult to define. Our simple definition development without growth beyond environmental carrying capacity, where development means qualitative improvement and growth means quantitative increase, just confirmed the orthodox economists' worst fears about the subversive nature of the idea, and reinforced their resolve to keep it vague.

One way to render any concept innocuous is to expand its meaning to include everything. By 1991 the phrase had acquired such cachet that everything had to be sustainable, and the relatively clear notion of environmental sustainability of the economic subsystem was buried under "helpful" extensions such as social sustainability, political sustainability, financial sustainability, cultural sustainability, and on and on. We expected any day to hear about "sustainable sustainability." Any definition that excludes nothing is a worthless definition. Yet if one objects to including culture in the definition of sustainable development one is accused of denying the importance of culture. Pretty soon sustainable development was being defined to include even the right to peaceable assembly. The right to peaceable assembly is a good thing, but it is not useful to include all good things in the definition of sustainable development. The term had acquired such vogue that everyone felt that their favorite cause had to be a part of the definition or else be implicitly condemned to oblivion, and this natural confusion was abetted by those in the Bank who wanted to keep the concept vague, to dull its sharp edges enough to keep it from cutting into business as usual, that is, pushing loans in the interest of export-led growth and global integration.

I should say in defense of the World Bank that its environmental standards are generally higher than those of most of its member countries. Only the Netherlands and the Scandinavian countries arc really in a position to tell the Bank to improve its environmental standards. The other thing that must be said in the Bank's defense is that it is like the church, trying to do good in the world according to what its clergy learned in seminary. But the "seminaries" are teaching bad theology. Bank economists, whether from Cameroon or California, all get their training in a handful of academic economics departments, and all learn basically the same economic theology. Frequent academic advisors to the Bank (its chief economist is also usually brought in from academia) keep renewing the flawed theology, reminding everyone, when necessary, that "that's not the right way to look at it." I have suggested to friends at Greenpeace that in addition to protesting Bank projects, they should at least once a year go hang a black shroud on the building that houses the MIT economics department (or that of Chicago, Stanford, Oxford, Cambridge, etc.).

Created on ... septembre 08, 2005 by Pierre Ratcliffe

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