Herman Daly: Steady State Economics

Biography

Born in 1938, Herman Daly is one of the pioneers of environmental economics. His book “Steady State Economics” was released in 1977. He taught economics at Louisiana State University for twenty years. In 1988 he became Senior Economist in the Environment Department of the World Bank where he developed its policies in relation to sustainable development before leaving to take up his current post as a Professor in the School of Public Policy at the University of Maryland. He is a recipient of the Honorary Right Livelihood Award (Sweden's alternative to the Nobel Prize), the Heineken Prize for Environmental Science from the Royal Netherlands Academy of Arts and Sciences and the Norwegian Sophie Prize.

Contribution

Daly’s basic maxim is that, as the economy approaches the scale of the whole Earth, it must observe the physical limitations that the Earth places on it. This would create a steady state economy, a concept that can be traced back to the classical economics of Adam Smith and John Stuart Mill.

“The global economy is now so large that society can no longer safely pretend it operates within a limitless ecosystem. Developing an economy that can be sustained within the finite biosphere requires new ways of thinking.”

Daly argues that the current economic system only worked at a time when, say, the amount of fish you could catch was determined by the number of boats you have, whereas today the limiting factor is the number of fish in the sea.

He developed the idea of “uneconomic growth” – the point at which the negative impacts of each unit of growth outweigh the benefits of that growth. Further beyond this point comes the futility limit where increased growth is not adding any benefit whatsoever.

"There is something fundamentally wrong with treating the earth as if it were a business in liquidation."

The current economy, according to Daly, resembles an aeroplane in that to stay airborne it must move forwards. This analogy sums up the current paradox in the world economy. We have been unable to decouple economic growth from resource use and/or environmental damage. Past a point of sufficiency (roughly a GDP of $7,500 per person), there appears to be little or no increase in quality of life as the economy grows. So we destroy the planet just to maintain quality of life. On the other hand, if an economy starts shrinking, as we have seen in post-Soviet Russia and a number of failed economies, quality of life falls rapidly.

The challenge is to redesign the economy to be more like a helicopter – able to stay aloft without having to move. Daly suggests this state would resemble the Earth itself, constantly changing and evolving, but with a stable overall size. In this model, the production side of the economy would be designed to maintain the goods and services we require rather than drive the economy itself. Durable goods would be leased rather than sold, shifting towards a service economy.

Daly’s time at the World Bank appears to have been frustrating for him. At his leaving address, he asked the Bank to adopt four policies, presumably having failed to get them adopted during his tenure. The four were:

1. Stop counting the consumption of natural capital as income.

2. Tax energy and material extraction, not income.

3. Maximise the productivity of natural capital and invest in increasing it.

4. Move away from globalisation and towards national production for internal markets.

Afterwards, Daly is quoted as saying the audience reacted to his speech “much better than I had hoped”. He was optimistic that the first two points could be adopted and possibly the third, but that the last would be “a real battle”.

Unfortunately, Daly’s words seem to have largely fallen on deaf ears. For example, one of the four elements of the UK Government’s definition of sustainable development is “maintenance of high and stable levels of economic growth [and employment]”. When the UK Government’s own Sustainable Development Commission produced a report in 2009 on steady state economics entitled “Prosperity Without Growth?”, the Treasury’s response, according to the Commission’s outgoing chairman Jonathon Porritt, was “a weird mixture of hostility and indifference”.

Donnella Meadows described Daly as “depending on your point of view, either the most dangerous economist in the world, or the most visionary”, but a more pessimistic verdict might be “the most ignored”. The world nods as if to say “you’ve got something there” and then goes back to business as usual.