Steady State Economy - History of The Concept

History of The Concept

For centuries, economists have considered a transition from a growing economy to a stable one, from classical economists like Adam Smith down to present-day ecological economists. 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.

John Stuart Mill, a pioneer of economics and one of the most gifted philosophers and scholars of the 19th century, 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."

John Maynard Keynes, one of the most influential economists of the twentieth century, 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.

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.

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. His way of correcting that to allow 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 bible story of Elijah coming to stay with an old widow and making her cup of oil inexhaustible.

The Cambridge intellectuals trying to understand Keynes' Treatise on Money misunderstood and called it "the fallacy" instead. Though Keynes described it more clearly in The General Theory 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 and later by P.F. Henshaw as a general principle of systems ecology. That it 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.

Nicholas Georgescu-Roegen recognized the connection between physical laws and economic activity and wrote about it in 1971 in The Entropy Law and the Economic Process. 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 high-entropy 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 The Entropy Law and the Economic Process, 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. 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."

Herman Daly, a student of Georgescu-Roegen, built upon his mentor's work and combined limits-to-growth arguments, theories of welfare economics, ecological principles, and the philosophy of sustainable development into a model he called steady state economics. He later joined forces with Robert Costanza, AnnMari Jansson, Joan Martinez-Alier, and others to develop the field of ecological economics. In 1990, these prominent professors established the International Society of 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 steady state 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.