Herman Daly on the Economy & the Environment

all right so to help us understand the rules of the game that we're talking about so what are the basic fundamentals of our global economic system and who are the principal actors and what are they trying to gain in yeah I think the most basic thing to understand about our global economic system is that it's a subsystem and it's a subsystem of a larger system the larger system is the biosphere and the subsystem is the economy and the subsystem is open that means that it takes in both matter and energy and it gives out both

matter and energy back to the larger system the larger system the biosphere is closed that is closed with respect to materials materials circle they recycle but it's open with respect to energy namely solar energy which comes in and then goes out and that powers all the cycle so that's that's the basic fundamental physical features of the system the problem of course is that our subsystem the economy is geared for growth it's all set up to grow to expand whereas the parent system doesn't grow it remains the same size so as we grow into as the

economy grows it displaces it encroaches upon the biosphere and this is a fundamental cost this is the fundamental opportunity cost of economic growth that's what you give up when you expand you you give up what used to be there and so we we lose ecosystem services as we expand the size of the economy and if we do that too much growth ends up costing us more than it's worth that is the lost ecosystem services are more valuable than the extra production that caused them to be lost and we haven't yet built that in to our

economic thinking we've assumed that we were just so small relative to the total system that it didn't matter but now it does matter and it's true in the past it really did but in in my lifetime the world population has tripled and the population of automobiles and houses and other things that make up the physical economy has grown by at least 12 fold let's say so the world is no longer empty oh the the principal actors the agents in this system of course if we just look at the the biosphere it's the natural world it's

other species it's biogeochemical cycles and all of these things that are happening within the the subsystem the economy its of course human beings and what's happening there is that we're we're growing and growth is what we're geared for and mainly I think we've now entered into a sort of phase where growth has become the almost an idle it's the it's the solution to all of our problems we have poverty what are we going to do where we're gonna grow we can't share because that's politically and morally difficult so we'll just make the pie bigger everybody

will get more and so we have unemployment so within the human economy we try to solve all of our problems by economic growth we solve unemployment by growth we saw poverty by growth or at least we think we do and we solve even the population problem because people think that if if the economy grows fast and people get richer they'll have fewer children and so forth well these these things are all presumed that economic growth is making us richer and it doesn't take a genius to figure out that most problems are easier to solve if

you're richer the difficulty is that beyond some point what we call economic growth increase in GNP will not make us richer that will in fact make us poorer because it will increase costs faster than it increases benefit and to go back and quote John Ruskin who said that well he coined a word which I think we need to reintroduce in Venus English language which is ill-health is the opposite of wealth and we accumulate ill when we generate Bad's faster than we generate Goods Bad's of course things like pollution depletion disruption of system of ecosystem services

all of this accumulates is built and this is a cost which heretofore we have not really counted in our measures of growth and so we need to start doing that and not see all the solution to all of our problems in growth I would say yes that this has practically become an idol of our age economic growth which is strange when you stop and think about it because and it's not a state of well-being that we're trying to maintain but just a continual increase perpetual growth and that's that's the idea as many have said that's

the ideology of the cancer cell it's not a good idea it's not something we can do in a world which is not growing so we what we really need is to shift our economic system from a growth economy to something which has been in economics called a steady-state economy or a stationary economy that idea goes back 150 years it goes back to John Stuart Mill who wrote very eloquently on the subject of the stationary state and it's a stationary state is not static people are born people died new things are invented there's new production in

their salsa to balance depreciation so the stock of capital remains constant and the population of people remain constant although quality they're always being renewed by birth and death production equal depreciation but the whole system is not growing it's not expanding further and further into the biosphere and incurring this cost of displacement of the very services that we depend on so the idea has been here for a long time a steady-state economy we just need to develop and get into that idea and work out the institution's required for it yeah externalities what in a way this

is a very big concept it started out as a little footnote kind of concept and exception externalities we're little nuisance items like you know if you your neighbor makes buys a new TV and plays it too loudly and that bothers you well the the cost of bothering you is not built into the price of the TV set that the neighbor had to pay he had to pay for all the wires and the electricity and so forth but but the cost of bothering you was not was not in there so it's a that's class then it's

an externality or an external cost or sometimes called a spillover effect well this little category as the economy grows into the biosphere we interfere with each other more and more and the spillover effects become greater and greater and so what gets left out of economic calculation becomes larger and larger relative to what is still internalized or included so this problem I mean it's to the point now where the very capacity of the earth to support life is considered an externality a spillover effect well something's very wrong with the structure of your basic theory if such

a vital issue has to be classed as a a spillover and ad hoc externality is high time then to revise the basic concepts so that those most important things will be internal and no longer just little footnote exceptions and I think the way to do that is to move towards the basic idea of a steady-state economy as opposed to a perpetual growth economy so how does so when the entire life support system is considered outside so theory what does that how does that impact the resources use how does that impact how we relate to to

or to life support system yes well it's it means that that it's left out and I can give you a little illustration of that when I was with the World Bank they were doing the World Development Report which was on the subject 1992 of environment of development and there was a diagram in the early drafts which said which was to be a picture of the relation of the economy to the environment and it was just as a rectangle and it was labeled economy and there was an arrow coming in from the left labeled input and

an Arab exiting from the right labeled output and that was supposed to be the relation of the economy to the ecosystem well we had a big discussion about that and I said well there's no the problem with that diagram is that there's no ecosystem there's only economy and inputs are coming from nowhere and outputs are going nowhere so draw a bigger circle around that little rectangle and say and label that ecosystem or biosphere then it will be clear that the inputs are coming from somewhere you're depleting something in order to get them and that the

outputs are exiting to somewhere they don't disappear you're polluting the system bite with the waste and then we can talk about the relation of the economy to the larger ecosystem in terms of depletion in terms of pollution in terms of the regeneration of resources by by recycling the the waste into reusable product we can talk about the entropic nature of this flow through the metabolism etc etc all kinds of interesting things well then the next comes back later on a new draft and there's a box big box drawn around the rectangle no label no change

in the text it's just a picture frame as I said the same thing all over again you know this is what we need cetera et cetera the third draft comes through no more diagram completely gave up on the attempt to draw a diagram of the relation of the economy to the ecosystem that really puzzled me at first but then I said well it's clear once you draw that picture it threatens you with questions to which you don't have a good answer it says the larger system of which we're a part is finite and non growing

we depend upon it we depend on ways that involve depletion and pollution etc etc how big should the sub system be relative to the total system it's a question we don't want to ask and so that's I think the reason too much depends on growth so when you draw a picture that says growth can't go on then that's threatening what has been our old way of managing resources I mean is it through car light cartels the oil cartel or I mean and I know I don't I don't know enough about this to maybe the structure

the question of the best but when we're trying to I what I'd like to understand I think what people need to know is how in our olds in this system we have do we regulate resource use is it just grab as fast as you can mm-hmm is it justice grass is the ability for a corporation to marshal resources to go dig stuff out of the ground or is there some form of international cooperation image we say like okay yeah I think the first thing to say about resources I think is that classical economics that has

Adam Smith and John Stuart Mill they they focused on fiscal resources it's very important then we went to neoclassical economics in which the idea of value became more subjective utility satisfaction of wants and so forth which is all-important but it shifted the emphasis off of physical resources and ever since it seems to me there's been a tendency in our economic thinking to downplay resources that's they're just stuff it's just stuff that's out there and what's really important is technology and technology manipulates and arranges all of this stuff and so you know they look at the

first law of thermodynamics could say we can't destroy matter energy and they say oh well it'll net there's no problem of resource shortage and so we just that that that seems to be what what I have that's completely at variance with the real world where we go to war over resources and and it's extremely important well what what is going on with resources resources are not produced and they're not consumed despite our common usage they are transformed we take from the ground and from the environment resources materials in a structured form which physicists refer to

as low entropy organized structured matter fossil fuels concentrated forms of energy we then further give structure to this by means of a production process making commodities which immediately satisfier wants then over time these commodities wear out or destroy and we end up then with high entropy waste materials and energy which is thrown back into the ecosystem so it's like a like an organism or like an animal the economy is like an animal with a digestive tract and the digestive tract has to be attached to the environment at both ends we have to take in and

we have to expel and the amount we bring in is equal to the amount we throw out except qualitatively it's very differently they're very different qualitatively the input is low entropy structured materials the output is high entropy so physicists urban Schrodinger years ago said ask the question what is life and he gave the answer of a physicist he says well life is is sucking low entropy from the environment that's what we do to stay alive the same is true for the economy that's the way we produce we suck low entry entropy from the environment we

expel high entropy and all of this is in the form of resources that's where we get what makes something a resource is that it has this quality of usefulness expressed and low entropy so we're turning useful stuff into useless stuff and we have to do that we can't produce we can't live without doing that so the question is to do it at a scale and a level at which the larger biosphere can absorb reconstitute and tolerate and that's the limit which we have not yet learned to incorporate into our into our economic thinking stand our

limit look what we can do yes the way to understand the limits that this is this is a difficult one because when when you say limit the natural tendency is to think of a brick wall it's something you just crash into and there's no question about where the limit is there's another notion of limit though which is more like a great big elastic band you run into it and it pushes back and you push forward into it and it pushes harder back on you and and I think those are the kinds of limits that are

represented by prices by higher prices so we we do run into these limits and we get physical feedback but it's seldom in the form of a brick wall now currently we're getting a lot of feedback from the from the climate which but then this again is not exactly a brick wall although maybe Hurricane Katrina was like a brick wall but we don't really know for sure what all of these costs are so there's a lot of discussion and an uncertainty that's why I like to to think of limits in terms of increasing costs and at

some point the cost becomes greater at the margin than the benefit that's the economic limit is when something costs you more than it's worth to do it and I think that's the limit we're running into it's not a brick wall we can we can go on paying a higher cost than things are worth for for quite a while and that's probably dangerous because we can get away with it for longer and longer and that's I think the way most limits are but that doesn't mean to say that there's not also such a thing as a

catastrophe limit you know a point at which the system simply breaks that may be the case too how does the pricing how can we get accurate pricing to reflect well there's I think there are two strategies to get the prices to better reflect the limits one is that prices have to include all external costs if we can internalize all the external costs in the prices by means of taxes that's a big help that helps a whole lot I don't think that's the whole story though I think the other way of doing it is to impose

quantitative limits on our activity limit the amount of petroleum extracted and burned per year then let prices race in that amount I think that's a safer way to do it but either either sort of strategy has its advantages and disadvantages but we haven't been willing to do either one so far so I think one way that I would like to see dealt with much more is something we call ecological tax reform that's the idea is we have to tax something we have to finance and pay for public goods we have to support the government so

we have to tax something but why tax income income is value-added people don't like to see the value they added taxed away and we want more value added really so it's not a good thing to tax why not tax that to which value is added namely the resource flow which is what is ultimately scarce in any sense so you want its price to go up so we'll be more efficient in using it so if we can shift the tax base away from value-added labour capital on to the resource flows severance taxes tax depletion tax pollution

and derive our revenue from that then we'll be will be increasing the the efficiency with which we use resources and at the same time easing up on taxing the the things that we really don't want to discourage one way in which this might be done this ecological tax reform you can do it gradually and step by step we might say let's let's have a carbon tax so that's going to raise the price of gasoline and people will pay more for their gasoline and they will therefore be more careful about trips and they will and about

their miles per gallon and so forth which is which is good at the same time we will we will substitute we will get rid of another tax so that the idea is to be revenue neutral not to tax more money from the public in total but to tax them differently so we will tax all expenditures on gasoline but then we will give back roughly the same amount of money by lowering taxes say on income what's our worst income tax our worst income tax let's say probably it's the payroll tax the most regressive okay we will

give back in the form of reduced payroll taxes the same amount of money that we collected in form and in say the best resource tax we could manage and we'll do that one year and then the next year we'll take the next best resource tax and the next worse income tax and substitute substitute those out and gradually move towards a different tax base which is much more congruent with a much more it gives much better incentives to people now I even though we're giving back the money to the public we're taxing in a different way

and they're still going to be political opposition to any change in the system of tack so there will be opposition from the resource industry the coal industry the petroleum industry to this sort of of change but it seems to me like like it's reasonable and we ought to be able to persuade people like a little bit on this because really no one likes the income tax either and you're in your it's a big political plus to give back some of the value-added than people produce let's talk about steady state economics and what that is yes

a steady state economics our economics of the stationary state so-called them the first expression of that I think was with the classical economists particularly John Stuart Mill 150 years ago nowadays there's been just to show the change in thinking Mill defined the stationary state as a constant stock of capital and a constant population nowadays you read neoclassical economists they will use the term steady state but they'll say steady state growth and what they mean by steady state growth is a constant ratio between the stock of capital and the population so that both are conceived to

be growing absolutely but the ratio between them stays the same and that's what they consider a steady state well I I think that's that Mills concept was much was much better and that that's what we need to move toward as the basic alternative to the perpetual growth economy there are many ways I guess in which we could talk about I mean ecological tax reform might be one way of holding steady the the consumption of resources you can get into the very difficult and controversial area of population limitation population control that's another ear side of it

but I think in a way we are undercutting now our possibility to even undertake those actions at a national level this is what bothers me most and when we talk about policies what's happening in the world now is globalization and I make a distinction between globalization and internationalization internationalization means that relations between countries become more and more important we step but the policy unit the unit of community is still the nation even though relations among nations are more and more important and have to be dealt with carefully globalization is so internationalization is a federated community

world community is a Federation of national and sub-national communities the other vision which we're moving towards globalization is an integrated view it's not a federation of independent national economies but it is an integrated global economy one single global economy not many interrelated national economies and that's what the WTO is pushing for and that's what the World Bank and the IMF for nowadays pushing through free capital mobility as well as free trade and increasingly easy or uncontrolled migration now when this happens boundaries become irrelevant for economic purposes mobilized economy is the key idea here is that

it's integrated and when you integrate something you make it one and I like to say that people actually I say the the global globally integrated economy is like an omelet and you take the national eggs and you crack them and you scramble them into a global integrated omelet everyone celebrates this global integration of the of the omelet but they don't count the cost of disintegrating the national eggs and that disintegration is severe many real costs and destruction of community and livelihood are being paid by ordinary people all over the world in order to foster this

vision of this globally integrated omelet now there are some benefits to it for sure but the idea of economics is always count the cost and I think the we've gone way too far in this direction integration to make that a little clearer I think integration is is very much like marriage and internationalism and trading it is like friendship the all nations need to be friends and have good relations but maintaining their separate identity to have to strive for multilateral marriage of all nations where they kind of merge into one and lose their individual identity is

probably a very bad idea I don't think we can handle that and that's exactly what happens if our borders become totally porous with respect to the free flow of commodities the free flow of capital and increasing the free flow of people in labor not to say we should be isolated by no means that internationalization recognizes the importance of increased relations among nations but you don't dissolve the integrity of the national unit in order to achieve that which is what we're currently doing now who benefits from this dissolution of the national unit well who is it

that's being controlled one of the sets of control is the large corporations the transnational corporations they escape from regulation by national governments they escape into this globalized economy which really has no rules and so they can play off one weak national government against another weak national government they can escape minimum wage laws they can escape environmental laws they can escape workplace safety laws they can minimize taxes and so this whole global economic system which is not so much a system as it is a free-for-all no-man's land without any rules and buy into that they can

get away from national regulation and I think it becomes individualism at a global scale rather than community and I emphasize this because community is a concept which does not fit well in neoclassical economics standard economics is very individualistic in the Homo economicus you know the basic unit is a pure individual well people aren't really like that people are members of communities they're persons and community and their very identity is constituted by relationships and community and if this if our community's national and sub-national are more or less written off in this individualistic quest for more and

more economic growth at a global level than I think we pay an enormous cost and that's what that undercuts the very capacity of policy at the national level I'm not let me give an example suppose in a globalised war we go to Kyoto and we all make agreements that we're going to cut co2 emissions the National the people who made the agreement go home to their well who's gonna who's going to carry out the policy to to limit those emissions its national governments that are going to do it and if the national governments can't control

their borders they can't control where capital goes they can't control what Goods come in and out then any limitations that they put on the actors in their economy to reduce co2 emissions can be evaded the national level becomes impotent than to deal with that problem well okay let's consider international trade is in spite of the name not trade between nations usually it's trade between private individuals who happen to reside in different national communities and the idea then is should those trades be take place solely for the interests of the individual or should they reflect the

interest of the national communities as well let's take another entity the corporation is is a collective entity individual if individuals in one corporation make private deals with individuals in another corporation for their own private personal benefit they'll probably be sent to jail they have to clear these route these agreements with the higher levels of the corporation to make sure that it's in the interest of the total community of the corporation so I think it's similar then with with the nation I'm not the the overall benefit has to be taken into account we have to worry

about the effects of employment the effects of on the distribution of income within a country not to put in another way in the United States and Western Europe there's been a kind of social contract between labor and capital and they said in effect we want the distribution of income to be more equal within our country than it is worldwide we don't we don't like that big of an inequality okay so that's the only way you can fulfill that social contract and is within the country where you made it now you suddenly say oh we're going

to integrate with the rest of the world economically well then you've totally lost your ability to keep that wage that distribution of income different from what it is in the world as a whole because you said we're going to integrate with the world as a whole if you integrate with the world as a whole you're in the world labor market you're in the world capital market you can no longer have standards which are different and that also leads to a kind of competitive standards lowering competition among firms when when they can escape national regulations in

this way what are the obstacles in the way I mean how how can we adopt this into our what's the path yeah the obstacles to a steady-state economy I think are are not really so much technical or you know economic and the technical sense I think they're they're almost religious in terms of our commitments and our basic idolatries for example we've already talked a little bit about ecological tax reform that's not all that radical and you know that could be done we're already doing another policy which is very much in the direction of a steady

state which is the cap-and-trade systems for individual pollutants you you just limit the total amount and emitted into an air shed and you decide who owns the right to emit and then you would allow trading of emission permits for efficiency and that that works pretty well so I think that that this would not it would not be so difficult to actually move the problem is we is when you've put so much emphasis on growth in the past and you said that the only way to solve poverty is by growing and making people making the total

pie bigger and bigger because we don't have the moral resources to to share then that gets that gets really into a to a religious picture and and then there's even underlying that that unwillingness to to share there's a kind of conviction that that nothing is impossible we are creators much more than creatures this is the the hubris of the technical the technological society we live in that fundamentally we are creators we're not really creatures we're we're in control that's that's the idea and science they look at technology and say see we've done this we've gone

to the moon we've done this we've done that look at all the things we can do nothing's impossible there's no limit what are you talking about limits people said this was impossible they said we couldn't fly now we fly etc etc etc well ok however it's sobering to think a little bit about that and remember that the reason technology is so successful is that it pays attention to the laws of science and the laws of science are practically all statements of impossibility the laws of science tell you basically what is not possible it is not

possible to create or destroy matter energy first law of thermodynamics it is not possible to have perpetual motion second law of thermodynamics it is not possible to go faster than the speed of light it is not possible for non living things to spontaneously generate into living things so all of the technology then precisely by not trying to do what it knows in advance is impossible it tends to be successful yes but that's certainly no reason for saying oh nothing is impossible things aren't possible and the most relevant one right now it's impossible for an economic

subsystem to continue growing forever in a finite non growing total system and that doesn't seem to be you know a that's a rather trivial truth but the fact that is trivial doesn't make it less true and it really ought to be taken much more seriously by economists you know your world back just what's interesting is what happen you believe before you watch the World Bank and what happens yeah yeah I by the time I went to the World Bank I was already this was 1988 I was already very much into environmental issues and I went

to the World Bank because I thought the World Bank was really going to take seriously environmental issues and conditioned its growth policies on environmental capacities and recognize costs and build amend and and I knew some people at the bank who I respected very highly and who are doing great work and so I thought it'd be a privilege to work for them and it was and the many of the people in the bank are extremely good and I've made excellent friends there and and liked it a lot but I just discovered over my six years there

that there was really that the in the conflict between environment and growth the bank was really ninety-nine point nine percent growth and environment was just window dressing that they were not serious I gave you the story about the diagram but that kind of encapsulated that economic economic growth is sort of the be all and so I I guess what I learned there was that there was a lot of an overwhelming commitment to economic growth which completely undercut the all the talk about environment and me the big idea of course was sustainable development we're going to

the bank was going to be committed to sustainable development well okay what did that mean the Brundtland Commission said it means well satisfying the needs of the present without sacrificing the needs of the future okay that's a good beginning but then when we tried to develop criteria for sustainable development they would there would always be resistance and the only way that you could get consensus around the concept was to keep making the concept more and more vague and finally it got so vague as to be meaningless and now the bank says sustainable development oh that's

just good development we're all we've always been in favor of that you know yes so it doesn't have any cutting power anymore no teeth to it and and I felt that the the bank was just totally caught up in the in the whole globalization ideology and I so I got out I'm grateful for my time there I learned a lot and certainly there's some excellent individuals working there but the institution itself it seems to me is has dropped the ball and as far as I can tell not likely to pick it up why do you

think these are the bigger questions now why do you think that we can we are running we just will destroying nature in the biosphere because we're not able to really internalize some of these recommendations why do you think we're doing that because we must know that we are and the second part of the question is if we are unable to you know pull the environment inside the system in theory what do you think is gonna happen what's your prognosis for okay well here I think we really do get two fundamental philosophical and religious attitudes if

I think if you conceive of the biosphere and the earth as a creation as a system then that supports your life and that's a kind of gift then there's a response of stewardship and care and so forth if you conceive of it as something which simply happened an accident highly improbable cosmic accident over gazillions of years and nothing it reflects nothing in the way of purpose our teleology it's just there then it's rather hard to think of to build up any ground to stand on for saving it or caring or it hard to put it

another way this is my biologist friends all of whom I love dearly nevertheless I think they've got some blinders just like economists do and they say they on Monday Wednesdays and Fridays they teach sophomores that all the evolutionary process is purely random there's no such thing as purpose of any kind and what purposes are felt or illusory and so on and so on and then on Tuesdays Thursdays and Saturdays they run down and testify before Congress and get all emotional about this or that little species being driven to extinction well who cares I mean you

know if it's all accident anyway and it's all evolving and it's going to change in any case why do I get all upset about you know a little something going to say to extinction so I think their fundamental issues here that we have not really grappled with and and they're not easy but I think the that the the increased secularization of society and the idea that everything is reducible to material physical terms makes it very difficult to undertake any policy based on values and where the value is going to comfort well they're not going to

come from accidental random variations that doesn't produce values it's that maybe real and maybe an important part of the way the world works but there's another part of the world that that doesn't explain and that other part of the world which that doesn't explain value insight religious conviction these are things which I think are at the base of the ability of the necessity to to save the environment to care for creation now I will admit there's a whole lot of religious thought that cuts in the other way a lot of religious thought says oh the

world's just a temporary platform for human beings to act on and it's gonna be destroyed anyway so you know let it go so it can cut that way too but I think the issue the level at which these things have to be discussed is it is a fundamental religious issue we short-circuited that we said we're not going to deal with all that that's just a bunch of you know vague talk we need to be scientific objective etc etc but if your scientific objective at cetera et cetera you you cut out the ground for ultimately for

moral value you've just got matter in motion and that won't get you I think to the to the fundamental issues so that's not an easy answer and as for my prognosis for the future I think it kind of depends on our ability to to reengage that kind of conversation at a deep philosophical level I I tend to be I think one has a duty again a religious duty to be hopeful sin despair is a sin so a religious duty to persevere and be hopeful in this matter but it would be foolish to be optimistic I

mean the objective conditions are such that I mean optimism is quite silly and unless we have a kind of religious grounding for hope then I think we're going to just fall into this easy optimism which is shallow and and is going to fall apart that's my thought say I want to do a time capsule question we're just doing just a message to future generations it's short or complementing all of these together just what would you like to say that people 100 years from now well I hope you're this still there and if you are I

hope that you're creating world community and that you're doing it and at a federated internationalist cooperative way rather than a globalist integrated one-world single system kind of way maybe we'll eventually get to the latter but I don't think in a hundred years you would have made it so I hope you're still here good luck