Monday, September 1, 2008


Now, macroeconomics is not my expertise, so this one is really for the rest of you to handle. But it is in reference to some macroeconomic literature pertaining to ecological economics written by Herman E. Daly all the way back in a 2005 issue of Scientific American. Here are the quotes of interest...

But the facts are plain and uncontestable: the biosphere is finite, nongrowing, closed (except for the constant input of solar energy), and constrained by the laws of thermodynamics. Any subsystem, such as the economy, must at some point cease growing and adapt itself to a dynamic equilibrium, something like a steady state.

The article referenced John Stuart Mill's theories concerning a stationary state, and I'm hoping someone can enlighten me regarding those thoughts. A bit further is what I consider Daly's most quotable quote...

Because establishing and maintaining a sustainable economy entails an enormous change of mind and heart by economists, politicians and voters, one might well be tempted to declare such a project would be impossible. By the alternative to a sustainable economy, an ever growing economy, is biophysically impossible. In choosing between tackling a political impossibility and a biophysical impossibility, I would judge the latter the more impossible and take my chances with the former.

I think Daly may be setting up a false dichotomy, as his separation of growth and development makes his argument unnecessarily argumentative. Wealth as sought by economic growth should be achievable through economic development, since the throughput won't inevitably remain entropy-neutral. Still, this has it's own assumption: Can production add value to total capital without depleting natural resources?

Illustration Credited to Matt Collins from the article discussed.


Pete Abbate said...

As far as JS Mill goes, I unfortunately have not read any of his thoughts on a stationary state, so I'll leave that for someone who knows what he or she is talking about.

You are correct, though, in thinking that Daly's dichotomy is a false one. If we look at history, we see that gasoline was originally thought of as a waste by-product of cracking kerosene. It was too combustible to be useful in the middle of the 19th century. However, it has now become an incredibly valuable commodity. When a resource is inexpensive enough, people will find ways to do something useful with it.

When you think about the nature of trade, trade itself is a process of adding value to goods, often without using any natural resources. If I have a box of cereal and you have a gallon of milk, and I trade you a bowl of dry cereal and receive in return a glass of milk, I have increased the value of my cereal and you have increased the value of your milk. Now we can both enjoy a delicious breakfast, something neither of us could have done before trade.

I will gave Daly this, though - if the choice is ever between politics and biophysics, I'd prefer to fight battles with politicians rather than Mother Nature.

Tim Moreland said...

My interpretation of JS Mill's stationary state is that there exists a desirable population level. Society finds this level, a point at which the benefit of a new person does not outweigh the lost opportunity to the rest of society by adding a new person, and uses restraint (aka birth control) to keep the population at this desired level. Hence, there would be a fixed labor supply that need not grow. Since the point of a society according to Mill is to maximize happiness (not necessarily income), it would be in the society’s best interest to stop economic growth, though not necessarily "development" via technology, at this optimal population, with optimal amounts of opportunity. This may not be 100% true to what Mill was trying to get across but this is the gist of the stationary state.

To get back to Daly, I think he is trying to tightly define his argument to the point he cannot lose. Yes, if one defines "economic growth" as necessarily using more natural resources, while "economic development" as increasing well-being via technology or redistribution, then obviously growth will be environmentally unsustainable. However, if one recognizes that a policy promoting economic growth, defined as increasing GDP, can in fact use fewer natural resources, then Daly's argument takes a hit. As Pete mentioned, trade is an example of adding value to goods without using extra natural resources.

In practical terms, I think the policy Daly seems to be advocating is irresponsible. His logic leads one down the path of recognizing that some day in the future natural resources will be depleted, therefore we should stop the “growth” of economies through cutting back on natural resource use. The problem is that the United States’ GDP is not going to maintain itself at a stable equilibrium if the state tries to enforce environmental regulations, alternative fuels, gasoline taxes, carbon emissions limits, etc without a huge cost, or “tax,” on the current population. When the new set of natural resources (i.e. H20 as fuel for cars, or wind power) becomes useful, it will be seen as plentiful. Then, economic growth will again take place. The citizens of the 22nd century will be able to reap the benefits of the earth-saving technology thanks to the large tax on people of the early 21st century. However, the citizens of the 22nd century would have been wealthier anyways. So Daly is in fact advocating taxing the poor (21st century citizens) to benefit the rich (22nd century citizens).

Yes, natural resources may someday become scarce, but the market has mechanisms to naturally take care of this. As the supply of oil, for example, goes down, its price will skyrocket. This high price will induce entrepreneurs to invent alternative fuels in order to capture profit by undercutting oil. As well, existing fuels such as corn-based ethanol will become relatively cheap in comparison to oil and make it cost-effective to move away from oil and towards ethanol. Sorry Mr. Daly but the government does not need to fight Mother Nature; the market will find the solution, create wealth, and protect the environment all on its own.

Zachary Piso said...

I want to attack a few of your premises and see how you respond. I have found three points that I consider flaws, but you may be able to sway me...

One: Tragedy of the Commons. In the example provided, the marginal gain of production is outweighed by the marginal cost. Daly describes the phenomenon as free market forces (specifically, the possibility of personal profit) driving production at the expense of the environment to such a degree that the costs (to society) outweigh the benefits (to society). Their may be gains to the individual or firm making the trade (similar to how inflation helps those who first receive the increase in pay), hence it is economically sensible for them to make that decision. Generally, situations that resemble a "tragedy of the commons" cannot be approached by libertarian insistence on capitalism. Privatization works in classic examples of public rangeland (arguably), but not in more ecologically relevant issues of water pollution, air pollution, or carbon emissions. That is unless you think we can privatize the atmosphere...

Two: Prioritarianism. I like the point that taxing the public now is irrationally "taxing the poor to help the rich" but believe it is ignorantly optimistic. If the above scenario is happening, then the total sum of capital is decreasing. Historically each generation has been better off because the conversion of natural resources to manmade capital resulted in a gain of wealth. This would not be the case if the marginal cost of the process outweighed the benefit. Since nonrenewable resources must at some point cost more to use than their benefit, a point comes when the exchange of natural capital for manmade capital is irrational. Essentially future generations will be worse off because we will have traded ecosystem services for less valuable manmade capital, constituting a net loss. I believe you can argue that this point has not happened, but I don't think you did. I think you instead argued "It hasn't happened, so it isn't about to". Please check out Hume's problem of induction if you need a painfully thorough explanation on why that won't work.

Three: Mixed Economy. So at this point I hope I have shown that A) Sometimes personal incentives can drive decisions at the expense of the general public, and B) That, provided this is happening, prioritarian models of diminishing future utility are misguided in assuming future generations of blessed with more capital. The question is now "Have we reached the point that the social cost of 'environmental decision X' outweighs the social gain?". I would contend yes, and hope to appeal to your libertarian instincts as follows: With regard to an industry you mentioned, prices have been irresponsible low. Due to the externalization of healthcare (pollution resulting in higher insurance premiums due to alarmingly high rates of respiratory illness) and environmental programs designed to compensate for the effects of air pollution (rain acidification, as well as decreased visibility and lower crop yield all hamper productivity), petroleum is artificially cheap. Let's not even mention the fact that it is heavily subsidized as well as given tax breaks, and you should recognize that market forces haven't had their way. Conservative estimates site gasoline as priced only half of what it should, while some estimates site a "real cost" per gallon of over twenty dollars. Alternative energy is also bought up by the petroleum companies to decrease competition. So the use of these resources has not been allowed to run its natural course, and consumption has been artificially--and irresponsibly, and, I would maintain, dangerously--high. Given that this has been the case for most natural resources since the Industrial Revolution, what makes you so sure that we have not exceeded optimal economic growth?

Tim Moreland said...

All valid points, but I will try to respond to your concerns.

1.) Privatize land and enact pollution taxes. Can we privatize the atmosphere (i.e. water, air, carbon emissions)? First, the government has proven time and time again inferior to the private market in caring for its own land. Therefore, one of the necessary steps in avoiding further environmental damage would be to shift as much land away from federal control to private control. Second, yes it would be possible to devise a market-oriented solution to pollution, via a pollution tax. If one found that the cost of pollution from industries were indeed a significant cost to the environment, then a pollution tax could be levied on them. This would encourage industries to develop “greener” technology in an effort to produce the most, while polluting the least. In the short run, pollution would fall as well strictly from the increased cost of polluting. This measure alone, in place of most all other environmental regulations, would “cure” the problem of pollution.

2.) Well, then I shall argue that this point has not happened. Food production has outpaced population growth, while using less land and increasing forest land. This change has been driven by technological improvements in efficiency. Fisheries are in no danger of being depleted, but privatizing fishing rights would help slow the process even more. Studies show that increased economic growth actually leads to cleaner air after a certain point of wealth. Almost all mineral and oil prices have fallen over the past 130 years, suggesting more, not less, supply. Proven reserves of petroleum were 40% greater in 2002 than in 1974. One study suggests that there remains over 1000 years left of recoverable oil and unconventional fossil fuels. It does not seem as hurting our economy now merits averting a crisis in the next millennium. It would not behoove the government to determine what natural resources will be used in the future. Some natural resources, such as tornadoes for example, have not been found to benefit humans; therefore, they cannot be defined as a natural resource. Yet, someday they could be and would thus become a natural resource. As well, petroleum was not important 200 years ago, but now is an essential part of life. On the other end, technology could be devised to replace coal, rendering it useless in the future. If indeed oil was depleting, it does not mean that oil will be the vital resource of our great-grandchildren. It would not make economic sense to deprive today’s society of the benefits of oil without having a crystal ball on hand to know what will be important hundreds of years from now.

3.) Let the market determine price. In regards to natural resource prices, I am obviously in favor of doing whatever it takes to make sure oil (or any other product) is appropriately priced by world supply and demand, without the influence of tax breaks, subsidies, price controls, etc. With that being said, I fall back on the fact that it does not seem that we have in fact reached the point of optimal economic growth.

As a study by the CATO institute concluded, “Society has managed to “sustain” development now for approximately 3,000 years without the guidance of “green” state planners. The result is not only a society that is both healthier and wealthier than any other in history but also a society with more natural resources at its disposal than ever before.

Zachary Piso said...

I'm pressed for time, but I have a few quick notes of interest...

One: Privatization works when the effects to the property only affect the individual owning that property. It does not work in a "real" ecosystem. Water transports excess nutrients. The classic example would be the dead zone the size of New Jersey at the mouth of the Mississippi, caused by the eutrophication spurred by fertilizers throughout the Mississippi Basin (yes, from the Rockies to the Appalachians). I've spoken to farmers who think they are protecting their land from such effects only to find destroyed streams only a hundred feet downstream from their property. With major issues, privatization does not work. A consumption tax would be viable, as long as you recognize it would be enforcing market forces rather than intervening.

Two: Fish populations are depleting in many key species, from the cod populations off Maine to orange roughie species off New Zealand. Furthermore, your "crystal ball" argument is irresponsible. If the evidence points to, say, future climate catastrophe, the fact that such result is impossible to prove does not mean we should fear it less. Tyler Cowen had a nice quote "The fact that we aren't sure what exactly will happen should make us worry more, not less".

Three: If you concede that social costs should be internalized (and this would require a tax since the individual firm would not experience the full cost, or even a fraction of it) then we agree here. If you think that our current system does represent a market, then you are ignoring the tragedy of the commons that must be accounted for if market forces can accurately guide supply and demand.

And 3000 years of sustainability? FDR had a great quote... "You can trace the fall of every great civilization back to how it treated its soil". So if this is Rome, and we are doing what the Romans did, we will end like the Romans did.

Tim Moreland said...

I’ll quickly respond to your three points.

1.) I agree that privatization won’t solve the problems of pollution on the ecosystem outside of the private property, but it is a better way to care for the environment than when government owns the land. I believe we can generally agree on that point. As well, I will agree with you that a certain type of tax on pollution (i.e. carbon emissions) would be the most market-friendly way to deal with pollution in the ecosystem en masse.

2.) I will agree with you that certain fish species and subspecies are being depleted. The cause of this comes back to “The Tragedy of the Commons” and subsidies to fisherman for catching certain fish. As mentioned, increasing the privatization of fishing rights will most effectively take care of the depletion of fish species. In response to the “climate catastrophe” point, I believe the evidence in terms of a steady-state economy points to not having reached that point. Could it be possible that we will someday run out of oil? Yes, but the evidence points to at least 1000 more years of having sufficient fuel, so why worry now?

3.) I don’t believe that the current system constitutes a free market. The U.S. government should work to bring the oil market closer to a free market. As well, I will concede that a legitimate case can be made for a pollution tax of some sort.

There are far too many explanations for why Rome collapsed. The U.S. should be more worried about allowing government spending to balloon to 40% of GDP at our current entitlement program growth or engaging in imperialistic missions like Iraq, among other things.

Zachary Piso said...

Good, I'm glad you and I have mostly resolved our dispute, though I'd like to hear a few more voices at least from the other "authors" of the site. You are still missing the main point of my second argument though, and I think it is crucial.

The threat of using too much oil is not that we will run out of oil. I have some very close friends who are geology majors, and some that are geology majors that have grown up with oilmen as fathers, and they constantly remind me that the resources are there (and that, given current technology, we have reached peak oil). The threat is that the use of oil depletes an different resource - a healthy climate. Oil may be available for another century, but 5 of 9 models predicting future climate patterns require an 80% reduction in our current consumption of fossil fuels (there are really 11, but 2 say we are doomed anyway, so we might as well not worry about those).

So let's say we need to internalize the cost of carbon emissions, in a way that promotes responsible consumption through market dynamics. How do we decide just what that cost is? It is the topic of the other post on this site, and I'm glad we got straight to it.

Pete Abbate said...

I'll throw in something else, since you seemed to have resolved your first thread. Here's a thought that popped into my head for no reason at all today: In Ocean's 13, when they get Shaobo Qin to play the fake businessman, they suggest that he owns most of the air in China. Maybe it's just nonsense, but do you think there's a way zoning laws/building codes could be used to sell the air, more or less? There seems to be a consensus that privatization is the best way to protect the environment; can zoning codes be used at all as a way to privatize the air?

Zachary Piso said...

The way it was depicted, no (but I thought of that also, so now I'm a bit less embarrassed). I think the policy equivalent of doing that would be a cap and trade system. That way you own a certain amount of pollution, which should correspond to the amount of atmosphere in which that pollution would be environmentally sustainable.

Zachary Piso said...

I also want to note that, in what I consider the pressing issue in Environmental Science, carbon emissions does not accord to the Kuznet's Curve as suggested by Tim. Most emissions, such as sulfur oxides or heavy metals, begin to decline in a post-industrial economy like the one's brandished in "first world" countries.

It is a well established phenomenon that carbon emissions continue to climb even after other pollutants peak in the Kuznet's Curve. Hence, putting faith in precedent (subject to the problem of induction) especially betrays global climate change.

Tim Moreland said...

That is true, carbon emissions have not followed the Kuznets curve. Although, one could argue that we just have not reached the income level at which these emissions start to decline. Putting that possibility aside, the nature of carbon emissions is different than other pollutants causing them to fall victim to the Tragedy of the Commons. Yet, an appropriate carbon tax could fix this problem (and be much more desirable than a cap-and-trade system). As economist Greg Mankiw asserts, Cap-and-trade = Carbon tax + Corporate welfare.