The Macroeconomics of a Steady State

The Macroeconomics of a Steady State Surprisingly little has been said by economists about the macroeconomics of modern environmental problems. Although such problems are seen by most economists as fundamentally microeconomic, there are dissenters. Herman Daly's (1991a; 1991b) formulation of a steady state economy is in response to what he sees as a macroeconomic environmental problem of crisis proportions. The essence of his view is that the scale of the global macroeconomy is dangerously out of sync with the scale of the global environment. While he argues that scale is the essential macroeconomic problem (Daly, 1991b), neither he nor others have explored in detail the macroeconomic consequences of a steady state. How does the fundamentally cyclical character of macroeconomic activity square with the notion of a steady state? What are the consequences of a steady state for macroeconomic policy? Is a steady state even consistent with a growth prone economy based on capitalist forms of business organization? The goal of this paper is to begin the task of addressing these and other issues related to the macroeconomics of a steady state. The Concept of a Steady State Since others, Daly (1991a) in particular, have argued eloquently for the ultimate necessity of a steady state economy, only limited attention will be given here to its justification.(1) The fundamental premise of a steady state economy is that the first and second laws of thermodynamics dictate an absolute scarcity of natural resources. Energy and matter can neither be created nor destroyed, and the quality of energy and matter deteriorate with use (Georgescu-Roegen, 1973; 1977; Daly, 1991a, pp. 14-16, 18-27; 1990). While capital and labor are ready substitutes for one another, their substitutability for resource flows is more limited (Georgescu-Roegen, 1984). As Daly (1991b, pp. 204-5) puts it, the task of the capital and labor stock is to transform a flow of energy and matter from nature into finished goods, and because the role of the transformer and transformed are so fundamentally different, one cannot be easily substituted for the other. Although improvements in the efficiency of energy and materials use and recycling are possibilities, energy and materials inputs cannot be assymtotically driven toward zero by substitution with labor and capital as implied by neoclassical production theory. Scarcity of energy and matter is not just a relative one solvable through substitution; it is absolute (Daly, 1985). Moreover, because solar energy and matter are fixed in terms of maximum availability at a global level, ecosystems on a global scale are limited in their capacity for biological production and nutrient recycling (Daly, 1990). Ecosystems thus have a limited capacity to provide a variety of important services to human societies -- including materials and energy supplies, waste absorption and recycling, water supply through the hydrological cycle, crop pollination, production of soils, local and global climatic stability and atmospheric gas balances, biological diversity, and opportunities for a variety of human experiences in a biologically diverse natural world (Ehrlich, 1989). To generalize, the economy is an open subsystem contained within and dependent upon a closed global ecosystem fixed in scale (Daly, 1992, pp. 186-87). Continuous global economic growth as presently constituted is on a collision course with absolute scarcity. Given that economic growth requires increasing flows of energy, materials, and ecosystem services, at some point in time upper limits on these flows will be reached. Moreover, given the propensity of economic agents to ignore the social costs of irreversible ecosystem destruction, as economic growth proceeds the capacity of ecosystems to provide services diminishes, and given the limits to recycling imposed by entropy, the capacity of the global environment to supply continuous flows of nonrenewable materials also diminishes. …