Steady state economy
A steady state economy is an economy of relatively stable size. A zero growth economy features stable population and stable consumption that remain at or below carrying capacity. The term typically refers to a national economy, but it can also be applied to the economic system of a city, a region, or the entire planet. Note that Robert Solow and Trevor Swan applied the term steady state a bit differently in their economic growth model. Their steady state occurs when investment equals depreciation, and the economy reaches equilibrium, which may occur during a period of growth.
The steady state economy is an entirely physical concept. Any non-physical components of an economy (e.g., knowledge) can grow indefinitely. But the physical components (e.g. supplies of natural resources, human populations, and stocks of human-built capital) are constrained and endogenously given. An economy could reach a steady state after a period of growth or after a period of downsizing or degrowth. The objective is to establish it at a sustainable scale that does not exceed ecological limits.
Economists use gross domestic product or GDP to measure the size of an economy in dollars or some other monetary unit. Real GDP – that is, GDP adjusted for inflation – in a steady state economy remains reasonably stable, neither growing nor contracting from year to year. Herman Daly, one of the founders of the field of ecological economics and a critic of neoclassical economics, defines a steady state economy as
...an economy with constant stocks of people and artifacts, maintained at some desired, sufficient levels by low rates of maintenance "throughput", that is, by the lowest feasible flows of matter and energy from the first stage of production to the last stage of consumption."
A steady state economy, therefore, aims for stable or mildly fluctuating levels in population and consumption of energy and materials. Birth rates equal death rates, and saving/investment equals depreciation.
Limits to economic growth
Development of steady state economics (sometimes also called full-world economics) is a response to the observation that economic growth has limits. Macroeconomic policies in most countries, particularly those with large economies as measured on a GDP scale, typically have been officially structured for economic growth for decades. Given the costs associated with such policies (e.g., global climate disruption, widespread habitat loss and species extinctions, consumption of natural resources, pollution, urban congestion, intensifying competition for remaining resources, and increasing disparity between the wealthy and the poor), some economists, scientists, and philosophers have questioned the biophysical limits to growth, and the desirability of continuous growth.
Economic growth in terms of a modern state economy is an increase in the production and consumption of goods and services. It is facilitated by increasing population, increasing per capita consumption, and productivity gains, and it is indicated by rising real GDP. For millennia most economies, in the current sense of the term, remained relatively stable in size, or they exhibited such modest growth that it was difficult to detect. Proponents of steady state economics note that the general transition from hunter-gatherer societies to agricultural societies resulted in population expansion and technological progress. From this they stress that the industrial revolution and the ability to extract and use dense energy resources resulted in unprecedented exponential growth in human populations and consumption.
Doubts about the long run prospects for continuous growth in the industrial age are commonly described as beginning around the publishing of An Essay on the Principle of Population in 1798 by Thomas Robert Malthus. Although many of Malthus's empirical claims and theoretical assumptions have since been discredited, his broader concerns have remained influential, from eugenics to more mainstream views. The modern debate on the limits to growth was kicked off in 1972 by The Limits to Growth, a book produced by the Club of Rome. The Club of Rome developed computer models and explored scenarios of continuing economic growth and environmental impacts. Their original analysis and several follow-ups specified planetary limits to growth.
Additional studies and analytical tools corroborate much of the Club of Rome's work. For example, the ecological footprint is a measure of how much land and water area a human population requires to produce the resource it consumes and to absorb its wastes, using prevailing technology. The Global Footprint Network calculates the world's ecological footprint to be the equivalent of 1.5 planets (as of 2014), meaning that human economies are consuming 50% more resources than the Earth can regenerate each year. In other words, it takes one year and six months to regenerate what we consume in a year. This sort of ecological accounting suggests that economic growth is depleting resources at a rate that cannot be maintained.
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.
...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.
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 for 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.
Policies for the transition
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Achieving a steady state economy requires adherence to four basic rules or system principles:
- Maintain the health of ecosystems and the life-support services they provide.
- Extract renewable resources like fish and timber at a rate no faster than they can be regenerated.
- Consume non-renewable resources like fossil fuels and minerals at a rate no faster than they can be replaced by the discovery of renewable substitutes.
- Deposit wastes in the environment at a rate no faster than they can be safely assimilated.
Policies for sticking to these rules are varied. The first rule requires conservation of enough land and water such that healthy ecosystems can flourish and evolve. The second and third rules call for principled regulation of resource extraction rates. Direct forms of regulation include cap and trade systems, extraction quotas, and severance taxes. The fourth rule requires pollution restrictions, such as emissions limits or toxicity standards. In addition to rules aimed at specific extraction and pollution activities, there are general macroeconomic policies and potential management actions that can help stabilize growth and limit throughput to sustainable levels. These types of policies and actions include managing interest rates and the money supply for stability, addition of environmental and social costs to prices, increased flexibility in working hours, and alteration of bank lending practices.
Critics of the idea of limits to growth present two main arguments:
- Technological progress and gains in efficiency can overcome the limits to growth
- The economy can be de-materialized so that it grows without using more and more resources.
These can be called the technological optimist and decoupling arguments respectively.
Decoupling means achieving higher levels of economic output with lower levels of material and energy input. Proponents of decoupling cite transition to an information economy as proof of decoupling. Evidence shows that economies have achieved some success at relative decoupling. As an example, the amount of carbon dioxide emitted per dollar of economic production has decreased over time. But those gains have come amidst the background condition of increasing GDP. Even with decreases in the resource intensity of GDP, economies are still using more resources. Carbon dioxide emissions from fossil fuels have increased by 80% since 1970.
Ecological economists also observe that an economy is structured like an ecosystem – it has a trophic structure that controls flows of energy and materials. In nature, the producers are plants, which literally produce their own food in the process of photosynthesis. Herbivores consume plants, and carnivores consume herbivores. Omnivores may eat plants or animals, and some species function as service providers, such as scavengers and decomposers. The human economy follows the same natural laws. The producers are the agricultural and extractive sectors, such as logging, mining, and fishing. Surplus in these sectors allows for the division of labor, economic growth, and the flow of resources to other economic sectors. Analogous to herbivores, some economic sectors, such as manufacturing, consume the raw materials of the producers. Higher level manufacturers are analogous to carnivores. The economy also features service providers, such as chefs, janitors, bankers, and purveyors of information. The key point is that the economy tends to grow as an integrated whole. More manufacturing and more services requires more agricultural and extractive surplus. The trophic structure of the economy puts limits on how much of an economy's resources can be dedicated to creating and distributing information.
Both technological optimists and proponents of decoupling cite efficiency of resource use as a way to mitigate the problems associated with economic growth. But history has shown that when technological progress increases the efficiency with which a resource is used, the rate of consumption of that resource actually tends to rise. This phenomenon is called the rebound effect (conservation) or Jevons Paradox. A recent extensive historical analysis of technological efficiency improvements has conclusively shown that energy and materials use efficiency improvements were almost always outpaced by economic growth, resulting in a net increase in resource use and associated pollution. Furthermore, there are inherent thermodynamic (i.e., second law of thermodynamics) and practical limits to all efficiency improvements. For example, there are certain minimum unavoidable material requirements for growing food, and there are limits to making automobiles, houses, furniture, and other products lighter and thinner without the risk of losing their necessary functions. Since it is both theoretically and practically impossible to increase resource use efficiencies indefinitely, it is equally impossible to have continued and infinite economic growth without a concomitant increase in resource depletion and environmental pollution, i.e., economic growth and resource depletion can be decoupled to some degree over the short run but not the long run. Consequently, Herman Daly and others in the ecological economics community have advocated that long-term sustainability require the transition to a steady state economy in which total GDP remains more or less constant.
- Uneconomic growth
- Zero growth
- Earth Economics (policy think tank)
- Ecological footprint
- Economic equilibrium
- Herman Daly
- The Limits to Growth
- Population dynamics
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- Center for the Advancement of the Steady State Economy (CASSE)
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- Steady State graphic by EcoLabs
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