The Steady Stater

What is the Steady State Economy?

August 16, 2020 Brian Czech
The Steady Stater
What is the Steady State Economy?
Show Notes Transcript

There's a lot of questions surrounding the steady state economy, principal among them being "what is it?" We decided to answer this most fundamental question in this week's episode of The Steady Stater. As one of the few experts on the subject, host Brian Czech provides a readily understandable introduction to what the steady state economy is, what it entails, the structure of the real economy, and the fallacies associated with the so-called "information economy." 

Richard Tibbetts:

From the Center for the Advancement of the Steady State Economy, this is the Steady Stater, a podcast dedicated to discussing limits to growth in the steady state economy.

Brian Czech:

Welcome to the show. I'm your host, Brian Czech, and today, we're going to be talking about a topic that's right at the core of the podcast. What is the steady state economy? It's probably one of the most common questions we get asked. How does it contrast with what we currently have, if it does, and what does it entail? How will it differ? How is it going to affect people? So that's the show today, what is the steady state economy and, you know, the best way to introduce it is to remind ourselves what economic growth is, and then we'll juxtapose the two. So economic growth is simply an increase in the production and consumption of goods and services in the aggregate, basic textbook definition. And it's typically expressed in terms of GDP, or gross domestic product. And it entails an increasing population, and or per capita production and consumption of goods and services, per capita, or per person. In other words, so the steady state economy, in contrast, is all of those things except stabilized instead of increasing. So it's a stabilized production and consumption of goods and services in the aggregate. And it still is expressed in terms of GDP, it's stabilized GDP, all else equal. And it entails a stabilized population, and or per capita production and consumption. Now, when we think about it very much, we can readily recognize that two things are unsustainable in the long run, one of them is economic growth, and the other one is economic degrowth. You can't have a perpetually growing GDP. And you certainly don't want perpetually declining GDP either. And you don't want either one of those to happen for too long, because both scenarios start causing major kinds of problems. And that leaves the alternative, the steady state economy as the sustainable alternative. So what are some of the problems that we encounter, if we stray from the steady state economy? Well, first of all, there weren't necessarily a lot of problems caused by economic growth, when humans were just evolving and beginning to develop cultures and civilizations and modern economies. But at some point, everybody, or a lot of people, keen observers certainly, began to realize that, wait a minute, we have a lot of things that are causing us problems now. And they seem to trace back to that, that increasing production and consumption of goods and services in the aggregate. So we have things like pollution, we have things like noise and, and stress and congestion and resource shortages, and therefore conflicts among peoples civil wars, even and, you know, full fledged wars over resources. So these things are, of course, extremely serious problems. And then all the way until now into the 21st century, where we have existential threats like climate change and collapsing biodiversity, and certain types of pollutants that could become serious threats like endocrine disruptors. Now, on the other side of the steady state line, the process of degrowth, degrowing the economy. Well, that certainly has been, in history, the bigger fear. I mean, that tends to entail things like less income, of course, less jobs. So higher unemployment, and a difficulty maintaining the system, if you will, the physical economy and the financial systems that are integrated with business and industry at large. So the steady state economy, then, is the alternative to avoid all of those kinds of problems, the growth problems and the degrowth problems. So why isn't it more recognized out there by now as the goal that we should be pursuing? That's a really good question, and it's frankly riddled with all kinds of political and historical and academic and cultural sorts of complications. But I think that as the 21st century progresses, we're going to find that more and more people start recognizing the perils of perpetually pushing for perpetual GDP growth. Now let's talk for a little bit about how conventional economics tends to think about the process of growth. So that'll help us to understand why economic growth is still such a preferred policy goal of politicians, and why it's taught in the classroom and in all the way back to high school, and certainly, across most of the college curricula in business and economics. If you open a standard introductory economics book, or business textbook, you will find this thing called the production function. And it sounds fancy, but it's a very simple equation that, that tells us that production is a function of capital and labor. So it's telling us that the big that what we really need for economic growth is capital and labor. And then very complex economic growth theory steeped in calculus has been built around that really basic production function. So it's fine. There's there are a lot of merits to it. But let's pick up right away on the single biggest weakness. You may have also seen in textbooks more about history or the history of economic thought, you would have heard reference to "land, labor and capital." So what happened to the production function? Why does it say production is a function of capital and labor, what happened to land? That's kind of a long story, actually, it's a very political story, there's a little bit of a technical issue to it as well, but it's primarily a political story. And it also reflects the historical tendency of the economics community to not be familiar, frankly, with the natural sciences, physics, and biology and ecology, most importantly. And so the production function, lacking land doesn't seem to be, to them, that problematic, but when you think about it, now, when we are having all of these growth associated problems, think what that what we might call the land-less production function. What does that look like then in the economist's mind or in the students mind? And by the way, business is one of the most common majors out there, economics is pretty prominent as well. But certainly business schools just pump the students out. So the landless production function is put in terms of a diagram, put in schematic terms, in these business textbooks as a circular flow of money, the circular flow of money between businesses and households, or firms and households. So you know, the households are paying for the goods produced by businesses and businesses are paying for the labor from the households, and you have this circular flow. So then when you think of the process of economic growth, it's just an expanding circle, and an ever growing, expanding circular flow of money with no limits implied. And that's the price that we pay that sort of perpetual growth mindset when we forget to deal explicitly and thoroughly and with nuance with land, when we drop land out of the basic production function. So in ecological economics, we fix that and we include land in a much more insightful production function for purposes of recognizing the limits to growth. And, and diagrammatically, we can envision this then, as starting with the planet, planet Earth. And then you see a little circular flow of money forming as humans evolve and, and eventually reached the stage of, of using money as a medium of exchange. And then that circular flow of money starts to grow starts to expand outward. And this then is starting to replace a lot of what had been on the planet before that, basically, the natural ecosystems and the the non human species that had evolved on the earth. So that's why there's this fundamental conflict between GDP growth and biodiversity. Because the human economy grows, you might say, at the competitive exclusion of the non human species in the aggregate. So it's much easier to see that fundamental conflict between economic growth and environmental protection, when you keep land front and center, both as a factor of production and as a cost in terms of the loss thereof, of the natural features of the land. Now, let's talk next, a little bit about the structure of the economy. And unlike a lot of talk shows, or podcasts, where there is going to be a focus on the financial institutions, let's focus on the real economy, the actual, physical, biological, ecological activities that are conducted out there, in order to derive an income, for example. And this economy has got to start out with the basics, with subsistence, food, clothing and shelter, in other words. And the first among those being food. And so it's the agricultural sector, that is the foundation of the economy. If, if we don't eat, then we're not going to be doing any of these other economic activities, because we're not even going to survive, right? So that's the foundation of the economy, the agricultural sector, and if there is plenty of activity there, if there's plenty of surplus, then what that does is it frees up the hands out there for the division of labor into other activities, in particular, manufacturing activities, and then service sectors as well. Now, there are other activities, kind of similar to agriculture that are very close to the foundation of the economy. You know, we talked about food, clothing, and shelter. And as well as providing stock for for manufacturing, we have all these extractive activities. And we need them all, we need them to be sustainable in order to sustain the economy long term. And so we're talking about things like mining and logging, and commercial fishing, and domestic livestock production. These are major sectors. They may not show up in the GDP calculations as real high income sectors, because they're toward the base of the economy. There's not what they call a lot of value added at that stage, but they're crucial for anything that builds upon them, which is basically all of the manufacturing and service sectors. But that helps us to see right away then, in another way, this conflict between growing the economy and protecting the environment. Because when you think about the agricultural and extractive sectors, it's all about exactly

what it sounds like:

extracting from the land. And what that does is once again, it excludes the non human species that had depended upon those resources that are being extracted and the landscapes that contain these resources. So the next part of the economy that that we have building upon the agricultural and extractive sectors are the manufacturing sectors. And of course, that's a huge swath of the economy and, and they range from very heavy manufacturing, like steel smelting, for example, all the way up to the latest types of manufacturing like computer chip manufacturing. And depending on how fine of a classification system you want to use, there certainly are dozens of manufacturing sectors and really hundreds and you could even say thousands of manufacturing sectors, so they're all over. And as you proceed from the agro-extractive activity to the manufacturing, you start to get toward a more urban arrangement of economic activity. And certainly for heavy manufacturing, you also have, as a matter of economic geography, you have a concentration of activity in places where transportation is much more convenient. So along rivers along shorelines, and it's not always natural features that are involved, if they're historically have been settlements developed, then those may be places where, for example, railroad lines may converge, and so forth. So, now we have the base of the economy. And by the way, at the base, we also have, of course, as one of those extractive sectors, the energy sector, so we have agricultural and extractive sectors, including energy extraction and/or energy utilization, non-renewable or renewable. And in some senses that's the very foundation of the economy, because if there were no energy, there would be nothing at all, of course, but with the agricultural activity, a lot of that energy is actually harvested, you would say, by the plants, by the crops, and by the the produce bearing plants. So it's, it's kind of a mix, then, of extracted energy, which at this stage in history, is about 90%, fossil fuels, and in particular, liquid petroleum is the key fossil fuel when it comes to transportation and agricultural activities. But then, of course, the natural harvesting of energy by plants, in the process of photosynthesis, is also involved. Now, we haven't talked much about the services and the service sectors. This is a topic that tends to confuse a lot of people, I'm afraid, because unless you really think about the whole economic system, as we're doing right now, from the bottom up, you may tend to think that, well, we don't necessarily have to have this impact on the environment, if we just have more and more services. But you know, we like to call that the self sufficient services fallacy. Because you can't have just services doesn't matter what the service is, you must have, first and foremost, that agricultural activity at the base of the economy in order to enable that division of labor into all the other sectors, including service sectors. Now, in recent decades, the particular service, which we could call information provision has misled or muddied the waters a little bit more, because we've had people talking loosely about some type of information economy. And the thought being that well, if it's just information that we're paying for, that's valuable, well, that doesn't do anything to the environment, right? Wrong. See, here's the thing about integrating information with the process of economic growth. If that information is not going to be used for all the other non-information sectors, well then that's great, but it's not going to contribute to GDP. So it didn't change anything fundamentally. All it did was it, in fact, probably exacerbated the growth problems by speeding them up because the information is flowing to the mass agricultural operations now, factory farming and such, and into the real high tech mining and logging, and commercial fishing. So the information helps to, to liquidate those natural resources, those natural capital stocks, if you will, even faster. And then of course, it has its implications on the the other side of that steady state line too. The information oftentimes leads to the loss of jobs because we have things like robotics, for example, artificial intelligence, that takes the place of people in the workforce. So information was no panacea in either way, solving growth or degrowth problems. Plus, I want to point out that this notion that suddenly we entered into an information economy somewhere in the 90s or early 2000s, it's also fallacious from the standpoint that humans always you might say, humans always had an information economy. Pleistocene hunters, how did they get by? They studied tracks, they looked for mammoth tracks, and they kept their nose to the wind, and they scrutinized the sky, they needed to see what what the weather was going to be like later in the day and when the right time to be hunting would be and they would try to sense danger approaching. So it was an information economy, then as well, it's just that they didn't sit around with laptops figuring these things out. They used their senses directly. Now, let's shift gears a little bit, maybe start talking a little bit about whether or not there's a conflict between economic growth and environmental protection. The only argument that is worth considering at all is that okay, well, with new technology, through technological progress, we can somehow solve that conflict. New technology, it's not manna from heaven. It takes heavy investment, to get the research and development that leads to these new technologies. And similar to the information sector, they do tend, when the goal is GDP growth, to end up liquidating even more natural capital stocks, eliminating even more biodiversity, causing even more pollution, albeit different types of pollution over time. But that's the basic story. But we'll talk a lot about it, because it's a fascinating topic. And it's crucial for us to really get. Now I did want to bring it down to the level of what we see outside. So if you're inside at the moment, take a look out the window. Now, do you like what you see out there? And if you do imagine, imagine maintaining that. Imagine having that for a long time for you, your kids, your grandkids, the neighborhood, the city, the county. Everybody loves it, right? If you're in a really good place, and everybody loves it, why lose that, and that's the steady state economy. Now, if you look out that window, and you don't even want to because it's smoggy out there, you see a new skyscraper coming out blocking out part of the horizon, you see a new road being developed that's just going to add to the congestion and noise in the area. Well, that's economic growth. And it's it's a fairly simple way of describing it, but it is pretty much what it boils down to. More and more stuff more and more people more and more stuff. That's economic growth, whether it's packed in to urban areas or spreading out across either way, it will entail more agricultural and extractive activity at the foundation of that economy. So there's no free lunch, as they say. And another thing that that you might wonder is okay, well, what does this mean, then, for my, let's say for my retirement account? Well, it basically means that we can have a perpetually growing population that has perpetually more retirement income, it does mean that let's face it, I don't think anybody with a lick of common sense, would think that we can have that there are some economists out there that will try to tell you, well, yes, we can have perpetual population and per capita income growth. We'll talk about that as well in coming episodes. But basically, the steady state economy means stabilized bank accounts, it means less raucus activity in the markets. And so, you know, brokers may not like it, the New York Stock Exchange in general may not like it, at least short term. But if you like the occasional financial crisis, go for it. Otherwise, your best bet is the steady state economy. And finally, some people tend to think that, 'well, the steady state economy that sounds awfully socialist, communist even.' Well, you know, no. The steady state economy is all about the size and the growth path of the economy. It has nothing to do, frankly, with the model of political economy, in the sense that the Soviet Union, for example, was a great case. As communist and centrally planned as it was, it was a great case of being hell bent on GDP growth, to beat the USA in the cold war to try to beat the USA in the Cold War. And therefore, you know, they exceeded their capacity and collapsed. So perpetual growth policy is never smart, it's always going to turn out to be short term in the broader sweep of history. And it doesn't matter what type of political economy you operate, that's a matter for history, for the culture, and for the ecosystem, as well. And in some cases, which is into intimately related to cultures. So in some cases, it may very well be a socialist democracy. In the American case, we feel that the American Constitution is entirely conducive, at least, or capable of hosting a steady state economy. So that about wraps it up. We've learned today a little bit about the steady state economy, what it is and what it entails. We've learned quite a bit I think about the structure of the real economy. And we've learned especially about some of the fallacies associated with the so called information economy. So thank you for listening. We hope you enjoyed it. I'm Brian Czech, and you've been listening to the Steady Stater podcast. See you next time.