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Special report: Economics blind spot is a disaster for the planet
15 October 2008 by Herman Daly
Magazine issue 2678.
HERE is a salutary tale about the World Bank. The first draft of its
1992 World Development Report, dedicated to sustainable development,
contained a diagram labelled "the relation of the economy to the
environment". It showed a rectangle labelled "economy", with an arrow
entering it labelled "inputs" and an arrow exiting it labelled
"outputs". That was it.
It was my job, as senior economist in the bank's environment
department, to review the draft and offer suggestions. I said drawing
such a picture was a great idea, but it really had to include the
environment. As drawn, the economy was receiving inputs from nowhere
and expelling outputs back to nowhere.
I suggested we draw a big circle around the economy and label it
"ecosystem". Then it would be clear that the inputs represented
resources taken from the ecosystem, and the outputs represented waste
returned to it as pollution. This would allow us to raise fundamental
questions, such as how big the economy can get before it overwhelms
the total system.
When the second draft came back, a large unlabelled rectangle had been
drawn around the original figure, like a picture frame. I complained
that it changed nothing. In the third draft, the diagram was gone. The
idea that economic growth should be constrained by the environment was
too much for the World Bank in 1992, and still is today. The bank
recognised that something must be wrong with that diagram - but better
to omit it than deal with the inconvenient questions it raised.
That was when I realised that economists have not grasped a simple
fact that to scientists is obvious: the size of the Earth as a whole
is fixed. Neither the surface nor the mass of the planet is growing or
shrinking. The same is true for energy budgets: the amount absorbed by
the Earth is equal to the amount it radiates. The overall size of the
system - the amount of water, land, air, minerals and other resources
present on the planet we live on - is fixed.
The most important change on Earth in recent times has been the
enormous growth of the economy, which has taken over an ever greater
share of the planet's resources. In my lifetime, world population has
tripled, while the numbers of livestock, cars, houses and
refrigerators have increased by vastly more. In fact, our economy is
now reaching the point where it is outstripping Earth's ability to
sustain it. Resources are running out and waste sinks are becoming
full. The remaining natural world can no longer support the existing
economy, much less one that continues to expand.
The economy is like a hungry, growing organism. It consumes
low-entropy natural resources such as trees, fish and coal, produces
energy and useful goods from them, and spits out high-entropy waste
such as carbon dioxide, mine slag and dirty water. Mainstream
economists are mostly concerned with the organism's circulatory
system, how the energy and resources can be efficiently allocated,
while tending to ignore its digestive system. As my experience with
the diagram showed, the sources of the resources that the organism
consumes and the sinks into which it deposits waste are ignored.
Effectively, economists are assuming they are infinite.
Because of this, they recognise no limits on the capacity for economic
growth. In a report published earlier this year, the Commission on
Growth and Development reviewed the experience and policies of 13
countries, including Botswana, Brazil, China and Japan, which since
the 1950s have grown at an average annual rate of 7 per cent or more
for 25 years or longer. The commission suggests that this is an
example the rest of the world should follow. If the global economy
were to grow this fast, however, then in 25 years it would have
increased to five times its present size. They don't say what would
happen after that; presumably we should simply aim to do the same
again.
Generally, when the cost of an activity starts to outweigh any
benefits, we stop doing it. Buying one ice cream makes sense if it
brings us pleasure and satisfies our hunger. Once we have eaten two or
three, however, we do not buy more because, despite the pleasant
taste, we start feeling sick. This "off switch" is not working for the
economy as a whole, though, because our national accounts do not
separate the costs of economic activity from the benefits. Instead,
both are counted towards a country's GDP. We count as desirable growth
both the beneficial activity that causes pollution and the costly
activity of cleaning up the pollution, for example. And when cutting
down trees and selling the lumber boosts GDP, we subtract nothing for
the loss of forests.
When the cost of an activity outweighs the benefit, we should stop
The scale of the global economy is approaching the limits of what our
planet can cope with. As the oceans are emptied of fish, forests
shrink from logging and levels of pollutants and greenhouse gases in
the atmosphere rise, the environmental and social costs of further
growth are likely to intensify until we reach a point at which the
price we pay for each unit of extra growth becomes greater than the
benefits we gain.
In fact, there is evidence that we have passed this point, at least in
well-off countries such as the US and UK. Since our GDP accounts
cannot reveal whether this has happened or not, scholars have devised
ways to track other potential indicators such as health, well-being
and the state of our environment. These include the Index of
Sustainable Economic Welfare, the Genuine Progress Indicator, the
Ecological Footprint, and the Happy Planet Index. They have found that
as GDP goes up, these other measures are levelling off and even
declining. Economic growth may already be making us poorer rather than
richer.
As long as our economic system is based on chasing economic growth
above all else, we are heading for environmental, and economic,
disaster. To avoid this fate, we must switch our focus from
quantitative growth to qualitative development, and set strict limits
on the rate at which we consume the Earth's resources. In such a
"steady-state" economy, the value of goods produced can still
increase, for example through technological innovation or better
distribution, but the physical scale of our economy must be kept at a
level the planet is able to sustain. Can we transform our economy from
a forward-moving aeroplane to a hovering helicopter without crashing?
After 200 years in a growth economy, it is hard to imagine what a
steady-state economy might look like, but it does not have to mean
freezing in the dark under a communist tyranny (see "Life in a land
without growth"). Most of the changes could be applied gradually, in
mid-air.
The idea of moving to a steady-state economy will appear radical to
many, perhaps politically impossible. But the alternative, a
macro-economy that is structurally required to grow in scale beyond
the biophysical limits of the Earth, is an absurdity, and heading for
the ultimate crash. Before we reach that radical physical limit, we
are already encountering the economic limit at which benefits of extra
growth are increasingly outweighed by the costs.
Profile
Herman Daly is one of the founders of the field of ecological
economics, which argues that the scale of the economy must be kept
within sustainable limits. He was senior economist in the World Bank's
environment department from 1988 to 1994, and is now professor of
ecological economics at the University of Maryland.
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