Herman Daly, pioneer of the concept of the Steady-State Economy, has a very interesting reaction to the current meltdown.

It’s a long essay covering all the basics, so I will be excerpting only. After the general presentation of SSE, we look at what this means for the financial system. The third section reproduces his transitional proposals. We recommend reading the original in full, and the intense discussion it has generated in the comments.

1. Herman Daly on the need for a Steady State Economy:

“A failed growth economy and a steady-state economy are not the same thing; they are the very different alternatives we face. The Earth as a whole is approximately a steady state. Neither the surface nor the mass of the earth is growing or shrinking; the inflow of radiant energy to the Earth is equal to the outflow; and material imports from space are roughly equal to exports (both negligible). None of this means that the earth is static—a great deal of qualitative change can happen inside a steady state, and certainly has happened on Earth. The most important change in recent times has been the enormous growth of one subsystem of the Earth, namely the economy, relative to the total system, the ecosphere. This huge shift from an “empty” to a “full” world is truly “something new under the sun” as historian J. R. McNeil calls it in his book of that title. The closer the economy approaches the scale of the whole Earth the more it will have to conform to the physical behavior mode of the Earth. That behavior mode is a steady state—a system that permits qualitative development but not aggregate quantitative growth. Growth is more of the same stuff; development is the same amount of better stuff (or at least different stuff). The remaining natural world no longer is able to provide the sources and sinks for the metabolic throughput necessary to sustain the existing oversized economy—much less a growing one.

Economists have focused too much on the economy’s circulatory system and have neglected to study its digestive tract. Throughput growth means pushing more of the same food through an ever larger digestive tract; development means eating better food and digesting it more thoroughly. Clearly the economy must conform to the rules of a steady state—seek qualitative development, but stop aggregate quantitative growth. GDP increase conflates these two very different things.

We have lived for 200 years in a growth economy. That makes it hard to imagine what a steady-state economy (SSE) would be like, even though for most of our history mankind has lived in an economy in which annual growth was negligible. Some think a SSE would mean freezing in the dark under communist tyranny. Some say that huge improvements in technology (energy efficiency, recycling) are so easy that it will make the adjustment both profitable and fun.

Regardless of whether it will be hard or easy we have to attempt a SSE because we cannot continue growing, and in fact so-called “economic” growth already has become uneconomic. The growth economy is failing. In other words, the quantitative expansion of the economic subsystem increases environmental and social costs faster than production benefits, making us poorer not richer, at least in high consumption countries. Given the laws of diminishing marginal utility and increasing marginal costs this should not have been unexpected. And even new technology sometimes makes it worse. For example, tetraethyl lead provided the benefit of reducing engine knock, but at the cost spreading a toxic heavy metal into the biosphere; chlorofluorocarbons gave us the benefit of a nontoxic propellant and refrigerant, but at the cost of creating a hole in the ozone layer and a resulting increase in ultraviolet radiation. It is hard to know for sure that growth now increases costs faster than benefits since we do not bother to separate costs from benefits in our national accounts. Instead we lump them together as “activity” in the calculation of GDP.

Ecological economists have offered empirical evidence that growth is already uneconomic in high consumption countries (see ISEW, GPI, Ecological Footprint, Happy Planet Index). Since neoclassical economists are unable to demonstrate that growth, either in throughput or GDP, is currently making us better off rather than worse off, it is blind arrogance on their part to continue preaching aggregate growth as the solution to our problems. Yes, most of our problems (poverty, unemployment, environmental degradation) would be easier to solve if we were richer– that is not the issue. The issue is: Does growth in GDP any longer really make us richer? Or is it now making us poorer?”

2. The implications for the financial system: towards 100% reserve requirements

“Could a SSE support the enormous superstructure of finance built around future growth expectations? Probably not, since interest rates and growth rates would be low. Investment would be mainly for replacement and qualitative improvement. There would likely be a healthy shrinkage of the enormous pyramid of debt that is precariously balanced atop the real economy, threatening to crash. Additionally the SSE could benefit from a move away from our fractional reserve banking system toward 100% reserve requirements.

One hundred percent reserves would put our money supply back under the control of the government rather than the private banking sector. Money would be a true public utility, rather than the by-product of commercial lending and borrowing in pursuit of growth. Under the existing fractional reserve system the money supply expands during a boom, and contracts during a slump, reinforcing the cyclical tendency of the economy. The profit (seigniorage) from creating (at negligible cost) and being the first to spend new money and receive its full exchange value, would accrue to the public rather than the private sector. The reserve requirement, something the Central Bank manipulates anyway, could be raised from current very low levels gradually to 100%. Commercial banks would make their income by financial intermediation (lending savers’ money for them) as well as by service charges on checking accounts, rather than by lending at interest money they create out of nothing. Lending only money that has actually been saved by someone reestablishes the classical balance between abstinence and investment. This extra discipline in lending and borrowing likely would prevent such debacles as the current “sub-prime mortgage” crisis. 100% reserves would both stabilize the economy and slow down the Ponzi-like credit leveraging.

A SSE should not have a system of national income accounts, GDP, in which nothing is ever subtracted. Ideally we should have two accounts, one that measures the benefits of physical growth in scale, and one that measures the costs of that growth. Our policy should be to stop growing where marginal costs equal marginal benefits. Or if we want to maintain the single national income concept we should adopt Nobel laureate economist J. R. Hicks’ concept of income, namely, the maximum amount that a community can consume in a year, and still be able to produce and consume the same amount next year. In other words, income is the maximum that can be consumed while keeping productive capacity (capital) intact. Any consumption of capital, manmade or natural, must be subtracted in the calculation of income. Also we must stop the asymmetry of adding to GDP the production of anti-bads without first having subtracted the generation of the bads that made the anti-bads necessary. Note that Hicks’ conception of income is sustainable by definition. National accounts in a sustainable economy should try to approximate Hicksian income and abandon GDP. Correcting GDP to measure income is less ambitious than converting it into a measure of welfare, discussed earlier.”

3. The ten-point transition plan

“1. Cap-auction-trade systems for basic resources. Cap limits to biophysical scale according to source or sink constraint, whichever is more stringent. Auction captures scarcity rents for equitable redistribution. Trade allows efficient allocation to highest uses.

2. Ecological tax reform—shift tax base from value added (labor and capital) and on to “that to which value is added”, namely the entropic throughput of resources extracted from nature (depletion), through the economy, and back to nature (pollution). Internalizes external costs as well as raises revenue more equitably. Prices the scarce but previously unpriced contribution of nature.

3. Limit the range of inequality in income distribution—a minimum income and a maximum income. Without aggregate growth poverty reduction requires redistribution. Complete equality is unfair; unlimited inequality is unfair. Seek fair limits to inequality.

4. Free up the length of the working day, week, and year—allow greater option for leisure or personal work. Full-time external employment for all is hard to provide without growth.

5. Re-regulate international commerce—move away from free trade, free capital mobility and globalization, adopt compensating tariffs to protect efficient national policies of cost internalization from standards-lowering competition from other countries.

6. Downgrade the IMF-WB-WTO to something like Keynes’ plan for a multilateral payments clearing union, charging penalty rates on surplus as well as deficit balances—seek balance on current account, avoid large capital transfers and foreign debts.

7. Move to 100% reserve requirements instead of fractional reserve banking. Put control of money supply and seigniorage in hands of the government rather than private banks.

8. Enclose the remaining commons of rival natural capital in public trusts, and price it, while freeing from private enclosure and prices the non rival commonwealth of knowledge and information. Stop treating the scarce as if it were non scarce, and the non scarce as if it were scarce.

9. Stabilize population. Work toward a balance in which births plus immigrants equals deaths plus out-migrants.

10. Reform national accounts—separate GDP into a cost account and a benefits account. Compare them at the margin, stop growing when marginal costs equal marginal benefits. Never add the two accounts.