In the opening chapter of his signature book, Beyond Growth: The Economics of Sustainable Development, Herman Daly shares an unforgettable story from his days as an economist at the World Bank. Having just listened to Lawrence Summers, then Chief Economist at the World Bank, make a presentation critical of the Limits to Growth thesis, Daly referred Summers to a picture of the economy as an open sub-system of the world's ecosystem, consistent with what I present below as Figure 1. He then asked Summers if, given this picture, it might make sense to start thinking about the growth of the economy in relation to the natural limits of the ecosystem. Dodging the question, Summers responded dismissively, "that's not the right way to look at it." End of discussion.
What is the right way to look at it, according to Summers? Daly says it is something like Figure 2, where the ecological context has been removed and, therefore, the circular flow of economic growth appears to be free from any natural limits beyond the economic system. This is not just Summers' radical vision of the economy. It represents the orthodox view of the great majority of economists who, if not outwardly hostile to the ecological view, generally set it aside as irrelevant to the analysis at hand.
Recalling Joseph Schumpeter's notion of a pre-analytic vision, Daly summed up this fundamental economic dilemma that divides so many economists, politicians, and citizens:
"Unless one has the preanalytic vision of the economy as subsystem, the whole idea of sustainable development—of a subsystem being sustained by a larger system whose limits and capacities it must respect—makes no sense whatsoever. On the other hand, a preanalytic vision of the economy as a box floating in infinite space allows people to speak of "sustainable growth"—a clear oxymoron to those who see the economy as a subsystem. The difference between these two visions could not be more fundamental, more elementary, or more irreconcilable." (Beyond Growth, 7)
The compelling thing about this particular ideological debate is that the objects of the debate, Earth's natural systems, don't much care whether or not they prevail in some intellectual discussion among the various schools of economic thought. Natural systems have a unique way of asserting their perspectives on human economic activity without regard for human priorities and convictions and without need for human understanding and consensus. Still, we are fools if we choose to wait for the world ecosystem to break the ideological impass between ecological and non-ecological economists. The stakes are too high.
Toward an Integral Reconciliation
I agree that these competing visions are fundamentally anti-thetical as they have been presented, by Daly, Summers, and countless other economists over the years. They are so antithetical that even a veritable encyclopedia of economic thought like Mark Blaug's breathtaking 700-page Economic Theory in Retrospect completely ignores the ideological challenge presented by the ecological vision of the economy--a challenge which, in partial defense of Blaug, has been largely ignored by most of the economists of the past 250 years. But just because this ecological view of the economy has been marginalized by the more dominant schools of thought does not mean that it is wrong, nor that it has necessarily failed in the overrated "efficient market in economic ideas." Where I disagree with Daly's assessment of the economic dilemma is in his claim that these pre-analytic visions are irreconcilable. I think they can be reconciled within a more integral vision that honors the partial truth in each, while providing some practical guidelines for post-visionary analysis of sustainable economic growth.
As I see it (Figure 3), the physical dimension of the economy, which can be measured in terms of the scale of material, energy, chemical, and biological throughput, does indeed comprise an economic sub-system of the world's physical biosphere, which includes the sources and sinks for the economic throughput. This is the partial truth in the ecological vision of the economy and it affirms the existence of certain physical limits to the scale of economic growth--but, strictly speaking, these limits only apply to physical economic growth.
In my view, the economy also has a non-physical, or mental dimension—e.g., the value we place on psychological development or intellectual learning—that contributes to the overall depth of economic growth. The mental economy is inextricably linked to, and entirely dependent upon, the physical economy, which is, in turn, governed by the natural logic and limits of the Earth's physical systems. However, the mental economy is not a sub-system of the Earth's physical biosphere and it is not governed directly by the rules of the natural world. The mental economy, for better and for worse, is where we make all our economic decisions and direct the economic growth in two-dimensions—mental depth and physical scale. But this mental economy is a sub-system/culture within a more encompassing mental super-system/culture that we might define as the non-physical, depth dimension of human civilization. Following the philosopher Ken Wilber and before him Teilhard de Chardin, we may call this the noosphere in relation to the biosphere. Wilber has been particularly articulate about the contrast between the depth of the noosphere and the scale (though he calls it span) of the biosphere, and I think these distinctions apply equally well to the economy. This reframing reveals the partial truth in the orthodox view of economic growth beyond the scale of ecological limits—but this truth is only valid to the extent that we are speaking of non-physical or mental economic growth.
When it comes to analyzing economic growth, households and the factors of production they supply to firms, as well as firms and the products they supply to households, all have a physical scale dimension that is subject to the logic and limits of the physical world and a mental depth dimension that is subject to the logic and limits of the mental world--hence the checkerboard pattern of green scale and yellow depth in Figure 3. The typical factors of production, being capital, labor, and resources, come in a variety of different forms with varying degrees of physical scale and mental depth. The same is true for the goods we produce. Although the common differentiation between products, services, and experiences is intended to denote a gradation from physical to mental attributes, we should remember that even the most ethereal of experience-goods has a physical component and even the most material of commodities has some mental component that is part of the cycle of two-dimensional growth.
People can reasonably disagree on the precise scale of the physical economy and therefore the timing of our future encounters with the biospheric limits to physical economic growth. But reasonable people, in my opinion, cannot deny the fact that there are very real limits to the physical growth of the economy. Given this premise, its seems entirely sensible to promote economic growth that is progressively less physical and more mental until such time as we can enjoy economic growth that is truly sustainable—limited in scale, yet mentally innovative, enriching, and developmental. Innovators like Amory Lovins have demonstrated how superior design can yield products whose physical-to-mental ratio is much lower than competing products, at the time of sale and over the useful life of the product, while still providing the same essential service as the more physically-intensive alternative (e.g., hypercars vs. gas-and-steel cars). We can even find some suggestive evidence in macroeconomic statistics (e.g., ratios of GDP to CO2 emissions across countries) indicating that some countries may be much further along in the shift to less scale-intensive economic growth, perhaps because of differences in technology, cultural values, geography, and political philosophy.
To the extent that we adopt either of the partial visions of the economy, I believe we create patterns of unsustainable economic action. An exclusive application of the non-ecological vision may result in a pattern of economic growth that is physically unsustainable, relying on eventual, but certain, ecological crises to force policy makers, business leaders, and market participants to learn, in the double-loop sense, their way out of the unsustainable patterns. Similarly, if we were to apply only the ecological vision and pursue a strategy of zero economic growth, we might lock a majority of the world's population into poverty and perhaps, ironically, preclude the economic innovations that would otherwise, in time, establish the foundation for an Integral Economy that is physically sustainable, yet mentally growing. Calling for limits to all growth is just as unsustainable as ignoring all limits to growth.
Reconciling Daly's Post-Visionary Analysis
What puzzles me about Daly's book, which outlines in considerable detail the post-visionary analysis that he believes to be consistent with his pre-analytic vision (Figure 1), is that his post-visionary analysis is actually much more consistent with my pre-analytic vision (Figure 3). But I wonder if he and his readers have realized this inconsistency, obscured as it is by some semantic issues.
First, Daly chooses not to use the standard economic definition of the word growth, which is basically a change in the aggregate prices of the economic product, such as Gross Domestic Product. He prefers instead to re-define growth as a change in the physical scale of this economic product, measured not in money prices but in matter-energy flows. This re-definition is the less-than-obvious justification for his unequivocal claims that sustainable economic growth is an oxymoron, an impossibility theorem. In my opinion, the very large number of people, both critical and supportive, who believe that Daly and other ecological economists are against all economic growth, as in GDP, has its origin in this unnecessary and counter-productive re-definition of the term growth.
Second, Daly adopts the term development to denote the non-quantitative, qualitative improvement component of the growth in economic product. This is more or less consistent with what I have referred to as the mental depth dimension of economic growth, although Daly makes no such distinction between physical scale and mental depth. This allows him to build his case against the narrowly re-defined and exclusively quantitative growth while still acknowledging that qualitative development may continue. More than just another semantic issue, this is actually inconsistent with his espoused pre-analytic vision (Figure 1), which allows no room for what he calls development, and only reinforces the first problem of his perceived indictment of all economic growth.
Finally, and perhaps most importantly, Daly doesn't appear to acknowledge that his versions of quantitative growth and qualitative development are both measured quantitatively in terms of money prices and therefore, as I said above, contribute to what everyone else calls economic growth (e.g., changes in GDP). It's not that I think he isn’t reflectively aware of this fact. I suspect he is. The problem is that he repeatedly critiques all quantitative growth, while occasionally acknowledging the value of purely qualitative development, without emphasizing that both really do contribute to what everyone else in the world defines as quantitative economic growth. It's no wonder that so many people think that Daly and other ecological economists are against all quantitative economic growth: because they are, and yet they aren't, depending upon which definition one is using.
This reconciliation reveals a shortcoming in all three of the above figures, which ignore the flow of currency that runs counter to the flow of production and consumption. This currency flow, depicted in Figure 4, is the index that everyone really uses to measure economic growth, because we do not have any other way to quantitatively measure aggregate product or the aggregate factors of production except for the aggregate prices they yielded in market exchange. The dizzying variety of economic products and factors of production are incommensurable without money prices. When I factor into this slightly more integral vision of the economy my understanding of our debt-based monetary system and its inherent need for sustainable growth in money/credit independent of any growth in physical or mental product, it reveals just how important it is to include the counter-cyclical flow of monetary income and expenditures. This also reveals why it is so difficult to convince anyone that economic growth, by any definition, must cease.
Our monetary system actually requires perpetual economic growth in order to sustain itself and therefore the productive economy as we know it. Even those who do not understand the mechanics of monetary production (which includes many economists, by the way) can properly sense the need for economic growth just to maintain, not improve, their own personal way of life. Ignoring the positive feedback loop built right into the design of our monetary system, whereby the creation of new money/credit begets the demand for still more money/credit, is a major oversight among ecological economists whose semantic redefinitions of growth only exacerbate the conflict with orthodox economists and economic reality. The fact that our monetary system creates powerful financial incentives for people to engage in ecologically unsustainable economic growth, for example by encouraging excess short-term production and consumption using existing physical-resource-intensive energy and transportation systems, should be a central concern of all ecologically-minded economists. While heightening the challenge of sustainable growth, our fatally flawed monetary system also highlights the pragmatic significance of this distinction between the scale and depth dimensions of sustainable growth.
In the reconciliation of a more Integral Economics, sustainable growth is not an oxymoron, but a double entendre, denoting the very real possibility of sustainable economic growth that satisfies the very real necessity of economic growth that is sustainable. The key to the riddle is that there are two kinds of growth--scale and depth--that are being measured in units of the same common medium, money prices, and fused into a single, undifferentiated indicator of economic growth. The primary goal of our post-visionary analysis is therefore to craft public policies, business strategies, and personal practices that will move the economy toward a pattern in which physical growth is systematically replaced by mental growth even while overall growth in terms of monetary prices continues to rise consistent with the rate of interest on money/credit and the rate of growth in people's demand for goods. This is the key to reconciling these apparently irreconcilable visions and learning our way out of this overwhelming predicament.
Originally Published through Catallaxis