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The Steady State Economy: A New Financial Architecture

An introduction to the Steady State Economy. Should this be the way globalisation goes? Read the article then add your thoughts below.


Previous posts in the “New Economic Architecture Required” series have looked at Wealth & Value, Money & Debt and Growth & Competition.

What these very brief analyses have shown is that we, the human race, are living beyond our means.

A Steady State Economy may be a way of bringing our consumption back into line, eliminating boom and bust in the process.

The Steady State Economy

This economic model was first advocated within classical economics as John Stuart Mill’s “stationary state”. It has since been developed by Herman Daly, former senior economist at the World Bank and now a public policy professor at the University of Maryland.

There are a number of principles which underpin the Steady State Economy, not all of which can be detailed here. The article Towards A Steady State Economy, published earlier this year on The Oil Drum, provides a full discussion.

Here is an outline of three of the key points:

The Limit of Economic Growth

Basic economic growth is fuelled by an increasing population buying ever more stuff. This cannot be sustained an so there comes times when spending can no longer support growth – recession.

The economy is therefore a finite creature which cannot sustainably grow beyond a population’s overall wealth. Once that ceiling has been reached any further growth is demonstrably unsustainable an should not be allowed to happen.

However, different parts of the economy will always rise and fall according to market pressures, thus continuing economic activity and its support for prosperity and rising standards of living will continue.

These rises may not be as fast, but they will be financially sustainable and permanent.

Conservation of Natural Resources

All economic activity is ultimately based upon the supply of naturally sourced materials: the raw materials which human ingenuity puts to good use.

Commodity markets are excellent vehicles to regulate the foreseeable availability of such materials.

However, they do not preserve these resources for future use: a boom in demand will always leads to a boom in consumption. Oil is a perfect example of this.

A supplementary cap and trade system on all raw materials will ensure that they are not all used up in a decades long glut but would remain available for centuries to come.

As well as having a positive effect upon the economy’s environmental footprint this will also gear economic activity towards development rather than growth.

This will put quality above quantity, establishing a lean and efficient economy where product differentiation is based upon the value as well as price.

Fair Participation In Free Markets

Free markets work at their best when as many people as possible are able to participate in them in a fair and equitable manner.

At present this is not the case; the wealthy are able to game the system to their advantage. This prices the poor out of the market, disenfranchising them and leading to a market which is no longer free or fair.

The best way to remedy this is to set minimum and maximum levels to individual income and a ceiling on personal wealth. These need not be overly constraining, just enough to ensure that dominance and disenfranchisement no longer occurs.

The knee jerk is to think about this as being anti-wealth. It is not; it’s a pro-market measure designed to protect it and ensure all can participate and prosper in continued economic development, irrespective of wealth.

The Future Economy

[social_buttons] No one can doubt the tremendous value free markets can bring to economic activity. Like any powerful force, they need to be channelled to ensure their effect is predominantly beneficial.

The only question is, where should the regulatory boundaries be drawn in order to maximise the value created by free markets and limit their potential for destruction?

Picture Credit: “Globus im Geographieunterricht” from the Archival Research Catalog

Written by Chris Milton

is a seasoned sustainability journalist focusing on business, finance and clean technology. His writing's been carried by a number of highly respected publishers, including The Guardian, The Washington Post and Scientific American. You can follow him on twitter as @britesprite, where he's one of Mashable's top green tweeters and Fast Company's CSR thought leaders. Alternatively you can follow him to the shops... but that would be boring.

Comments

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  1. @Don … a very interesting forumla that! Could you please get the description of it to me somehow: I’m active on LI and Ecademy, or feel free to post a link to it below 🙂

    @Ryan I’d love to hear more about how you think this model could be corrupted. Not because I don’t think it’s impossible .. far from it!

    I’d also be interested in hearing whether anyone else thinks the shift from growth to development would make change harder.

  2. Great article-a bit above my understanding of global economics but I think I follow. I wonder, however, if we would be more successful in removing government subsidies (like the US cotton subsidies) and enforcing Fair Trading instead of setting minimums and maximums on individual wealth?

  3. @GreenSara .. you’ve got the elephant in the room — subsidies. There’s a terrific wrangle going on at the moment between free and regulated market believers; subsidies could be the make or break between the two. Anyone else want to comment on subsidies, either as part of Stable State Economics, or under any other model?

  4. I think these are interesting ideas. I like the idea of ensuring that resources are preserved for a longer time. But will it ever fly in a system of short electoral cycles, where politicians vie to offer the most to electors? – and if electors expect this? And in a world wracked with hunger, where people demand to be fed now?

    Perhaps future generations should be given effective representation in our democracies (no doubt many have suggested this) – a power of veto, perhaps. But would the current generation ever agree to it?

  5. For myself, one of the most powerful arguments for such a system is what was said about putting “quality above quantity”. In the heavily consumer driven economy that we are in today – where products are not priced to cover the cost of making them, but are priced at what the seller thinks he can make out of the consumer – this is a very fresh thought.
    I agree with Monica though, with such short politcal cycles, hope of implementing anything that resembles this kind of a system seems like just a pipe-dream.
    Looking at the small number of cost-based systems that exist today, Congestion Charges for example; most are crippled by bureaucratic inefficiencies that arguably undermine what good they could do. Just the skeptic in me speaking though…

  6. As much as free markets are touted as the world’s salvation, they never take into account the imbalance that occurs when populations continue to increase. Acting as though there is no upper limit to population growth is a sure path to economic calamity.

  7. @Monica @Ollie .. intriguing that you link it through to the short electoral cycle, although you’re undoubtedly right.

    What do people think would be the solution to this .. a single, eight year presidency? Or perhaps greater citizen involvement in democracy, along the Athenian model where it was a duty of every citizen to participate in government?

  8. I am thinking of perhaps government more along native Indian lines, where as I understand it decisions were made considering the impact of the next seven human generations.

    Plato would have advocated rule by an enlightened few, not elected I think. He did not favour democracy. Can’t recall exactly why – perhaps he thought the short-term self-interest of the majority was not a good basis for a sustainably strong nation? Not sure.

    Short electoral cycles might not really be a problem in themselves – it’s more short-sighted government that could be a problem, whatever its cause. Governments (and peoples) that don’t take responsibility for the long-term effects of their decisions and actions.

    On another aspect, I agree that the whole growth ethic needs to end. Is the world’s financial system currently reliant on growth? How to re-engineer their basic rules to help create a “steady-state” economy?

  9. Monica — I like that, “the next seven generations”. Unfortunately, can you imagine the bureaucracy our governments would seek to impose upon such long-sighted planning?!

    You’re pretty well correct about Plato — he eschewed democracy because of it’s “mob rule” overtones. However I’m not sure how you get a government to be long sighted without increasing the electoral cycle.

    It’s nice to have some forms of consensus that one way or another the “unlimited growth” ideal has got to end. Would anyone like to speak up in favour against finite growth in the future?

  10. I just briefly was reading through since I’m in the process of doing intense research regarding supporters of thinkers of the steady state economy, of which I am a supporter and baffled that one would cast it off based on it being “boring.” So is watching the world consume resources beyond their need while others starve to death and our actual capacity for such a lifestyle shrinks to zilch.

    But what really caught my eye were subsidies because I got into this economic research from an agricultural approach, agriculture being the foundation of our economy, and since we emerged into sedentary civilizations, the foundation of our existence. Subsidies are a complex thing to figure out – to provide federal monetary support to our farmers or not to? Coming from a farm, I say yes, please because we are not making enough to even break-even. The input costs far exceed the market price and without subsidies, the cost of food would go through the roof, denying poor people the right to….life? Not fair. On the same line, how can we treat the producers of our sustenance in such a way that denies them the ability to take a vacation from such exhausting labor? They deserve to make a buck if we are going to continue living in this deranged form of capitalism (and I’m not a ‘socialist,’ nor am I a ‘capitalist,’ rather I am a moralist that believes any system will work if we think and act in more collective ways). So, the government provides subsidies to support farmers, which is where the real problem lies: how those subsidies are allocated. They go to the largest land-holders and agribusinesses that produce cheaply, cutting corners on proper animal treatment and environmental conservation. The higher the yield, the greater the subsidy payment, leaving all those smaller more sustainable farms to suffer out of existence. What I think we need is a better system of monetary allocation, providing incentives for sustainable practices, and not encouraging growth as the sole purpose of the economy, rather an economic system that will naturally generate an equilibrium.

  11. Read, 'Walden Two.' This utopion novel is based on Mill's 'steady state' philosophy. It would be great if it could work. For this to happen the basis of the GDP would have to change. We would need to start factoring resource depletion. I think Mill is perhaps the most brilliant social philosopher. Glad to see he is getting some attention.

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