Adam Smith and a Steady-State Economy,

John V. 10°

"Properly functioning markets allocate resources efficiently, but they cannot determine the sustainable scale; that can be achieved only by government policy." - Herman Daly

Human beings are the strangest of creatures. We make observations about our surroundings or about our behaviors, these observations become cast into theory, and then these same theories feedback to shape both our behavior and our surroundings.

In 1776, Adam Smith made some ground breaking observations about economic behavior and published An Inquiry into the Nature of Causes of the Wealth of Nations. Smith would argue that individuals, working in unfettered freedom for their own self interest, would collectively and via an “invisible hand” provide for the greatest common good. His work would provide the foundation for much of today's economic theory and would father the concept of the “free market”.

Adam's work coincided with the birth our nation, and it is ironic, but not surprising that this Scottish moral philosopher, would become the patron saint of Wall Street. For many, the belief in the invisible hand of an unfettered free market would take on religious overtones and it would become the dominant sub-text in our American political discourse.

Theories about our world only survive until a new observation fractures the old beliefs and takes us forward to a new way of seeing. Caught up in our current ways of seeing the world, we find it hard to believe that what we believe today might be the equivalent of thinking that the “world is flat”. It has been over 200 years since Adam Smith fathered the science of economics and mainstream economic theory has evolved into a highly regarded science wrapped in the respectability of sophisticated and complex mathematics. However, emerging resource limitations and ecological observations are beginning to cause fractures in the old belief system. An belief system that blindly assumed that the world economy operates on an infinite resource base with infinite waste sinks, and that infinite economic growth is a self evident truth.

The gapping hole in mainstream economic theory is scale. In other words, the size of the economy relative to the closed ecosystem on which it relies for resources and waste sinks. This means that there are limits to growth, and that to live within those limits, the economy needs to find an optimum or steady-state condition. However, free markets and their invisible hand are blind to these limits and will continue to grow out of self interest until the invisible hand of the underlying ecosystem adjusts out of its own self interest. Unless we collectively wake up to this gapping hole in our world view, this adjustment will be both painful and harsh. Think massive population die-off and a pre-industrial standard of living.

The market cannot determine a sustainable scale for our economy. Because it is based on individual self interest, the free market's inevitable path is one of ecological overshoot and catastrophic collapse. Government is the only economic player capable of acting in our common interest and of setting a sustainable economic scale. Unfortunately we are hard wired to discount the future and the government is .... well .... us. So short of a major mind altering crisis, it is unlikely that we will hear any our politicians call for an end to growth. It is more likely that the end of our belief in the goodness and rightness of growth will be imposed on us by peak oil. Many observers agree that oil production, as measured by flows, has already plateaued. The market forces of demand destruction have initially maintained a fragile supply-demand equilibrium, but its only a matter of time before oil consumption becomes completely supply driven and economic growth is stopped and then reversed.

This will likely result in a kind of economic armageddon. However, the vested individual interests of the free market will continue to fight the notion of a steady-state economy until we hit some kind of alcoholic bottom. That's unfortunate, because a steady-state economy scaled to our planet's ecosystem may not be able to grow quantitatively, but it can grow qualitatively. In other words, rather than more stuff, we could produce better stuff. We could measure gross domestic happiness instead of gross domestic product. We could aspire to a true standard of living rather than today's GDP driven standard of consumption. Think more time, less hassle and stress, and a healthier population.

In the world of housing, a sustainable, steady-state economy means the end of low density single family housing. It means smaller, multi-family housing. Dwelling patterns will evolve to be more tribal than individual. Think urban village versus suburban wasteland. It means a healthier walkable lifestyle. It means healthful indoor air quality, and buildings that are self sufficient in energy. Since our mono-cultured, industrial food system is unsustainable, expect food to be grown locally and our children to relearn its source and value.

It will be a world in which the common interest finds parity with the individual interest. A world on which Adam Smith, the moral philosopher, would smile.

3 replies

Charles M. 110°

Because individuals will always want to consume more, creating growth (of sorts), a steady state economy can only result from a totalitarian government and no democratic government will work.

We are a result of hundreds of thousands of years of development. Until recently (last 100 years or so), most of the world's population has been living on the brink of starvation. Opportunistic consumption and hoarding have been important for survival.

Now that we have far better access to sufficient food (obese people outnumber starving people), we no longer need the consumption and hoarding impulses to survive but we still have them. Result: we will continue to consume and will resist efforts to reign them in.

Written in August 2008

Daniel S. 12°

I think your words rounded up well the current situation. I would like to bring in some aspects that might explain why the invisible hand is more like squeezing than caressing the world. There was not even nearly something like a free market.
Let's take electricity: feed-in tariff is absolutely new, you weren't even allowed to use it for storage for your panels.
In many countries there are subsidies for gas! Europe sold agricultural overproduction to Africa so cheap it would destroy local production. Free market requires equal conditions of production.
It has been shown that unregulated systems tend to chaotic oscillation which is bad for growth when production cycles are long. Some products take years to reach production and there must be predictable market opportunities.
In fact regulations are not the difference between free and nonfree market but between chaos and market. It all depends on the nature of the regulation.
In fact it can be considered a science in progress to define what exactly is free market.
Some of the difficulties are not within the realm of free market but are res publica, that is politics. Let's take a look at commuting. In the beginning industrial zones were created to protect residential areas from soot and noise, but today transportation outweights emissions of production, so politics should favor downsizing production to get them closer to consumers. International trade of manufactured goods is absolute nonsense in the realm of politics.
Beyond a certain cash-flow companies should be obliged to produce locally in the respective continent. In perspective transportation fee would make up for the higher production cost.
There are two principles that can be applied to the present malaise.
1. diversity is more efficient than competition.
2. plenitude is obtained by respecting limits.
I am wondering what Adam Smith would tell Wall Street about the way they are using his philosophy.

Written in September 2008

Charles M. 110°

It scares the hell out of me that people quote Adam Smith in the modern age.

In the times that have passed since he died (over 200 years ago), significant changes have happened that would have caused him to revise his position. Unfortunately he died so his words are stuck in a time warp.

The context he spoke in was that of a relatively vast world, relatively limited human capability and high transport & communications costs

We now live in a world where none of those hold true any more.

The largest economy on earth - USA- proudly claims to be based on capitalist "free market" ideas, but that's no really true.
Agricultural subsidies and import barriers keep a very distorted agricultural sector flourishing. This has impacts throughout the world with food dumping, feedlot production etc.

Bailing out the Fanny Mae/Freddy Macs of the world in order to prevent the corrective economic crunch from happening might make voters happy but it just puts off the evil day when the correction will just have to be far larger.

A steady state (or close) economy is somewhat desirable because the feedback loop is tighter corrections are smaller. Once you start suppressing the feedback the steady state is lost and when a correction eventually does happen it will be far bigger and more severe.

A big problem is that the whole stock market is driven by growth, or the potential for growth. Nobody wants to buy shares for a company that is consistently profitable but not growing because its share price will not go up. Thus, Wall St demands growth and companies must deliver that growth to survive (on Wall St).

The economists and governments play these numbers too.

Written in September 2008

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