The Fallacy of the Steady State Economy

The increase in global warming and overpopulation leads to the current depletion of resources which then causes people to look for alternative resource systems that are more sustainable. This puts more non-mainstream economic proposals, both good and bad, to the public view. In this post, we shall discuss a bad proposal called the Steady State Economy.


What is the Steady State Economy?

Its founder Herman Daly defines it as:

An economy with constant stocks of people and artifacts, maintained at some desired, sufficient levels by low rates of maintenance ‘throughput’, that is, by the lowest feasible flows of matter and energy from the first stage of production to the last stage of consumption.

Immediately, the word ‘constant’ creates a problem because it must be defined and set. If applied to population, then it would justify imposing a one-chid or two-child policy as seen in China and Vietnam.

With the absurdity of the first definition, other steady state sites offer alternatives:

“steady state” economy = an economy a roughly constant output of goods and services or “a sustainable economy with stabilized population and consumption.”

Steady state imposes a limit on production. Since you can only produce what is demanded, then you can only do this effectively by stifling demand or human desire in general. This can only be done by draconian or unnatural policies implemented by big governments. If laissez faire were ‘no regulation’ and high but unstable growth, then steady state would be the opposite ‘excessive regulation,’ leading to zero growth.


Steady State Policies

Some of these unnatural policies and their effects are:

  • Cap-auction-trade systems for basic resources- this would give more resources to the richest or the highest bidder
  • High tax on polluters- this would lead to bribes
  • Re-regulate international commerce- (move away from free trade) this would put the world into a depression immediately
  • Move to 100% reserve requirements instead of fractional reserve banking – this would destroy economies immediately also
  • Stabilize population – this requires draconian policies


How Steady State Misinterprets Smith

To justify the limitations to growth, it cites Smith saying that growth is limited to 200 years:

“But Smith recognized a limit to economic growth. He predicted that in the long run, population growth would push wages down, natural resources would become increasingly scarce, and division of labor would approach the limits of its effectiveness. He even predicted 200 years as the longest period of growth, followed by population stability.”

As someone who has read Smith’s works word by word, I can say that Smith never said such a thing like a limit to economic growth*. It conveniently misinterpreted Smith’s following statements in Book 1 and 3 of the Wealth of Nations and then used it to justify its own ideas, in the same way that Samuelson conveniently misinterpreted Smith’s invisible hand to justify selfishness:

“In a country fully peopled.. the competition for employment would necessarily be so great as to reduce the wages of labour to what was barely sufficient to keep up the number of labourers, and, the country being already fully peopled, that number could never be augmented. In a country fully stocked in proportion to all the business it had to transact, as great a quantity of stock would be employed.. as the nature and extent of the trade would admit. The competition.. would everywhere be as great, and consequently the ordinary profit as low as possible. But perhaps no country has ever yet arrived at this degree of opulence. China seems to have been long stationary, and had probably long ago acquired that full complement of riches which is consistent with the nature of its laws and institutions. But this complement may be much inferior to what, with other laws and institutions, the nature of its soil, climate, and situation might admit of.” (Book 1, Chap 9)

From shallow observation, it would seem that the Earth itself matches Smith’s description of a ‘country fully peopled’ at 7.4 billion. Outsourcing has allowed work to be sent elsewhere, lowering wages, while free trade agreements allow foreign products in, pushing down profits. However, like Smith’s observation of China, this is only true because the prevailing economic system is unnatural. The ancient Chinese economy was unnaturally dominated by the ruling class as emperors, causing it to stagnate, while the current global economic system is dominated by the merchant class who are called ‘capitalists’ nowadays, causing ‘secular stagnation’ and even possible extinction via global warming. Change the system, balance the classes naturally, then such a situation can be avoided naturally.


Another misinterpretation is the application of the 200 year limit:

What would it have been had the law given no direct encouragement to agriculture besides what arises indirectly from the progress of commerce, and had left the yeomanry in the same condition as in most other countries of Europe? It is now more than 200 years since the beginning of the reign of Elizabeth, a period as long as the course of human prosperity usually endures. (Book 3, Chap. 4, Par 20)

That paragraph was taken from a chapter on how commerce contributes to wealth. Smith merely said that with zero agriculture or land investments (fixed capital), commercial wealth (circulating capital) can only last around 200 years. This observation is true when applied to societies that only use commerce or circulating capital — mercantile companies. Smith’s 200 year span holds true for most mercantile companies. It does not usually apply to nations, except maybe for mercantile towns and ports such as Amsterdam, Singapore and Hongkong which have very little land. Amsterdam flourished in the 16th and 17th century but declined in the 18th and 19th.

*economists who entertain limits to economic growth, population, development, etc are merely materialists in their core (such as Malthus). They shallowly see that nature imposes limits, such as a fixed land area, and then conclude that humans must be bound to that limitation. Smith and Hume were non-materialists and believed that humans can overcome physical limitations.


So What is Steady State Good For?

Smith always looked at the good and bad aspects of policies and systems. So on the positive, steady state goes straight into attacking the recklessness of profit maximization and deregulation advanced by Economics and brings up the threat of planetary destruction. Rather than emphasize its bad recommendations, it would be better to hitch a ride on its ‘save the planet’ advocacy, then steer it to the proper direction once more people jump in.


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