Rock Steady - Moving Towards a Steady State Economy

Excerpt from The Investment Professional, 2009

'...since he retired from the World Bank almost 15 years ago, Daly has remained decidedly outside the mainstream himself, mounting a steady barrage of criticism against what has been the central, unchallenged goal of Western economies since World War II—the relentless, single-minded pursuit of economic growth as measured by GDP (gross domestic product). The zeitgeist may be catching up with Daly, though. More and more economists, environmentalists, and real-world financiers and portfolio managers, many of whom call themselves “steady staters,” are seeking to knock GDP growth off its pedestal as the preeminent driver of economic policy....

Growth advocates, steady staters maintain, are operating under a number of wrongheaded assumptions, the first of which holds that the earth’s ecosphere functions only to serve the human economy. The economy, steady staters argue, is an open system inside the earth’s closed system. It cannot expand indefinitely without using up the earth’s finite resources.

Steady staters assert that growth as currently defined in GDP terms has failed to signal when human productive activities become “uneconomic.” In societies operating at high levels of consumption, incremental benefits are outweighed by incremental costs—for example, the health impacts of pollution. These costs, however, either go unrecognized or are registered as additions to rather than subtractions from GDP.

Steady staters also point to studies that suggest that continued growth in high-consumption economies, rather than enhancing human welfare, contributes to social malaise, as consumers acquire “positional” goods far beyond their basic needs, chasing fruitlessly after elevated social status. Polls indicate that self-reported “well-being” actually peaked in the United States in the 1950s and began to decline as per capita consumption rose sharply through the postwar years...

But steady staters aren’t just naysayers; they propound a clear set of alternative policies to the GDP growth model. The Canadian ecological economist Peter Victor maintains that “you can construct a macro picture for a national economy where the economy is not growing much or at all in GDP terms but where social and economic objectives are being met.”

Exactly what would such an economy look like and how can it be realized? In a speech before the UK Sustainability Commission in 2008, Herman Daly outlined ten policy ideas for the transition to a steady-state society. They include a cap–auction–trade system for basic natural resources; a shift away from taxing income and toward taxing resource depletion and environmental pollutants; limits on income inequality; more flexible workdays; and the adoption of a system of tariffs that would allow countries that implement sustainable policies to remain competitive in the global marketplace with countries that don’t...

Daly also calls for a transition to a 100% reserve requirement for bank lending, returning the control of the money supply to government; a stable worldwide population; and separation of GDP into two separate “costs” and “benefits” accounts. To discourage transborder financial capital flows that exploit the labor and resource capital of developing countries, he would also downgrade the IMF (International Monetary Fund) and World Bank into clearinghouses that collect fees from countries that run both surpluses and deficits in their current and capital accounts. Lastly, he would remove the price barriers to “nonscarce” intellectual capital—including royalty payments to patent holders. These barriers, he notes, often prevent developing countries from accessing the clean technologies critical to sustainable growth...

In March 2009, the UK government’s Sustainable Development Commission published “Prosperity without Growth?” Both Herman Daly and Peter Victor were consultants on this report, which blames the single-minded pursuit of growth for the global financial and environmental crises, and which calls on the leaders of the developed G-20 countries to adopt a 12-step transition to sustainable economies that is almost identical to the steady-state blueprint.

Grassroots movements are also driving steady-state behaviors on a local level. For example, Sweden is now home to a number of ecomunicipalities. Led by economist Torbjörn Lahti and by Karl-Henrik Robèrt, founder of the Natural Step Movement, these formerly depressed industrial towns have made an official and deliberate commitment to “dematerialize” their economies and to foster social equity...

Meanwhile, the UK-based Transition Culture movement has gone viral. Founded by permaculturalist Rob Hopkins in Totnes, England, the movement promotes local resilience, “powering down,” and “reskilling” as a response to climate change and peak oil. From Chile to Japan, over 150 communities around the world have become Transition Towns. Here in the United States, 24 communities belong to the movement. (Sandpoint, Idaho, was featured in Jon Mooallem’s April 16, 2009, New York Times Magazine article “The End Is Near! (Yay!).”)

Other signals of a steady-state mentality include growing public protest over executive compensation and the Obama administration’s proposed regulations for realigning executive pay with long-term performance across the financial services sector. And then there’s the “locavore” movement, which has taken off with a vengeance in the US—as evidenced by the Obama White House’s kitchen garden. The Story of Stuff, a low-budget 20-minute animated video that vividly connects the dots between human consumption and the despoiling of the planet, is being used as an educational tool in classrooms across the country.

Perhaps one of the most intriguing pieces of legislation inspired by steady-state principles is a bill that is expected to be introduced into the Vermont Senate in 2010. The bill would establish a Common Asset Trust managed by a board of trustees, with a binding mandate to assign present and future generations explicit property rights to certain resources—water, wetlands, air, and air waves. “If this legislation passes, if you want to use one of these assets you will have to compensate the commons,” says Joshua Farley of the Gund Institute, which helped craft the legislation...

Those who fail to factor “natural capital” risks and costs into their valuation models are likely to join the endangered species of the capital markets in a steady-state world. On the flip side, those in the investment and financial community who buy into the inevitability of the steady state say it is opening up a whole new approach to value.'