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Leontief
Prize
"Reconciling
the Economics of Social and Environmental Sustainability"
Remarks by Herman Daly
on the occasion of his receipt of the Leontief Prize
at Tufts University, on November 13, 2001
The current
answer to poverty is growth in aggregate production,
as measured by GDP. Redistribution of GDP from rich
to poor is rejected as "class warfare",
and any recomposition of GDP from private goods toward
public goods is rejected as government interference
in the free market. We are assured that a rising tide
lifts all boats, that the benefits of aggregate growth
will eventually trickle down to the poor, and that
increasing inequality is unimportant as long as the
poor are experiencing growth in their absolute incomes.
I will argue
that this growth solution will not work for two reasons,
one having to do with environmental sustainability,
the other with social equity.
(1) Ecological
limits are rapidly converting "economic growth"
into "uneconomic growth" growth which increases
costs by more than it increases benefits, thus making
us poorer not richer. The macroeconomy is not the
Whole it is Part of a larger Whole, the ecosystem.
As the macroeconomy grows in its physical dimensions
(population and per capita resource use), it does
not grow into the Void. It grows into and encroaches
on the larger ecosystem, thereby incurring an opportunity
cost of preempted natural capital and services. These
opportunity costs of sacrificed natural services can
be, and often are, worth more than the extra production
benefits of growth. We cannot be absolutely sure because
we measure only the benefits, not the costs. And even
if we measure the costs we add rather than subtract
them. But whatever the true benefits of economic growth,
it is clear that they cannot apply to uneconomic growth.
(2) Even if
growth were still economic, much of what we mean by
poverty is a function of relative rather than absolute
income, that is, of social conditions of distributive
inequality. Growth cannot possibly increase everyone's
relative income. We cannot all be above average, like
the children of Lake Wobegon. There is a degree of
inequality that is legitimate and in accord with a
larger concept of fairness and incentives, but also
there is a degree beyond which further inequality
destroys community and social cohesion, as well as
undermines incentive to work. Growth, both economic
and uneconomic, seems to have increased the consumption
of the present rich at the expense of:
(1) the present
poor;
(2) the future;
and,
(3) nonhuman
species.
Am I saying
that wealth has nothing to do with welfare, and that
we should embrace poverty? Not at all! I am saying
that growth, as we currently measure it (GDP), no
longer necessarily reflects increases net wealth that
we may actually be increasing illth faster than wealth,
making ourselves poorer, not richer, even as GDP increases.
Moreover, the amount of welfare derivable from a given
increment in real net wealth has diminished because
the increasing inequality of its distribution results
in the trivial wants of the rich being satisfied ahead
of the basic needs of the poor.
One might object
that growth in rich countries might be "uneconomic",
growth in poor countries where GDP consists largely
of food, clothing, and shelter, is still very likely
to be "economic". There is much truth in
this, even though poor countries too are quite capable
of deluding themselves by counting natural capital
consumption as income. But, more to the point, the
current policy of the IMF, WTO and WB is not for the
rich to decrease uneconomic growth while the poor
increase economic growth. Rather the vision of globalization
is for the rich to grow rapidly in order to provide
markets in which the poor can sell their exports.
It is thought that the only option poor countries
have is to export to the rich, and to do that they
have to accept foreign investment from corporations
who know how to produce the high-quality stuff that
the rich want.
The whole
global economy must grow for this policy to work,
because unless the rich countries grow rapidly they
will not have the surplus to invest in poor countries,
nor the extra income with which to buy the exports
of the poor countries.
Under the current
ideology of export-led growth the last thing poor
countries are supposed to do is to produce anything
for themselves. Any talk of import substitution is
nowadays met by trotting out the abused and misunderstood
doctrine of comparative advantage. The logic of comparative
advantage is unassailable, given its assumptions.
Unfortunately one of its assumptions is capital immobility
between nations. When capital is mobile, as indeed
it is, we enter the world of absolute advantage, where
there are still global gains from specialization and
trade, but no longer any guarantee that each country
will necessarily benefit as under comparative advantage.
One way out of this difficulty would be to greatly
restrict capital mobility thereby making the world
safe for comparative advantage. The other way out
would be to introduce international redistribution
of global gains from trade based on absolute advantage.
Which solution does the IMF advocate? Neither. They
prefer to pretend that there is no contradiction,
and call for both comparative advantage-based free
trade, and free international capital mobility.
In an economically
integrated world, one with free trade and free capital
mobility, it is difficult to separate growth for poor
countries from growth for rich countries, since national
boundaries become economically meaningless. Only by
adopting a more nationalist approach to development
can we say that growth should continue in some countries
but not in others. But the globalizing trio, the IMF,
WTO, and WB cannot say this. They can only advocate
continual global growth in GDP. The concept of uneconomic
growth just does not compute in their vision of the
world.
Let us have
a closer look at GDP, that alchemical elixir whose
growth is supposed to forever transmute base poverty
into gilded wealth. It is defined by economists as
the sum of all value added by labor and capital in
the process of production. Value added is simultaneously
created and distributed in the very process of production.
Therefore, economists argue that there is no "pie"
to be independently distributed according to ethical
principles. As Kenneth Boulding put it, instead of
a pie, there are only a lot of little "tarts"
consisting of the value added by different people
or different countries, and stupidly aggregated by
statisticians into an abstract "pie" that
doesn't really exist as an undivided totality. If
one wants to redistribute this imaginary "pie"
he should appeal to the generosity of those who baked
larger tarts to share with those who baked smaller
tarts, not to some invidious notion of equal participation
in a fictitious common inheritance.
I have considerable
sympathy with this view, as far as it goes. But it
leaves out something very important.
In our one-eyed
focus on value added we economists have neglected
"that to which value is added", namely the
flow of resources and services from nature. "Value
added" by labor and capital has to be added to
something, and the quality and quantity of that something
is important. It cannot be reduced to value previously
added to nothing by labor and capital. Now there is
a real and important sense in which the original contribution
of nature is indeed a "pie", a pre-existing,
undivided totality that we all share as an inheritance.
It is not an aggregation of little tarts that we each
baked ourselves. Rather it is the seed, soil, sunlight,
and rain from which the wheat and apples grew that
we converted into tarts by our labor and capital.
The claim
for equal access to nature's gifts is not the invidious
coveting of what our neighbor accumulated by her own
labor and abstinence. The focus of our demands for
income to redistribute to the poor, therefore, should
be on the value of the contribution of nature, the
original value of that to which further value is added
by labor and capital. In sum, we must bring increasingly
scarce environmental services under the discipline
of the price system, because these are truly rival
goods) the use of which by one person imposes opportunity
costs on others. The necessary price or scarcity rent
that we collect should be used to alleviate poverty.
It should be
noted at least in passing that there are some goods
that are by nature nonscarce and nonrival, and should
be freed from illegitimate enclosure by the price
system. I refer especially to knowledge. Knowledge
is not divided in the sharing but multiplied. There
is no opportunity cost to me from sharing knowledge
with you. Yes, I would lose the monopoly on my knowledge
by sharing it, but we economists have long argued
that monopoly is a bad thing because it creates artificial
scarcity that is both inefficient and unjust. Once
knowledge exists, the opportunity cost of sharing
it is zero and its allocative price should be zero.
Consequently, I would urge that international development
aid should more and more take the form of freely and
actively shared knowledge, and less and less the form
of interest-bearing loans.
I am aware
that although the proper allocative price of existing
knowledge is zero, the cost of production of new knowledge
is usually greater than zero, sometimes much greater.
This of course is the usual justification for intellectual
property rights in the form of patent monopolies.
This is an area needing much reconsideration. I only
mention it here, and signal my skepticism of the usual
arguments for patent monopolies, so emphasized recently
by the free-trading globalizers. As far as I know,
James Watson and Francis Crick receive no patent royalties
for having unraveled the structure of DNA, arguably
the most basic scientific discovery of the twentieth
century. Yet people who are tweaking that monumental
discovery are getting rich from monopolizing their
relatively trivial contributions that could never
have been made without the free knowledge supplied
by Watson and Crick.
The point
of the above digression, again, that although the
main thrust of my remarks is to bring newly scarce
and truly rival natural capital and services into
the market discipline, we should not overlook the
opposite problem of freeing truly nonrival goods from
their artificial enclosure by the market.
Returning to
my main theme, economists have traditionally considered
nature to be infinite relative to the economy, and
therefore not scarce, and therefore properly priced
at zero. But nature is scarce, and becoming more so
every day as a result of growth. Efficiency demands
that nature's services be priced. But to whom should
this price be paid? From the point of view of efficiency
it does not matter who receives the price, as long
as it is charged to the users. But from the point
of view of equity it matters a great deal who receives
the price for nature's increasingly scarce services.
Such payment is the ideal source of funds with which
to fight poverty and finance public goods.
Value added
belongs to whoever added it. But the original value
of that to which further value is added by labor and
capital belongs to no one, or to everyone. This original
value of nature should be the focus of redistributive
efforts because its existence is a scarcity rent required
by allocative efficiency, and its public appropriation
is in the service of distributive justice.
Appeals to
the generosity of those who have added much value
by their labor and capital are more legitimate as
private charity than as a foundation for fairness
in public policy. Taxation of value added by labor
and capital is certainly legitimate. But it is both
more legitimate and less necessary after we have,
as much as possible, captured natural resource rents
for public revenue.
The above seems
to be the basic insight of Henry George. Neoclassical
economists have greatly obfuscated this simple insight
by their refusal even to recognize the productive
contribution of nature in providing "that to
which value is added". In their defense it could
be argued that this was so because in the past economists
considered nature as non-scarce, but now they are
beginning to reckon the scarcity of nature. Let us
be glad of this. But there is also a flaw in their
very understanding of production as a physical process.
Neoclassical production functions depict output as
a function of two inputs, labor and capital. In other
words, value added by labor and capital in production
is added to nothing, not even valueless neutral stuff.
But value cannot be added to nothing. Neither can
it be added to ashes, dust, rust, and the dissipated
heat energy in the oceans and atmosphere. Only low-entropy
matter/energy is capable of receiving the imprint
of value added by labor and capital. Since human action
cannot produce low entropy in net terms we are entirely
dependent on nature for this ultimate resource by
which we live and produce. Any theory of production
that ignores this fundamental dependence is bound
to be seriously misleading.
As an example
of how students are systematically misled on this
issue I cite a textbook used in the microeconomic
theory course at my institution. On p. 146 the student
is introduced to the concept of production as the
conversion of inputs into outputs via a production
function. The inputs or factors are listed as capital
(K), labor (L), and materials (M) -a promising beginning.
We turn the page to p.147 where we find the production
function written symbolically as q = f(K, L). M has
disappeared, never to be seen again in the rest of
the book. Yet the output referred to in the text's
"real world example" of the production process
is "wrapped candy bars". Where in the production
function are the candy and wrapping paper as inputs?
Production functions are often correctly described
as technical recipes. But unlike real recipes in real
cookbooks we are never given a list of ingredients!
The modern
form of the Georgist insight is to tax the resources
and services of nature (those things left out of the
production function)- and to use these funds for fighting
poverty and for financing public goods. Or we could
simply disburse the earnings from a trust fund created
by these rents to the general public, as in the Alaska
Permanent Fund, which is perhaps the best existing
institutionalization of the Georgist principle. Taking
away by taxation the value added by individuals from
applying their own labor and capital creates resentment.
Taxing away value that no one added, scarcity rents
on nature's contribution, does not create resentment.
In fact, failing to tax away the scarcity rents to
nature and letting them accrue as unearned income
to favored individuals has long been a primary source
of resentment and social conflict.
Charging scarcity
rents on natural resources and redistributing them
to the poor can be effected either by ecological tax
reform, or by quantitative cap and trade systems.
In differing ways each would limit expansion of the
scale of the economy into the ecosystem, and also
provide revenue to be redistributed to the poor. I
will not discuss their relative merits, but rather
emphasize the advantage that both have over the currently
favored strategy. The currently favored strategy might
be called "efficiency first" in distinction
to the "frugality first" principle embodied
in each of the mechanisms mentioned above.
Efficiency
first sounds good, especially when referred to as
"win-win" strategies or more picturesquely
as "picking the low-hanging fruit". But
the problem of "efficiency first" is with
what comes second. An improvement in efficiency by
itself is equivalent to having an increased supply
of the factor whose efficiency increased. The price
of that factor will decline. More uses for the cheaper
factor will be made. We will end up consuming as much
or more of the resource than before, albeit more efficiently.
Frugality first induces efficiency; efficiency first
does not induce frugality- it makes frugality less
necessary.
I am afraid
I will be told by some of my neoclassical colleagues
that frugality is a value-laden concept, especially
if you connect it with redistribution of scarcity
rents to the poor. Who am I, they will ask, to impose
my personal elitist preferences on the democratic
marketplace, blah, blah, etc. etc. I am sure everyone
has heard that speech. The answer to such sophistry
is that ecological sustainability and social justice
are fundamental objective values, not subjective individual
preferences. There really is a difference, and it
is past time for economists to recognize it.
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