Steady-state economics and the limits of growth

What is the new school challenging?

We start with two unfamiliar labels, but the disagreement underneath them is manageable. Neoclassical economics treats the economy as a closed system of exchanges between producers and consumers. Steady-state economics says that picture leaves something important out.

Closed can initially sound like a fixed amount of value moving around, with no room for growth. But the next sentence explicitly says that growth has no limits. So that first reading can't be right. The point is that the neoclassical model treats the economy as free from outside, noneconomic constraints. We need the next paragraph to see what kind of constraint matters here.

First, the neoclassical position gets a further defense. Some economists say growth is essential because it creates the capital needed to address problems such as income inequality. On that view, even a problem associated with growth can be a reason to pursue more growth.

The steady-state reply is simple: where do the materials come from, and where does the waste go?

The economy depends on nature. Raw materials enter it; consumed products and waste come out. We aren't just watching money or value circulate between people. Nature has a limited ability to regenerate those materials and absorb the waste.

That produces the idea of an optimal size. Beyond a certain point, environmental costs rise faster than the benefits to producers and consumers. More activity can still produce some benefits, but those gains no longer keep pace with the costs. This is why steady-state economists want an economy in equilibrium with nature, rather than one committed to growing forever.

At this point, we might ask: what if we become more efficient? Could we get more useful output from the same resources instead of continually using more? Keep that question in mind. It is different from assuming we can simply take an unlimited amount from nature.

Neoclassical economists respond in another way. They treat nature as one element within the economy, not an outside limit. If a natural resource runs out, a human-made resource can replace it and growth can continue.

Notice what that argument concedes. A natural resource can be depleted. The disagreement isn't necessarily over whether the supply of a particular material is finite. It's over whether that fact ultimately limits the economy, given the proposed substitutes.

The final paragraph moves from the models to their implications. Some steady-state economists think Western economies have already exceeded their optimal size. They point to a growing gap between measures that count the monetary value of goods and services and a measure that also accounts for resource depletion and production costs. More monetary activity doesn't, by itself, establish that the activity is environmentally sustainable.

The objection is obvious: if we hold back growth, won't the economy stagnate?

The reply brings us back to our efficiency question. An economy needs to satisfy human wants, but using more resources isn't the only way to do that. Conservation can improve how resources are used. Recycling is the stated example.

Imagine a process that could produce ten units of useful energy with one unit of oil instead of ten. Those numbers are only an illustration. The idea is to obtain the desired result with less resource use. This is the distinction between qualitative improvement—better management—and quantitative expansion—more resources.

The ending doesn't say people should simply give up everything they want. It proposes judging a steady-state economy partly by whether it can use alternatives such as conservation without sacrificing its ability to satisfy producers and consumers. That condition matters. The challenge to unlimited growth comes with an alternative, not just a demand to stop.