Contribution to GTI Roundtable "Full-World Economics"

An exchange on the essay Economics for a Full World

Eric Zencey

June 2015

Herman Daly’s essay makes clear that ecological economics and its corollary, steady-state economic thinking, represent a return to economics as it was practiced in the nineteenth century—when it was known as political economy, the integrated treatment of morals and economics, ultimate ends and efficient means. Late in that century, economics calved off from political economy, leaving behind political science and political philosophy as the residuum. It did this in service to the ideal of becoming rigorously scientific.

It is odd, then, that alone among disciplines with any pretense to analytic rigor, economics has steadfastly resisted the thermodynamic revolution that swept physical and life sciences in the nineteenth and early twentieth centuries. Physics, biology, chemistry, geology, even the study of history were transformed, but not economics.

I think we can blame this on bad timing, willful ignorance, and oil.

Bad Timing

In the late nineteenth century, the archetypal science was physics, and physics was Newtonian mechanism. Ignorant of what a young thermodynamic theorist named Albert Einstein would soon do to the Newtonian paradigm they emulated, economic “scientists” set about mathematically modeling the economy as sets and subsets of self-contained, equal-and-opposite actions and reactions, happily (and explicitly) assuming that all economic activity consists of ahistorical, which is to say completely reversible, processes. No one with a nodding acquaintance with the law of entropy could have countenanced this. Entropy is time’s arrow, the law of irreversibility; it describes the one-way flow of energy use. A purely mechanical process can be run forward or backwards, but we will never invent a machine that can suck in exhaust gases, heat, and motion and transform them into gasoline. The entropy law can tell you why. Newton couldn’t.

Just as a consumer is loath to trade in a new appliance when an even newer one comes on the market, neoclassical economists weren’t about to retool their brand new thinking to reflect changes in the underlying metaphysics they had been so keen to adopt.

Because the entropy process is time’s arrow, and because Daly’s work is aimed at fostering the long-delayed thermodynamic revolution in economics, it is entirely appropriate that his essay touches at several key points on the necessity for political economy to understand its subject matter historically. As with many paradigm-defining truths, once the idea has been stated, it seems obvious: elements of the neoclassical model that could pass for true on a large and forgiving planet a hundred years ago are obviously not true today, when the planet’s source-and-sink services are severely taxed, when natural capital is the limiting factor in production, when there are seven billion of us and our economic wants, capacities, and expectations have been amplified by our access to the ancient sunshine of fossil fuels.

Willful Ignorance

By modeling the economy as a closed and circular system, neoclassical economists have encouraged themselves to operate in a remarkable state of denial about the physical roots and ecological consequences of our wealth-creating activities. And yet economics has experienced no paradigm-shaking crisis as a result. Neither climate change nor any of the other source-and-sink catastrophes facing civilization have been laid at the feet of bad economic theory. One reason for this is that neoclassical economists succeed in treating environmental costs as “externalities.” How could environmental degradation be the result of economic activity if it is external to the economy?

In its self-confirming isolation of the economy from nature and theory from reality, neoclassical economics amounts to a highly principled practice of solipsism. When this pathology is manifest in an individual, it produces unpleasant consequences that might eventually prompt some reflection and personal growth. Not so with the collective delusion of mainstream economists. Evidence of our ongoing ecological catastrophe falls far from their purview—not just disciplinarily but geographically, as the wealthier nations (wherein the vast majority of economists reside) export their ecological footprint to the impoverished nations of the world. And for several generations (at least since Reagan defeated Carter, removed Carter’s solar panels from the White House, and ushered in an era of GDP growth through de-regulation of the social and ecological damage done by economic growth), there has been a strong self-selection among students of economics. Undergraduates with any kind of deep personal connection to natural systems tend to find the study of standard economics unattractive, displeasing, even soul-deadening. This leaves the field to those most willing to bracket off as irrelevant to their professional purpose any question about the moral and ethical consequences of economic activity, any question about the health and maintenance of nature, any question about the economy’s relation to the larger social and natural systems within which it operates.

Oil

Even so, you might expect that a discipline with such a demonstrably deficient view of its subject matter would fail of its object—would fail to offer wise counsel about the collective project of augmenting the stock of wealth that humans can enjoy. But economics has had much apparent success. Despite regular downturns and financial crises, the wealth produced by our economies has grown and grown and grown. I think there is a ready explanation that becomes visible through the conceptual lens of ecological economics. Energy is one of three elemental factors of production (along with matter and human design intelligence), and when your economy operates on an energy source that cranks out wealth-making value in a ratio of 100 to 1—the estimated energy return on energy invested (EROI) that petroleum offered us in the early twentieth century—you can believe anything you want about how economies operate and your economy will still generate a great deal of wealth.

In other words, oil granted the new science of economics immunity from being proven false by events. Ironically enough, falsifiability of principles and propositions is one solid measure of a science. (Non-falsifiable beliefs are called faiths.)

In effect, the discipline of economics has a free rider problem—it has been given a free pass by the enormous power of oil to misunderstand itself and its subject matter. You could also recognize it as having a Midas problem. Like the power granted to that legendary king, the power of wealth generation that oil granted to our economy made it impossible for the discipline of economics to connect in any fundamental way with otherness, including the otherness of the planet and its role in the very processes that economics presumes to model. Midas rued his gift when he touched his daughter and transformed her into extension of his self, his will, his wealth-creating power. Urban planners and neighborhood organizers regret what wealth-creating oil, in the form of the personal automobile, has done to our cities, just as environmental activists and systems ecologists are sorrowed by what diesel engines and our oil-fed population explosion have done to the planet. Like Midas, neoclassical economists may yet learn to rue what our wealth-generating gift has done to them and their discipline.

Revolutionary Portent, Future History

Long delayed, the thermodynamic revolution in economics cannot be permanently forestalled. For one thing, it is getting harder and harder for the neoclassical model to maintain the pretense that economic activity takes place in abstracto—on the clean blank sheets of paper on which they write their formulae, with no roots in or consequences for anything outside of itself. Economic truths derived on the model of Newtonian mechanism are supposedly abstract and ahistorical, but our planet and our economy are most assuredly evolving concretely and over time.

The driving dynamic of this economic and planetary change has been human use of high-EROI fossil fuel. The driving dynamic of the history yet to come is the declining EROI of our civilization’s energy sources. You can see some of the consequences already:

• Despite a rising real per capita GDP, for a significant percentage of workers in OECD, nations personal income has flatlined or is declining.
• As more and more economic effort goes into the overhead of providing energy to the economy, there is less left for other sectors. “Austerity” becomes the watchword for governmental budgets, even in the wealthiest nations in the world.
• Developed countries find it increasingly difficult, if not impossible, to pay maintenance and upgrade costs on infrastructure investments made in the heyday of 100-to-1 oil.
• Governments are reducing their scope and energy at the exact moment that sustainability would have them take strong action to rein in the corporate tendency to maximize profits by degrading the commons and externalizing other costs.
• Pension-fund wipeouts are becoming common as one way to fulfill the economy’s structural need for debt repudiation—a need that lies in our system’s willingness to let debt grow faster than an increasingly deregulated but declining EROI economy can pay back.
• The planetary carbon sink is full, producing climatic effects that even an abstraction-inhabiting, arithmo-morphizing economist has to acknowledge as a troubling reality.

Centuries from now, economic historians are likely to understand the relationship between EROI and wealth creation much better than does the average economist of today. I think it likely that future political economists will express wonder not at the twentieth century’s enormous economic success, but at how little we actually added to our stock of wealth for all the high-EROI coal and oil it was our pleasure to burn. They are almost certain to shake their heads in wonder that we, enjoying an energy supply and an EROI never seen on the planet before or since, could ever have experienced an economic downturn, could ever have let a human starve from want, could ever have been so programmatically blind to the physical origins of our fortunes.

Democracy’s Lost Habitat

I am afraid that those economic historians will also bemoan the fact that we alive today did not fully appreciate another truth: on a fully developed planet, economic growth is no longer the friend of democracy, but its enemy. A new, thermodynamically enlightened political economy needs to notice this: We run our planet like a badly managed factory, with a cost-be-damned focus on maximizing the output that we humans (supposedly) desire. Unfortunately, it does not make much sense to talk about individual liberty and democratic freedom in a factory. (Engels himself said that an appropriate motto for the gates of every factory was “Abandon all autonomy ye who enter here.”) As trade agreements like NAFTA and the TPP make all too clear, a planetary economy run like a factory has no room for the inefficiencies of democracy or local control. Nor can a maximum-throughput society, budgeted right up to the edge of what the planet can sustainably offer to us in the form of resources and sustainably absorb from us in the form of waste, tolerate the possibility that democratic decision-making might misjudge a relevant limit and crash the system. Daly’s full planet—what I have elsewhere called Factory Planet—is a planet that must be run by technocrats if it is to have any chance of supporting human civilization sustainably.

The Ultimate End

And this leads to a friendly amendment I offer to Daly’s statement of the ultimate economic policy goal. I think it needs to be tweaked to reflect the reality that the good life has elements that reach far beyond material well-being, and that these non-wealth elements are nevertheless affected by economic policy. Political philosophy has long posited that, politically, the good life consists of the enjoyment of individual liberties, political rights, and the appropriate exercise of political agency—the ability to participate in the decisions that affect one and one’s community. The good life also requires that we be capable of encountering nature as other, as an occasion for experiences that lift us out of ourselves and out of a world consisting solely of human acts and works. This is one strong theme in John Stuart Mill’s chapter “On the Stationary State” that Daly mentions. The author of On Liberty saw a direct connection between his defense of the individual’s right to develop his or her excellences in society and his call for recognizing that at some point the ecological footprint of the economy must cease to grow. After the thermodynamic revolution in economics, when the discipline is restored to its proper wholeness as political economy, it may no longer be unthinkable to open an economics textbook and find a sentence like this one, taken from that chapter in Mill’s Principles of Political Economy:

Solitude, in the sense of being often alone, is essential to any depth of meditation or of character; and solitude in the presence of natural beauty and grandeur, is the cradle of thoughts and aspirations which are not only good for the individual, but which society could ill do without.

I think economic policy needs to honor Mill’s idea that individual encounter with nature’s sheer otherness is in some significant measure a civic necessity and a political value, even as that otherness is sorely taxed by climate change and the relentless ubiquity of the human presence.

In sum, I suggest the following as the appropriate goal of a post-Newtonian political economy: maximizing the cumulative number of human lives ever to be lived over time at a level of per capita wealth, a level of individual political liberty, and with a degree of access to untrammeled natural systems sufficient for the good life. Without the additional specifications covering liberty and nature, we risk providing a strictly material version of the good life on a Factory Planet run by technocrats, with no democracy and no wilderness in sight.