Adam Smith and a Steady-State Economy

The world we have created is a product of our thinking, it cannot be changed without changing our thinking. – Albert Einstein

Properly functioning markets allocate resources efficiently, but they cannot determine the sustainable scale; that can be achieved only by government policy. – Herman Daly

Human beings are the strangest of creatures. We make observations about our surroundings or about our behaviors, these observations become cast into theory, and then these same theories feedback to shape both our behavior and our surroundings.

In 1776, Adam Smith made some ground breaking observations about economic behavior and published An Inquiry into the Nature of Causes of the Wealth of Nations. Smith would argue that individuals, working in unfettered freedom for their own self interest, would collectively and via an “invisible hand” provide for the greatest common good. His work would provide the foundation for much of today’s economic theory and would father the concept of the “free market”.

Adam’s work coincided with the birth our nation, and it is ironic, but not surprising that this Scottish moral philosopher, would become the patron saint of Wall Street. For many, the belief in the invisible hand of an unfettered free market would take on religious overtones and it would become the dominant sub-text in our American political discourse.

Theories about our world only survive until a new observation fractures the old beliefs and takes us forward to a new way of seeing. Caught up in our current ways of seeing the world, we find it hard to believe that what we believe today might be the equivalent of thinking that the “world is flat”. It has been over 200 years since Adam Smith fathered the science of economics and mainstream economic theory has evolved into a highly regarded science wrapped in the respectability of sophisticated and complex mathematics. However, emerging resource limitations and ecological observations are beginning to cause fractures in the old belief system. An belief system that blindly assumed that the world economy operates on an infinite resource base with infinite waste sinks, and that infinite economic growth is a self evident truth.

The gapping hole in mainstream economic theory is scale. In other words, the size of the economy relative to the closed ecosystem on which it relies for resources and waste sinks. This means that there are limits to growth, and that to live within those limits, the economy needs to find an optimum or steady-state condition. However, free markets and their invisible hand are blind to these limits and will continue to grow out of self interest until the invisible hand of the underlying ecosystem adjusts out of its own self interest. Unless we collectively wake up to this gapping hole in our world view, this adjustment will be both painful and harsh. Think massive population die-off and a pre-industrial standard of living.

The market cannot determine a sustainable scale for our economy. Because it is based on individual self interest, the free market’s inevitable path is one of ecological overshoot and catastrophic collapse. Government is the only economic player capable of acting in our common interest and of setting a sustainable economic scale. Unfortunately we are hard wired to discount the future and the government is …. well …. us. So short of a major mind altering crisis, it is unlikely that we will hear any our politicians call for an end to growth. It is more likely that the end of our belief in the goodness and rightness of growth will be imposed on us by peak oil. Many observers agree that oil production, as measured by flows, has already plateaued. The market forces of demand destruction have initially maintained a fragile supply-demand equilibrium, but its only a matter of time before oil consumption becomes completely supply driven and economic growth is stopped and then reversed.

This will likely result in a kind of economic armageddon. However, the vested individual interests of the free market will continue to fight the notion of a steady-state economy until we hit some kind of alcoholic bottom. That’s unfortunate, because a steady-state economy scaled to our planet’s ecosystem may not be able to grow quantitatively, but it can grow qualitatively. In other words, rather than more stuff, we could produce better stuff. We could measure gross domestic happiness instead of gross domestic product. We could aspire to a true standard of living rather than today’s GDP driven standard of consumption. Think more time, less hassle and stress, and a healthier population.

In the world of housing, a sustainable, steady-state economy means the end of low density single family housing. It means smaller, multi-family housing. Dwelling patterns will evolve to be more tribal than individual. Think urban village versus suburban wasteland. It means a healthier walkable lifestyle. It means healthful indoor air quality, and buildings that are self sufficient in energy. Since our mono-cultured, industrial food system is unsustainable, expect food to be grown locally and our children to relearn its source and value.

It will be a world in which the common interest finds parity with the individual interest. A world on which Adam Smith, the moral philosopher, would smile.

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4 responses to “Adam Smith and a Steady-State Economy

  1. Interesting speculation about unsustainable growth made in April of 2008, considering what happend in April of 2009. What do you think now?

    I don’t think that dependence on oil will lead to our ultimite demise. When supply becomes the limit and the price gets back to about $5 per gallon in the US change will start to happen again. I am really looking forward to plug in hybrid cars and ultimately electric cars, and solar cells on my roof. It’s a change that will happen that will be driven by the price of oil.

    But I agree that scale s a concern. AIG got to be too big too fail.

    The car companies got to be too big, too few and their labor unions got to be too big and influencial. Labor unions do good, car companies do good, but toether they became to slow to change or adapt.

    • Electric cars are welcome and will reduce our consumption of oil and air pollution in urban centers. However, these cars will be powered by coal and natural gas via our electric grid, so the pollution will simply be moved to the urban hinterland, and we will in effect playing a game of fossil fuel “whack-a-mole”. As for what I think in 2009 vs. 2008 go here to see a copy of a presentation I made last month at the International Association of Public Participation’s annual conference.

  2. I agree that MOST electricity is produced by non-renewable, poluting resources. But, not all. California has a madate that 33% of electricity will be produced by renewable resources by 2020. The step to plug in hybrids is part of the evolution. It allows a wave of choice to drive the change toward renewable energy – rather than a giant revolution.

    • Keep in mind that grid as currently configured is a 7/24 dance of balancing supply with demand. As a result it can only accommodate about 20% of its total supply coming from intermittent [non-dispatchable in grid-speak] sources like wind and solar.

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