Friday, October 14, 2011

Herman Daly's Steady-State Economics

I finally sat down and read Daly’s classic book Steady-State Economics, which I think is worth discussing in light of today’s situation. In this post I’d like to begin to review Daly’s ideas (which were ahead of their time—the first edition was written in 1977). His ideas are deep and simple at the same time, and should be a foundation for any future economic system.

Daly makes a point at the beginning of the second edition that is both “obvious” and true. (I use quotes because I’ve found that sometimes things that are obvious are either not so, or not true, for a variety of reasons.) Using Schumpeter’s term “preanalytic vision”—the premise upon which a theory is built—he describes the basis for both standard and steady-state economics:

What is the preanalytic vision of standard economics? Of stead-state economics?

For standard economics, it is that the economy is an isolated system in which exchange value circulates between firms and households. Nothing enters from the environment, nothing exits to the environment. It does not matter how big the economy is relative to its environment. For all practical purposes an isolated system has no environment.

Contrast this with steady-state economics:

For steady-state economics, the preanalytic vision is that the economy is an open subsystem of a finite and nongrowing ecosystem (the environment). The economy lives by importing low-entropy matter-energy (raw materials) and exporting high-entropy matter-energy (waste). Any subsystem of a finite nongrowing system must itself at some point also become nongrowing.

The logic is so simple, yet somehow it isn’t the basis for today’s dominant economic thinking. Daly comments that the discipline of economics is not so keen on creative destruction when applied to the discipline of economics itself....
Read the rest at Contraposition, Daly’s Steady-State Economics by barath


googleheim said...

clintonian economics had us in a steady state in 90's right ?

very cheap inputs from Asian and cheap oil - we just made up a bunch of dot Commie crap here in the states and exported it

Oliver said...

Why must they be exclusive? It would seem as though both our monetary system as well as our value system are open and infinite, whereas our physical environment is more or less finite for all practical purposes. I'd say economics is, among other things, about finding out how these different systems relate to one another.

marris said...

What a nut. Entropy analysis? If this guy took a moment to measure how much raw materials humans have used, say as a fraction of earth's mass, he would see that so far, we've already scraped around the edges.

The vast vast vast majority of material is still in a low entropy state. Maybe his arguments will become relevant if/when we start large-scale geo-engineering.

googleheim said...

mt everest is nothing but an embossment like an orange peel is the earth - like 5 miles / diameter of earth > shows that we haven't even scrapped around the edges

Tom Hickey said...

Daly is doing thermoeconomics

marris said...

Uhm, ok. So I guess all thermoeconomists are nutty. At least the ones who think this is a problem right now (I'm sure the physics part is fine because the physicists did all the work).

Seriously, do these guys really understand what they're saying? Do they have an argument for why thermodynamic constraints are relevant at our scale?

Or are they trying to jump on the environmental bandwagon from another angle. Because the climatologist side is too full?

Tom Hickey said...

Thermoeconomics: Beyond The Second Law by Peter A. Corning, Ph.D.. Institute for the Study of Complex Systems

Anonymous said...

They are doomsayers whose predictions never turn out to be accurate.

A steady state economy cannot yet be defined; dwindling energy supplies may lead us "there", the point at which it can be observed, then evaluated. Economists of the future may decide to call it something else.

Technological advances may place us on another course, where our energy needs for the foreseeable future are secured.

marris said...

The linked paper (Beyond the Second Law) attacks naive applications of the 2nd Law. IMHO, the author (Corning) actually knows what he's talking about. I hope most people who claim to be "doing thermoeconomics" (TE) are doing what Corning does.

In contrast, Daly seems to NOT know what he's talking about. [Ironically, the wikipedia page for TE describes the field as exactly what Daly is doing]. Daly _is_ building his theory around the second law [what Corning correctly derides as a simple thermoDYNAMIC analysis, and not at all an economic one].

marris said...

Actually, the wikipedia page is not completely on Daly's side. It talks about Corning's ideas as well.

marris said...

Actually, the wikipedia page is not completely on Daly's side. It talks about Corning's ideas as well.

Tom Hickey said...

There are advances in every field. Daly was writing in 1977. It got other people thinking.

Daly's simple model is kind of like the simple models economists use in the class room, but applied to energy. It is a starting point for thinking about a subject rather than an end point.

People are beginning to see parallels between money and energy. There is something of a push now to use energy units as a numeraire.