Review of Herman Daly’s “Beyond Growth”

Up until the recent global financial meltdown, the predominant mantra of sustainable development and poverty reduction from World Bank technocrats to New York Times editorial pages seemed to be that economic growth through market-based solutions held the possibility for a new, borderless utopia.  Whether it was Thomas Friedman exhorting the seemingly boundless opportunities from free trade and information exchange in his bestseller The World is Flat, to Paul Wolfowitz’s claim that “sustained growth is essential for economic development” at the 2005 annual IMF/ World Bank meeting, the notion that economic growth could be ever be problematic was considered among mainstream development circles to be laughably naïve if not completely heretical.  Where disagreements existed, they were generally about the extent to which that growth was distributed, not whether the growth paradigm itself should be fundamentally re-examined.

During the period that “sustainable development” became an obligatory catch-all term showcased in funding proposals and green marketing materials worldwide, no less an authority than the President’s Council on Sustainable Development (1995) noted that “economic growth, environmental protection, and social equity should be interdependent goals”, and that “market strategies should be used… to protect and improve the environment” as a means of achieving this (increasingly vague) end.  But according to Herman Daly, they’ve got it wrong.

In his contrarian response to the accepted dogma entitled Beyond Growth: The Economics of Sustainable Development, Daly claims that not only is growth not sufficient for truly sustainable development, but it is directly opposed to the goals that this doctrine generally espouses.  Daly’s central premise draws upon a medley of theory and practice from economics, ecology, sociology, political science and physics in order to argue that ever-increasing growth is not only an undesirable and inefficient economic outcome, but that it is also a physical impossibility that will lead human society, and the planet, to ruin.  That premise states that while economic growth as measured by GDP is theoretically infinite, the physical laws of thermodynamics, namely as they concern entropy, impose a practical limit to the quantity and quality of GDP improvement, and that we are likely already beyond the optimal amount of growth.

According to the First Law of Thermodynamics, a closed system is essentially the conservation of energy – in a closed system energy can’t be created or destroyed, only transferred.  The Second Law of Thermodynamics states that in a closed system, entropy will tend to increase over time.  Entropy is defined as a measure of the unavailability of a system’s energy to do work- therefore, as entropy increases, the productive value of the system declines, and according to the First Law, low entropy (high energy) matter cannot be regenerated without an energy input from outside of the system.  Daly argues that sunlight is the only net energy input to Earth’s system, and that the fossil fuels that currently propel the majority of the world’s growth is simply the “stored sunlight of Paleozoic summers”.

The flow of materials from low-entropy inputs to high-entropy wastes upon which defines our oft-praised “economic consumption”, does not, therefore, create any net value.  He likens this “throughput” to the human digestive system, upon which the circulatory system relies.  The failure of traditional macroeconomics, he says, is that it views the economy as a closed value sustaining “circulatory system” and ignores the throughput of low-high entropy flows that drive this, just as the digestive tract drives the circulatory system in humans.  The Cobb-Douglas production which forms the basis productivity in nearly all macroeconomic textbooks, assumes that labor-and capital are the only relevant inputs which operate as part of a value creation cycle.  In the rare case where resources are considered at all as a determinant of production, it is assumed that labor, capital, and resources are all substitutes for one another.

Yet Daly argues that without the underlying resource base, there would be neither labor nor capital, and therefore these cannot be treated as substitutes.  Such reasoning, he posits, is a relic of 19th century economic theory developed at a time when low-entropy resources, as well as ecological “sinks” to absorb high entropy waste, were considered to be infinite.  From such a “snapshot in time” perspective, it is true that resources would seem to be held constant, just as the workings of the human circulatory system, when viewed at a single moment, do not appear to rely upon the digestive system.  But when there are no more calories for the circulatory system to draw upon, it becomes very clear that the two are highly interdependent.  To the extent that economic growth is a function of increasing throughput, we are not creating value but rather are subtracting from t he capital stock that we inherited.  True “development”, which Daly advocates in place of growth, is economic activity that increases the “circulatory system” activity of true value creation while minimizing the entropy producing resource consumption of throughput (the “digestive track”) to a level at which the ecosystem is able both absorb waste and restore kinetic energy (through sunlight).

Likewise, Daly argues that traditional microeconomics will not efficiently account for resource inputs when aggregated at the macro level, since micro-level decisions also tend to view resources to be more abundant then they really are.  Traditional environmental economics is almost exclusively centered on micro-considerations, such as the internalization of externalities, in order to solve environmental problems.  Daly suggests that while this approach can promote rational decision-making at the micro-level, it this breaks down when extended to the larger system.  To resolve this, Daly advocates an entirely new framework must be adopted by academics and practitioners in order to capture the true dynamics of the ecological system in macroeconomic considerations).

The reality, Daly says, is that the entire macro-economy depends upon and exists as a subset of the ecosystem and natural resource base, even though according to conventional macro-indicators such as GDP, these resources directly account for very little economic “growth”.  He likens this relationship to an inverted pyramid balancing on its tip- the tip representing the low-entropy natural/environmental resources upon which all else depends.  While this may appear to be common sense, Daly shows that the most basic classical macroeconomic models- upon which all current sustainable development and growth theory depends and upon which policies are made- completely ignores this reality.  In doing so, current policies are creating a growth mirage that, like a house of cards, threatens to collapse upon itself once the resource overuse reaches a critical point.  According to Daly, we may have already passed that point.

The major core macro indicator, GDP, is especially troubling for Daly.  While it is used as a key driver of major development policy decisions, Daly argues that the majority of GDP is simply a measure of throughput consumption rather than net value added.  For example, a resource rich country may have very high GDP growth based upon a single extractive industry, but the net value being created is actually very little since all that is occurring is a transfer of matter from low to high entropy, and the natural capital base is drawn down at the expense of future generations and perhaps ecosystem health.  Daly likens this to selling off assets of a company and counting it as income when there is no net value creation.  Worse still, according to Daly, is that fact that with increasing growth comes an increasing need for defensive expenditures and so-called “positional externalities”, or the so called “rat race” effect.  While some wealth leads to objective benefits, other wealth is relative to that of others in terms of the utility that we derive from it, such that if we get a raise, but our neighbor gets an even larger raise, we “feel” worse off.  Daly argues that such effects are pervasive past a certain level of income, and lead to reduced individual utility even as GDP appears to grow.

In his analysis of the role that markets should play in fostering true “development”, Daly distinguishes between three primary categories relevant to global economic development: 1) optimal pricing and allocation of scarce resources; 2) the distribution of resources; and 3) the gross scale of the economy as a whole relative to the capacity of the biosphere to sustain it.  He does not deny the important role that markets play, and argues that markets are undoubtedly the best mechanism for optimal pricing and allocation of resources.  Markets do not, he claims, address issues of distributive justice in a satisfactory manner.  Likewise, a tendency for micro-rationality to result in irrational macro outcomes will encourage a scale of economic growth that far exceeds the optimal level for true, entropy-neutral sustainable development.

Although his analysis goes on to include highly specific recommendations and critiques of everything from loan interest, monetary policy, family planning, the banking system, intellectual property laws, the WTO, and religion, his core argument is that our current growth paradigm is operating within “zero-sum” constraints, and that if we continue as we have in the past we are doomed to hit a wall, and hit it hard.  Therefore, policy makers and macro indicators should move to a new paradigm away from growth and towards balanced development that is truly sustainable.

Daly is certainly not the first person to espouse such a viewpoint, parts of which can be traced back to Thomas Malthus’ An Essay on the Principle of Population (1798) and appear more recently in the writings of Paul Ehrlich and the Club of Rome’s controversial Limits to Growth, and he acknowledges as much throughout the book.  However, his background as a neo-classically trained economist and “insider” who served as Senior Economist for the World Bank in charge of sustainable development policy brings considerable heft to his analysis and provides a unique perspective, bolstered by his synthesis of seemingly disparate information across traditional disciplines.

I came into this book with a background in neo-classical economics and having worked on USAID and World Bank sponsored international development and conservation projects, I generally felt that while I didn’t always agree with the methods and the distribution outcomes of the current paradigm, the goal of creating a “larger pie” was essentially sound, so long as in doing so externalities were priced in and the market was made to function efficiently at the microeconomic level.  Doing so would, I believed, address traditional Malthusian concerns of resource scarcity, with technology and innovation taking care of the rest.  The population issue would be taken care of through global demographic transition whereby the growing middle class would have fewer children and the population would stabilize and perhaps decline.  While I disagreed fervently with the “growth for the sake of growth” extremism of economists such as Julian Simon, mine was essentially an optimistic view of growth, so long as it was “done right”.  Upon picking up Daly’s book, my stance was one of open-minded skepticism- I’d give it a chance, but didn’t expect anything new or especially convincing.  I could not have been more wrong.

The extent to which he takes on the most tightly held economic dogma with a humble yet confident air, while systematically considering counter-arguments before surgically cutting them apart was very impressive.  His theories, as implausible as they may seem on the surface, are remarkably durable and clearly the result of much thought and refinement.  I liked his analysis of international trade, where he takes apart the argument for comparative advantage in today’s global environment by pointing out that David Ricardo (whom he clearly admires) developed this theory under the assumption that capital is not internationally mobile, which in today’s world it clearly it.  As a result, he suggest what I personally have always believed – that holding imports to the same standards and laws as domestically produced products is not, if done correctly, an act of protectionism, rather an exercise of state sovereignty that allows externalities to be appropriately captured.  He even uses a quote from David Ricardo highlighting Ricardo’s own belief in national sovereignty, a belief that today would have the father of international trade theory dismissed as a “protectionist” in mainstream economic circles. There are also some prescient gems that were quite astounding in light of current global events (this book was written in 1996), as during his rant against debt and interest rates when he all but predicts the current financial crisis by noting that interest rates are out of touch with the actual creation of value (beyond throughput), and even predicted a global “re-nationalization” of financial assets in the coming decade.

In sum, this analysis covers a lot of ground and puts into concrete terms a lot of concepts and ideas regarding development and the environmental that have always been a point of visceral discomfort for me and, I believe, for many others during this time of rapid change and instability.

Unfortunately, in trying to cover all bases, Daly might have been a little too thorough at the expense of readability.  At points the pace was rather plodding, while in other sections it was just plain difficult to follow (such as when he spends ten pages arguing that charging interest on loans is inconsistent with the second law of thermodynamics and uses biblical analogies to “manna from heaven” to demonstrate his point…).  This book was patched together from several essays that Daly had previously written, and I felt that this detracts from the flow and tempo of the reading.  In my opinion he would have been better served to narrow his scope in order to clarify the theme of his analysis.

Beyond Growth presents itself as a book for not only practitioners but all those with an interest in sustainability, yet I found the content to be much harder to digest than I had expected.  The ideas in this book are not for the faint of heart, and for me I feel that I’ll need to read it at least once more before fully grasping the impact of his argument.  This is not bedtime reading, and requires a fair amount of digestion.  As such, it is best taken on in “bite sized” chunks.  Nevertheless, as one who has read countless books on the topic of sustainable development, I can safely say that Beyond Growth has completely changed and clarified my views on this topic in a way that few other books have, with the possible exception of Paul Hawken’s The Ecology of Commerce.  For those who are truly committed to the idea of sustainable development and willing to trudge deep into uncharted territory with an open mind and a willingness to believe that conventional wisdom is not always best, Beyond Growth is a must read.