Economics definition by Adam Smith

January 1, 2016
Adam Smith Prize

AdamSmithRightA steady state economy is an economy with stable or mildly fluctuating size. The term typically refers to a national economy, but it can also be applied to a local, regional, or global economy. An economy can reach a steady state after a period of growth or after a period of downsizing or degrowth. To be sustainable, a steady state economy may not exceed ecological limits.

Herman Daly, one of the founders of the field of ecological economics and a leading critic of neoclassical growth theory, defines a steady state economy as:

An economy with constant stocks of people and artifacts, maintained at some desired, sufficient levels by low rates of maintenance ‘throughput’, that is, by the lowest feasible flows of matter and energy from the first stage of production to the last stage of consumption.

A steady state economy, therefore, aims for stable or mildly fluctuating levels in population and consumption of energy and materials. Birth rates equal death rates, and production rates equal depreciation rates.

History of the Steady State Concept

For centuries, economists have considered a transition from a growing economy to a stable one, from classical economists like Adam Smith down to present-day ecological economists. Adam Smith is famous for the ideas in his book The Wealth of Nations. A central theme of the book is the desirable consequences of each person pursuing self interests in the marketplace. He theorized and observed that people trading in open markets leads to production of the right quantities of commodities, division of labor, increasing wages, and an upward spiral of economic growth. But Smith recognized a limit to economic growth. He predicted that in the long run, population growth would push wages down, natural resources would become increasingly scarce, and division of labor would approach the limits of its effectiveness. He even predicted 200 years as the longest period of growth, followed by population stability.

John_Stuart_MillJohn Stuart Mill, pioneer of economics and gifted philosopher, developed the idea of the steady state economy in the mid-19th century. He believed that after a period of growth, the economy would reach a stationary state, characterized by constant population and stocks of capital. His words eloquently describe the positive nature of such an economic system:

It is scarcely necessary to remark that a stationary condition of capital and population implies no stationary state of human improvement. There would be as much scope as ever for all kinds of mental culture, and moral and social progress; as much room for improving the Art of Living and much more likelihood of its being improved, when minds cease to be engrossed by the art of getting on.

John Maynard Keynes, the most influential economist of the twentieth century, also considered the day when society could focus on ends (happiness and well-being, for example) rather than means (economic growth and individual pursuit of profit). He wrote:

…that avarice is a vice, that the exaction of usury is a misdemeanour, and the love of money is detestable… We shall once more value ends above means and prefer the good to the useful.

and

The day is not far off when the economic problem will take the back seat where it belongs, and the arena of the heart and the head will be occupied or reoccupied, by our real problems – the problems of life and of human relations, of creation and behavior and religion.

Nicholas Georgescu-Roegen recognized the connection between physical laws and economic activity and wrote about it in 1971 in The Entropy Law and the Economic Process. His insight was that the second law of thermodynamics, the entropy law, determines what is possible in the economy. Georgescu-Roegen explained that useful, low-entropy energy and materials are dissipated in transformations that occur in economic processes, and they return to the environment as high-entropy wastes.Georgescu-roegen The economy, then, functions as a conduit for converting natural resources into goods, services, human satisfaction, and waste products. Increasing entropy in the economy sets the limit on the scale it can achieve and maintain.

Around the same time that Georgescu-Roegen published The Entropy Law and the Economic Process, other economists, most notably E. F. Schumacher and Kenneth Boulding, were writing about the environmental effects of economic growth and suggesting alternative models to the neoclassical growth paradigm. Schumacher proposed “Buddhist Economics” in an essay of the same name, included in his book Small Is Beautiful. Schumacher’s economic model is grounded in sufficiency of consumption, opportunities for people to participate in useful and fulfilling work, and vibrant community life marked by peace and cooperative endeavors. Boulding used the spaceship as a metaphor for the planet in his prominent essay, The Economics of the Coming Spaceship Earth. He recognized the material and energy constraints of the economy and proposed a shift from the expansionist “cowboy economy” to the conservative “spaceman economy.” In the cowboy economy, success is gauged by the quantity and speed of production and consumption. In the spaceman economy, by contrast, “what we are primarily concerned with is stock maintenance, and any technological change which results in the maintenance of a given total stock with a lessened throughput (that is, less production and consumption) is clearly a gain.”

Georgescu-Roegen’s student, Herman Daly, built upon his mentor’s work and combined limits-to-growth arguments, theories of welfare economics, ecological principles, and the philosophy of sustainable development into a model he called steady state economics. He later joined forces with Robert Costanza, AnnMari Jansson, Joan Martinez-Alier, and others to develop the field of ecological economics. In 1990, these prominent professors established the International Society of Ecological Economics. The three founding positions of the society and the field of ecological economics are:

  1. The human economy is embedded in nature, and economic processes are actually biological, physical, and chemical processes and transformations.
  2. Ecological economics is a meeting place for researchers committed to environmental issues.
  3. Ecological economics requires trans-disciplinary work to describe economic processes in relation to physical reality.

Ecological economics has become the field of study most closely linked with the concept of a steady state economy. Ecological economists have developed a robust body of theory and evidence on the biophysical limits of economic growth and the requirements of a sustainable economy.

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