A Critique of ‘Steady State Economics’


Here is a brief account of human history:

‘For the vast majority of human history, the size of the economy was small compared to the size of the biosphere. But over the last hundred years or so, this balance has changed remarkably due to the increase in the number of people in the world and the growth in each person's consumption of goods and services. […] Due to economic growth, humanity now uses eleven times as much energy, and eight times the weight of material resources every year as it did only a century ago. The global economy is now so large that it is undermining the natural systems on which it depends. The result is a wide range of global environmental problems: climate change, biodiversity loss, stratospheric ozone depletion, deforestation, soil degradation, and the collapse of fisheries. The list goes on’

(O'Neill et al., 2010, pp. 23–26).

Here is another account of the same phenomenon:

‘From 2 million or 200,000 or 20,000 or 2,000 years ago until the 18th century there was slow growth in population, almost no increase in health or decrease in mortality, […] increase in wealth for a few, and mixed effects on the environment. Since then there has been rapid growth in population due to spectacular decreases in the death rate, rapid growth in resources, widespread increases in wealth, and an unprecedently clean and beautiful living environment in many parts of the world […] In the 19th century the planet Earth could sustain only one billion people. […] Now, 5 billion people are living longer and more healthily than ever before, on average. The increase in the world's population represents our victory over death’

(Simon, 1994, pp. 22–23).

Unlikely as it may seem, both authors are really describing the same planet, representing two diametrically opposed sets of assumptions. The first view, ‘Malthusianism’ or ‘Steady State Economics’ (SSE), holds that the planet's biosphere is highly fragile and can only cope with a low level of human economic activity. If the latter exceeds its ‘planetary boundaries’, it overstretches the biosphere's carrying capacity, and thus depletes the world's ecological capital: according to the SSE view, the lifestyle we have grown accustomed to is akin to the lifestyle of a prodigal heir, who squanders the family wealth in a mindless consumption frenzy. The only way to prevent disaster is to downsize the world economy to a level which the planet can absorb. Since this is deemed impossible in a capitalist economy, an economic system in which the state tightly controls all economic activity is advocated.

The second position, ‘rational optimism’ or ‘sceptical environmentalism’, rejects the SSE assumption that people are just passive consumers of the resources they stumble across. Rather, people are seen as potential problem-solvers, who can overcome resource constraints given the appropriate institutional setup: a system of secure property rights and the free formation of market prices.

Suppose demand for resource X was growing at a much faster rate than supply. A Steady State Economist would typically extrapolate this trend into the future, calculate the date we will ‘run out of X’, and describe the consequences in a melodramatic fashion. A sceptical environmentalist would argue that if this trend continues, the price of X will increase. This entices X-suppliers to look for ways of tapping into hitherto inaccessible X-deposits, and X-consumers to look for ways of making more with less X. Entrepreneurs, meanwhile, are enticed to look for ways of substituting X.

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Whichever approach one finds intuitively more convincing, the empirical track record of the optimist position is vastly superior. Over the past 200 years, all kinds of resources have been predicted to run out and all kinds of ecological disasters have been predicted – next to none has ever materialised.

On the macro level, the long-term trend since the Industrial Revolution has been for the world to gradually become more populous and more prosperous. If the global ecosystem was in danger of bursting under the weight of our economic activity, it would have burst long ago. Instead, all kinds of social, health and environmental indicators have improved.

So what explains the continued fascination with doom-and-gloom theories? Most modern-day Malthusians make no attempt to hide their loathing of mass consumerism (e.g. New Economics Foundation, 2009). So there may be a predisposition, on their side, to ascribe negative consequences to a process which they are opposed to anyway. This highlights, once more, the danger of using economic analysis in order to seek confirmation for one's preconceived intuitions.

Kristian Niemietz is the IEA's Poverty Research Fellow (kniemietz@iea.org.uk)