Exciting findings for my second paper : a single theory of the steady state economy

In my first paper [1], I consolidate enough evidence that  the persistence of growth as a main economic goal is flawed and full of environmental, social and economic costs.

Long story short, in a big economy in a small planet we cannot expect further to growth, and hence we need the analytical tools to define the conditions over which the planet, our society and the economy can thrive in the absence of growth in throughput.

A mandate for profit, not for growth

To my surprise, the extensive believe that growth is mandatory for a health economic system is not rooted in any mainstream economic theory: neoclassical, keynessian and marxists theories, do have conditions over which the economic function in the absence of  aggregate growth in output [2]. Those conditions do required stablishing limits and other policy goals, but they are technically viable.

The microfundations of the economic theory stablish that it is positive or null profits what is required for business to function in competitive or semi competitive markets [3]. When markets failed it is in regulation, property rights, cost internalization that we should look for and not growth to understand why some companies failed and others thrive. 

When there are economies of scale growth becomes a competitive advantage growth becomes a goal in itself. It must be noted that with adequate cap systems and as long as competitive markets do exist, economies of scale reduce costs and could make relevant products less resource intensive, not only profitable, so consumers benefit from it too. It is clear that this argument should not be used to all industries to explain growth, as this is particularly false for services, alhtough less so with digitalization. 

It is worth emphasizing here that profit will critically change depending on the assigment of costs to the economic activity. Historically it has been too often the case that natural capital, resources and pollution has been appropiated or generated with little cost for the companies. This is a market failure, and as such the correct internalization schemes must be in place, adjusting the tools based on the transaction and abatement costs of each industry and common affected.

Pursuing growth, without a growth engine

It is remarkable that the obsession with growth in the macroeconomics literature, did not lead to theories that focus on the component that clear condition and explain the growth of the economies.

Disregarding natural resources and capital, as their cost was relatively minor to the overall economy size, physical capital, humand capital and labor, were the measure inputs to explain growth theories.

The facts that those three only explain a minor ~30% of the variance on growth over the last century, forces theories to name the huge residual of the models the "technological progress or Total Factor Productivity". It seems that putting a fancy name to the residual was good enough to keep going. "It must be technology", some said, and decades go by, focusing on human capital and TFP to explain growth and disposing "free and abundant" natural resources.

It was not till very recently, around 10 years ago, that Ayres et al. [4], show that useful work, derived from energy use and the energy efficiency was the engine for economic growth. It is energy and our capacity to use it efficiently that power our economy, and most of the progress of the last 100 years. Man-made capital and labor will be much less productive if not were from the highly dense and pollutant sources of energy we have been using in the last 150 years. 

We now know that without highly dense, affordable and renowable energy, we are not only putting the climate into a unstable state, but also our economies will be forced to contract. The renewable sources offer a possible transition, but not without challenges as their density and return is worse than fossil fuels, despite the great efficiency gains in the last decade. The engine of growth is not certain to keep growing, and hence, our economic metabolism...

Wealth and wellfare, not growth

Dasgupta [5] wrote beautifully that sustainable wellfare is better explain with our wealth, or stock of capital (natural, human, physical), that the consumption/expenditures of a point in time as the GDP does.

It is wealth, and ideally well distributed wealth, what creates thriving systems and propragate wellfare across generations.

Our economies are far from perfect, with assymetries in information, wrong cost allocation and abundant economies of scale, yet the correct allocation of the costs of increasing physical capital is capable of providing permanent welfare gains to a wider community.

Sustainability, well defined

If sustainability is to be pursued, or taken seriously, that enforces the assurance that all subsequent generations could potentially enjoy the same levels of wellfare as we do today. Llavador et al. [6], show how the intertemporal allocation of resources to ensure sustainability in utlity is theoretically feasible within planetary boundaries in a multicountry context.

The authors did not inluclude the limiting power of energy, which I will, but at least took, not like Nordhaus or Stern, the planetary boundaries as given, and find a steady state path of investment and consumption, where the convergence between the north and the south happen within the next three generations.

Achieving sustainability will require investment in knowledge and human capital, as well as the vast implementation of renowables, with moderate "sacrificies" in consumption, and no or little in utility over time.

We need to stop discountting future generations or current generations too much, and rather find paths where the sustainability in utility and no consumption only, are part our goals as a society.

Winners, and lossers

The authors cited as of now, where placing little policy emphasis to the intragenerational inequality. It is important then to deal with it and ensure that the transition paths relies on investment efforts on the already rich, so some degree of convergence happens within generations too in utility.

Contrary to the mainstream thinking, those who are going to loose from a fair a sustainable future are only the extremly rich groups of this generation, but even the richest of the next generations will profit from a resilient economy, and not a economy that is collapsing due to energy or climate shocks.

I am working on the equations and solving the system now, but you can already taste how we are closer to a single theory of the steady state economy. It is not only sweet, but a healthy dish served at the best time.

Guten Appetit!

[1] https://www.researchgate.net/publication/350386086_Post_growth_A_case_for_prosperity_without_economic_growth

[2] https://www.metropolis-verlag.de/Macroeconomics-Without-Growth/1298/book.do

[3] https://pubmed.ncbi.nlm.nih.gov/21332490/

[4] https://www.e-elgar.com/shop/gbp/the-economic-growth-engine-9781848441828.html

[5] https://oxford.universitypressscholarship.com/view/10.1093/0199247889.001.0001/acprof-9780199247882

[6] https://www.jstor.org/stable/j.ctvjk2xrr