Motivation
Economic Growth is a relative recent thing, as it barely exists before the XIX century. The division of labor and use of dense/cheap but polluting forms of energy explain our increases in productivity, but also a destruction of the environment and the exhaustion of the commons that is imprecendented in human history at least.
Pursuing a steady state economy, and the study of the the macroeconomics of the steady state is not about going back in time, but rather comply with resources and environmental limits, achieve sufficiency, in a economic system that avoids the growth mandate while improve wellbeing intra/inter generations.
In my first paper [1], I showed the limitations of growth in multiple dimensions and the impossibility to achieve aggregate growth without facing social, resource, energy and environmental crises. While the case that we need to stop growing has been made, what remains to be investigated is the macroeconomic conditions of economies without growth and the stability and wellbeing implied but this economies. It is importatn to show what conditions can ensure an stable economic output with better environmnetal and social outcomes.
The second paper is therefore aimed at exactly that:
- Define concrete macroeconomic conditions to achieve economic stability in a steady state
- Consider the effectivity of that economy in wellbeing for multiple generations and regions
- Ensure those conditions avoid carbon leakage and sevre local economic losses in the global context
Proving that there are conditions for a stable economic system without growth in throuput and sufficient wellbeing results that are appealing for the majority of the society in a global context is one thing. What remains unclear and is how the politics of the steady state needs to be. What are the institutions, regulations and the role of organizations (public and private) in the implementation of the steady state? This will be the topic of my third paper.
Contributions
While some authors like Steffen Lange [2] have derived the conditions for macroeconomic stability in zero growth in the neoclassical, keynessian and marxists school of though, it is still based on unique analysis of the GDP, despite the clear problems known from that indicator. Leveraging the work from Dasgupta [3] we can evaluate the wellbeing implications of that steady state economy.
The macroeconomics explored [2] are also based on a closed economic set up, leaving open room for carbon leakage and unexpected instabilities lead by the global market. We validate and define if necessary the conditions to ensure that economic stability and better environmental outcomes in a global economic context leveraging the international economics literature [4]. The conditions extracted from the synthetic review are validated with complex models and less macroeconomic focused theories in the ecological economics field in the last section. To my knowledge that would be one of the most complete exercises in macroeconomic analysis of the steady state done.
Foundations
Macroeconomics study the relantionship between output, consumption, investment, public expenditure, employment and other variables of interest of the economic system. The need to aggregate very different goods and services into one number, or to measure production value as a whole, lead to the use of Gross Domestic Product. It contains all economic activities that create a monetary flow, weighted by their prices in a region in a point in time. There is not exclusionof terms based on its social desirability, nor discounting of environmental and social costs.
Despite being a poor measure of economic performance and social wellbeing, economic policy making has beein focused on GDP growth and macroeconomic theories circumnavigate around this indicator. Because of the political, academic and also environmental importance of that indicator and its growth, it is still sensible, at least as a starting point, to define the conditions where this indicator does not grow for our analysis. While the configuration of that GDP would lead to very different social and environmental outcomes, on the aggregate, more GDP means in absolute terms more energy use and more pollution[1]. The mandate to achieve economic sufficiency and a reduction in energy and environmental inputs, justify our evaluation of the macroeconomics in the same fashion as has been done in the last decades.
By doing this we do not support its use as a wellfare indicator, and because of its flaws we consider that wealth in the multiple forms of capital and its ownership distribution should be considered as a better proxy of the health of the economic system instead of its year monetary flows[2]. We use GDP as a proxy for economic activity, as it was original concieved.
At a country level one must evaluate if the current amount of economic activity is sufficient. That means that the direction of its GDP will depend if sufficiently distributed wellbeing could be achieved. It is wrong therefore to benchmark with the most industrialized nations as they may exceed their fair share of the resource pie or distribute very innefectively wellbeing and prosperity. This is why our assestment on wellfare is key as that should define if policy is aimed to stabilize, contract or grow overall GDP. In the long term though, all nations should end up in the steady state economy.
The macroeconomic conditions explored are to achieve a steady amount of production in the long run, less energy use and better environmental outcomes than the current ones. As we have analyzed in [1], energy is likely to become a limited factor, in a full or mix renewable set up due to the limitations explained, and hence it is important to describe the amount of technological development to achieve the steady state levels of production.
One can notice that many economies with large GDP per capita are not growing as they used to. This is by now means an indicator that they are sustainable, nor than they are performing socially as desired, as inequality and pollution are above any level considered to be desirable in the long term. The possibilities of green growth are briefly touched in the series of posts, as some theories claim that, but their negation is not developed in detail, as that has been done deeply in [1]. The steady state of macroeconomic variables such as output, does not mean that there are not changes in their content, all the contrary. Business will be created, technologies and innovations will be replaced, and jobs will change, it is only the aggregate output and footprint that stays constant in the long term. Innovation is part of a steady state economy, and not only possible in growth economies, as some, with more ideological than scientific intentions claim.
Classical economic theory links consumption to utility, and therefore growth in consumption is key to utility betterment. It is also common to relate price with value, as the willingness to pay is reflected in market prices, and therefore revealed preferences. While a huge deal of literature and psycological research show how a great deal of consumption is status driven and has little to do with actual needs, the decreasing marginal contribution of consumption is in line with the view of sufficiency and a steady state in wellbeing, where more consumption growth will be more costly than benefitial.Also covered in [1], while certain levels of income are key to achieve life satisfaction, the data shows that the countries with the biggest GDP and environmental footprint are well above that optimal point in the aggregate, and inequality is the topic to be dealt, not aggregate growth.
Conclusions
Steady State macroeconomics aimed to describe the relantionship between macroeconomic, social and environmental variables, to develop theories that lead to stable, integrative and sustainable economies in the long run.
The limitations of the GDP are no reason to not used it as a starting point, given its relevance in the academia and policy making. To assess if GDP should grow, decay or stay the same, one should look and wellbeing and sustainability across generations and regions, and not a the current size of the production pie only. In any case, the most industrialized countries are likely to reduce or stop growing its GDP, without an expected compromise in wellbeing indicators, better environemental outcomes, if the right policies are applied.
To increase realism and generalize to any country, the context of the global economy should be considered after the conditions for no growth are in place. The steady state macroeconomic policy should ensure that regional policies or the state state of one country does not lead to carbon leakage or economic instability.
The successful implemenation of these conditions required a deep analysis of the political economy and ecology on a regional and global context, this is out of the scope of this series, but will be the focus on my third paper.
In Part 2 of this post series we will explore what are the conditions for Neoclassical Theories.
[1] https://www.researchgate.net/publication/350386086_Post_growth_A_case_for_prosperity_without_economic_growth
[2] Macroeconomics Without Growth..Steffen Lange (2018)
[3] https://oxford.universitypressscholarship.com/view/10.1093/0199247889.001.0001/acprof-9780199247882
[4] International Economics, Theory and Policy, Global Edition by Paul Krugman et al. (2012)
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