Solow stated in 2008 that there is no reason for capitalism to exist in a steady state, and this is the main conclusion after we analyse the neoclassical literature. There are multiple conditions where economies could function without growth, and such economies almost always have better environmental state than those that grow.
Those theories also called supply side economics, state unanomously that the condition for stable output and emissions is a constant supply of effective (actual input * productivity) input remains constant. That could be done by either reducing the input in line to the technological progress on that input or redirecting input usage and technology to the clean ones (labor instead of resources, and renewable sectors instead of fossil fuel based).
To achieve that, regulation is needed. A cap on input use have to be in place for example for resource use or taxes on the dirty sectors will deviate production to cleaner sectors that are more intensive in labor and capital and less on natural resources. How much substitution and composition could reconcile growth and emissions depends on the degree of substitution between inputs and goods. The general conclusion is that economic growth and emission reductions require more stringent conditions as the ones of a steady state economy with constant input.
Let's deep dive on each scenario in detail:
Scenario 1 : labor augmenting technological change with abatement
In this scenario, emissions are presented a la "green sollow" where abatement technology evolves exogenously(gGIP) and the growth of emissions depends on that being larger than the growth of effective labor supply (gl+ga).
The models states that with ga>0, we can reduce emissions and keeping output constant as long as gl<0 and sufficiently so that gGIP>ga+gl.
We already made that claim but it remains an open question is the state of technology A and the abatement technology GIP could improve without clear investments and lower labor. One can argue that engaging into voluntary work and research could lead to that, but note that no investment is placed and less aid labor would be available in that scenario.
In the following scneario we include natural resources to cover partially the lack of realism of scenario 1.
Scenario 2 : labor augmenting technological change with natural resources
In this scenario, labor augmenting technology could augment output while a decreasing supply of natural resources reduces it. The extend to which effective labor can compensate for lower resource input depends on the degree of substitution between the factors. This scenario posses little limits to that and therefore labor and capital can compensate almost without limitation low resource use. This has little support in the ecological economics literature and lack a physical basis.
We can see for the previous equations that for the output to achieve a steady state, the reduction of effective resource use should be equal to the growth of effective labor. Emission reduction on the steady state can only be achieve with reductions on resource use. As we stated, this inherently assumes almost infite substitution of natural resources and effective labor, which is problematic,to say the least. The next scenario of directed technological change is focus on resource augmentation.
Scenario 3 : resource augmenting technological change
In that scenario, resource augmenting technological change explain long term economic growth. The state state economy reduces the supply of natural resources at the same rate the technology evolves to keep effective resource constant. If resource augmentation technologies stagnate, a lower resource use would lead to decrease in economic output.
Conclusions
The theories cover in section 2.1-2.3 provide clear conditions to achieve a steady state in output and stagenation or reduction in emissions or the equivalent for the environmental state.
In any model, there are two interventions required:
- Keep the effectivity of the inputs constant, reducing its input availability if productivity grows
- Redirect innovations to clean sectors or augmented resource use
While the model present clearly the require amount of change of inputs and the return on investments, it does not consider the implications of the steady state in terms of unemployment, monetary figures and inequality in wellfare. While the first two will be covered in keynessian theories in section 3, the inequality of wellfare will cover in section 5.
The political and institutional ecosystem is key to explain the profit motive and the challenges to implement such interventions. In section 4 we will cover what the marxist theories contribute in that part, which has been barely touch here.
Bare in mind that the impacts of global trade on the steady state economy have not been covered yet and will be subject of section 6. This is crucial as carbon leakage or final output depends on the economic relationships with other nations.
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