Is a Steady State Economy Possible? A summary of what neoclassical, keynessian and marxists say about it

 

A lot has been writen, since the book Limits to Growth in the 70' about the desirability to stop growth, as its costs exceed its benefits. There are wellbeing, natural and philosophical reasons to reach a steady state, to find what is enough, to celebrate and live with self impossed limits. The literature on the economic stability of such an economy is still rare, 50 years later, and Steffen Lange book, is the best contribution we have at this time. My last posts owe him almost everything I have to say about the topic. It was, the best selftaught course on keynessian and marxists economics I took, as it seems that in mainstream economics, there is over-representation of the neoclassical view of the economy, not leveraging what keynessian, marxists and ecological economics can offer. My prediction is that ecological economics will simply called economics, and the macroeconomics of the steady state will be called simply macroeconomics. In this post I will summarize what I have learned from this school of though, and how can we achieve economic stability without growth.

Preliminary insights

To my surprise, there are multiple scenarios where economic stability can be achieved according to each theory. Neoclassical theories offer always an equilibrium, and hence there are not economic unbalances such as debt, unemployment... and by contruction a steady state is possible. Keynessian theories allow for a steady state but without goverment intervention that will likely lead to unemployment and inequality growth. Marxists do also allow for such a steady state, but claim that competition and profit maximization lead to expansion, and wealth concentration blocked the political changes required to achieve a steady state. No one said it would be easy, but it is certainly possible.

We would draw conclusions aggregating theories using dobusch 2012 interested pluralism method, allowing for a robust assestment of multiple theories in one scenario. (https://jakob-kapeller.org/images/pubs/2012-DobKap-JEI.pdf)

Environmental regulation

Limiting the amount of resource use is a necessary requirement for a steady state economy. That could allow for some growth if resource augmenting technology is in place, but as this reach some limit, it leads to a stop in aggregate output.

For the neoclassicals, that requires limiting the supply of resources available for production via quota or price increase.  The amount of substitution in the production function between resources, capital and labor is almost infinite although increasingly ineffective. How much that can be pushed is uncertain but far from what we see from empirical studies or in compliance with the laws of physics.

For keynessians, input substitution is limited if not impossible. That means that the only way to keep economic output with decaying resource use is via resource augmenting technology. 

Marxists theorists claim that economies of scale and in part possible with the usage of fossil fuels. A reduction of the availability of those is a necessary condition for better environmnetal outcomes and lower market concentration and incentives for expansion.

To summarize, increasing the relative prices of resources will incentivize sector subsitution (more labor and capital instensive), resource augmenting technological change and reduce economies of scale and hence the expansion motive.

Investments and capital depreciation

Ensuring that there is no further capital accumulation and net investments are zero is key to reach a steady state economy.

Neoclassical theories give little role to investments explaining growth, as the amount of inputs define the output, together with technology, and the rate of saving is given. In order to change investments we need to change savings preferences or technological progress.

In the keynessian frameworks to the contrary, the investments play a crucial role in aggregate demand. They both estimulate one after the other the realization of future outcomes. If demand stay constant, future investments will too as there is no expectation of more revenues. A steady state economy needs certain capital costs and business types to ensure there is no incentives for market share expansion or to stop the investment that will expand demand. 

Marxian economists provide multiple solutions to keep investments steady. One option is to change the organization of firms, collectivizing ownership and reducing cost minimization strategies or economies of scale. Effective demand can be stabilized by reducing commercials exposure to citizens or appliying sufficiently tax on capital earnings to desincentivize investments.

Despite the theories diverge significantly in the causal link between investments and demand, the condtions do not necessary contradict. The goal of having zero net investments or investments to replaced depreciated capital required constant aggregated demand (from citizens and the goverment). That is feasible changing the company ownership type, or by applying policies such as limiting advertisement, discouraging economies of scale, and taxes to limit capital profits.

Business types

The business type is key to explain how much of the surplus is used on wages, investments and sales efforts. 

Neoclassical studies work on representative firms and citizens, and therefore there is not an option to explain how different business types affect economic and distributional outcomes.

Still limited but present, some keynessian authors claim that monopolistic power tend to concentrate a greater share of the surplus. Publicly owned / Shareholders based firms tend to prefer expansion that dividend redistribution or raising wages.  To avoid the incentives of expansions, the authors claimed that either the incentives for accumulation or the business type have to change.

Marxists theorists have at their core the business organization. Large corporate capitalist organization concetrate too much of the surplus and have a mandate to growth. The reasons is that economies of scale and expansion reduces cost and increases revenue, and hence profits. Planned obsolescence and conspiscious consumption via advertisement are tools to achieve that. Cooperative business models instead are more in line with increasing wages and less pressure to grow. 

Consumption and Goverment spending

A steady state economy requires constant aggregate consumption and goverment spending. A composition change from environmental better products /sectors will improve the environmental state. To ensure constant demand advertisement should be contained, or even banned as it creates conspicious consumption.

Neoclassical theories define the amount of consumption as a result of individual preferences, of the optimization of utility and tradeoffs between work/income/consumption and leisure. With labor productivity increases, to avoid increased production and consumption, more leisure have to be superior in utility term than consumption. 

Keynessian theories aim to achieve full employment. If technological progress reduces labor demand, sufficient working hour reduction and hourly wage adjustments needs to be placed to keep aggregate demand constant. Alternatively, the goverment can inrease spending to compensate for the reduction in labor demand. In any case, better environmental outcomes require a change in the consumption mix towards more sustainable alternatives (circular economy, bio, renewable energy based...).

In marxian theories, consumption is related to the amount of distribution of total income. Higher wages reduces profits and hence investment expansion. High consumption means a high wage share and little incentives to expand production or aggregate demand further. In both competitive or monopolistic capitalism, economies of scale of the sales effort could artificially push demand further and increase profits. Both have to be avoided if constant demand is desired. 

While the mechanisms that ensure constant consumption are different across theories (utility preferences, employment targets with labor augmenting technology, distributional composition of income) their conditions do not so much. A preference for leisure instead of consumption, a shift from dirty to clean products, limitation on advertisement limit the expansion of consumption. The business organization and market conditions could push more or less the expansion of consumption, being cooperated business less likely to invest in achieving economies of scale or advertisement. Goverments have to decide whether the keep consumption constant via work and income distribution or goverment expenses. As long as the aggregate demand is constant, the steady steady state economy is feasible.

Employment

Employment is an essential income source for 99% of population , and hence a key variable for goverments and the population in general. There are multiple ways to achieve large employment rates or income equality according to the theories.

For neoclassicals, unemployment does not exists, as there is always an equilibrium and all available labor is used. the amount of work is the result of the preferences and wages, not demand limited. A steady state economy with labor augmenting technological progress requires labor supply reduction to keep output constant. 

On the contrary, keynessian theories allow for unemployment when effective demand is not sufficient. to keep employment constant with labor augmenting technological progres hour/wage redistribution needs to be in place or goverment spending should compensate for the lack of demand due to lower income from workers. 

On marxian theories, the expansion of production increases labor demand but also productivity, without a clear net effect on employment. Unemployment is unevitable as a result of capital concentration in fewer firms, lower wages and excessive supply of labor.  In order to avoid that, capital and energy use have to be made more expensive/limited and the organizational of business have to be changed to increase incentives to use labor and not substitute it. 

A steady state economy with labor augmenting technology reduces labor demand. There are multiple ways to avoid an increasing level of unemployment and inequality. Goverments should either change: the direction of technology towards resource augmenting, the weight of clean and labor intensive sectors in the economy, the working hours and wage per hour, how business are organize... Any of these measures are compatible with constant levels of employment and better environmental levels.

Income distribution

A steady state ecoomy requires moderate amounts of inequality to thrive politically and socially. 

For neoclassical economics, distribution plays little role as workers and also investors and they are all identival. 

In keynessian theories, the tension between capitalists and workers is more clearly stated. On the one hand, lower wages leads to higher profits for capitalists, for also lower aggregate demand.  The economy should find an equlibrium to ensure sufficient income distribution exists so citizens consume and generate sufficient demand.  Higher equality increases consumption, as people with lower income consume larger proportions of their income, so in order to prevent increases in investments, goverments should ensure that both inequality and investment remain low and constant over time in the aggregate.

According to marxists theories, low inequality without ownership change is not possible, as most of the surplus goes to capitalists. Given the technological developments, economies of scale and market concentration, only workers owned companies could ensure sufficient equality and wages for all.

There are multiple levels of inequality that are compatible with a steady state economy. Goverments and societal agents should assess how much to split the surplus into labor and capital, the direction of technological change and the business organization. There is no inevitable level of inequality as many has claimed. There is also no clear automatic process to ensure equality, to the contrary, the current development in technology and institutions leads to more inequality rather than less, all things constant.

Monetary System and Savings

The theories covered so far explained very little about the role of money in the steady state, particularly interest rates and the mandate for growth. Keynessian theories are the only frameworks where we explicitely mention the importance to keep the interest rates and the cost of financing sufficiently high to avoid further investments and capital accumulation. This has been greatly explain, but not formally, in the book sacred economics that I summarized here:   https://alanfortunysicart.blogspot.com/2022/02/sacred-economics-draft.html

Concluding remarks

The main insight after exploring in detail every main macroeconomic theory is that,multiple steady state economies are possible. The levels of equality, environmental quality, consumption  and overall wellbeing depend of economic policies. Our tax system, societal goals, and definition of limits affect ultimately the type of economy we have. There is nothing inevitable for both positive and negative outcomes, and policy makers should understand that the current trends of high returns on capital, labor augmenting technology, and shareholder value oriented business lead to inequality, unemployment and short term growth and push us far from an inclusive steady state economy.

It remains to be answer what happens when a steady state economy is implemented in the global context, what happen to global demand, and if there is a risk that the good environmental outcomes and the local level are neutralized by growth in other regions. It remains to be explored the economic stability and feasibility to apply aggresive capital taxes in a context of global capital markets and easily moved production systems. This is key to validate the credibility and feasibility of a stable steady state economy.