Steady State Macroeconomics : Keynessian theories of the Environment

The keynessian approaches to model the economy have focused on keep unemployment low, without barely paying attention to the environment. Despite this unfortunate fact, the keynessian mechanism to model the economy such as limited substitution of factors could help to analyze the economy consistently with main ecological economics principles. I will review only models with that limited substitution and skip the IS-LM-EE, despite being very popular among textbooks.

Harris : Clean and Dirty Sectors

Harris define the economy as a two sector economy, with a dirty-resource intensive and a clean-labor intensive sector. According to him there is a possible to make a composition change in the economy, which could lead to overall short term growth and long term steady state with lower environmental footprint.  That shift required fiscal and monetary policy to accelerate investments in the clean sector, which despite the overall lower productivity, could keep employment equal or even higher in the steady state as it is more labor intensive.

As the reduction in non sustainable sector is greater than the increase in the clean sector, overall consumption goes down, the gap is used to finance and protect natural capital. In this setting average income goes down, without clarity on the distributional effects of that. 

Fontana and Sawyer: Environmental Depletion Rate

The monetary economy can be described as a five-step sequence: (1) Firms borrow money from banks (2) Firm use money for investments to product goods and build capital (3) Workers sell their labor to buy products with their wages (4) Workers decide how much to consume and save (5) Firms use their revenues to pay back credits.

 Steady State conditions

As with the other theories, it is required to stop capital accumulation and ensure net investments are zero. It is not clear what happen with employment and the state of the environment. On the one hand, lower production leads to lower demand of labor, but also lower labor productivity growth. In terms of depletion, it depends if the R&D applied to clean technologies depends on growth, when it does it will slow down that progress. The level of environmental degradation in the steady state cannot be stated.

Summary and conclusions of the section

The theories explored here provide some but limited guidance on how environmental and economic outcomes behave in the steady state economy. 

One of the options proposed by the authors is to transfer the investments from the energy intensive and pollution sector to the clean sector, achieving short term growth and not compromising employment as the clean sector is assumed to be labor intensive.

Another policy is to decouple resource augmenting technology investments from growth, to ensure the transition from a fossil fuel to a renewable energy economy is not slow down because of the stop in overall growth.

Last but not least dedicating part of the investment surplus to environmental protection would stop growth and improve the environmental state. This is a strong argument for non productive investments in ecological system preservation and natural capital accumulation.

The changes mentioned here required a new set of regulations and goverment policy to make that shift in sector shares and R&D investment happens. There is no automatic mechanism for the transition that make a steady state economy feasible and with better environmental outcomes.

All in all, there is not a cohesive framework linking clearly the mandate for growth and the linkages with technology, employment and emissions in such frameworks. The following expresses what we would like to see in the synthetic model to be build in following posts:

• Substitution between factors is limited and capital and natural resources go hand in hand, as the latter is the input of the former
• Explicitely conditions are given to increase investments in clean sectors and reduce it in the dirty sector.
• Explicetly include the tradeoff in inequality and employment of such an economy
• The monetary mechanisms and competition explain the mandate for growth, and the theory should explain how to amiliorate that pressure 

In the next post, we will discuss the best synthesis attainable and summarize the key conditions for a steady state economy in the keynessian framework, in accordance to ecological economics principles.