Let me put the positive up front. Professor Herman Daly and his colleagues in the school of ecological economics (SEE) have made important contributions to the study of sustainability and have increased awareness on the relations between economics and the environment. But there are serious problems with their approach that will hamper the future development of SEE. This is why I want to raise a couple of critical issues. What follows is a discussion on value theory that may sound old fashioned, but it needs to be brought out if we want to move ahead with a more meaningful discussion on economic forces and the environment.
According to Daly and colleagues, the fundamental problem with mainstream economic theory is its inability to analyze physical flows in economic systems. The story line is that conventional economic theory relies on the fallacy of a circular flow of commodities in a system in which natural resources are not finite. The flows are expressed in abstract or monetary units and can therefore be expanded indefinitely. According to Daly, from this flawed beginning of “money fetishism” economics erroneously concludes that physical quantities are also amenable to infinite growth.
But economic theory’s starting point is exactly the opposite of what Professor Daly and his friends believe. Economic theory proceeded first by excluding money from its field of analysis in order to develop its theory of how markets operated. This is why Adam Smith opened his Wealth of Nations by constructing a value theory, in opposition to money. This vision is shared by neoclassical theory and contemporary general equilibrium theory.
To verify this, take the following question: why do we need a value theory? The answer is straightforward: the purpose of value theory is to restore a common unit of measurement (or a unit of account) in a world of physical and heterogeneous objects (commodities). Once money had been abstracted from the analysis, it was necessary to build a concept of value allowing for the analysis of trade between equivalent magnitudes of the same “substance” (using Marx’s terminology).
For Smith mercantilism was not only a bad recipe for economic policy, it was a portentous fallacy. Money is not wealth, he argued, so he proposed we analyze market relations in terms of real value. I won’t go here into the details of his particular (labor commanded) value theory, but I will insist on the fact that value theory was the logical response to the expulsion of money from the analytical space of the emerging discipline.
Today economic theory carries on its analysis with the help of a value theory that is centered on how physically determined objects (called commodities) are related to each other by “relative prices” (physical rates of substitution). The same approach can be found in general equilibrium theory, from Walras to Debreu, whose Theory of Value explicitly recognizes that money is not covered by the model (in contrast to the set of physically determined commodities).
The problem that logically follows from here is the integration of monetary theory with value theory. In a famous article published in 1968, Frank Hahn discussed the nature of this problem. Franklin Fisher analyzed the same difficulty in the context of stability analysis. The summing up article by Carlo Benetti reveals this problem remains unsolved.
Mainstream economic theory has failed to demonstrate how equilibrium prices are formed through the free interplay of market forces. Daly believes markets solve the allocation problem and that they do this very well. This ignores the fact that economic theory was never able to replicate the dynamics of convergence to equilibrium prices and allocations. The Sonneschein-Mantel-Debreu theorems of 1974 should have clarified this forever. All of this is ignored by Daly and colleagues thus their misguided critique of mainstream economics.
The problem of mainstream economic theory is not that it is incapable of integrating physical flows into its analysis. In fact, there are many examples of general equilibrium models used to evaluate environmental policies in terms of physical flows. The problems of mainstream economic theory are more important and they are related to the concept of money, as well as its incapacity to prove that markets guide economies to equilibrium allocations.
By emphasizing the role of physical flows, Daly and the school of ecological economics leave aside the social relations that underlie economics and look at the question of sustainability from a very simplistic angle, namely, the logic of carrying capacity and limits to growth. Physical or materials’ flows can be very useful but they cannot reveal the nature of the economic forces behind environmental destruction.
I would also applaud the SEE for some major contributions, but also argue that the SEE needs more breadth and depth to be relevant and comprehensive. Daly’s adaption of the work of Nicholas Georgescu-Roegen in an environmental context is brilliant. Viewing the human economy as an open sub-system of a relatively closed eco-system (the earth) that provides matter and energy to the human economy that is then transferred by the human economy back into the earth as waste–the concept of throughput–is groundbreaking. The work of Norgaard and Howarth that brings the concept of inter-generational equity and discounting into this framework makes for a nice general theory that economists need to focus on reducing throughput for present and future generations.
However, the field in some ways stops there. Nadal has brought up some key ideas. Another limitation for years had been the “political economy” of ecological economics–focusing on the short-and long term winners and losers of economic-environmental interactions and how power plays a role. In recent years SEE has started to realize the importance here, most notably in the work of James Boyce (a blogger at Triple Crisis), Juan Martinez-Alier, and new ISEE president Bina Agrawal. So the good news is that SEE can evolve.
A major gap still lies in the role of technology and technological innovation in the economy as a force for reducing throughput and un-equal development. SEE was pitted against neo-classical economists (think of the classic Solow critique of SEE) who argued that resource scarcity and environmental degradation would be reflected in high prices which in turn would spur substituting technological innovations. This is of course not true, given the myraid of market failures in such markets. However, the framing of the argument in this way made SEE take the mantle of technological pessimism–which is a major mistake and has made most folks in SEE miss out on major breakthroughs in other parts of economic theory.
Economists such as Richard Nelson, Brian Arthur, and Arnolf Grubler have done pathbreaking (heterodox) work on the economics of technological change that are consistent and offer key lessons for SEE. However this work has been almost completely ignored. Two economists of the SEE bent, Faye Duchin and Richard England, are exceptions to this rule. Duchin’s book with Glenn-Marie Lange “The Future of the Environment: Ecological Economics and Technical Change” is the first comprehensive attempt to bring technological change into SEE. Yet the book caught on more outside SEE than in. This is a shame. Until the field becomes more open it will remain of limited use and marginalized.
No doubt there are many areas that are inadequately developed in SSE. Probably money is one of them. However, we have been arguing for 100% reserve requirements for some time, following Frederick Soddy, Irving Fisher and Frank Knight. For a summary argument see “Money in the SSE” in CASSE web site next week.
Technical progress is something we try to induce or force by raising resource prices (while capturing the rents for redistribution). We hope for it, and try to incentivate it, but do not try to predict it, nor borrow against it in advance to justify present growth.
I join in starting from recognition of Herman Daly’s enormous contributions; because of him it is not possible (and, of course, certainly not desirable) to go back to a mind-set that saw the economy as a free-standing system, or that assumed that market forces could induce substitutions for all resources. I also join in feeling some disappointments about Ecological Economics. For one thing, it has lagged in recognizing some of the critical issues of methodology. Too many of its adherents are ecologists who, without seeing how economic methods of analysis can skew results, have been willing to apply standard methodologies to the issues of interest to them. Pointing up which issues deserve attention is a valuable contribution; it is lessened when the issues are tackled with inappropriate methods.
On the subject of money – it’s remarkable how difficult it is to get this right. Mainstream economists has suffered from errors on both sides: sometimes assuming that the measuring rod of money could and should be applied to everything; at other times assuming a world in which money is perfectly transparent – not a potent actor. What we need is a theory that can, to start with, recognize when money is the best measuring rod, and when not. Beyond that, it also needs to take apart the complex subject of money, and recognize that it can have many different forms (local or alternative currencies; credit-card created debt; and fancy money-substitutes invented by those clever folks on Wall St.) – and that different forms of money are more, or less, appropriate, in different circumstances.
As the director of the Center for the Advancement of the Steady State Economy (CASSE), it should be clear that I am committed to promoting Herman Daly’s vision of a sustainable and fair economy. That said, Professor Nadal is right to point out that the mechanics of a steady state economy have not been fully formulated, and the field of ecological economics has much developing yet to do. At CASSE, we are committed to those goals as well. As an example of that commitment, we are organizing a one-day conference in Leeds, UK this summer headlined by Peter Victor and Tim Jackson to address some of the questions surrounding the institutions and policies needed for a healthy but non-growing economy (details on this conference are available at http://steadystate.org/leeds2010/).
Regarding the connection between value and money in the economy, we are addressing this topic a bit in The Daly News. My most recent article can be found at the link below, and Herman will be posting an article that will be available Monday morning.
http://steadystate.org/money-is-a-cow/
Thank you,
Rob Dietz
Daly’s Response?
Money & the Steady State Economy: Historically Money has evolved through 3 phases..(DalyNews) http://bit.ly/ankPdU
I wrote an article on this some time ago — Nelson A (2001) ‘The poverty of money: Marxian insights for ecological economists’, which was published in the journal Ecological Economics (36: 499–511). Taking a non-market socialist position and addressing the contemporary challenge of environmental crises I do not think that we can retain any form of monetary system and achieve either the ecologically rational use of resources or a fair social system. My arguments are laid out in brief at http://radicalnotes.com/content/view/74/39/ and in a broader way at the website — http://www.moneyfreezone.info Capitalism’s language and unit of measuring, monitoring, competing and assessing itself as well as other things is money in the form of interlinking national/international currencies. Capitalism is structured in such a way that growth is essential, the principles of degrowth contradicting capitalism in such essential ways that they point to another kind of system altogether…
I am an Economics student. I have tried to find some comment on the the Natural Capital Accounting ideas expressed in the 2002 publication ‘Not by Money Alone’ by Slesser and King, where they suggested that what is lacking is a physical method of quantifying the economy to parallel the monetary quantifications to be used in policy. They argue that energy units must be used as indicators to guide policy if development is ever to be “durable” – the term they propose to substitute for the degraded concept of “sustainability”. Has this been part of SSE thinking?
Nadal certainly conveys his familiarity with value theory and money. However, his criticism of Daly indicates his lack of familiarity with the fundamentals of ecology, the biological science of ecosystems which underlie all economic activity.
Having spent years in professional work of social services and acitivism, I have completed my masters recently in mid-life with a highly practical orientation reflecting my own background in biology. Thus, while I agree that Daly and ecological economics has not integrated social relations sufficiently in their work, I also recognize that that is not their forte. Even more significantly, Nadal mentions only conventional economists, while concluding with a reference to the social relations underlying economic activity. Unfortunately, the excellent efforts that are being made in social economics are not even hinted at in this post’s discussion. Mark Lutz’s 1970s book with Ken Lux on Humanistic Economics was updated in 1999 as an excellent survey. Among other theorists and including Daly, he mentions David Ellerman’s work. Ellerman’s 2007 paper in the Review of Radical Political Economics available at his website represents a new breakthrough in the theoretical deconstruction of neoclassical assumptions of capital and firm dynamics, at the very heart of real, verifiable dynamics and the basis of the social relations in the economy.
Moreover, there is the real world of practical accomplishments which respond to conditions of real urgency at the consequences of behaviors by corporations and their executives mostly justified by orthodox economists. Non-profit group, civil society certifications like organics and Fair Trade are fundamental initiatives based on real world necessities, not theoretical and mathematical hoops jumping by academic theorists. These successful initiatives include such work as Anna Milford’s 2004 paper on Coffee Co-ops that employs co-op economics in an excellent treatment.
My background in biological anthropology and therapeutic psychology includes such work as Greg Bateson the interdisciplinary anthropologist. Many of us social scientists have strong descriptive and functional understandings of value creation through human activity and psychological motivation processes. I recommend looking at sociologist Georg Simmel’s use of anthropologist Eliot Chapple’s interaction theory.
Daly’s 1996 book Beyond Growth does great injustice and is seriously misinformed in two aspects: his neglect of indigenous populations in Brazil and the power balances in employer-employee relations. Ellerman’s work goes a long way to clarifying these dynamics, as does William Dugger’s work from 1989 and Warren Gramm’s work from the 1970s, along with JK Galbraith’s work on countervailing power.
Nevertheless, ecological economics by Daly and others is foundational and essential work. The ocean’s dead zones from pesticide and chemical washes are a good example and metaphor for Paul Hawken’s phrase, “You can’t make money on a dead planet.””
I hope conventional economists will take a close look at Elinor Ostrom, an ISEE member, and her Riksbank Nobel winning work. My sources tell me that she has done plenty of field work, and thus serves as a reminder that most economists are masquerading as “scientists.” Most conventional ones are philosophers, and the many excellent environmental reports like the 2005 Millenium Ecosystem Assessment, yearly UNEP reports, and UNDP reports clearly remind those of us interested in references to reality that initiatives like Fair Trade are not figments of philosophical mathematics. They are the basis for realistic and grassroots formulations. Adam Smith needs to be reduced in status, and Robert Owen, Malthus, Marx, and John Stuart Mill raised, much as Daly et al have been doing.
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