Multinational Monitor: You criticize the economics profession as biased towards growth. What is wrong with that bias?
Herman Daly: I think the economics profession should look at growth in economic terms. It should say, "We don't want growth if further growth increases costs faster than it increases benefits." If growth in population and per capita resource use is increasing pollution and depletion and congestion and other problems faster than it is increasing real wealth, then growth is not making us richer, it is making us poorer.
MM: Why do you think the profession is biased towards growth?
Daly: It is politically convenient for growth to be the answer to everything. If growth is not the answer to problems of poverty, then you have to go back and ask what is the answer. If you have poor people and you can't make everybody richer by growing, then you have to share, or you have to face up to population limits. But population limitation and sharing are both politically taboo, they are sacred cows; our politicians can't face up to those issues, and neither can economists for the most part.
There are other problems in economic analysis. It also gets traced back to what I like to call - using a term from Schumpeter - the basic pre-analytic vision of economists. It makes all the difference in the world where you start your analysis from, what your basic starting point is. I see the economy as an open subsystem of a larger but finite and non-growing ecosystem. If the economy is a subsystem of a bigger system, and the bigger system is not growing and the economy is growing, then the economy is assimilating within itself a larger percentage of the total system. At some point that process cannot continue.
The economist doesn't look at it that way. His pre-analytic vision is that the economy is the total system and that nature or the ecosystem is just a subsector of the total economy, like agriculture or industry. And you can substitute for nature just like you substitute for other things, and the whole economy just keeps on growing unconstrained by any larger system.
MM: You have proposed the Index of Sustainable Economic Welfare (ISEW) as an alternative to the conventional reliance on gross national product. What does your index do differently than GNP?
Daly: This, I should make very clear, is the product mainly of John Cobb, my co-author [of For The Common Good], and a group that has worked with him at the School of Theology at Claremont, including especially Clifford Cobb. I served as a helper and a critic, but they did most of the work on that. That doesn't mean I am disclaiming it; I support it and am proud of it. But it was largely their work.
What does it do? It plays by the basic economic rules of the game. It is not a far- out measure of welfare. It says welfare is basically a function of personal consumption. So we don't subtract cigarettes and pornography and other things which one might believe would make people worse off; we leave all that in there, just the way the economists do. In that sense, it is very conservative.
[But] we make some adjustments. We subtract a figure for depletion of natural capital: depletion of oil wells, deforestation, depletion of soils and water. We subtract something for regrettable necessities, that is, increased commuting costs, extra medical payments which are due to stress and on-the-job problems. We make a correction, perhaps most controversial, for changes in the distribution of income, on the grounds that an extra $1,000 to a poor person means much more than an extra $1,000 to a rich person in terms of that person's welfare. That is pretty firmly grounded in the law of diminishing marginal utility in economics, so we count income to the lower part more than income to the upper part. That makes a big difference, because over the Reagan years income distribution became decidedly more unequal. And we make a correction for the increase in foreign debt. Foreign debt has to be repaid at some point by U.S. citizens, so increasing indebtedness is not sustainable consumption. Those are the kinds of things we correct for.
With the ISEW, we found that there was actually a slightly inverse correlation in recent times between GNP and welfare.
MM: How does the recent history of the United States measure up on the ISEW scale?
Daly: We found that, up until the early 1970s, GNP and ISEW move along together, they track each other. But then there is a divergence, which becomes greater as the seventies go on and into the eighties. The ISEW becomes flat while the GNP keeps on rising, and then eventually the ISEW declines just a bit. Our findings do not support the hypothesis that GNP and welfare are highly correlated. In fact, they contradict that.
MM: How do you explain the divergence starting in the early seventies?
Daly: I think it is [largely] due to increasing inequality; the debt, with the United States moving from a creditor to a debtor position; and then the problems of depletion and pollution begin to weigh more heavily.
MM: One of the dominant trends in the world economy is integration, and it is one widely praised by economists. Yet you are quite critical of that. Why?
Daly: I am very critical of the general celebration of the increasing world interdependence of the economy because free trade and free capital mobility really mean an erasing of national boundaries for economic purposes. And when you erase economic boundaries, then there has to be an equalization of prices across the larger market. You are not going to have great divergences of prices and wages within the same market. So when you expand the market to the entire world, then you are going to have a tendency toward equality of prices and wages worldwide, with due allowance for transport costs and so forth.
In particular, that is going to mean a movement toward equality of wages. That means wages in the industrial, high-wage countries will tend downward, as we in fact have seen them doing. Wages in the Third World and poorer countries would theoretically tend to move upward as capital moves to the low-wage countries and increases the demand for labor. So there is this tendency toward equality. You might say, that is not so bad, what is wrong with a little equality in wages across the world? Well, the problem is that the movement is going to be almost totally downward. The supply of labor in the Third World, with large populations of underemployed people, the very rapid growth of those populations of underemployed people, the fact that India and China, two huge cheap labor economies, are just now really getting into the world market - all those things are going to keep the supply of labor very large, and will make it impossible for wages worldwide to be bid up very much, certainly not to the U.S. or European level.
What is really happening is that the capitalists in the North are saying to the laborers in the North, "Well you guys have to compete in the world market for labor, and your wages are going to go down. That is just the way it is." And that seems to be what is happening. I think that for the employing class basically to say they have no obligation to their own laboring class and they will just go wherever labor is cheaper is an enormous breach of community within a nation. That just means an economy's high wages, plus social gains like laws against child labor, limiting the working day, [protecting the] environment, anything which raises costs, are going to tend to be competed down to the lowest common denominator in free international trade. In a nutshell, that is the problem I see with this movement toward world integration.
In addition to that, [with increasing economic interdependence] people who are farther away from you - both physically and culturally - will have a greater impact on your life. This separation of ownership and control, which already creates difficulties within a country, becomes even more difficult when it becomes international.
MM: Is there a broader ecological concern about sustainability being incompatible with free trade, in addition to the concern about environmental standards being bid down?
Daly: Yes, there really is. To the extent that a country engages in trade with the rest of the world, it can escape the carrying capacity of its own limits. Take, for example, the Netherlands. I think for something like every hectare farmed within the Netherlands, something like five hectares outside the country are preempted in order to supply the animal feed and other inputs to their system. So clearly the Netherlands is living beyond its domestic carrying capacity. It is not cheating or exploiting the rest of the world; it is playing by the rules of the system and making things and paying for the carrying capacity it imports. Nevertheless, it is still the case that the whole world cannot emulate the Netherlands. That is, all countries cannot become net importers of raw materials and ecological capacities of other countries.
Free trade masks that fact; it makes countries tend to think they can escape the bounds of carrying capacity by international trade. And indeed, that is true, except that when you do the sum, the total cannot escape. Free trade means that instead of running into carrying capacity constraints nationally and sequentially, in different countries, there will be a tendency to run into those constraints globally and simultaneously, which will make them more difficult to handle. In that sense, free trade or trade in general tends to obscure the overall limits.
MM: A mainstream economist would criticize your argument, saying it overlooks the consumer interest in the lower prices which free trade brings. How would you respond to that criticism?
Daly: That is only true with a very restrictive notion of price and cheapness. Yes, people who still have jobs in rich countries will benefit from cheaper, imported products produced by cheaper labor somewhere else. There will be that benefit. However, that is only part of the picture. You have to set against that the social cost that has been paid in gaining that cheaper product: a general reduction in the standard of living of your laboring class; a reduction in the purchasing power of your internal market; social dislocation of laborers, of people who are disemployed in one area and have to be employed somewhere else.
If you factor in all those costs, [free trade] doesn't look cheap at all. Yes, there is a benefit to consumers, but I think that is more than offset by the social costs, which are not counted, such as the disruption of community and people losing jobs and having to relocate and be retrained.
MM: Mainstream economists would also say that Third World development would be hurt by restrictions on free trade. This is also a major concern of people who feel their primary allegiance to the Third World and even Third World leaders themselves. How do you respond to this argument?
Daly: Third World economists will make the same argument, and I think that is not particularly surprising because most of them got their economics degrees from institutions that the standard economists are teaching in or got their degrees from. The vision is: the more the North grows, then the bigger will be the markets in which the South can sell their raw materials and their products. The South is presumed to be incompetent to develop along any path other than just selling raw materials and a few minor manufactured goods to the North. In exchange for their export earnings, Southern countries import more sophisticated goods, consumer toys for their elite class and also some capital goods.
If your vision of the world is the one I started out with, that the economy is the subsystem of a larger total system, then you see the North growing more and more as taking up a larger and larger ecological space and therefore leaving less for the South. You would then say it may not be a good idea for the North to continually grow. Maybe the South should not rely simply on exporting things to the North. They should transform their own resources into products for their own people and develop their own internal markets so that people within their countries can buy the things they produce.
On the other hand, if you have a vision of the economy as being the total system and nature as just a little piece of the economy, then you don't see any reason why the North can't grow forever. If the North can grow forever, then it will drag the South along behind it. It's the basic trickle-down theory.
MM: What would be the role of trade in a sustainable world economy?
Daly: That is a good question and a very difficult one. I do not have a fully satisfactory answer. I think trade is certainly beneficial, and no one is arguing for autarky or total self-sufficiency. There are too many benefits to trade. But trade has to be in some fundamental sense balanced. You can't go on with large imbalances being made up by debts which are piled up in one country.
As a general rule, I recommend the principle of short supply lines. To the extent possible, try to keep your supply lines short. If you can get it locally, get it locally. If not, get it from as near as you can. If you have to get it from another country, try to get it from a near country. If you can't get it from a near country, then go a little further, and just try to keep supply lines short. But that doesn't mean don't have international trade. It means trade should be balanced.
Economists usually justify free trade according to the doctrine of comparative advantage, which guarantees mutual benefit to all trading partners if they specialize according to their comparative advantage and then trade. That is all very logical and neat, except that one of the assumptions of that position is that capital is not mobile internationally, that capital stays home and is reallocated within a nation according to the principle of comparative advantage. If capital is free to cross national boundaries, it will pursue absolute advantage; that is, it will go to wherever it is absolutely cheapest to produce, and it doesn't matter where. And, in today's world, capital is highly mobile across international boundaries. So all the comforting conclusions of the doctrine of comparative advantage are groundless.
One [response to this situation], in terms of policy, is to restore this basic assumption of comparative advantage by having greater limits on the free mobility of capital. Or, if capital wants to go to, say, Mexico and employ Mexican labor to make goods to sell in the U.S. market, let's put a tariff on those goods and tend to equalize prices to protect wages in the United States.
But I do not speak on this subject with great confidence. This is a difficult area. The only thing that I feel fairly confident about is that the present celebration of increasing interdependence and the reliance on comparative advantage is badly flawed. Let's slow down this increasing global interdependence, and let's go more in the direction of national self-sufficiency and pay more attention to our own working class. I think there has been a tendency to write off the interests of the working class in industrial countries, and I think that is just wrong.
MM: Are there other policies industrialized countries should adopt to foster a shift to greater self-reliance?
Daly: I am very much in agreement with the standard economists on the idea of internalizing environmental costs into prices. Let's try to get prices right. Let's quit subsidizing water and energy and get realistic prices; that should help efficiency.
When you improve efficiency by raising prices, you create an equity problem, because it hurts the poor more than the rich. But you can take the revenue from the new taxes and reallocate those toward the poor to make up for this. So you can gain in both equity and efficiency.
For example, the most important, simplest thing the United States could do would be to impose a stiff tax on petroleum at the wellhead and on imported petroleum to raise the price of gasoline and energy in general. That would increase efficiency, and it would raise a lot of revenue. We could then serve equity by reducing income taxes on poorer people.
MM: How should natural resource use, in both the industrialized and developing world, be regulated to achieve sustainability?
Daly: I think the basic principles would be: On the input side, seek to harvest renewable natural resources at a rate equal to the rate at which they can regenerate. On the output side, the waste outputs from processes should be limited to rates which the local ecosystem can absorb without degrading the system beyond a reasonable or acceptable point. A third rule would be for inputs which are nonrenewable. We should exploit nonrenewable resources at a rate equal to the rate at which we can develop a long- run renewable substitute.
MM: What does operating sustainability mean for Third World economies?
Daly: If the governments are interested in the welfare of their citizens - and that is a big if; I think there are a lot of governments that are really not interested in the welfare of their citizens, or don't appear to be - then they will have to pay attention to their own poor class, their own lower class. They will have to face up to problems of land redistribution and of population limitations. Certainly family planning should be extended vigorously to all who want it. I think those two things - population control and redistribution - plus sound policies of growth at local, small-scale participatory levels, would be the things that would increase welfare in the Third World.
MM: If the U.S. or other industrialized countries' governments were to follow your prescriptions, it clearly would have an effect on Third World economies which have been either persuaded or forced to pursue export-oriented policies. What would be the obligation of industrialized countries to soften the impact on the Third World?
Daly: I think there would be an obligation to be gradual in the adjustment, to phase things in. If you move towards a greater degree of self-reliance, you announce that and cut back gradually. I think it would be to everyone's advantage to be a little bit gradual in moving back.