Supply Shock: Economic Growth at the Crossroads and the Steady State Solution
Of all the proposed solutions to the conundrum of perpetual growth in a finite world, one stands out for its straightforwardness and frankness. It is the notion of a steady state economy, or one that strives toward equilibrium rather than continual expansion. The reasoning behind such an economy is unassailable: Since every environment has inherent limits to the levels of population and consumption that it can support, it seems smart to try to stay within those limits. Indeed, the steady state is not so much a solution as an inevitable eventuality. We will all one day find ourselves living in a steady state economy, whether through conscious choice or a resource supply shock.
Economist and wildlife biologist Brian Czech isn't banking on the first possibility. In his new book Supply Shock he presents a stark assessment of our near-term economic prospects, based on sound logic and extrapolation from current trends. He points to a range of worsening crises in the economy of natural capital that underlies all other economies, including energy scarcity, freshwater depletion and climate change. He predicts a future of resource shortages, economic collapse, unemployment and the attendant suffering of the masses. Widespread hardship is almost certain, he writes, and chaos is not out of the question. In the process of this mayhem, he predicts, our ideas about what constitutes economic development will be unceremoniously stood on their heads.
A core tenet of Supply Shock is that there are serious problems with our current favored indicators of economic well-being, consumption and gross domestic product (GDP) per capita. These metrics totally ignore biophysical and ecological realities, implying that growth can continue forever, that it's the solution to all our problems and that its damaging by-products can be shrugged off as externalities. As a biologist, Czech knows better, and thus he's a strong advocate of alternative measures of economic health like the Genuine Progress Indicator (GPI) and the Index of Sustainable Economic Welfare (ISEW). These alternative metrics take account of important things that GDP does not. For example, a rise in unemployment would have no effect on GDP but likely would bring a drop in GPI.
In focusing on the economy's size rather than its true health, GDP disregards the hard laws of physics that ultimately constrain economic activity. Chief among these is the second law of thermodynamics, also referred to by the term entropy. Entropy explains why so many visions of a sustainable society are simply elaborate spins on the old perpetual motion machine. Czech sums it up nicely: "[E]nergy inevitably, invariably dissipates. Things that are hotter than their environment cool off. Of the billions of cups of coffee poured in the broad sweep of history, not one has warmed up of its own accord, not for an instant. And yet we seem to assume that the economy should be able to heat itself up on command and without a fuss, regardless of how plentiful the water, land, oil and other resources that power its growth happen to be.
The idea of a steady state economy is directly rooted in the law of entropy. Indeed, Herman Daly, the father of steady state economics, used entropy as his conceptual framework. In its strict physics sense, entropy refers to the waste heat produced any time energy flows from higher concentrations to lower ones, as in the case of a cup of coffee (however, the term is also used more broadly to describe the general level of disorder in a system). A crucial point to grasp is that entropy is a given in any energy system, since there is no such thing as a friction-less machine. When applied to economics, entropy says that there are limits to how much an economy can produce and grow.
Supply Shock exposes a range of erroneous views voiced by mainstream economists. The most dangerous of these, believes Czech, is the unquestioned worship of technological progress and faith in its ability to bail us out of trouble. For most economists, technological advancement is exogenous, or independent of the actions of the firms that produce goods and services in an economy. In other words, technological progress is simply a constant, like the boiling point of water or the speed of light, that can be counted on to elevate us to ever grander heights of technological development. Czech chooses an apt quote for showing how such reasoning can lead to blatantly incorrect conclusions. It comes from an article by economic growth theorist Robert Solow, in which he states, The world can, in effect, get along without natural resources.
This book's constant refrain is that we re living in a full-world economy in which we can no longer afford to indulge in complacency about resource limits. Business and economics students need to be taught that Earth's ecology is the larger system within which the money in an economy flows, and that economies ultimately owe all their wealth to the natural world. People need to recognize how fleeting the predominant energy sources of modern society are, and that Earth's primary source of energy is, and always has been, the sun. (Czech points out that, in addition to having created fossil fuels millions of years ago, solar energy also generates wind energy by way of thermal currents, and hydroelectric energy through evaporation and precipitation.)
Czech certainly can't be accused of lacking specific ideas on how to reform the world economic system. In a spirited Call for Steady Statesman, he lays out a robust set of policy options. He believes that in the United States, tremendous good could be done simply by better enforcing the Endangered Species Act (ESA). This is because economic growth is directly to blame for species endangerment, meaning that if statutes intended to protect endangered species were strictly enforced, economic growth would cease and would give way to steady state economics. Czech also has suggestions for amending the Full Employment Act, which he says in today's context calls for a steady state economy. He argues that in a full-world economy, employment for all can be achieved only by putting an end to population and economic growth.
I have to say that I m puzzled by an omission from Czech's survey of the evolution of economic thought. He gives only the briefest mention to 19th-century economist William Stanley Jevons, who contributed a formative insight to the sustainability debate. Known as Jevons paradox, it's the observation that increased efficiency in our use of a resource doesn t cause us to use less of it, as conventional wisdom would have us believe; rather, it causes us to use more of it, due to its increased affordability. Jevons paradox is a compelling argument for lowering consumption and shrinking the economy, and as such it receives high billing in most books making this case. Czech should have at least touched on it in his book yet he doesn t. But this fault is the only glaring one in Supply Shock; overall the book is quite well done.
The wisdom that reverberates throughout Supply Shock will be lost on a large segment of the population. That does not mean that the book isn t deeply intelligent, well-written or thought-provoking, because it is all these things. It just means that many people will never be persuaded to reject or even question the desirability of economic growth. For the rest of us, though, Supply Shock is a fine reference and a good choice of book to share with friends and acquaintances who are new to steady state economics and want a general overview of it.