Index of Sustainable Economic Welfare

The Index of Sustainable Economic Welfare (ISEW) is an economic indicator intended to replace the Gross Domestic Product, which is the main macroeconomic indicator of System of National Accounts (SNA). Rather than simply adding together all expenditures like the gross domestic product, consumer expenditure is balanced by such factors as income distribution and cost associated with pollution and other unsustainable costs. It is similar to the Genuine Progress Indicator (GPI).

The Index of Sustainable Economic Welfare (ISEW) is roughly defined by the following formula:

ISEW = personal consumption
+ public non-defensive expenditures
- private defensive expenditures
+ capital formation
+ services from domestic labour
- costs of environmental degradation
- depreciation of natural capital

History

GDP is misleading as an indicator or even as a proxy of the welfare of a nation, let alone as a measure of people’s well-being,^[1] although the makers of economic policy commonly think to the contrary. This problem already became apparent in practical economic policies in most^{[citation needed]} industrialised countries in the early 1970s. The most famous examples of this development are the MEW index developed by William Nordhaus and James Tobin in their Measure of Economic Welfare (MEW) in 1972, the Japanese Net National Welfare (NNW) indicator in 1973, the Economic Aspects of Welfare index (EAW) index of Zolatas in 1981, the ISEW indicator of Daly and Cobb in 1989 and the UN’s human development index, or HDI, in 1990^{[citation needed]}. They are all based on neoclassical welfare economics and use as the starting point the System of National Accounts (SNA). The basic idea behind all these approaches is the inclusion of nonmarket commodities, positive and negative, to yield an aggregated macroindicator in monetary terms.

The EAW index, applied to the United States for the period from 1950 to 1977, showed that the economic aspects of social welfare are a diminishing function of economic growth in industrially mature, affluent societies^{[citation needed]}. The percentage increases in social welfare over time are smaller than the corresponding increases in the GDP, and are diminishing^{[citation needed]}. When the elasticity of the EAW/GDP ratio reaches zero, economic welfare will have attained its maximum value. Beyond that point any further increase in the GDP would lead to an absolute decline in economic welfare.

The ISEW was originally developed in 1989 by leading ecological economist and steady-state theorist Herman Daly and theologian John B. Cobb, but later they went on to add several other "costs" to the definition of ISEW^{[citation needed]}. This later work resulted in yet another macroeconomic indicator Genuine Progress Indicator (GPI): see sustainability measurement. The GPI is an extension of ISEW that stresses genuine and real progress of the society and seeks especially to monitor welfare and the ecological sustainability of the economy. The ISEW and GPI summarise economic welfare by means of a single figure according to the same logic by which GDP summarises economic output into a single figure. Beside economic issues, social and environmental issues in monetary terms are included.

Trend of ISEW in the United States

The calculation of the ISEW in the United States from 1950 to 1986 was done by Cobb and Daly in 1989. The results reveal that the increase in economic welfare of an average American has stabilised after the 1970s although the economy, measured by GDP, has continued to grow. According to Cobb and Daly’s calculations the external effects of production and the inequity of income distribution are the main reasons for this development in which an increase in production does not necessarily lead to an increase in welfare.

Other countries and regions to calculate ISEW

Besides the USA there have been at least seven other countries or regions which have compiled the ISEW, namely the UK (Jackson & Marks 1994), Germany (Diefenbacher 1994), The Netherlands (Rosenberg & Oegema 1995), Austria (Stockhammer et al. 1995), British Columbia (Gustavson & Lonergan 1994), Sweden (Jackson & Stymne 1996), Chile (Castaneda 1999), Finland (Hoffrén 2001), Poland (Gil & Śleszyński 2003), Belgium (Bleys, 2008) and Flanders (Bleys & Van der Slycken, 2019).

Progress of the Finnish ISEW

The calculation of the ISEW for Finland has been done by Dr. Jukka Hoffrén at Statistics Finland in 2001 [1]. Today the time period covered is extended to years from 1945 to 2010. According to results sustainable economic welfare rose steadily in the 1970s and early 1980s, but has since declined and stabilised. One of the underlying reasons for this development was effective income distribution which apportioned evenly the welfare derived from increased production. In the mid-1980s income disparities started to grow again, flows of capital (investments) abroad increased and environmental hazards escalated, resulting in a decline in the weighted personal consumption.

Major contributors to Finnish ISEW in 2000 (FIM billion, rp)
Weighted personal consumption + 467.8
Household work + 82.8
Other positive contributions + 21.7
Long-term environmental damage - 228.0
Environmental deterioration - 192,5
ISEW + 151,8

References

^ Wuppertal Institute. "Alternatives to GDP for Measuring Progress" (PDF). Wuppertal Institute. Retrieved 6 January 2017.

Bleys, B. (2008). Proposed changes in the Index of Sustainable Economic Welfare: An application to Belgium. Ecological Economics, 64, 741-751.
Bleys, B., & Van der Slycken, J. (2019). De Index voor Duurzame Economische Welvaart (ISEW) voor Vlaanderen, 1990-2017. Studie uitgevoerd in opdracht van de Vlaamse Milieumaatschappij, MIRA, MIRA/2019/04, Universiteit Gent. Web: https://biblio.ugent.be/publication/8641018/file/8641020
Daly, H. & Cobb, J. (1989), For the Common Good. Beacon Press, Boston.
Delang, C.O. and Yu, Y.H. (2015) "Measuring Welfare beyond Economics: The Genuine Progress of Hong Kong and Singapore" London: Routledge, 256 pages
Diefenbacher, H. (1994), "The Index of Sustainable Economic Welfare in Germany", in C. Cobb & J. Cobb (eds.), The Green National Product, University of Americas Press
Gil, S. & Śleszyński J. (2003), "An Index of Sustainable Economic Welfare for Poland", Sustainable Development, Vol. 11, No. 1, 2003, (47-55).
Hamilton C. (1999) "The Genuine Progress Indicator: methodological developments and results form Australia", Ecological Economics, vol. 30, pp. 13–28
Hoffrén J. (2001) "Measuring the Eco-efficiency of Welfare Generation in a National Economy. The Case of Finland." Statistics Finland. Research Reports 233. Helsinki. pp. 107–109.
Jackson, T., Marks, N., Ralls, S., Strymne, S (1997) "An index of sustainable economic welfare for the UK 1950-1996", Centre for Environmental Strategy, University of Surrey, Guildford
Jackson, T. Marks, N. (2002) "Measuring Progress", new economics foundation and Friends of the Earth, London
Jackson, T., McBride, N., Marks N., Abdallah, S. (2006-2007)"Measuring Regional Progress: Developing a Regional Index of Sustainable Economic Well-being for the English Regions", new economics foundation, London
Nordhaus, W. and Tobin, J. (1972) Is growth obsolete?. Columbia University Press, New York

External links

Friends of the Earth: Measuring progress

* * * * * * * * *

ECONOMICS FOR A FULL WORLD

Article Link

Herman E. Daly

June 2015

Because of the exponential economic growth since World War II, we now live in a full world, but we still behave as if it were empty, with ample space and resources for the indefinite future. The founding assumptions of neoclassical economics, developed in the empty world, no longer hold, as the aggregate burden of the human species is reaching—or, in some cases, exceeding—the limits of nature at the local, regional, and planetary levels. The prevailing obsession with economic growth puts us on the path to ecological collapse, sacrificing the very sustenance of our well-being and survival. To reverse this ominous trajectory, we must transition toward a steady-state economy focused on qualitative development, as opposed to quantitative growth, and the interdependence of the human economy and global ecosphere. Developing policies and institutions for a steady-state economy will require us to revisit the question of the purpose and ends of the economy.

CONTENTS: The Economy as Subsystem of the Ecosphere | From Empty World to Full World: The Limiting Factor Has Changed | Limits to Growth and the Optimal Scale of the Economy in a Full World | Policies for a Steady-State Economy | Larger Ethical and Ecological Context of Economics | Endnotes

The Economy as Subsystem of the Ecosphere

When I worked at the World Bank, I often heard the statement, “There is no conflict between economics and ecology. We can and must grow the economy and protect the environment at the same time.” I still hear it a lot today.

Although it is a comforting idea, it is at most half true. The “true” part stems from a confusion of reallocation with aggregate growth. Possibilities of better allocation almost always exist—more of something desired in exchange for a reduction in something less desired. However, aggregate growth, what macro-economists mean by the term “growth” (and the meaning in this essay), is that the total market value of all final goods and services (GDP) is expanding.

The economy, as shown in Figure 1, is an open subsystem of the larger ecosphere, which is finite, non-growing, and materially closed, although open to a continual, but non-growing, throughput of solar energy. When the economy grows in physical dimensions, it incorporates matter and energy from the rest of the ecosystem into itself. It must, by the law of conservation of matter and energy (First Law of Thermodynamics), encroach on the ecosystem, diverting matter from previous natural uses. More human economy (more people and commodities) means less natural ecosystem. In this sense, the statement that there is “no conflict” is false. There is an obvious physical conflict between the growth of the economy and the preservation of the environment.

That the economy is a subsystem of the ecosphere seems perhaps too obvious to emphasize. Yet the opposite view is common in high places. For example, a recent study by the British government’s Natural Capital Committee asserted, “The environment is part of the economy and needs to be properly integrated into it so that growth opportunities will not be missed.” To the contrary, it is the economy that is the part and needs to be integrated into the whole of the finite ecosphere so that growth limits will not be missed.1

But is this physical conflict economically important? Some believe that we still live in an “empty” world. In the empty world, the economy was small relative to the containing ecosystem, our technologies of extraction and harvesting were not very powerful, and our numbers were small. Fish reproduced faster than we could catch them, trees grew faster than we could harvest them, and minerals in the Earth’s crust were abundant. In other words, natural resources were not really scarce. In the empty world, it made economic sense to say that there was no conflict between economic growth and the ecosystem, even if it were not strictly true in a physical sense.

Figure 1: Welfare in a Full vs Empty World

Neoclassical economic theory developed during this era and still embodies many assumptions from it. But the empty world has rapidly turned into a “full” world thanks to growth, the number one goal of all countries—capitalist, communist, or in-between. Since the mid-twentieth century, the world population has more than tripled—from two billion to over seven billion. The populations of cattle, chickens, pigs, and soybean plants and corn stalks have as well. The non-living populations of cars, buildings, refrigerators, and cell phones have grown even more rapidly. All these populations, both living and non-living, are what physicists call “dissipative structures”—that is, their maintenance and reproduction require a metabolic flow, a throughput that begins with depletion of low-entropy resources from the ecosphere and ends with the return of polluting, high-entropy waste back to the ecosphere. This disrupts the ecosphere at both ends, an unavoidable cost necessary for the production, maintenance, and reproduction of the stock of both people and wealth. Until recently, standard economic theory ignored the concept of metabolic throughput, and, even now, its importance is greatly downplayed.2

The concept of metabolic throughput in economics brings with it the laws of thermodynamics, which are inconvenient to growthist ideology. The First Law, as noted above, imposes a quantitative trade-off of matter/energy between the environment and the economy. The Second Law, that the entropy (or disorder) of the universe is always increasing, imposes a qualitative degradation of the environment— by extracting low-entropy resources and returning high-entropy wastes. The Second Law of Thermodynamics thus imposes an additional conflict between expansion of the economy and preservation of the environment, namely that the order and structure of the economy is paid for by imposing disorder in the sustaining ecosphere. Furthermore, this disorder, exported from the economy, disrupts the complex ecological interdependencies of our life-supporting ecosystem.

Those who deny the conflict between growth and environment often claim that since GDP is measured in value units, it has no necessary physical impact on the environment. But one must remember that a dollar’s worth of gasoline is a physical quantity—recently about one fourth of a gallon in the United States. GDP is an aggregate of all such “dollar’s worth” quantities bought for final use, and is consequently a value-weighted index of physical quantities. GDP is certainly not perfectly correlated with resource throughput. Nevertheless, prospects for absolute “decoupling” of resource throughput from GDP are quite limited, even though much discussed and wished for.3

These limits are made visible by considering an input-output matrix for an economy. Nearly every sector requires inputs from, and provides outputs to, nearly every other sector. And these inputs require a further round of inputs for their production, etc. The economy grows as an integrated whole, not as a loose mix of sectors. Even the information and service sectors require substantial physical resource inputs. In addition to the supply side limit reflected in the input-output interdependence of production sectors, there is the demand side limit of what has been called the “lexicographic ordering of wants”—unless we first have sufficient food on the plate, we are just not interested in the information contained in a million recipes on the Internet. And, of course, the Jevons Paradox—the idea that, as technology progresses, the increase in efficiency with which a resource is used tends to increase the rate of consumption of that resource—negates much of the benefits of such progress. This does not deny real possibilities of improved technical efficiency in the use of resources, or ethical improvement in the ordering of our priorities. But these represent qualitative development and are frequently not captured in GDP, which mainly reflects quantitative growth.

Since GDP reflects both harmful and beneficial activity, ecological economists have not considered it to be a desideratum in itself. Instead, they have distinguished growth (quantitative increase in size by accretion or assimilation of matter) from development (qualitative improvement in design, technology, or ethical priorities). Ecological economists advocate development without growth—qualitative improvement without quantitative increase in resource throughput beyond an ecologically sustainable scale. Given this distinction, one could indeed say that there is no necessary conflict between qualitative development and the environment. GDP accounting mixes together both growth and development, as well as costs and benefits. It thus confuses more than it clarifies.

From Empty World to Full World: The Limiting Factor Has Changed

When the entropic throughput becomes too large, it overwhelms either the regenerative capacity of nature’s sources or the assimilative capacity of nature’s sinks. This tells us that we no longer live in the empty world, but instead inhabit a full world. Natural resource flows are now the scarce factor, and labor and capital stocks are now relatively abundant. This basic pattern of scarcity has been reversed by a century of growth.

Figure 2: Change in Limiting Factors

This simple picture is instructive. In the past, the fish catch was limited by the number of fishing boats and fishermen. Now, it is limited by the number of fish and their capacity to reproduce. More fishing boats will not result in more caught fish. The limiting factor is no longer the manmade capital of boats, but the remaining natural capital of fish populations and their aquatic habitat.

Economic logic would tell us to invest in the limiting factor. The old economic policy of building more fishing boats is now uneconomic, so we need to invest in natural capital, the new limiting factor. How do we do that? For one, we can do so by reducing the catch to allow fish populations to increase to their previous levels, and by other measures such as fallowing agricultural land to refresh its fertility. More generally, we can do so through restoration ecology, biodiversity conservation, and sustainable use practices.

One could draw similar pictures for other natural resources. What ultimately limits the production of cut timber? Is it the number of chainsaws, sawmills, and lumberjacks, or the remaining forests and the growth rate of new trees? What limits the crops from irrigated agriculture? Is it the number of pipes, sprinklers, and pumps, or the stock of water in aquifers, their recharge rate, and the flow of surface water in rivers? What limits the number of barrels of pumped crude oil: the number of drilling rigs or the remaining accessible deposits of petroleum? What limits the use of all fossil fuels: our mining equipment and combustion engines, or the capacity of the atmosphere to absorb the resulting greenhouse gases without causing drastic climate change? In all cases, it is the latter, the natural capital (whether source or sink), rather than the man-made capital.

Traditional economists reacted to this change in the identity of the limiting factor in three ways. First, they ignored it—by continuing to believe that we live in the empty world of the past. Second, they pretended that GDP is an ethereal, angelic number rather than a physical aggregate. Third, they claimed that natural capital has not, in fact, replaced manmade capital as the limiting factor because manmade and natural capital are interchangeable substitutes, at least according to neoclassical production functions.

Only if factors of production are complements can the one in short supply be limiting. So even if natural capital is now scarcer than before, this would not be a problem, neoclassical economists say, because manmade capital is a “near perfect” substitute for natural resources. It is represented as such in multiplicative production functions such as the widely used Cobb-Douglas. But multiplying “factors” of production to get a “product” is mathematics, not economics. In the real world, what we call “production” is in fact transformation, not multiplication. Natural resources are transformed by capital and labor inputs into useful products and waste.

While improved technologies can certainly reduce waste and facilitate recycling, agents of transformation (capital and labor) cannot serve as direct substitutes for the material and energy being transformed (natural resources). Can we produce a ten-pound cake with only one pound of ingredients, simply by using more cooks and ovens? And further, how could we make more capital (or labor) without also using more natural resources? While a capital investment in sonar may help locate those remaining fish, it is hardly a good substitute for more fish in the sea. And what happens to the capital value of fishing boats, including their sonar, as the fish disappear?

Limits to Growth and the Optimal Scale of the Economy in a Full World

It is clear from Figure 1 that the transition from empty to full world involves both costs and benefits. The brown arrow from Economy to Welfare represents economic services (benefits from the economy). It is small in the empty world but large in the full world. It grows at a diminishing rate because, as rational beings, we satisfy our most important wants first—the law of diminishing marginal utility. The costs of growth are represented by the shrinking ecosystem services (green arrow) that are large in the empty world but small in the full world. It diminishes at an increasing rate as the ecosystem is displaced by the economy because we—in theory—sacrifice the least important ecosystem services first—the law of increasing marginal costs.

We can restate this in terms of Figure 3, showing the declining marginal benefit of growth of the economy and the increasing marginal cost of the resulting environmental sacrifice:

Figure 3: The Limits to Growth

From the diagram, we can distinguish three concepts of limits to growth:

1. The futility limit occurs when the marginal utility of production falls to zero. Even with no cost of production, there is a limit to how much we can consume and still enjoy it. There is a limit to how many goods we can enjoy in a given time period, as well as a limit to our stomachs and the sensory capacity of our nervous systems. In a world with considerable poverty, and in which the poor observe the very rich still enjoying their extra wealth, many view this futility limit as far away, not only for the poor, but for everyone. By its “non-satiety” postulate, neoclassical economics formally denies the concept of the futility limit. However, studies have shown that, beyond a “sufficiency threshold,” both self-evaluated happiness and objective indices of welfare cease to increase with GDP.4

2. The ecological catastrophe limit is represented by a sharp increase to the vertical of the marginal cost curve. Some human activity, or novel combination of activities, may induce a chain reaction, or tipping point, and collapse our ecological niche. The leading candidate for the catastrophe limit at present is runaway climate change induced by greenhouse gases emitted in pursuit of economic growth. Where along the horizontal axis it might occur is uncertain. The assumption of a continuously and smoothly increasing marginal cost curve is quite optimistic. Given our limited understanding of how the ecosystem functions, we cannot be sure that we have correctly sequenced our sacrifices of ecological services from least to most important. In making way for growth, we may ignorantly sacrifice a vital ecosystem service ahead of a trivial one. Thus, the marginal cost curve might in reality zigzag up and down discontinuously, making it difficult to define the third and most important limit, namely the economic limit.

3. The economic limit is defined by the equality of marginal cost and marginal benefit and the corresponding maximization of net benefit. The economic limit would appear to be the first limit encountered. It certainly occurs before the futility limit, and likely before the catastrophe limit. At worst, the catastrophe limit might coincide with and discontinuously determine the economic limit. Therefore, it is very important to estimate the risks of catastrophe and include them as costs counted in the disutility curve as far as possible.

From the graph, it is evident that increasing aggregate production and consumption is rightly called economic growth only up to the economic limit. Beyond that point, it becomes uneconomic growth because it increases costs by more than benefits, making us poorer, not richer. Nonetheless, we perversely continue to call it economic growth. Indeed, you will not find the term “uneconomic growth” in any macroeconomics textbook. Any increase in real GDP is called “economic growth” even if it increases costs faster than benefits. That richer (more net wealth) is better than poorer is a truism. The relevant question, though, is, does growth still make us richer, or has it begun to make us poorer by increasing “illth” faster than wealth?

Examples of “illth” are everywhere, even if they are still unmeasured in national accounts. They include things like nuclear wastes, climate change from excess carbon in the atmosphere, biodiversity loss, depleted mines, deforestation, eroded topsoil, dry wells and rivers, sea level rise, the dead zone in the Gulf of Mexico, gyres of plastic trash in the oceans, and the ozone hole. They also include exhausting and dangerous labor and the un-repayable debt from trying to push growth in the symbolic financial sector beyond what is possible in the real sector.

Economists will note that the logic employed in Figure 3 is familiar in microeconomics—the optimal size of a microeconomic unit, be it a firm or a household, occurs where the marginal cost is equal to the marginal benefit. That logic is not applied to the macro-economy, however, because the latter is thought to be the Whole rather than a Part. When a Part expands into the finite Whole, it imposes an opportunity cost on other Parts that must shrink to make room for it. When the Whole itself expands, it is thought to impose no opportunity cost because it displaces nothing, presumably expanding into the void. But as seen in Figure 1, the macroeconomy is not the Whole. It, too, is a Part, a part of the larger natural economy, the ecosphere, and its growth does inflict opportunity costs on the finite Whole that must be counted. Their refusal to acknowledge this is why many economists cannot conceive of the possibility that growth in GDP could ever be uneconomic.

Standard economists might accept Figure 3 as a static picture but then argue that, in a dynamic world, technology will shift the marginal benefit curve upward and the marginal cost curve downward, moving their intersection (economic limit) ever to the right, so that continual growth remains both desirable and possible. However, the macroeconomic curve-shifters need to remember three things. First, the physically growing macro-economy is still limited by its displacement of the finite ecosphere and by the entropic nature of its maintenance throughput. Second, the timing of new technology is uncertain. The expected technology may not be invented or come online until after we have passed the economic limit. Do we then endure uneconomic growth while waiting and hoping for the curves to shift? Third, the curves can also shift in the wrong directions, moving the economic limit back to the left. Did the technological “advances” of tetraethyl lead and chlorofluorocarbons shift the cost curve down or up? How about nuclear power? Or “fracking”?

Adopting a steady-state economy at the macro level (while, of course, allowing for improvements in allocation at the micro level) helps us to avoid being shoved past the economic limit. We could take our time to evaluate new technologies rather than blindly adopting them in the interest of aggregate growth that may well be uneconomic. And the steady state gives us some insurance against the risks of ecological catastrophe that increase with growthism and technological impatience.

Three Perspectives on Integrating Economy and Ecosystem

Our vision and policies should be based on an integrated view of the economy as a subsystem of the finite and non-growing ecosphere. Three different theoretical understandings have grounded such attempts at integration, and all three start from the vision of the economy as a subsystem of the ecosphere and thus recognize limits to growth. They differ, however, in the way they each treat the boundary between the economy and the rest of the ecosystem, and these differences have large policy consequences for how we adjust to limits.

Figure 4: Approaches to Integrating Economy and Ecosystem

Economic imperialism seeks to expand the boundary of the economic subsystem until it encompasses the entire ecosphere. The goal is one system, the macroeconomy as the Whole. This is accomplished by the complete internalization of all external costs and benefits into prices. Those myriad aspects of the biosphere not customarily traded in markets are treated as if they were by imputation of “shadow prices”—the economist’s best estimate of what the price of the function or thing would be if it were traded in a competitive market. Everything in the ecosphere is theoretically rendered comparable in terms of its priced ability to help or hinder individuals in satisfying their wants. Implicitly, the end pursued is an ever-greater level of consumption, and the way to effectively achieve this end is growth in the aggregate exchange value of marketed final goods and services (GDP).

Economic imperialism is essentially the neoclassical approach. Subjective individual preferences, however whimsical or uninstructed, are taken as the ultimate source of value. This is a perverse value judgment, not the absence of value judgments, as economists normally treat it. Since subjective wants are thought to be infinite in the aggregate, as well as sovereign, the scale of activities devoted to satisfying them tends to expand. The expansion is considered legitimate as long as “all costs are internalized into prices.”

While costs should certainly be internalized into prices, this should not become an excuse for allowing excessive takeover of the ecosphere by economic growth. Unfortunately, many of the costs of growth that we have experienced have come as surprises. We cannot internalize them if we cannot first imagine and foresee them. Furthermore, even after some external costs have become quite visible (e.g., climate change), internalization has been very slow, partial, and much resisted. Profit-maximizing firms have an incentive to externalize costs. As long as the evolutionary fitness of the environment to support life is not perceived by economists as a value, it is likely to be destroyed in the imperialistic quest to subject every molecule and photon in creation to the pecuniary rules of present value maximization.

There is no doubt that once the scale of the economy has grown to the point that formerly free environmental goods and services become scarce, it is better that they should have a positive price reflecting their scarcity than to continue to be priced at zero. But the prior question remains: Are we better off at the new larger scale with formerly free goods correctly priced, or at the old smaller scale with free goods also correctly priced (at zero)? In both cases, the prices are right. This question of optimal macro scale is neither answered nor even asked by either neoclassical or Keynesian economics in their blind quest for growth.

Ecological reductionism begins with the true insight that humans and markets are not exempt from the laws of nature. It then proceeds to the false inference that human action is totally explainable by and reducible to the laws of nature. It seeks to explain whatever happens within the economic subsystem by exactly the same natural laws that it applies to the rest of the ecosystem. It subsumes the economic subsystem indifferently into the natural system, erasing its boundary. Taken to the extreme, this view purports to explain everything by a materialist deterministic system that has no room for purpose or will. This is a sensible vision from which to study the ecology of a coral reef or a rainforest. But if one adopts it for studying the human economy, one is stuck with the inconvenient policy implication that policy can make no difference.

Ecology has inherited from its parent discipline, biology, a measure of modern biology’s mechanistic philosophy. This stems from a neo-Darwinian fundamentalism that is often uncritically accepted by many leading biologists as a deterministic metaphysics validated by science, rather than as a fruitful working hypothesis for doing science. Determinism is totally at odds with purposeful policy of any kind, and consequently with any economic thought aiming at policy. A happy marriage between economics and ecology, as in “ecological economics,” must overcome this latent incompatibility. Economic imperialism reduces everything to human will and utility, neglecting objective constraints of the natural world. Ecological reductionism sees only deterministic natural laws, and imperiously extends these into materialist “explanations” of human will and consciousness as mere illusions. It is a tragic irony that the discipline whose scientific findings have done most to awaken us to the environmental dangers we face is also the discipline whose metaphysical presuppositions have done most to weaken our will to respond to these dangers through purposeful policy.5

Economic imperialism and ecological reductionism are both monistic visions, albeit rather opposite monisms. The monistic quest for a single entity or principle by which to explain everything leads to excessive reductionism on both sides. Certainly, science should strive for the most reduced or parsimonious explanation possible without ignoring the facts. But respect for the basic empirical facts of natural laws on the one hand, and self-conscious purpose and will on the other hand, should lead us to a kind of practical dualism. After all, that our world should consist of two fundamental features offers no greater inherent improbability than that it should rest on only one. How these two fundamental features of our world (material cause and final cause) interact is a venerable mystery—precisely the mystery that the monists of both kinds are seeking to avoid. But economists are too much in the middle of things to adopt either extreme. They are better off denying the tidy-mindedness of either monism than denying the facts that point to an untidy dualism.

The remaining perspective is the steady-state subsystem. It does not attempt to eliminate the subsystem boundary, either by expanding it to coincide with the whole system or by reducing it to nothing. Rather, it affirms both the interdependence and the qualitative difference between the human economy and the natural ecosystem. The boundary must be recognized and drawn in the right place. The scale of the human subsystem defined by the boundary has an optimum, and the throughput by which the ecosphere physically maintains and replenishes the economic subsystem must be ecologically sustainable. The goal of the economy is to minimize the low-entropy used up to attain a sufficient standard of living—by sifting it slowly and carefully through efficient technologies aimed at important purposes. The economy should not be viewed as an idiot machine dedicated to maximizing waste. Its ultimate purpose is the maintenance and enjoyment of life for a long time (not forever) at a sufficient level of wealth for a good (not luxurious) life.

The idea of a steady-state economy comes from classical economics, and was most developed by John Stuart Mill (1857), who referred to it as the “stationary state.”6 In such a state, the population and the capital stock would no longer grow, although the art of living would continue to improve. The constancy of these two physical stocks defined the scale of the economic subsystem. Birth rates would be equal to death rates and production rates equal to depreciation rates. Today, we add that both rates should be equal at low levels rather than high levels because we value longevity of people and durability of artifacts, and wish to minimize throughput, subject to maintenance of sufficient stocks for a good life.

Policies for a Steady-State Economy

Ecological economics should seek to develop the steady-state vision and get beyond the dead ends of both economic imperialism and ecological reductionism. Ten policies for moving toward a steady-state economy appear below. Many could be adopted independently and gradually, although they cohere in the sense that some compensate for the shortcomings of others. Of course, the question of the desired level of steady-state economy is crucial, and local, regional, and global ecological limits must be considered in fashioning effective policies.

(1) Developing Cap-Auction-Trade systems for basic resources (especially fossil fuels): Set caps for natural resource according to three key rules: (1) renewable resources should not be depleted faster than they regenerate, (2) nonrenewable resources should not be depleted faster than renewable substitutes are developed, and (3) wastes from all resource use should not be returned to the ecosystem faster than they can be absorbed and reconstituted by natural systems. This approach achieves sustainable scale and market efficiency, avoids rebound effects, and raises auction revenue for replacing regressive taxes.

(2) Tax shifting: Shift the tax base from “value added” (labor and capital) to that to which value is added, i.e., natural resource throughput, the source of social costs such as pollution and adverse public health effects. Such taxes will also encourage efficient resource use.

(3) Limiting inequality: Establish minimum and maximum income limits, maintaining differences large enough to preserve incentives but small enough to suppress the plutocratic tendencies of market economies.

(4) Reforming the banking sector: Move from a fractional reserve banking system to 100% reserve requirements on demand deposits. Money would no longer be mainly interest-bearing debt created by private banks, but non-interest-bearing government debt issued by the Treasury. Every dollar loaned for investment would be a dollar previously saved by someone else, restoring the classical balance between investment and abstinence from consumption, and dampening boom and bust cycles.

(5) Managing trade for the public good: Move from free trade and free capital mobility to balanced and regulated international trade. While the interdependence of national economies is inevitable, their integration into one global economy is not. Free trade undercuts domestic cost-internalization policies, leading to a race to the bottom. Free capital mobility invalidates the basic comparative advantage argument for free trade in goods.7

(6) Expanding leisure time: Reduce conventional work time in favor of part-time work, personal work, and leisure, thereby embracing well-being as a core metric of prosperity while reducing the drive for limitless production.

(7) Stabilizing population: Work toward a balance in which births plus in-migrants equals deaths plus out-migrants, and in which every birth is a wanted birth.

(8) Reforming national accounts: Separate GDP into a cost account and a benefits account so that throughput growth can be stopped when marginal costs equal marginal benefits.

(9) Restoring full employment: Restore the US Full Employment Act of 1945 and its equivalent in other nations in order to make full employment once again the end, and economic growth the temporary means. Un/under-employment is the price we pay for growth from automation, off-shoring, deregulated trade, and a cheap-labor immigration policy. Under steady-state conditions, productivity improvements would lead to expanded leisure time rather than unemployment.

(10) Advancing just global governance: Seek world community as a federation of national communities, not the dissolution of nations into a single “world without borders.” Globalization by free trade, free capital mobility, and free migration dissolves national community, leaving nothing to federate. Such globalization is individualism writ large—a post-national corporate feudalism in a global commons. Instead, strengthen the original Bretton Woods vision of interdependent national economies, and resist the WTO vision of a single integrated global economy. Respect the principle of subsidiarity: although climate change and arms control require global institutions, basic law enforcement and infrastructure maintenance remain local issues. Focus our limited capacity for global cooperation on those needs and functions that truly require it.

Larger Ethical and Ecological Context of Economics

It is one thing to suggest a general outline of policies, but it is something else entirely to say how we will secure the will, strength, and clarity of purpose to carry out these policies—especially when we have treated growth as the summum bonum for the past century. Such will requires a major change in philosophical vision and ethical practice, a shift that is hardly guaranteed even in light of the increasingly perilous circumstances in which the planet finds itself.

As a way to contemplate such a change, consider the “ends-means pyramid” in Figure 5. The policies suggested above belong in the middle, under “Political Economy.” At the base of the pyramid are our ultimate means (low-entropy matter-energy)—that which we require to satisfy our wants, but which we cannot make, only use up. We use these ultimate means directly, guided by technology, to produce intermediate means (e.g., artifacts, commodities, services) that directly satisfy our needs. These intermediate means are allocated by political economy to serve our intermediate ends (e.g., health, comfort, education), ethically ranked by how strongly they contribute to the Ultimate End under existing circumstances. We can perceive the Ultimate End only vaguely, but in order to ethically rank our intermediate ends, we must compare them to some ultimate criterion. We cannot avoid philosophical and theological inquiry into the Ultimate End just because it is difficult. To prioritize requires that something go in first place.

Figure 5: An Ends-Means Pyramid of Human Activity

The middle position of economics is significant. Economics traditionally deals with the allocation of given intermediate means to satisfy a given hierarchy of intermediate ends. It takes the technological problem of converting ultimate means into intermediate means and the ethical problem of ranking intermediate ends with reference to an Ultimate End as solved. All economics has to do, then, is efficiently allocate given means among a given hierarchy of ends. In neglecting the Ultimate End and ethics, economics has been too materialistic; in neglecting ultimate physical means and technology, it has not been materialistic enough.

Ultimate political economy (stewardship) is the total problem of using ultimate means to best serve the Ultimate End, no longer taking technology and ethics as given, but as steps in the total problem to be solved. The overall problem is too large to be tackled without breaking it down into its pieces. But without a vision of the total problem, the pieces do not fit together.

The dark base of the pyramid represents the relatively solid and consensual knowledge of various sources of low-entropy matter-energy. The light apex of the pyramid represents the fact that our knowledge of the Ultimate End is uncertain and not nearly as consensual as physics. The single apex will annoy pluralists who think that there are many “ultimate ends.” Grammatically and logically, however, “ultimate” requires the singular. Yet there is certainly room for more than one perception of the nature of the singular Ultimate End, and much need for tolerance and patience in reasoning together about it.

The Ultimate End, whatever it may be, cannot be growth. A better starting point for reasoning together is John Ruskin’s aphorism that “there is no wealth but life.” How might that insight be restated as an economic policy goal? I would suggest the following: maximizing the cumulative number of lives ever to be lived over time at a level of per capita wealth sufficient for a good life. This leaves open the traditional ethical question of what is a good life, while conditioning its answer to the realities of ecology and the economics of sufficiency. At a minimum, it seems a more reasonable approximation than the current impossible goal of “ever more things for ever more people forever.”

This essay has been adapted from a speech delivered on the

occasion of the Blue Planet Prize, Tokyo, November 2014.

Endnotes

1. Dieter Helm, The State of Natural Capital: Restoring our Natural Assets (London: UK Natural Capital Committee, 2014).
2. This is despite notable contributions from Nicholas Georgescu-Roegen and Kenneth Boulding. See Nicholas Georgescu-Roegen, The Entropy Law and the Economic Process (Cambridge, MA: Harvard University Press, 1971); Kenneth Boulding, “The Economics of the Coming Spaceship Earth,” in Environmental Quality in a Growing Economy, ed. H. Jarrett (Baltimore: Johns Hopkins University Press, 1966), 3-14.
3. Tim Jackson, Prosperity without Growth: Economics for a Finite Planet (London: Earthscan, 2009), 67–71.
4. As indicated by the GPI (Genuine Progress Indicator) and its forerunner the ISEW (Index of Sustainable Economic Welfare). For an informative survey, see Ida Kubiszewski, Robert Costanza, Carol Franco, Philip Lawn, John Talberth, Tim Jackson, and Camille Aylmer, “Beyond GDP: Measuring and Achieving Global Genuine Progress,” Ecological Economics 93 (September 2013): 57-68.
5. This contradiction is most apparent in the work of acclaimed naturalist and environmentalist Edward O. Wilson, who strongly affirms both materialistic determinism and environmental activism. He recognizes the contradiction and, unable to resolve it, has simply chosen to live with it. See Wendell Berry, Life is a Miracle (An Essay Against Modern Superstition) (Washington, DC: Counterpoint Press, 2000), 26. See also Chapter 23 in Herman Daly, Ecological Economics and Sustainable Development (Cheltenham, UK: Edward Elgar, 2007).
6. John Stuart Mill, Principles of Political Economy IV.VII.I (London, 1848).
7. Capitalists are interested in maximizing absolute profits and therefore seek to minimize absolute costs. If capital is mobile between nations, it will move to the nation with lowest absolute costs. Only if capital is internationally immobile will capitalists bother to compare internal cost ratios of countries and choose to specialize in the domestic products having the lowest relative cost compared to other nations, and to trade that good (in which they have a comparative advantage) for other goods. In other words, comparative advantage is a second-best policy that capitalists will follow only when the first-best policy of following absolute advantage is blocked by international capital immobility. For more on this, see Chapter 18 in Herman Daly and Joshua Farley, Ecological Economics (Washington, DC: Island Press, 2004).

* * * * * * * * *

Prof. Herman Daly Interview Summary

https://www.af-info.or.jp/better_future/html/vol_V/2014/Prof_Daly/2014a_Daly1.html

I. Birth – Childhood (1938-)

II. Universities (Rice University – Vanderbilt University – 1967)

III. Teaching at Louisiana State University, etc. (1968 – 1983)

IV. As a Senior Economist, Environment Department, World Bank (1988-1994)

V. As a Professor at the School of Public Policy, University of Maryland (1994-2010) and a Senior Researcher (2010-Present)

VI. Comparison of GDP and ISEW

VII. Conclusion

VIII. About Myself

I. Birth - Childhood (1938-)

I was born in Houston, Texas in 1938. My grandparents on my father's side were immigrants from Ireland, and my grandparents on my mother's side were from Germany. Both sets of grandparents passed away before I was born, so I do not know much more than that.

May parents were unable to attend university because of the Great Depression, and so they started working very early. My father was a hard worker and was able to open a retail store handling carpenter's tools. I also worked at his store part time between the ages of 12 to 21, and the experience taught me a lot. I have a younger sister who is teaching Spanish literature at a university. My father taught us the importance of independence, and my mother taught us to be sincere and ethical. We were very lucky to have been raised by affectionate and wise parents.

Although I was a shy child, I liked swimming, playing tennis and reading books. At different times during my childhood, I wanted to be a doctor, priest, chemist, and a novelist. When I was seven, I contracted polio. My body was partially paralyzed and I was hospitalized for two months. When I was released from the hospital, my left hand was completely paralyzed, which prevented me from participating in sports with the exception of swimming. For this reason, I found myself reading more. Despite treatment, by the time I was 14 years old, my left hand had completely atrophied and was causing various complications. The doctors decided to amputate. As traumatic as this was, it stopped me from wasting my time hoping I would recover and saved me from using lots of energy going through treatment that would be of little or no benefit. This painful experience taught me to concentrate on what I am able to do and not waste energy on things that I can't do.

Fortunately, for a half century after losing my hand, I have been spared the aftereffects of polio. In addition to the normal problems that come with age, however, I have recently experienced physical weakness and fatigue due to the loss of motor nerve and the excessive load on healthy motor nerves because I had polio as a child.

II. Universities (Rice University - Vanderbilt University - 1967)

I was interested in humanities as well as science. When I had to choose between the two, I decided to study economics in preparation for a major in the social sciences, which was rooted in both the natural sciences and the humanities. I thought that economics was situated between the natural sciences, which are related to resources, and the humanities, which are related to ethics and human goals. In fact, the primary economists in the classical school thought in this way. However, the neo-classical school of economics that I studied was different and disappointing. I decided to study economics with the goal of restoring biophysics and ethics to the field. I needed to convert my disappointment into motivation.

Biophysics covers all aspects of human life, physics, biology, natural resources, energy and ecology. This was appealing to me because it didn't force me to choose between the natural sciences and the humanities. I was very lucky that the teacher who taught the history of economics was excellent. I was strongly influenced by a book he had assigned, "Personal Knowledge," by Michael Polanyi. My classes provided me with beneficial knowledge of the unknown world and motivated me greatly. Traditionally, the history of economics is a required subject; however, it has since been removed from the curriculum and is rarely taught. Economists these days probably think that they have already learned enough from the failures of the past. However, I believe that it is also a problem if we place too much emphasis on the theoretical and actual phenomena.

After taking my bachelor's degree, I went on to graduate school at Vanderbilt University in Nashville, Texas to study economic development with an emphasis on Central America. I chose economic theory and statistics, which were taught by Nicholas Georgescu-Roegen, as required subjects. These two courses were extremely stimulating and motivated me to study more. I applied what I learned to research on economic growth in Central America. Since I was born and raised in Texas, I studied Spanish and was quite attracted to Central America and Mexico. My doctoral thesis was on currency exchange rates as a way of implementing economy and development plans in Uruguay. Besides studying, I enjoyed playing tennis, reading books on philosophy, theology, and science, and interacting with friends.

III. Teaching at Louisiana State University, etc. (1968 - 1983)

After acquiring my doctorate in economics, I taught at Louisiana State University. I had many great teachers that I respected and appreciated; and I wanted to be for younger students what my teachers were for me. While I was teaching at the university, I explored environmental economics, which includes aspects of the environment, regional society, quality of life, and ethics. In the 1960s, the environment was not valued in economics; so I was a pioneer.

In 1968, I was invited by the Federal University of Ceara to be a guest professor. This was through a project undertaken by the Ford Foundation to cultivate students from the northwestern part of Brazil, where poverty was a serious issue, by giving them the chance to study overseas. This specific project was designed to cultivate economic specialists capable of addressing regional poverty. In 1969, I carried out a demographic study on the population increase and economic growth in the northern part of Brazil, and examined Malthusianism and Marxism for one year as a researcher at the Yale University.

Through my teaching and research in Brazil, I started understanding that population growth increased poverty and caused income disparity. During that period, I reread On the Stationary State by John Stuart Mill and examined the content with the disorder and limited effects of economic growth learned from Georgescu-Roegen.

Steady state economy was a concept developed by classical economist John Stuart Mill (1806-1873). A steady state economy is a social state whose capital and population are a stable size. However, the limited capital and population are complemented by reproduction. Mill's theory is different from those developed by many other economists or from general concepts based on economic growth. He valued societies with steady state economies as the stable societies that consider quality of life. Mill's theory was valuable because he explained for the first time from an economic perspective the importance of differentiating time for work from time devoted to improving the art of living. He paid attention to the quality of life as well. He described in his book Essays on Economics and Society that it is scarcely necessary to remark that a stationary condition of capital and population implies no stationary state of human improvement. He went on to say that there would be as much scope as ever for all kinds of intellectual culture, and moral and social progress; as much room for improving the Art of Living and much more likelihood of it being improved, when minds cease to be engrossed in the art of getting on.

I have studied the relationship among the economy, environment and ethics for a long period of time. The study I carried out in the northwestern part of Brazil between 1967 and 1968 made me realize the extreme importance of work in this field. According to traditional theory, economic growth was the best method for solving ethical failures that arose. This means, for example, that everyone would benefit. In addition, environmental issues were thought to have no impact on economic growth, or at least create no problems that science and technology or alternative resources could not overcome. Through my study on policies in developing countries, I concluded that energy issues in developing countries cause the most serious environmental problems, and that these are also associated with deforestation and agricultural issues. This increased people's awareness that the costs of economic growth were larger than we thought.

I summarized theories developed by economists in the past and published them in Towards a Steady-State Economy in 1973. It was my dream to collect and publish the powerful work written by economists who were of my teachers' generation and which were critical of economic growth in a way that my students and general readers could understand. These were serious works and included articulate criticisms of excessive dependence on economic growth. This publication made me more confident about my thinking on economic growth; however, strong criticism was levelled at me from many economists.

In addition, in the middle of 1980s, I founded the International Society for Ecological Economics with Professor Robert Costanza, my co-worker at Louisiana State University, with support from Joan Martinez-Alier in Spain and the late Ann-Mari Jansson in Sweden. It was founded to promote mutual understanding between economists and environmental specialists. It was first an international gathering; however, it evolved into an organization with branches in many countries and regions. They hold national and international conferences every two years. I also jointly founded the journal Ecological Economics with Professor Costanza to promote active discussions in the field.

In 1980, I carried out population research at the Center for Resources and Environmental Studies, Australia National University for three months and gave a presentation on the influence of a stable economic state on the balance of population and resources. After that, I gave lectures in Brazil as a Fulbright Senior Lecturer, and conducted research at Yale University. In 1983, I returned to Louisiana State University to teach economics and developed a new program for the study of population, environment and economic development.

The main reason that I was interested in Brazil was that I had met my wife, Marcia, there. We've been married for 50 years. She was an exchange student from Brazil studying at Peabody College near Vanderbilt University, where I was studying. After my graduation, I was invited to Brazil as a guest researcher, and we continued our relationship. We married in 1963 when I was 25 years old. Brazil, therefore, is my second home.

IV. As a Senior Economist, Environment Department, World Bank (1988-1994)

1. The World Bank

I left my post at the university in 1988 to become a Senior Economist at the Environment Department of the World Bank. Economics at the university had become conservative and emphasized existing styles only, which I could no longer accept. At that time, the neoclassical school's influence had increased, and the focus had become narrower and more conservative. They did not even look at resources or the environment, or ignored them more often than not when they did. This tendency was seen strongly in the Louisiana State University Department of Economics; and this came into conflict with my theory, which emphasized resources and the environment, and this made it more difficult for me to remain. Therefore, I decided to leave the world of academia and shift to a more practical and active field before entering my 50's.

I was very grateful to have received an invitation to join the World Bank. The World Bank received pressure from the government agencies and environmental NGOs to consider environmental costs along with economic growth. Therefore, the World Bank asked the late Dr. Robert Goodland, who passed away this year (2014), to become a Senior Economist at the Environment Department for Central America. He was the first ecologist hired by the World Bank. I was known as critical of economic growth without consideration of the environment, so it was a big surprise for me that the World Bank, whose basic policy was economic growth, offered me a job. Dr. Goodland was head of the Environment Department for Central America and insisted on hiring me against opposition from other employees. He was my supervisor and my instructor, and it was an honor to have been able to work under him for six years. He once taught in Brazil before joining the World Bank, and he also learned tropical ecology from Professor Daniel H. Janzen. I was deeply moved by the fact that Professor Janzen and I, who are acquaintances of Dr. Goodland, received the Blue Planet Prize together this year.

2. Index of Sustainable Economic Welfare (ISEW) and Herman Daly's Three Rules/ Pyramid

In the following year, Dr. John B. Cobb Jr. and I developed the Index of Sustainable Economic Welfare (ISEW) as a more effective index than GDP to measure socio-economic growth, and released as a reference to supplement both the basic concept and theoretical discussions attached to For the Common Good, which was published in 1989. This jointly published book proposed a new economic model that emphasized the environment, regional society, and ethics. It attracted the attention of the industrial, academic and political worlds, but it also caused a significant amount of controversy and was met with a certain amount of skepticism.

The purpose of presenting the ISEW was to provide a basic example of the principle separate from statistical measurements. Dr. Clifford W. Cobb, son of Dr. John B. Cobb Jr., was a major contributor to its development. While GDP is problematic, the ISEW provides an accurate indicator of growth. In order to make it even clearer, however, we separated the primary and secondary issues in measurement. Numerical data can always cause confusion, so it is up to the author to make it clear.

Dr. John B. Cobb Jr. and his son Dr. Clifford W. Cobb asked renowned economists to review and critique the ISEW for revision before publication of The Green National Product. They were also involved in second version of For the Common Good, which included a significant improvement in the description of the ISEW. In the postscript of the second version, we also included a section on the influence of currencies, financing and cost of economic growth, which were also important points that we had overlooked in the first version.

I also developed Herman Daly's Three Rules, three essential principles of sustainable human society, and Herman Daly's Pyramid.

Herman Daly's Three Rules:

The sustainable use of renewable resources requires that consumption not be greater than the rate at which resources regenerate.
The sustainable use of nonrenewable resources requires that the rate of consumption not be greater than the pace at which renewable substitutes can be put into place.
The sustainable pace of pollution and wastes requires that production not be greater than the pace at which natural systems can absorb, recycle, or neutralize them.

In addition, Herman Daly's Pyramid was conceived from the question of whether economic growth truly leads to improvement in the quality of life.

The pyramid transcends elements of the economy that can be conjured up under normal circumstances - "artificial capital (factories, facilities, etc.), human capital (labor, knowledge, skills), financial capital," and added natural capital - which envelope the economy's potential and limitations, as well as social and human capital. As shown in this pyramid, it consists of intermediate stages of normal economics in between the ultimate purpose of well-being placed at the top and natural capital placed at the bottom.

3. As a Senior Economist at the World Bank

My theory worked against the World Bank's traditional model of economic growth, a model that entailed significant cost, and so was not favorably received. Complying with my three rules meant limiting economic growth to include other goals. Although the ultimate purpose of the World Bank is the eradication of poverty, we differed on how this could best be accomplished.

Senior Economist sounds like a high ranking position. However, it follows behind the Principal Economist, Lead Economist, and Chief Economist, that is the top position. What I did was to assist Dr. Goodland in researching and evaluating applications to the World Bank's loan project for dams, roads, airports, schools, farms and power stations in Central America, and classifying the predicted influence on the environment into categories. For the projects whose influence on the environment was serious or was likely to be serious, we made proposals to reduce the environmental load; however, these were not accepted by the executives or debtor nations due to their high cost.

After this, I was transferred from the Project Section at the Environment Department to the Research Section. The term "sustainable development," which was presented by the World Commission on Environment and Development (WCED) (Brundtland Commission), became trendy and everyone agreed to adopt this term; however, the definition was not clear. Actually, some wanted the term to remain vague because a clear definition of "sustainable development" would require significant change. Therefore, it was used to mean "desirable development." I proposed the three above-mentioned rules for sustainable development, which attracted attention outside the World Bank, but they were criticized within the World Bank because it was thought that my rules would delay economic growth and make it more difficult to obtain approval for each project. Meanwhile, inside the World Bank, some tried to reform the GDP accounting system to reflect environmental costs, but this was to little or no avail.

If the term "sustainable development" means "development" is "sustainable," then I do not agree with the idea because "development" conflicts with "sustainability." However, the Brundtland Report was successful in a way because it made people aware of the issue of sustainability. If we would like to cease economic growth for true sustainability, we should follow my three rules. However, since the rules conflict with economic growth, "sustainable development" was interpreted as "sound development," which I of course could not accept. When I explain my idea to my grandchildren, they all say, "We already know about it." The sustainable development that I proposed was that simple.

In the end, my three rules were not adopted. However, Dr. Goodland took the initiative in the development of limited environment assessment standards, which enabled the World Bank to limit investment in cigarettes, provide compensation for residents who were forced to move due to dam construction, take measures for the protection of the original inhabitants, provide technical safety and ensure public health. Policy standards along with the broad meaning of "sustainable development" were not included due to conflict with their goal, which was economic growth. However, economic growth should be handled appropriately. With little consideration to welfare, economic growth is of little benefit.

While I was with the World Bank Research Department, I worked on projects for Central America and traveled to Paraguay, Brazil, Ecuador, Costa Rica, and Thailand. I carried out research on the environmental capacity of xerophile forests in Paraguay and the Amazon, participated in policy conferences on sustainable growth held in Europe and the United States, and was involved in some projects related to the Rio Summit.

V. As a Professor at the School of Public Policy, University of Maryland (1994-2010) and a Senior Researcher (2010-Present)

After six years at the World Bank, I taught six years at the University of Maryland. I did not belong to the School of Economics, but the School of Public Policy, where my experience in developing policy at the World Bank was extremely useful. Many of my students went on to work at the World Bank. Compared with the School of Economics, faculty at the School of Policy were more sympathetic to my ideas about growth and the environment. Throughout my more than 40-year experience teaching, I taught students the need for policies that would benefit people.

VI. Comparison of GDP and ISEW

Compared with GDP, which has been used as the indicator of national economic power, ISEW is more capable of comprehensively reflecting expenditures and gains, which compensates for the defects in GDP regarding the inequitable distribution of benefit, hours spent on housework, the deterioration of natural resources, and external debt. GDP is a simple indicator of cost and profit. If gains exceed expenditures, GDP is considered to have grown. GDP, therefore, lacks the detail included in ISEW.

As a method of measuring social economic growth, ISEW is superior to GDP; however, it is not yet a perfect indicator of welfare. ISEW is based on individual consumption and prices, as GDP is, which reflects only a part of social economic effects. ISEW corrected the unfairness in the allocation of benefits by taking into account the marginal utility of incomes between the rich and poor; however, ISEW has not been corrected to decrease the marginal utility of incomes when total income grows. I believe that the major contribution of ISEW has been to calculate the most fundamental costs associated with economic growth, screen expenditures and gains, and clarify growth utilizing GDP as one indicator. In the future, expenditures and gains should be separated, and margins should be compared rather than net figures. Theoretically, the results would be the same; however, the separation of expenditures and gains would promote greater understanding and make it easier to establish policies.

ISEW is not used as a national indicator in the United States, but it is used by some states and national organizations. Based on this sustainable indicator, social economic growth in the United States has been measured every two years from 1959 to 1990. This revealed that the GDP continued to increase in and after 1970; however, the average level of welfare had not changed since 1970, which was a shock to society. The shock was a reaction to the externality and disparity of income. ISEW continued to improve, and was renamed the General Progress Indicator (GPI); and its applications have continued to broaden. However, in spite of these improvements, the national government continues to use GDP as an indicator, which is disappointing. The United Nations has started utilizing the Satellite Account, which includes a flow of resources; however, it has not yet been integrated with national accounting indicators such as GDP.

VII. Conclusion

For the Common Good was Dr. John B. Cobb Jr.'s and my attempt to make the economy suitable for regional society, the environment, and a sustainable future. Standard economics is based on individualism, but we thought it would be better to shift our focus to regional society. In other words, a shift to a community in which everyone could live together regardless of income, the present and future, fundamental values, and species other than humans which are essential for maintaining life.

When I proposed my three rules in the 1980's, everyone thought of natural resources as unlimited, and no one thought about their ever vanishing. However, awareness about the depletion of resources has changed. Despite this, economic theories have remained pretty much unchanged from the time we had sufficient natural resources. This needs to change. Maintaining an appropriate balance between economic growth and nature to ensure sustainability is very important. If growth exceeds the ability for nature to absorb it, the state of the economy will become worse and worse. The three rules I proposed clarified the need to ensure that our economic activities did not exceed sustainable levels. However, even though the theory has been recognized, the political response is still lacking. Of course, I do not expect change to happen immediately; but I do hope to see gradual change.

If we continue consuming natural resources as we have been, we will fall into poverty not in the future, but in our lifetime. The cost of the economic growth based on the sacrifice of nature will exceed profitability through the expansion of production, and economic growth will not produce gains. To prepare for the future, it is necessary to shift from the pursuit of economic growth to a steady economy that supports life and maintains sustainability. The reason economic growth without the sustainable use of resources is problematic is that growth continues until capacity is exceeded, at which point competition for ever dwindling resources quickly leads to conflict. Economic growth in wealthy countries increases environmental and social costs beyond profitability, which negates gain. However, this idea may also differ depending on the method of calculation employed. For this reason, my theory may leave room for debate.

We also need to reconsider our desire to acquire goods. We should ask ourselves if our happiness is in greater consumption, or if our happiness is in leisure, having time for family and friends, or in the pursuit of knowledge. We need to ask ourselves what real happiness is while improving our sense of ethics. If we seek growth that exceeds resources, we will create pain for ourselves. We once had plenty of forests and people suffering from poverty; therefore, economic growth was meaningful. The solution to poverty is not the redistribution of capital, but equal growth. In this sense, it is reasonable for us to think about returning to lifestyles of the past.

It is not easy to change the way others think, but it is necessary for us to keep learning, accept the reality of our world and respond to that reality. Although it is hard to change the way others think, it is possible to change the rules by which we live. This is not easy either because in a democratic society, the majority decides; and it is easier to convince people of the short-term benefits of economic growth that it is to get them to change their consumer behavior. Although it is impossible to change this in the short run, I am hopeful that can be achieved over time.

We also need to recognize that we cannot live without all the other species in the ecosystem. Economic growth is associated with the consumption of resources and energy that cannot be replaced. In the end, it will create a state of unbalance in the economy and ecosystem. Biology and bio-literacy help us to recognize the need to maintain the ecosystem and the cost of repairing the damage if we do not change our habits. For a long time, we have had plenty of resources. This enabled us to put aside problems related to economic growth. Now, however, we are required to deal with the deterioration of resources in economics. Once resources become insufficient, people finally start think about them. This is where we are now, and interest in the environment is slowly increasing.

VIII. About Myself

My wife Marcia has been a wonderful partner for me during our more than 50 years together. Without her cooperation and understanding, I would not have had this wonderful and fruitful life. We have two daughters and three grandchildren. Once I loved playing tennis, swimming, and taking walks, but nowadays, I cannot swim or walk without effort. Currently, I enjoy reading and watching movies. I like spending holidays on the coast and being with family and friends. At my age, my past is longer than my future, and I am filled with memories and gratitude rather than plans for the future. My dream is that everyone on the earth will strive for sustainability to ensure that everyone can enjoy a happy life.

[1] Wuppertal Institute. "Alternatives to GDP for Measuring Progress" (PDF). Wuppertal Institute. Retrieved 6 January 2017.

[1]

Relevancy22: Contemporary Process Christianity: Post-Evangelic Topics and Theology

Quotes & Sayings

Tuesday, May 4, 2021

Herman Daly - Towards A More Sustainable Economics

What on Earth is the Doughnut?…