Herman Daly, professor of economics at the University of Maryland, is one of the very few voices within the economics profession who has the audacity to question the pursuit of economic growth at all costs. Of course, it wasn’t always that way: John Stuart Mill and John Maynard Keynes both thought that after a period of growth, economies would eventually reach a point of dynamic equilibrium. Professor Daly has just made his first excursion into the blogosphere with the brilliantly titled Daly News from CASSE, the Centre for the Advancement of a Steady-State Economy.
The term “economic growth” has two distinct meanings. Sometimes it refers to the growth of that thing we call the economy (the physical subsystem of our world made up of the stocks of population and wealth; and the flows of production and consumption). When the economy gets physically bigger we call that “economic growth”. This is normal English usage. But the term has a second, very different meaning – if the growth of some thing or some activity causes benefits to increase faster than costs, we also call that “economic growth” – that is to say, growth that is economic in the sense that it yields a net benefit or a profit. That too is accepted English usage.
Now, does “economic growth” in the first sense imply “economic growth” in the second sense? No, absolutely not! Economic growth in the first sense (an economy that gets physically bigger) is logically quite consistent with uneconomic growth in the second sense, namely growth that increases costs faster than benefits, thereby making us poorer. Nevertheless, we assume that a bigger economy must always make us richer. This is pure confusion.
That economists should contribute to this confusion is puzzling because all of microeconomics is devoted to finding the optimal scale of a given activity – the point beyond which marginal costs exceed marginal benefits and further growth would be uneconomic. Marginal Revenue = Marginal Cost is even called the “when to stop rule” for growth of a firm. Why does this simple logic of optimization disappear in macroeconomics? Why is the growth of the macroeconomy not subject to an analogous “when to stop rule”?
Professor Daly has contributed to nef‘s Other Worlds are Possible and wrote the foreword to National Accounts of Well-being. Read nef‘s own critique of economic growth in Growth Isn’t Possible and Growth isn’t Working.
Hat tip to Jeremy Williams for spotting this.