The Irrationality of Homo Economicus – “Economics at the Crossroads” Interview with Herman Daly

“. . . . what if economics is to move away from being a self-centred academic discipline interested only in working out the consequences of its own assumptions and if it’s to engage itself more in the world ? . . . . It’s built into the very functioning of the economic process that we have to deplete, we have to pollute, that we have to keep those two activities within some sort of ecological constraint and what those constraints are affects the optimal scale or size of the total economy relative to the environment. And that big question has been completely left out. There’s no concept of an optimal scale of a total macro-economic system relative to the larger ecosystem . . . . we have to work into economic theory not only the circular flow of exchange value which is important but also this one-way throughput of matter and energy – the digestive tract as well as the circulatory system – because it’s that that ties us to the environment.”

“By free trade, what I mean is deregulated international commerce. So the opposite of free trade is not autarky or no trade. The opposite is not state trade or total monopolization of trade. The opposite of free trade, which is deregulatory, is regulated trade (which Adam Smith said in the Wealth of Nations to be the duty of the nation state). . . . Trade can be very beneficial. But the argument is that trade should not be based on standards-lowering competition. You have to maintain certain standards. And standards-lowering competition can be weakening the environmental standards to give cheapness, weakening social insurance standards and safety standards to get cheapness (you can make products cheaper if you lengthen the working day, if you employ children . . . ), and so I think there has to be this national community protection of basic standards. We can’t allow that to be competed away in the name of free trade.”

“Interestingly, the classical doctrine of free trade as it came from David Ricardo is (that). . . . capital did not cross national boundaries. Capital stayed at home and labour stayed at home. The only things that were traded were goods . . . . So the (present) vision of a globally integrated economy is really a single system. You have one tightly integrated system that’s mutually dependent across the globe. That’s a very dangerous kind of system – something goes wrong, you’re in big trouble. We prefer nations to be much more fundamentally self-sufficient, not totally self-sufficient, that’s too expensive. But to the degree possible, strive for self-sufficiency and maintain loose international trading relations to make up for where it’s hard to be self-sufficient. I mean everyone can make their own aspirin and matches, you don’t need to trade multinationally for that. But there are some things that you do need to trade for. That’s kind of the vision that we put forward, and you maintain more local control over you economic life. If you don’t, then control is shifted far away and the foreigners who control the capital investment in your country may be lovely decent people, they may even be nicer than the local people, but they’re far away and they don’t really know or have an interest and a feel for what happens there. This is a vision that John Maynard Keynes expressed very similar kinds of notions [to] when he wrote on national self-sufficiency . . . .

I think economics has been very successful in one very important area: allocative efficiency. So that [regarding] the efficiency of allocation of scarce resources among competing ends, economists have preached the importance of decentralized decision-making coordinated by markets and the price system . . . . It’s important, but it’s only one. There are two others, which I mentioned briefly before: there’s distribution and scale. So allocation is about how resources get divided up among different users – how much goes to produce bicycles, how much to cars, how much to houses. You know, is that efficient given what people want and their ability to pay. You end up giving people the most that you can get of what they want with the resources available. That’s a question of efficiency – are allocations efficient or inefficient? The distribution question is a question of justice. Who gets all the stuff that was produced. Does it go to you or me. And that’s a question of justice – is it fair, is it a fair distribution? And then the third question of scale – the total amount that gets produced in all of the resources and the depletion and pollution generated by the use of those resources. Is that at a total scale which is within the absorptive and regenerative capacity of the ecosystem? Or are you destroying natural capital at a rate which is too great? The welfare effects of destroying natural capital may be greater than the welfare benefits of what you produced. And whose products required the destruction of that national capital? So just from a purely anthropocentric view, not giving any value to other species or nature intrinsically, just as an instrument for human betterment, you still run into this limit of scale . . . . So my view is that while economics has done a great deal in the matter of economic efficiency, it has been negligent regarding distributive justice and extremely negligent regarding optimal scale.

I think that yes, there has been an evolution in policy which has forced us to deal with the scale question. And that has been in things like the bubble system where [there are] marketable licences to deplete or pollute. And these kinds of policies are excellent because they clearly say the first problem you have to solve is the scale problem – what’s the total amount of emissions that are acceptable in this watershed or airshed or county or whatever. The second question is, given that there’s that total limit, that means it’s no longer a free good, that means it’s valued: the distribution question – who owns it. You’ve created a new asset which is now limited – who owns it? Shall we give it equally to all citizens? Shall we give it historically on the basis of who’s been using it most? So you have to face the question of fairness of distribution. And then in third place – after you solve the scale question, on ecological grounds presumably, after you solve the distribution question, on equity grounds presumably – only in third place is the market trading allowed to solve the allocation question and efficiency. So I think that [has] provided a way of moving in the policy area … And since it seems to have evolved pragmatically, I think it’s way ahead of a lot of standard economic theory. It just sort of pragmatically brought in scale without creating a big fuss about it. …

And well the scale question – that’s part of the scale question of population times per capita resources or total resources. So one way of reducing scale is dealing with population, the other way is per capita consumption. So both of those I think are important. So in the North we have to focus more on limiting our per capita consumption. In the South I think the focus has to be more on limiting numbers. And that might be the basis of a kind of North-South bargain . . . . And that idea of limiting scale, by operating both on population and per capita consumption is to my mind a reasonable possibility.

Shift the tax base from income, labour, value-added onto that to which value is added – namely the resource flow. So tax throughput, tax depletion and pollution, tax the resource flow – that to which you are adding value. That is what’s causing depletion and pollution. Those are ‘bads’. Tax bads, stop taxing goods. That’s the basic idea . . . . We couldn’t just do an abrupt, all-at-once shift. It would have to be a gradual thing which would give people a chance to see what’s coming and adapt to it before it hits, and make their adjustments.

Full Interview at the International Institute for Sustainable Development

Keywords : appropriate science and technology, economics, capitalism, ecological economics, ecosocial crisis, free trade, self-reliance, population growth, tax
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So they keep themselves exceedingly pure just working out the logical implications of what they have taken to calling the ‘canonical assumptions’, which is a revealing phrase. There are certain canonical assumptions which define what it all is, and then you play games and [make] logical derivations on those assumptions. And the world and its real problems are just sort of left to one side. And if you try to apply any of that to the real world it’s a real problem because you’ve abstracted from what are the most important things.

The first thing the canonical assumptions abstract from is any notion of community – nothing but isolated individuals, Homo economicus. Community both in the social sense of our identities being made up of interrelationships, and community in the ecological sense of mutual dependence of species in the natural world. So in the core of economics, those things are abstracted from.

“. . . . what if economics is to move away from being a self-centred academic discipline interested only in working out the consequences of its own assumptions and if it’s to engage itself more in the world . . . . you go and you look at the basic textbooks and you get the standard isolated circular flow of firms to households, of exchange value going around and around. There’s no environment. The theorems of underlying supply and demand are purely individualistic. There’s no social element in any of it . . . . we have to work into economic theory not only the circular flow of exchange value which is important but also this one-way throughput of matter and energy – the digestive tract as well as the circulatory system – because it’s that that ties us to the environment . . . . It’s built into the very functioning of the economic process that we have to deplete, we have to pollute, that we have to keep those two activities within some sort of ecological constraint and what those constraints are affects the optimal scale or size of the total economy relative to the environment. And that big question has been completely left out. There’s no concept of an optimal scale of a total macro-economic system relative to the larger ecosystem.”

“By free trade, what I mean is deregulated international commerce. So the opposite of free trade is not autarky or no trade. The opposite is not state trade or total monopolization of trade. The opposite of free trade, which is deregulatory, is regulated trade . . . . Trade can be very beneficial. But the argument is that trade should not be based on standards-lowering competition. You have to maintain certain standards. And standards-lowering competition can be weakening the environmental standards to give cheapness, weakening social insurance standards and safety standards to get cheapness . . . . You can make products cheaper if you lengthen the working day, if you employ children … and so I think there has to be this national community protection of basic standards. We can’t allow that to be competed away in the name of free trade.

Interestingly, the classical doctrine of free trade as it came from David Ricardo is (that). . . . capital did not cross national boundaries. Capital stayed at home and labour stayed at home. The only things that were traded were goods. So you really did have a much more community/national orientation. You have national capital cooperated with national labour – albeit with class conflict, the national community was able to contain that class conflict. You had national labour and national capital cooperating to make national goods, and those goods that competed internationally with other countries and their teams.

There is no global community. Where community really exists is at the national and subnational level where people take on mutual responsibilities for each other. Not at the global. Now maybe someday there will be a global community. But our view – of John Cobb and I – is we’re all in favour of global community, but it would have to be a federation of strong national communities – a community of national communities. And the present vision is not of a federated community of communities, the present vision is of a cosmopolitan world without borders in which you erase national community and replace it with this globalized single sort of tightly integrated world community.

So the vision of a globally integrated economy is really a single system. You have one tightly integrated system that’s mutually dependent across the globe. That’s a very dangerous kind of system – something goes wrong, you’re in big trouble. We prefer nations to be much more fundamentally self-sufficient, not totally self-sufficient, that’s too expensive. But to the degree possible, strive for self-sufficiency and maintain loose international trading relations to make up for where it’s hard to be self-sufficient. I mean everyone can make their own aspirin and matches, you don’t need to trade multinationally for that. But there are some things that you do need to trade for. That’s kind of the vision that we put forward, and you maintain more local control over you economic life. If you don’t, then control is shifted far away and the foreigners who control the capital investment in your country may be lovely decent people, they may even be nicer than the local people, but they’re far away and they don’t really know or have an interest and a feel for what happens there. This is a vision that John Maynard Keynes expressed very similar kinds of notions [to] when he wrote on national self-sufficiency . . . .

Some things have to be international, for example, we have to deal with global CO2 and things [like that] at a global level. But again that has to be a federation of national governments because once you have a treaty for global CO2 or something, who’s going to enforce it? It has to be the national governments who signed the treaties. They have to be strong enough to enforce within their own boundaries the conditions that they agreed to in the international treaty. And if capital, labour and goods flow freely across their borders they don’t have any basis for exercising the control that they agreed to.

I think economics has been very successful in one very important area: allocative efficiency. So that [regarding] the efficiency of allocation of scarce resources among competing ends, economists have preached the importance of decentralized decision-making coordinated by markets and the price system. This has historically dramatically proven to be much better than central planning in this collapse of the former Soviet Union and so forth, [and] is something that needs to be recognized and taken seriously. As far as market control of allocation of resources [goes], I think economics has provided a whole lot. And good reasons were given for why this is so.

Now, my problem is that allocation is only one fundamental economic problem. It’s important, but it’s only one. There are two others, which I mentioned briefly before: there’s distribution and scale. So allocation is about how resources get divided up among different users – how much goes to produce bicycles, how much to cars, how much to houses. You know, is that efficient given what people want and their ability to pay. You end up giving people the most that you can get of what they want with the resources available. That’s a question of efficiency – are allocations efficient or inefficient? The distribution question is a question of justice. Who gets all the stuff that was produced. Does it go to you or me. And that’s a question of justice – is it fair, is it a fair distribution? And then the third question of scale – the total amount that gets produced in all of the resources and the depletion and pollution generated by the use of those resources. Is that at a total scale which is within the absorptive and regenerative capacity of the ecosystem? Or are you destroying natural capital at a rate which is too great? The welfare effects of destroying natural capital may be greater than the welfare benefits of what you produced. And whose products required the destruction of that national capital? So just from a purely anthropocentric view, not giving any value to other species or nature intrinsically, just as an instrument for human betterment, you still run into this limit of scale.

So I think those are the two questions which economists have not dealt with. They have logically recognized the necessity of the distribution question and so standard economic theory says that all theorems about allocative efficiency pre-suppose some given distribution, which may be just or unjust. They recognize that, but they don’t emphasize it. It’s there but it’s not front and center. And the scale question is not even recognized. That’s off the radar screen. And to the extent that it’s recognized, well it’s just a matter of property rights – ‘If we just get prices better in property rights, then the problem disappears. It doesn’t matter if we grow more as long as we pay the costs of growing more.’ So my view is that while economics has done a great deal in the matter of economic efficiency, it has been negligent regarding distributive justice and extremely negligent regarding optimal scale. So those two things are where the effort should go. We’ve pretty much given good answers to the allocation problem, I don’t think we need to spend time and effort proving once again that the market is efficient, investigating every possible variation. I mean okay, there’s room for people who are interested in that, I mean fine, I don’t want to tell people what they should do, let people study that. But socially, I don’t think that’s where the big payoff is right now because past success in that has been impressive, and we need some success in the areas of distribution and scale and that’s where we need to devote the effort.

I think that yes, there has been an evolution in policy which has forced us to deal with the scale question. And that has been in things like the bubble system where [there are] marketable licences to deplete or pollute. And these kinds of policies are excellent because they clearly say the first problem you have to solve is the scale problem – what’s the total amount of emissions that are acceptable in this watershed or airshed or county or whatever. The second question is, given that there’s that total limit, that means it’s no longer a free good, that means it’s valued: the distribution question – who owns it. You’ve created a new asset which is now limited – who owns it? Shall we give it equally to all citizens? Shall we give it historically on the basis of who’s been using it most? So you have to face the question of fairness of distribution. And then in third place – after you solve the scale question, on ecological grounds presumably, after you solve the distribution question, on equity grounds presumably – only in third place is the market trading allowed to solve the allocation question and efficiency. So I think that [has] provided a way of moving in the policy area … And since it seems to have evolved pragmatically, I think it’s way ahead of a lot of standard economic theory. It just sort of pragmatically brought in scale without creating a big fuss about it. …

And of course population issues, we have to deal with population limitation and that’s been a long and heated subject but I think we do need to deal with that much more forthrightly. And well the scale question – that’s part of the scale question of population times per capita resources or total resources. So one way of reducing scale is dealing with population, the other way is per capita consumption. So both of those I think are important. So in the North we have to focus more on limiting our per capita consumption. In the South I think the focus has to be more on limiting numbers. And that might be the basis of a kind of North-South bargain. Because currently it’s very difficult for the North to tell the South you should limit your numbers so you save all these resources that we can gobble up in over-consumption. And it’s also difficult for the South to say to us, you should limit your per capita consumption and save these resources so we can dissipate them all in population growth down here. So it seems to me there has to be some basis of a global agreement or compact. And that idea of limiting scale, by operating both on population and per capita consumption is to my mind a reasonable possibility. But I don’t mean to tell you that’s it’s not something that popular, it’s certainly not popular.

Shift the tax base from income, labour, value-added onto that to which value is added – namely the resource flow. So tax throughput, tax depletion and pollution, tax the resource flow – that to which you are adding value. That is what’s causing depletion and pollution. Those are ‘bads’. Tax bads, stop taxing goods. That’s the basic idea . . . . We couldn’t just do an abrupt, all-at-once shift. It would have to be a gradual thing which would give people a chance to see what’s coming and adapt to it before it hits, and make their adjustments.