The European: You have worked for the World Bank for six years – an institution that has been described as spreading “the theology of the free market to the heathens”. Are you a non-believer?
Daly: I guess you can call me an apostate. When I went to work for the World Bank’s Environment Department, I looked at it this way: It is of no use preaching to the choir. You have to talk to the people you disagree with and be persuasive. At times we thought we were being persuasive. But eventually I came to believe that it was really a lost cause and mainly window dressing. By and large, people at the World Bank were no cynics but true believers in growth, and environmental protection was seen as an impediment to growth. They had all learned from the same teachers in the same elite universities and now preached the same doctrine. They had every reason to believe they were right – expect for two things: Common sense and real-world feedback. Some criticized the World Bank for failing to serve its goal to enable growth. Some thought that growth needed to be more widely shared. But the emphasis on growth was sincere and fundamental, so it was not questioned. I don’t expect anything good from the World Bank.
The European: Why should we question growth?
Daly: We are in a situation where growth has begun to cost more than it is worth. It has become uneconomical, at least in rich countries. In an empty world, growth is good. But that is not the world we inhabit. We live in a world that is full of us and our stuff, a world that is finite in terms of the economic activity it can sustain. We need to build the physical constraints of a finite biophysical environment into our economic theory.
The European: Let us start with economic theory on the level of the individual. Has the ideology of the homo oeconomicus outlived the model upon which it was originally based? People concede that Smith or Hayek were partially mistaken, yet their credo is very much alive.
Daly: I would add one more aspect: Their ontological picture of man is flawed. Instead of conceiving of human beings as atomistic independent individuals that are connected through the nexus of the market and keen to maximize their own benefit and pleasure, we should really think of man as being constituted by the relationships with others. We are not only externally related to others, we are internally related to them as well. When you ask me: ‘Who are you?’ I would define myself as a husband, son, father, citizen, friend, or member. And in a more physical sense, I would be an air-breather and a water-drinker and a food-eater. The quality of these relationships by which we are constituted determines our welfare far more than the amount of commodities we consume. Economists nod at that criticism of their model and then just go back to doing what they have always been doing.
The European: Are you not constructing a straw man? There have been many attempts at updating the classical homo oeconomicus model over the years, economics has broadened its gaze and turned more towards sociology or politics.
Daly: Sure, there is behavioral economics and environmental economics and experimental economics. I just don’t think that they are having an effect. The evidence I would give is from introductory textbooks. Don’t show me the latest article in a specialized journal. Show me the fundamental textbook you teach in the first course, where students are supposed to learn the very basics of economics. Is it in there? There might be a paragraph on the environment somewhere as an addendum to chapter 36. But environmental problems, they say, can be easily solved by getting prices “right”.
The European: Is economics suffering from a case of path dependence, where the structures and norms that were once set up dominate the discourse long after they should have been questioned?
Daly: I would go even further than that. What is a polite word for “brain dead”? Actually there are very smart people among economists, but they are all operating within the basic paradigm. It used to be that academic disciplines interacted at the university, and that philosophy was the critic of the disciplines. Now it is considered bad form to engage in interdisciplinary criticism, we have too much respect for each other. None of the other disciplines have the courage to challenge the fundamental presupposition of economics: that growth is the solution to all our problems.
The European: Is the financial crisis an opportunity to change that discourse?
Daly: The fundamental presuppositions are not really changing. We are accumulating more and more debt to finance economic growth, and we need more future growth to repay the debt. When growth does not happen, things fall apart. Look at the financial sector: When it is hard to grow in physical terms, it becomes more appealing to grow in symbolic terms. Forty percent of US economic profits are now in the financial sector. That is a huge drain on the rest of the economy.
The European: According to Crédit Agricole, total global consumer credit in 2008 was 4.5 trillion Euros. That’s a lot of money. Maybe we should not overestimate the separation between the financial sector and the rest of the economy?
Daly: The financial sector is based on the faith that the real economy will grow. One of my heroes in the field of economics is Frederic Soddy. He won the Nobel Prize in chemistry in 1921, but nobody has ever heard of him as an economist. But he made a very simple point: An increase in debt is just a numerical increase. An increase in wealth requires real labor and energy. Money can grow without limits, growth in wealth is limited by the law of entropy and the scarcity of matter and energy. It is an idiocy to get so fixated on the symbolic and mathematical side of the economy and confuse that with real wealth. Today, debt is so large that it is very unlikely that we will be able to redeem it with real growth. Where are 4.5 trillion Euros in real wealth supposed to come from? No way it is happening.
The European: So how can we distinguish economic progress from good economic progress?
Daly: GDP only measures economic activity, but it doesn’t distinguish between beneficial and costly activity. Let us separate them and compare them at the margin. That will give us an idea whether further growth will increase benefits more than costs.
The European: In other words: Take the economic models and refine them?
Daly: You cannot make a sandwich out of labor and capital. You need to grow wheat, you need to harvest vegetables, you need water, you need to feed the people who cultivate the soil and make the sandwich. Sometimes, there’s a model that includes resources alongside labor and capital. But the function is still a multiplicative function where you can get the same end result by increasing any of the variables. If you apply those mathematical rules to the real world, you would be able to bake a thousand-pound cake with a few ounces of flour if you only use enough cooks and plenty of ovens. That math doesn’t work with natural resources. We have a finite amount that can be extracted, and there is also the output waste that needs to be dealt with. We are depleting sources and simultaneously filling up sinks. Economic theory has become far too abstracted from those things. Our empiricism should be correct, we should pay attention to the laws of physics.
The European: I talked with Tim Jackson a few weeks ago, and he suggested a radical reform of the tax code. Instead of taxing things we want – like income – we should tax things we don’t want – like the depletion of natural resources. But every benefit comes at a cost.
Daly: I think we need to shift the tax base away from value added taxes. Tax labor less, tax enterprise less. And instead, put the tax on that to which value is added, namely the resource flow, from depletion to pollution. We want to make those things expensive that are ultimately scarce. We can always replace labor, but we cannot replace some resources at all, and can renew others only at limited rates. And the more expensive the use of resources is, the more efficient we will try to become.
The European: Some of your arguments sound like they go even further: You suggest that we have to abandon the idea of growth altogether. Efficiency and resource productivity might slow the rate of growth that is necessary to sustain the system, but they don’t really tackle the problem of infinite growth within a finite environment.
Daly: In fact, efficiency might even help to accelerate the depletion of resources. We call it “Jevons’ Paradox”: When you increase the efficiency of a car it is like lowering the cost of gas, people simply drive more. If we focus on efficiency first, frugality becomes less necessary. But if we focus on frugality first, efficiency is the automatic consequence. We should institute a cap-auction-trade system that establishes a quantitative limit for how much we can deplete basic resources.
The European: You talk about the three problems of economics: Allocation, distribution and scale. Cap-auction trade solves the question of scale, or sustainability. Efficiency solves the problem of allocation. But we are still left with the problem of distribution, which is a question of justice. I fear that a quantitative limit would have a very disparate impact.
Daly: Which is why I should really emphasize the difference between cap-and-trade and cap-auction-trade. You put the cap on a resource, and then the government auctions off the right to deplete that resource. That money can be used for redistribution to tackle the problem of economic justice. The worst thing to do would be to funnel the benefits of a cap-and-trade system to those who have already benefitted from resource depletion in the past. The proceeds (resource scarcity rents) from our interaction with the environment are a social patrimony that should be socially collected and distributed.
The European: We already talked about the idea of path dependence. Do you think your ideas are politically feasible in light of the degree to which they differ from existing economic and institutional arrangements?
Daly: Our tax system is riddled with loopholes and exceptions. If you have a crooked government that wants to favor the wealthy, they can do it through taxes. Or the crooked government could institute a cap-auction-trade and simply redistribute the money regressively. I would not call that path dependence but class dominance.
The European: Traditionally, you have said, “the solution to all problems has been growth”. Social welfare, wages, retirement savings and debt financing all depend on it. To me, that sounds like a whole lot of structural dependence.
Daly: We live in a growth economy. If it stops growing, everything falls apart. But the reason we live in a growth economy is the underlying assumption that growth makes us richer. And it is easier to be rich than it is to be poor. Why would we want to keep growing if it is making us poorer?
The European: But the costs and benefits are usually not borne by the same group.
Daly: In theory, we could take the aggregate and redistribute it to compensate for that. But it is certainly true that one big reason behind the attachment to growth is that it is still working very well for the people who have figured out how to make it work for them. They capture the privatized benefits while socializing the costs. But that does not change the fact that the costs are greater than the benefits. Growth has become uneconomic, even though some people, those in control, still benefit.
The European: And again, the question how change could be practically possible or politically feasible.
Daly: We need a crisis, and we also need a change of values. I would put considerable emphasis on a religious view. If we are totally secular in our views of nature and think that that our lives and the environment result from random configurations of atoms without intrinsic value or purpose, it would be hard to argue why we should prolong that particular configuration. We need a philosophy that goes beyond chance and natural selection. Until we experience further crises, I don’t think that there will be an audience for those arguments. And then the second component is the empirical demonstration that the status quo is not sustainable.
The European: Are you a pessimist regarding our future, or an optimist regarding our ability to change course?
Daly: I would distinguish optimism and pessimism from hope and despair. Optimism and pessimism are probabilistic tendencies whereas hope and despair are existential attitudes. They are almost religious: One has a duty to hope. But you should not be stupid and hope for unrealistic things. You can pessimistically expect that things will get a lot worse before you can reasonably hope for something better.
The European: We should focus on what “might be”, rather than on the probabilities of particular solutions?
Daly: There needs to be a dialogue between science and religion. Both are presumably interested in truth. Truth is what is most important. We tend to dismiss religious arguments as folly, and we tend to dismiss scientific arguments as lacking ontological insights. Both criticisms are partially true, so they have to be brought together.
The European: But we have two different ideas of truth: Religion is interested in absolute truth, whereas science is interested in positivist truths.
Daly: From a policy perspective, they need to be brought together. We need to understand how the world works. But we also need to reason about what constitutes a good state of the world. One of the costs of the separation of knowledge into distinct academic disciplines has been that these discussions happen less frequently now. Economists pride themselves on being value-free. They think that makes them scientists. It doesn’t.
The European: Cornel West has said that academics have the “responsibility of nurturing young minds”. My feeling is that there is a generational change that is reviving the inter-disciplinary exchange.
Daly: We are a long way away from nurturing young minds. I taught in the Economics Department at Louisiana State before I worked for the World Bank, and I taught in the School of Public Policy at the University of Maryland after I left the Bank. I like to ask my students there: What are the presuppositions of policy? What do you have to believe already in order for this to be a sensible thing? Two things always come up: You cannot be a determinist and do policy. And you also cannot be a nihilist. You need to be able to believe that things can change, and that some outcomes are better than others. But the university often doesn’t prepare students to be non-determinists and non-nihilists. The science curriculum tends to produce determinists. The humanities tends to produce nihilists. Young people need open minds and a commitment to finding truth. They need the willingness to be persuaded by a good argument.
The European: Truth is always open to contestation, reason is always doubtful?
Daly: When I talk about truth, I don’t mean relativism, and I don’t mean truths that are purely subjective. We need to be able to agree that there are some things that are objectively true. Such a commitment is the precondition for tolerance. If we reject the idea of any objective truth and disagree, then there is no point in reasoning together. We will end up fighting. But if we can agree that there are objective truths, then there is at least something to point to in an effort to persuade each other. Dialogue becomes reasonable and productive; we can sharpen each other’s perception of objective truth through our mutual discourse. That would be impossible if we started by denying the reality of objective truth.