The economic meaning of “steady state”

Herman Daly offers his view of what a “steady state economy” is and how to use the term in a guest blog post on the Capital Institute website. I agree that understanding the meaning is more important than exactly what name you use, but there are important types if “steady states” not yet being discussed.

My comment, posted there and below, is for helping distinguish between the “lively” and “lifeless” forms of steady states that are possible for economies in nature. Of course, I raise the curiously overlooked concise meaning that Keynes would have given the type of lively and conflict free stable state of healthy economies too, as he discussed in “The General Theory…” but was misunderstood.

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Finding the Fitting Name

I’d agree with Daly that ultimately what you call the ideal kind of steady state for an economy matters less than whether what you achieve is something close to an ideal steady state. I study the physics of “open systems”, a.k.a. natural economies, and there are clearly discernible “ideal” steady states one might seek to achieve.

There are the ecosystems that while relatively stable and full of competing populations also display such deep and diverse complementary relationships between populations that the whole system operates with a relatively low level of internal conflict.

That’s also a bit like the kind of climax for systems that work as a whole, like for the relationships between the cells and organs of most any organism. Our own bodies stop growing with the lungs not being in much conflict at all with the heart they wrap around and with which they had competed for space.

In either case you’d call the climax economy that these natural systems represent as quite “lively”. The term “steady state” is more often used for systems that are not lively at all, and it takes effort to counter that characterization.

Still “steady state” is a good term in the sense that the popular understanding of the dynamic states possible for our economy is largely limited to either “exponential growth” or “misery”. So discussing “steady state” economies of any kind enriches the popular vocabulary.

My concern would be that the discussion of the many different ways growth can come to climax, and result in a non-growing economy, is not addressing the range of various alternative models for halting endless growth. If you think of an economy as a “vehicle” there’s a big difference between the various ways to keep it from attempting to achieve infinite speed.

You can let it run out of gas, run into a tree or other obstacle or calamity, steer it up an ever steeper mountain trail, slam on the brakes, pour sand in the fuel lines or take your foot off the gas. The latter would result in the fewest complications, from a mechanics of systems view.

That “low cost option” also seems to be the one that regularly doesn’t get discussed as well. It’s as if a pause in devoting more and more resources to accelerating the economy would bring about the “misery” result of the “growth or misery” equation the traditional discussion starts with.

That “taking our foot off the gas” seems like the less stressful solution, but not getting discussed in deference to the old myths we’re trying to overturn, seems confirmed by its also being the subject of Chapter 16 of Keynes’ “The General Theory…”(1), but which neo-classical economists ridiculed as a “fallacy”. I think the reason for that reaction was that what Keynes proposed would mean responding to stress on the system by relieving the pressure on it to grow, resulting in a low stress type of steady state economy.

He pointed out that (to paraphrase):

[If nominal interest rates tend to zero it indicates there is too much financial savings, with little productive to do, and so accumulates growing deflationary pressure on the productive economy instead].

See 1) the text of Chapter 16 for Keynes’ more convoluted way of saying it in The General Theory,  2) my notes on his telling it as a fable of sharing food Elijah, “The widow’s cruse”.   A site search gives my other writings on Keynes .

There is also a longer list of harms caused by having ever growing unproductive investment.   We’re all now becoming painfully aware of them. We should try to understand that those are what Keynes was referring to “standard of life sufficiently miserable to bring savings to zero”[(1) p 218].

he predicted his own model for stable  economic growth would completely fail

The real issue and point of his discussion is that the use of the earnings from savings to increase savings is the economy’s accelerator of growth, but only when those savings are put into productive investments.

How savings are directed to investments is the economy’s “steering wheel”, its means of deciding what to change in our uses of the earth. The question Keynes raises then, is how do we choose to limit investment to what will continue to be profitable, to maintain a healthy interest rate.

We don’t know how to do that, I guess that’s clear, but maintaining the profitability of the economy in the long term also isn’t such a fearful objective in the end. It’s a value that everyone shares, for one. I think what’s most needed is a practical way to discuss the practicalities, more than competing goals.

 

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