Toward More National Economies

LIVING IN A WAY THAT ENSURES A FUTURE FOR GENERATIONS YET TO come will require major changes in the way we organize ourselves and live. But at present, all our political and economic leaders are taking us down the same destructive path, toward maintaining growth in consumption, overexploiting renewable natural resources, overseeing economic growth while employment declines, and supporting globalization. How can we bring the global economy that enmeshes all of us into alignment with the natural world on which it depends? Few economists even consider the question.

An exception is Herman Daly, who left his position as senior economist with the World Bank after six years. On returning to academia, Daly delivered a remarkable farewell speech full of important suggestions for the World Bank.

His first suggestion? “Stop counting the consumption of natural capital as income. Income is by definition the maximum amount that a society can consume this year and still be able to consume the same amount next year. That is, consumption this year, if it is to be called income, must leave intact the capacity to produce and consume the same amount next year. Thus, sustainability is built into the very definition of income.”

Conventional economics forgets or ignores the fact that everything we depend on for survival comes from the Earth and represents “natural capital.” Fiscal responsibility dictates that we live on interest and not touch the capital. But Daly points out that economists focus on the notion that wealth is created by human beings, so “productive capacity that must be maintained intact has traditionally been thought of as manmade capital only, excluding natural capital. We have habitually counted natural capital as a free good.… [I]n today’s full world it is anti-economic.”

Daly tells us that the error of considering natural-capital consumption as income is built into our system of national accounts, in the evaluation of projects that deplete natural capital and in the accounting of international balance of payments. He says the accounting “biases investment allocation toward projects that deplete natural capital, and away from more sustainable projects.” Clearly this bias must be corrected if we are to have a sustainable future. Depletion of nonrenewable resources, or their exploitation beyond a sustainable yield, should be counted as user costs. So should the ability of air, water, or soil to act as a sink for the absorption of products of human activity, such as excess carbon dioxide.

Daly says, “In balance of payments accounting, the export of depleted natural capital, whether petroleum or timber cut beyond sustainable yield, is entered in the current account, and thus treated entirely as income. This is an accounting error. Some portion of those nonsustainable exports should be treated as the sale of a capital asset.… If this were properly done, some countries would see their apparent balance of trade surplus converted into a true deficit, one that is being financed by drawdown and transfer abroad of their stock of natural capital.” Had this been done for the northern cod or Pacific Northwest old-growth forests, our economic and political decisions might have been very different.

His second recommendation is to “tax labor and income less and tax resource throughput more. [The matter and energy that go into a system and eventually come out are what goes through—the throughput.] In the past it has been customary for governments to subsidize resource throughput to stimulate growth. Thus energy, water, fertilizer and even deforestation are even now frequently subsidized.” In most countries, labor and income are taxed, but in so doing we merely exacerbate the pressure toward higher levels of unemployment. Instead, Daly says, we should be moving our tax base away from labor and income.

Daly goes on: “Income tax structure should be maintained so as to keep progressivity in the overall tax structure by taxing very high incomes and subsidizing very low incomes. But the bulk of public revenue would be raised from taxes on throughput either at the depletion or pollution end.” He points out that such changes must be instituted in the North first. The problem is that the World Bank has leverage to encourage environmentally sustainable development only in the countries it gives loans to, namely, the poor countries of the South; it does not have influence over the rich industrialized nations.

Herman Daly’s perspective enables us to see the distortions built into conventional economics and explains why the current thrust toward economic globalism is so dangerous. Here’s another proposal in his parting shots: “Maximize the productivity of natural capital in the short run and invest in increasing its supply in the long run.” Any economist knows that when there is a factor that limits production, we should make maximum use of what we have and invest in increasing its supply. But many economists don’t look on the “natural capital” that comes from the Earth as a limiting factor.

Economics is based on the notion that human inventiveness can overcome any limits in nature, creating more or finding substitutes. Daly knows this assumption is a mistake. “In the past, natural capital has been treated as superabundant and priced at zero … Now remaining natural capital appears to be both scarce and complementary, and therefore limiting. For example, the fish catch is limited not by the number of fishing boats, but by the remaining populations of fish. Cut timber is limited not by the number of sawmills, but by the remaining standing forests.… The atmosphere’s capacity to serve as a sink for CO2 is likely to be even more limiting to the rate at which petroleum can be burned than is the source limit of remaining oil in the ground.”

But since, by definition, natural capital cannot be made by us, how do we invest in protecting it or in increasing it? According to Daly, we can do this by encouraging different kinds of policies, such as “following investments, allowing this year’s growth increment to be added to next year’s growing stock rather than consuming it. For nonrenewables … how fast do we liquidate? … how much of the correctly counted income do we then consume and how much do we invest? … The failure to charge user cost on natural capital depletion surely biases investment away from replenishing resources.”

Finally, Daly makes the radical suggestion that we “reverse direction from globalization to more national economies. It will not be easy because, at the present time, global interdependence is celebrated as a self-evident good. The royal road to development, peace, and harmony is thought to be the unrelenting conquest of each nation’s market by all other nations.… [T]he word ‘nationalist’ has come to be pejorative.”

Daly points out the strange fact that “the World Bank exists to serve the interests of its members, which are nation states, national communities, not individuals, not corporations, not even NGOs. It has no charter to serve the one-world-without-borders cosmopolitan vision of global integration.” We often see this destructive impact of the global economy in Canada and the U.S., where logging, fishing, or mining policies that may foster sustainable communities and ecosystems are opposed by transnational corporations whose goal is to maximize returns for investors. When international agreements are made for global environmental problems, national governments must be able to enforce them. As Daly says, “If nations have no control over their borders, they are in a poor position to enforce national laws, including those necessary to secure compliance with international treaties.”

Daly also makes the daring warning that “Cosmopolitan globalism weakens … the power of national and subnational communities, while strengthening the relative power of transnational corporations.… It will be necessary to make capital less global and more national.… [T]en years from now the buzz words will be ‘renationalization of capital’ … not the current shibboleths of export-led growth stimulated by whatever adjustments are necessary to increase global competitiveness. ‘Global competitiveness’ usually reflects … a standards-lowering competition to reduce wages, externalize environmental and social costs and export natural capital at low prices while calling it income.”

Daly forces us to question our current economic paradigm. He brings a welcome dose of common sense to counter the barrage of mindless repetition of the overriding importance of globalization