How economics borrows from ecology, physics, and mathematics | Interview with Dr. Herman Daly

00:17Biophysical limits to economic growth

Jed Macosko: Hi, I’m Dr. Jed Macosko at Wake Forest University and AcademicInfluence.com. And today, we have a wonderful guest with us, Professor Herman Daly. And Professor Daly worked at the World Bank and a whole bunch of other places, so I was curious to find out that Professor Daly, you think of yourself as a bit of a heretic when it comes to economic theory. And we interviewed another person who called himself a heretic of economic theory, is Steve Keen .

How do the two of you differ a little bit in the way you see economics?

Herman Daly: Well, I think my emphasis has been much more in terms of the physical constraints on the economy, the biophysical limits to economic growth. I think Steve’s work has been much more in the area of monetary theory and finance. And the two fit together, I think, in some ways. I will say that one of the… Because we have been so interested in the biophysical constraints on growth: Depletion, pollution and so forth, in ecological economics we’ve tended to neglect money. And I think that was a mistake we made earlier on.

And Steve, to a certain degree, has certainly been a correction of that because he is… Another correction to that, my first realization of that mistake came from reading a chemist, a Nobel Laureate chemist by the name of Frederick Soddy . I don’t know, maybe he’s not heard of so much today, but he won the Nobel Prize in 1926. He worked with Rutherford in developing atomic theory, and he is credited with having discovered the existence of, and coined the name for, isotopes. And, well, to go on in that direction just for a minute, because I think you as a chemist might… You’re a physicist, right?

Jed: Well, actually, I was trained as a chemist, so of course I know Rutherford.

Herman: As a chemist. You might find this interesting. Because Frederick Soddy was a very smart man, and he said, “Well, here I have contributed with my scientific work to atomic theory, and this is going to lead to the use of what they then called subatomic energy, and what are people gonna do with this huge new source of energy? Why, they’re gonna build bombs and blow each other up with it.” And he said this back in 1926. And he said, “Goodness! You know, I’m to some degree responsible for this. I don’t will that this happen, but inadvertently I’ve contributed to it.”

So, why are people gonna do this? Why do the gifts of science end up being used for destructive purposes? What’s wrong? And he said, “Well, what’s wrong is the economy. It’s our… It’s the economy. What’s wrong with the economy? What’s wrong with the economy is the monetary system.” He says, “Look at our monetary system, the fractional reserve banking. Banks create money out of nothing and lend it at interest. Wow! What a good deal that is. It shouldn’t be allowed to do that.” And he says, “Money is the symbol for real physical wealth, and a symbol should not be allowed to do things which the reality that it symbolizes cannot do. And wealth cannot be created out of nothing, and it cannot be destroyed into nothing the way money can.”

So what we need is to bring the monetary system into conformity with the physical rules that govern real wealth and real production, and that means you can’t create it or destroy it. So we’re gonna have a system of 100% reserve requirements. Banks no longer create money out of nothing. They do what people normally think banks do anyway. People normally think that if you make a loan from a bank, you’re lending… That bank is lending you money that someone else deposited in the bank and no longer has access to because it’s being loaned to you.

Well, man, that’s not true; they just create the money out of nothing. And there’s a little bit of a tie towards deposits, but not so much. Well, okay, so that… Anyway, that’s a bit of a tangent, which I launched into, but I do very much think that the importance of ecological economics does have something to do with money, and in that point, I would have a big agreement with Steve Keen.

05:43Going from a growth economist to an ecological economist

Jed: Good. So even though you’re sort of in separate realms, you guys consider each other helpful to refine each other’s theories. And just speak a little bit more about how the conflict that you’ve generated over being a heretic in economics has affected you and affected your career. Talk a little bit more about that.

Herman: Yeah, well, I suppose, as I was saying earlier, I started out in economics not as a heretic. I was orthodox. I said, “Economics is great. It’s a wonderful thing to study. Economic growth is the solution to poverty. My little contribution to the world, in so far as I can do it, is going to be to help economic growth in a particular part of the world, namely Latin America,” having grown up in Texas, that was… And of course, Texas, too.

And it took me a while to change. When did I change? What made me change? Well, I suppose several things. One was that I read a book by Rachel Carson called Silent Spring back in 1962, and I said, “Wow! This has to do not just with pesticides, this is a whole big question of conflict between ecosystem and the economic subsystem. And she’s really zeroed in on something extremely important.”

The second thing that I had to do that influenced me was I went to graduate school to study economics, economic development. But required courses you have to take, you can’t just take what you want, you also have to take what they require, and I was required to take a course in economic theory with a professor there named Nicholas Georgescu-Roegen , a Romanian-American.

And what I learned from him was that economics is fundamentally rooted in the Second Law of Thermodynamics, that what is useful is low-entropy matter energy, and that gets used up and you end up with high-entropy matter energy, which is waste. You can recycle it a few times, but you can’t recycle energy, or if you do recycle, you can reuse energy in a kind of cascade, but fundamentally you can’t recycle, you can’t burn the same lump of coal twice; you can only burn it once. And when you burn it, you end up with waste heat, ultimately, and ashes and waste. And you can’t reverse it, you can’t go back the other way.

So this is the most fundamental basis of economic scarcity, is on the one hand, you have a physical basis of scarcity, Second Law of Thermodynamics, and finitude, of course. The other source of value, or scarcity, is human wants. We want a lot of things. So the more we want, the scarcer are the means for attaining what we want.

So that kinda got me back… One is a psychic root of value: What do we want? Why do we want it? Should we really want that? What does it cost us to really do that? That’s a psychic root of value; what is fundamentally ethically valuable and what is not? And then at the other end, there’s the thermodynamics. What is fundamentally useful, and what is not useful? And how do you squeeze the greatest want satisfaction out of the resources as they are transformed from low entropy to high entropy? So these were the things that really got me.

And then I guess the third thing that got me was my interest in Latin America. I went to work in Northeast Brazil, teaching Economics. And there, at that time, this was when, 1966, ’67, at that time there was a tremendous population explosion in that area. The population was growing extremely rapidly. And Northeast Brazil is sort of the Appalachia of Brazil, it’s the poorest region of Brazil. And I just realized at the time that even though in Northeast Brazil GDP was growing quite rapidly at the time, it was not doing any good because the poor population was increasing more rapidly than the GDP was. And there didn’t seem to be much possibility, short of restraining the population growth, of economic growth keeping up with the population growth, at least for the lower class.

Now, for the upper class, it was different. They already practiced contraception and limitation of number of children. So the average total fertility in the upper class was maybe four, and the average total fertility of the lower class was about eight or nine. So it was a huge difference, you could not overcome that difference. And it tended to me that the wage rate of the poor, because the supply of labor was very large and increasing rapidly, so you were not going to really develop in the terms of human welfare unless you did something about population.

So that got me into the whole question of population. So that was, well, that was… And then, well, I’m gonna rattle on, so you interrupt me to ask other questions. But an interest in population brought me back to the classical economist and their idea of a steady state economy; or stationary state, as they called it.

And I began to think more about that. And the other thing that struck me was, at that time… You know, the world keeps changing, but at that time there was a beginning recognition that population could not continue to grow forever. [chuckle] And so there was much more willingness to talk about population limits at that time than there is now, I’m sorry to say. But I began to reason, well, why is it the population is limited? Well, because human bodies are physical. We take up space. We require food. We create waste, all of this has… We run into physical limits. Well, what about economic growth? The idea was that, well, we’ll just grow economically faster than the population is growing and we’ll be okay. Well, wait a minute, what are the things… When we grow economically, what’s growing? Basically what’s growing is extensions of human bodies. The things that are wealth, that we count as wealth, well, clothes is an extension of your skin; a radio, a TV, extension of your ears and your eyes; automobile is an extension of your legs. So all of these things that we grow and count in economic growth, and we count as wealth, are like extensions of the human body.

And like the human body, they are what you physicists call dissipative systems. They require an input, a maintenance input of matter and energy to resist the force of entropy, and they have to be replaced, and they create a demand on the biophysical environment. So that gets you into the constraints of the ecosystem. So those were the things that led me away from being a growth economist to being an ecological economist.

Jed: And did that happen relatively late in your career, so that the repercussions in terms of tenure and all your career didn’t really matter?

Herman: Very interesting question. Very interesting question. That’s true. It happened late enough in my career, so that by the time I really became a heretic, I had already gotten tenure. So that made it kind of tough to get rid of me. [chuckle] But even with tenure, as you probably know, even with tenure a department can make life difficult for you. And so one of the reasons why I left LSU, where I was very happy for like 15 years, but then the last five years or so I was there, I moved one direction towards the ecological economics at the same time that the rest of the department, along with the profession, was moving in the direction of neoclassical growth economics more and more.

So it made it very difficult for me to mentor a graduate student. Any student who’s gonna study and write with me was almost automatically suspect by the rest of the department. So that became a conflict, which I didn’t know how to resolve it. And so that was one of the reasons why I left and went to the World Bank, because I was pretty disgusted with academia because of that. So, but what does that mean? It means it was in a way sort of lucky for me that I didn’t become untouchable too soon, I only became a heretic after I had a certain security. Of course I had…

17:12If you could choose one…

Jed: Yeah, it’s definitely good for you, especially looking at people like Steve Keen, he doesn’t seem to have that same sort of security that you have, and of course now you’re retired, so no one can touch you now. And are you… Do you feel like you or Steve are able to make inroads into changing the way that the world works, ’cause it seems like from your perspective you’d love to change it along the lines of economics with ecology, but also along the lines of economics with the way that people think it’s always growth, growth, growth. So I guess, have you had any success in either of those areas, influencing the world, and if you only could choose one, which one would it be?

Herman: Well, I guess what success I have had has largely been outside of the academic field of economics. So I’ve been fortunate to… I wrote a book called For The Common Good with a theologian named John Cobb, and that book received quite a bit of attention. And then I’ve written other things which have received attention. And so I’ve received some prizes, some recognition; the Heineken prize from the Netherlands, the Italian… The medal of the republic… Italian Medal of the Presidency of the Italian Republic from Italy, the Japanese prize, Asahi Glass Company, it’s a Blue Planet prize.

So I have received recognition, but it’s not been within economics. So economists would say, “Oh yeah, well, Daly, he’s an… He’s gone off into ecology.” Or the… I liken it with my professor Georgescu-Roegen; now Georgescu they said, “Oh well, we don’t need to pay attention to his criticisms because he’s gone off into physics. He’s now sort of a physicist or philosopher.” And Kenneth Boulding, another forerunner that I’ve learned a lot from, they’d say, “Oh, well he’s gone off into philosophy, so he’s no longer an economist.” So you draw the boundaries of economics tighter and tighter, anytime somebody becomes an inconvenient critic from the… You sort of define him out of the circle, and then you don’t have to deal with him.

So that’s the kind of thing which I see has been happening. Now, so why do I keep going? [chuckle] Well, because I think we’re making some progress, and I think the logic of the way the world is going… I’m not a genius, and if I can see this, why can’t other people? Well, there are a whole lot of other people in the world who are a whole lot smarter than me, and they’re gonna see it, and some of them are beginning to see it, so I think there’s kind of the tipping point or the turning point problem. And a lot of people before me have seen it, and I’ve been following in their footsteps, so there’ll be other people who continue the process, and I think at some point it will become dominant. If it doesn’t, we’re cooked.

[laughter]

20:57Sing off

Jed: Well, on that happy thought, I wanna just thank you for spending a little more time with us here at AcademicInfluence.com, and just really appreciate the thoughts and wisdom you’ve given us. Thank you so much, Professor Daly.

Herman: Well, I appreciate your interest. Thank you.