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MARCH 2006
Sustainable economic growth requires thesimultaneous achievement of right allocation,right distribution, right scale, and right depth.
O’Connor:
Sustainable Growth March 2006
Page 1
One of the important contributions of theecological economists to the overall economic dialoguehas been their emphasis on the notion of economic
scale
, which they generally define as ameasure of the physical volume of matter-energythroughput, or the efficiency with which the economyis using the sources and sinks of the ecosystem. Whenthey introduce the idea of scale, they typically do so incontrast to the more widely accepted ideas of economic
allocation
and
distribution
. As they see it, economicsmust address the perennial questions of allocation,distribution, and scale, seeking the appropriate meansvia market, state, and society to the desired ends of
efficient
allocation,
fair
distribution, and
sustainable
scale.
1
Clearly, there are some value judgements beingexpressed in the crisp adjectives they choose to definetheir desired ends, so I will often adopt a moretransparently normative, but deliberately ambiguousterm like
right
allocation,
right
distribution, and
right
scale.As I presented in the article Sustainable Growth:Irreconcilable Visions?, I think we can benefit from therecognition of a fourth facet to economic development:that of economic
depth
.
2
The easiest way to graspeconomic depth is to imagine growth in economicoutput independent of any growth in money supply(i.e., inflation-adjusted growth) and any growth ineconomic scale (i.e., steady-state scale). What's left isgrowth in economic depth, or the depth dimension of the growth in economic output. We talk around theconcept all the time without really defining it, usingterms like knowledge economy, intellectual capital,experience goods, organizational learning, trust, andinnovation, which are all just different components of this economic depth. As I have tried to demonstrate,the recognition of economic depth can reconcile theapparently irreconcilable visions of those who(accurately) recognize the ecological limits toeconomic scale and those who (accurately) recognizethe potential for economic growth beyond theseecological limits. Thus, we have to consider
right depth
in relation to
right scale
,
right distribution
, and
right allocation
.Assuming for the sake of discussion that we canadequately define and measure degrees of economicallocation, distribution, scale, and depth, what can wesay about
right
allocation,
right
distribution,
right
scale, and
right
depth? Given the
positive economictruths
, what are these
normative economic rights
? Whodecides?
Right Allocation
According to ecological and non-ecological econo-mists,
right
allocation is
efficient
allocation. Efficiencyin this context means the extent to which we allproduced a mix of products consistent with what we allwanted to consume. The closer the match, the moreefficient the allocation. A perfectly efficient allocationvia the market is another way of describing a market system in
equilibrium
, free of any surplus or shortage.While they probably don't believe in
perfectly
efficient markets, many ecological economistsapparently do believe that markets are the best meansto the desired end of
relatively
efficient allocation. "Thepolicy instrument that brings about an efficient allocation is relative prices determined by supply anddemand in competitive markets."
3
I find it interestingthat with regard to this critical preference for
allocation via exchange
ecological economists arealigned with even the most orthodox neoclassicaleconomists.
Right Distribution
When we shift to the question of right distributionacross people, things get a bit more contentious. Theecological economists I've read propose that right distribution should be described as
fair
or
just
distribution, which they contend can only bedetermined through the non-market, political processof the state. "The policy instrument for bringing about a more just distribution is transfers, such as taxes andwelfare payments."
4
Assuming for the sake of discussion that we canadequately define and measuredegrees of economic allocation,distribution, scale, and depth,what can we say about
right
allocation,
right
distribution,
right
scale, and
right
depth?
O’Connor:
Sustainable Growth March 2006
Page 2
The neoclassical economists will at least imply that the
constrained
optimization
associated with anefficient allocation, or the strong tendency toward suchan equilibrium exhibited by real markets, results in areasonably fair distribution of income or productsamong market participants, wherein nobody can makeoneself better off without simultaneously and
unfairly
making someone else worse off. They consider this tobe a welfare
optimum
—
not necessarily a welfare
maximum
, but at least an optimum
given
initial
conditions
.Critics of this view would then point out that these
initial
conditions
are all-too-important, as they includeinitial distributions of wealth and resources that areinherently unfair, perhaps due to inefficient allocationsor unfair distributions that date back many years.They've got a good point. Unfair distributions going inwill tend to yield unfair distributions coming out,despite a relatively efficient allocation of resourcesbetween input and output. I suspect that manyneoclassical economists who appreciate the analyticalpower of their exemplar of constrained optimizationmight nevertheless acknowledge that many real-worldmarkets do little more than efficiently re-allocaterelatively unfair pre-existing distributions.However, one might argue with some justificationthat, over time, people who have not fairly earned theirinitial distributions will tend to lose them in acompetitive market that, through every cycle of relatively efficient allocation, is also systematically re-distributing income and products to people whocontinue to really earn it through smart work ratherthan lazy privilege. But then again, this is little comfort to those who believe that initial distributions are sounfair as to require decades if not generations to re-distribute via the market's evolutionary process.Granted, but does this mean that economists must concede to the state the privilege of engineering thefair distribution that continues to elude the market?Not necessarily. Other schools of thought, Austrians forexample, might argue that state-governed re-distribu-tion of what the market already distributed is, bydefinition,
unfair
. They have a good point. What is fairand just about the state taking from one who has in fact earned a portion of the economic distribution andgiving it to another who has not earned it? Worse yet,what is fair and just about the state taking from onewho has earned it under the guise of giving it to onewho needs it more, while secretly re-distributing it tohouseholds and firms that neither earned it nor reallyneed it for basic needs? The moral seems to be that if the process of re-distribution is inherently unfair, thenit may not be the resolution to past injustice that manypeople imagine it to be.
Right Scale
Moving on to right scale, the ecological economistsoffer the ideal of
sustainable
scale. With economic scalebeing generally defined as a measure of the physicalvolume of matter-energy throughput, or the efficiencywith which the economy is using the sources and sinksof the ecosystem, sustainable scale would then be that level of throughput or eco-efficiency that does not erode the capacity of the ecosystem to support suchactivity in the future. In other words, a sustainableeconomy would consume natural system
services
rather than natural
capital
, because the consumption of natural capital will reduce the ecosystem capacity todeliver services in the future.According to some ecological economists, "it isclear that scale should not be determined by prices, but by a social decision reflecting ecological limits." Theycontinue by re-iterating that "distribution should not be determined by prices, but by a social decisionreflecting a just distribution of assets." And finally,"subject to these social decisions, individualistictrading in the market is then able to allocate the scarcerights efficiently."
5
They do offer guidance in this samesource for how these social decisions are to be made,first, within the context of social dialogue about preferred futures and, second, within the context of thestate's normal political and bureaucratic processes,with the hope that the latter is influenced by theformer.
The moral seems to be that if the process of re-distribution isinherently unfair, then it maynot be the resolution to pastinjustice that many peopleimagine it to be.One of the reasons whymany economists question thecapacity of the market to set asustainable economic scale isbecause the market does notprice every aspect of theecosystem on which theeconomy depends.
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