The Macroeconomics of de-growth - Can a de-growth strategy be stable?

Master's Thesis 2012 50 Pages

Economics - Macro-economics, general


II. Table of Content

1. Introduction

2. From growth critics to de-growth
2.1. Historical overview of the economic growth theories and environmental limits
2.2. Formation of the de-growth concept from the environmental perspective

3. Economics of the concepts for sustainability
3.1. Neoclassical environmental approach to sustainability
3.2. Ecological approach to sustainability
3.2.1. The Steady-State economy
3.2.2. The LowGrow model
3.3. Post-Keynesian approach to sustainability

4. De-growth modelling in the Post-Keynesian economic framework
4.1. Kaleckian model and its extensions
4.1.1. Dutt-Amadeo model and Bhaduri-Marglin extension
4.1.2. The impact of financialisation
4.2. The de-growth assumptions in the Kaleckian model
4.2.1. Zero growth assumption in the Dutt-Amadeo, Bhaduri-Marglin, and market financialisation framework
4.2.2. Governmental intervention in the economy
4.2.3. Evaluation of the functioning model with the given notion of de-growth

5. Policy recommendations

6. Conclusion


III. Table of Figures

Figure 1 The structure of the LowGrow model

Figure 2 Interpretation of the Kaleckian model

Figure 3 Zero-growth assumption in the Kaleckian model

Figure 4 (1) Dutt-Amadeo model (2) Bhaduri-Marglin extension

Figure 5 Inelastic saving function in the Bhaduri-Marglin extension Figure 6 The introduction of the tax on extra saving out of income

IV. List of Abbreviations

illustration not visible in this excerpt

1. Introduction

The issue of environmental constraints and environmental degradation has been discussed recently not only among ecologists and environmentalists, but also amongst economists. They attempt to answer the questions of what impact economic activity may have on the environment and how to overcome this current devastating effect at the global or at least national level.

As a result of these debates different approaches were reconsidered including the “Green New Deal”, or so called “green” Roosevelt’s recovery plan, a strategy that was developed as the possible solution to tackle the economic crisis of 2008. The main purpose of this idea is to attract investment into green technologies, low-carbon infrastructure, and new “green” sectors of the economy to improve the environmental situation and to tackle the crisis of unemployment. On this basis the OECD and the UNEP have developed a long term alternative, - the “green growth” strategy. It mainly conceptualizes the transformation of the economic system towards sustainable economic growth, stressing the need to overcome the dependence on fossil fuel energy by substituting it with the renewable energy sources.

During this debate, a third approach to solve environmental problems was designed. The de-growth strategy, which is the most radical one, claims that growth-targeted measures are one of the biggest threats and stumbling blocks for future development. It questions the theory of economic growth based on exogenous factors of production. From this perspective, growth leads to an unsustainable economy that is built up on the increased extraction of natural resources, rise in waste and emissions, and destabilized general human wellbeing. Thus, one of the proposed solutions to prevent a devastating economic impact on the environment is to implement a de-growth strategy.

Apart from other considerations, the de-growth strategy remains the least popular measure among policy-makers to improve environmental conditions, for several reasons. Firstly, it has a vague economic framework. Secondly, de-growth conditions are associated with economic recession that leads to massive macroeconomic problems. Finally, the proposed measures still have untested and unverified results, measured only on ecologists papers’ drafts. Thus, it does not provide firm proof that it can solve current environmental problems while sustaining economic wellbeing. Despite it we believe that the current issue of de-growth should be considered as an alternative, especially considering that our economies stepped into the area of “actual de-growth” after the financial and economic crises 2008-2009.

Hence, this research paper provides an interdisciplinary study with the aim of incorporating environmental concerns into the economic growth model, and to analyse the de-growth concept as an alternative economic strategy. The author will try to answer the question of the feasibility to get macroeconomic stability while pursuing zero-growth.

The main macroeconomic framework is based on post-Keynesian prepositions, which stress the demand side as the driving force of economic growth and investment accumulation as the main fuel for it. We consider that the post-Keynesian methodology is more preferable for this analysis in comparison with the neoclassical vision, as it evaluates macroeconomic stability. Notably, to build up the de-growth macroeconomic model, the author incorporates Kaleckian growth theory that raises the issue of stability between aggregate demand and aggregate supply, while the increase in saving rate exceeds the increase in investment rate (rate of accumulation).

However, the basic assumption is that the macroeconomic strategy has to target the growth rate (or rate of capital accumulation) to zero in order to prevent environmental degradation. The expected results provide us with the relevant economic conditions for the new framework. Correspondingly, the main purpose of this research paper is to explore if the de - growth strategy, presented in the ecological economic theory, may be sustained in the current economic system.

This paper is based on a qualitative and descriptive analysis, and tries to establish a theoretical framework for the de-growth concept. For analysis of the de-growth strategy, secondary literature is the main source of reference. Chapter 2 presents the historical overview of the related concepts and literature on the limits to growth from the ecological and demographic perspectives and introduces the concept of de-growth in order to highlight the main condition for the further macroeconomic framework. Following the concept overview, the prevailing environmental macroeconomic frameworks are discussed in chapter 3, which is divided by the environmental thoughts and ecologists’ approaches. Considering the remaining debate on the macroeconomic analysis and the de-growth concept the Kaleckian model with the zero-growth assumption will be presented in the next section. Before drawing a conclusion, the constructed economic framework will lead to political recommendations for its implementation, which finally aims to answer these central questions: Is the de-growth strategy a feasible alternative to the current economic system or does it require special economic conditions to be sustained? Can it be implemented in the long run or is it only a short-term transitional approach? What measures are required to implement this strategy?

2. From growth critics to de-growth

2.1. Historical overview of the economic growth theories and environmental limits

The debate on the relevance of growth to our society has a long and rich history. In the XIX century the nation’s wealth was considered as first state’s priority, however already at that time the idea of the limits of wealth was discussed. First idea was proposed by T. Malthus in his work “ The essay on the principle of population ” in 1807, where he touched on the point of exponential growth of population and the inability of the agricultural system to sustain it (Simms, et al., 2010). The same vision was shared by D. Ricardo, which he formulated as the limits on growth based on the availability of the agricultural products and lands in his work (Ricardo, 1817, citied in Kerschner, 2010).

The next step was made by J. Mill. Supporting the Malthusian theory to control the world population, the growth’s limits were derived from a demographic perspective. However he proposed another idea, that due to constant struggles “humanity would be content to be stationary, long before necessity compels them” (Mill, 1848, cited in Kerschner, 2010). He argued that the “increasing of wealth is not boundless: that at the end of what they term the progressive state lies the stationary state” (Mill, 1848, Book IV, Chapter VI).

These debates remained unproved at that time, moreover historical facts turned against demographical estimations, because after the First World War and the following Second World War the world faced massive population losses, and the idea of demographic limits was pushed back.

The XX century was the time of formalized growth theory’s development. Starting from the Great Depression, J. M. Keynes proposed fiscal policy as the solution to overcome crises. The economic formation shifted to another direction, discussing the demand - driven economy and its potential to grow. Keynes’ contribution to the growth debate among others was the starting point for growth theories’ development. Already in 1946 Harrod and Domar presented their dynamic model of growth. In the 50’s two major schools published their growth models: the neoclassical growth model, presented by Solow and Swan, and Keynesian wing, represented by the Kaldor and Robinson’s model and later the Kaleckian model. It was a solid platform for the further expansion of economic growth theories that captured the minds of policymakers looking for a panacea against “economic diseases”, such as poverty.

In the beginning of 70’s the movement concerned with growth limitation strategies experienced a renaissance. The idea of growth was criticized from different angles, starting from social and demographic perspectives and ending with environmental and ecological concerns. The first raised question was whether growth improves people’s living conditions. In 1967 E. Mishan made an attempt to demonstrate the lack of linkages between economic growth and individual wealth (Mishan, 1967, cited in Simms, et al., 2010, p. 9). Later, Heuting asked the same question, claiming that economic growth does not contribute to welfare improvement, and in some cases it leads even to its deterioration (Heuting, 1974). Heuting (2010) argues that economic growth is not necessary because it does not lead to well-being improvement; hence we degrade the environment without getting any positive results, a poor trade off. According to his definition “the term ‘economic growth’ can mean nothing other than increase in welfare, defined as the satisfaction of wants derived from our dealings with scarce goods” (ibid.).

Demand driven economic activity has to satisfy the people’s needs, but if these needs are uncontrollably rising it leads to the inevitable economic expansion. Marcuse (1964, citied in Heuting, 2010) states that people have lost their freedom through the current economic system and have become slaves of consumer goods imposed upon them.

The environmental criticisms of the imposed growth strategies has been presented in a book by M. Meadows (1972) “Limits to growth: A report for the Club of Rome ’ s project on the predicament of mankind”. Taking as a basis the long-term trend in the economy, environmental state, and population, he developed a computer model, which covered possible future finites of the world (Meadows, 1972, cited Simms et al., 2010, p. 9). Many mainstream economists were critical on the report's approach and conclusions. However the concept of Earth’s capacity limitation was captured by environmentalists very quickly. In 1973 H. Daly stepped in into this debate, publishing the book “Toward a steady state economy”, then developing this idea of devastating growth in the works “Steady state economy” (1977) and “Beyond the growth” (1996). Herman Daly, one of the leading ecological economists, is a supporter of the theoretical streams that go beyond the growth limits and economic dimension, considering it as a subsystem of the biosphere. His approach is to establish a new economic order that will be framed in the steady-state environmental economy. It assumes changes in the production and consumption patterns, fiscal regulation, migration and demographic policy, and international trade (Daly, 2008).

Another branch of the theory the growth critics adhere to is the concept of degrowth. The father of the de-growth movement was N. Georgesu-Roegen that started discussing it in the 70’s, arguing that a declining state of growth is feasible and desirable. His idea was captured by the “de-growth movement” in Europe (decroissance) (Georgesu-Roegen 1971, cited in Kerschner 2010) .

In the current period ecological economists, opposing environmental economics theory, represent the “growth-critic” movement developed from the works of their successors. However the main quest is to present the visible alternative to the “pro- growth” framework. Recently P. Victor has published his book, describing the macroeconomic modelling of low growth development, claiming that it can be a reasonable option for a sustainable future (2008). T. Jackson, another British economists has also presented a desired macroeconomic framework for the de-growing economy. Thus in the next part we consider what de-growth actually means in the ecological economic framework.

2.2. Formation of the de-growth concept from the environmental perspective

In this chapter we discuss the main debates on the notion of de-growth and the obstacles to its implementation.

When economists use the term de-growth or zero-growth, it’s inevitably associated with economic recession and deterioration of the social condition. The concept of de- growth cannot be fully considered as a grounded theory questioning solid economic growth theory. To quote S. Latouche, one of the vigorous supporters of economic limitations:

“ We are sorry to disappoint the media, but degrowth is not a concept. There is no theory of contraction equivalent to the growth theories of economics. Degrowth is just a term created by radical critics of growth theory to free everybody from the economic correctness that prevents us from proposing alternative projects for post-development politics. ”

S. Latouche, 2004.

However recently it has gained more popularity, especially after the financial crisis 2008, presenting an alternative vision of development: not quantitate, rather qualitative. It combines cultural, social, political, ecological and economic aspects, discussing structural changes, human values and wellbeing, consumption and production patterns and political desire or unwillingness to impose its changes (Schneider et al., 2010 a). This broad explanation is also considered as the weakest aspect of de-growth that captures many multidisciplinary notions. During the first conference on the Economic De-growth for Ecological Sustainability and Social Equity, which took place in 2008, environmental economists agreed on the definition:

“ De-Growth is the transformation of the global economic system and policies to allow unsustainable national economies de-grow in a way that it fulfils the basic human needs and ensures a high quality of life, while reducing the ecological impact. ”

Declaration of the Paris 2008 Conference

The given definition does not provide an answer to what should de-grow and how, in order to achieve such a marvellous result. Nevertheless, the de-growth proponents try to conceptualize it, providing different aspects to the de-growth domain. Incorporating social, cultural, environmental, economic and even political concepts (Schneider, 2010 a). We may present 6 approaches of de-growth that are advocated by different ecological economists, and first five of them are summarized by van den Bergh (2010):

- GDP de-growth;
- Consumption de-growth;
- Work-time de-growth;
- Radical de-growth;
- Physical de-growth;
- Sustainable de-growth.

(1) GPD de-growth implies the reduction of GDP, as one of the most logical consequences. On the one hand this strategy is the most visible as the reduction of production. On the other hand it remains the most misleading, because critics mainly consider it as pure GDP reduction without selection among polluting industries and consideration of production and consumption’s composition. Thus, this strategy would not allow for the differentiation of policy regulation to decrease particularly “dirty” production (van den Bergh, 2010).

However the goal is not simply to challenge the centrality of GDP as the overarching policy objective, but to propose a framework for economic transformation, where GDP is no longer centrality. Thus, in order to avoid wrong justification, de-growth proponents apply the idea of GDP de-growth as the result of the implementation of a different measurement system, which goes beyond GDP terms (O'Neill, 2011) or as Van den Bergh (2010) calls it, “GDP a-growth”.

Another component of the GDP de-growth is the reduction of production and consumption capacities that foster the resource exploitations. Ecological economists reject the idea of efficient energy use, calling it “energy rebound effect”. This idea denotes that greater energy efficiency triggers additional energy use or other environmental disorders (van der Bergh, 2011). Therefore, the decline in the possible resource’s use is the inevitable solution. It implies building on land that is already built, strict recycling capacities that should be compatible with ecosystem reproduction and finally implementation only of small-scale projects and limits in the amount of resources used and energy generated (Schneider, 2010 b). This approach bound together industrial and labour regulation and forces us to reconsider the role of technologies that initiates further resource use.

(2) Consumption de-growth in contrary targets the demand side. Changes in the consumption behaviour may reduce “dirty” production. Decrease in our unsustainable consumption leads to the decline in output and to the substitution of environmental- friendly products. This issue reveals the topics on consumption patterns, which recently took a form of the social behaviour, and on the determination of a sustainable level of consumption (Brown & Cameron, 2000). The main concerns for this strategy are to define the level of individual limit, to achieve agreements among consumers for voluntary reduction (van den Berg, 2010), to avoid the rebound effects of the released savings that can be reinvested into further growth (van den Berg, 2011).

The proposed solutions include the top-down measures via the price mechanism and different structure of the taxation; and down-up measures via raising concerns to the problem, and so called “green brainwashing”. Also, the wage and income policy regulations have to be the part of the implemented strategy. However a voluntary consumption decline, without governmental intervention, is considered as the least achievable result.

(3) The third concept is derived from constant increases in productivity and assumes that with technological progress, work becomes more efficient and productive, thus labour working hours should be decreased (Schneider, 2010 b). Proponents of this type of de-growth argue that more free time should increase the level of happiness. This issue deals also broadly with the labour market and employment mechanism that should be restructured in favour of providing more options for income sustainability as working hours are reduced. This measure is the most unpredictable, concerning the possible outcomes for the environment. First, it does not tackle environmental constrains, because it does not provide any motives to shift from the “dirty” production. Second, decrease in the working hours may lead to a consumption increase, due to the extra free time, also as one of the types of rebound effect (van den Bergh 2010; 2011).

The suggested regulation mainly includes the cap system for wealth, investment in the social security system, and redistribution policy. Moreover, it is one of the approaches that directly brings up the unemployment issue in the sustainability framework (Spangenberg et al., 2002).

(4) Radical de-growth is the most vigorous proposition discussed among the proponents of de-growth. It requires a tremendous changes in values, financial systems and regulation, markets, work and labour, profit making and ownership (Latouche, 2009; Kallis 2011 b). Combing social, cultural and ecological changes, Latouche (2009) raises the main question: toward what kind of radical changes this approach should follow. It implies construction of a new regime beyond existing capitalistic and socialistic frameworks.

As for political recommendation, the Latouche proposed “8 Rs” of de-growth: Re- evaluation of human goals; Reconceptualization of wealth, poverty, value, scarcity and abundance; Restructure of the production and social relations; Redistribution of wealth and access to natural resources; Relocalization of savings, financing, production and consumption; Reduction of production and consumption, especially for goods and services with little use value but high environmental impact; Re-use products and Recycle waste. The centrality of the concept remains the localization of production, which should be the basis for the new social order. However the author admits that in the current condition implementation of the community-based society is considered as a utopia, both from the political perspective, and from the point of view of global social needs (Latouche, 2009, pp. 38-44).

(5) Physical de-growth targets the reduction of the physical size of the economy (Martínez-Alier et al., 2010). Van der Berg (2010) distinguished it from GDP de-growth, however we find it is a very similar concept. Nevertheless, this interpretation is derived from the H. Daly definition of the steady state economy and throughput. Physical de- growth is aiming at stabilizing the economy in the short run (approximately one decade) around a slightly varying level of capital stock, non growing human labor (population) level as well as an almost constant rate of throughput and the production of socially valuable goods and services under a given technological framework (Martínez-Alier et al., 2010).

The difficulties occur in the attempt to define the sustainable level to which the economic size should be reduced. Daly (1992, cited in Martínez-Alier, 2010) stated “the optimal scale of the economy is one that is sustainable, therefore not eroding the environmental carrying capacity over time and one where at the margin, economic activity provides the same level of productive benefit to society compared to the cost of degrading ecosystem services from further growth in throughput”. However Van der Berg (2010) is critical about this approach, claiming that it hardly brings any new vision to environmental regulation and policy measures, merely summarizing already developed tools. Thus the main policy tools for physical de-growth are tradable permits and population limits.

(6) The last concept, sustainable de-growth, is promoted by Martínez-Alier and Kallis, and implies “an equitable and democratic transition to a smaller economy with less production and consumption (Martínez-Alier, 2010). Kallis (2011 a) gives the following definitions of sustainable de-growth “(it is) a sustainable and equitable reduction of society’s throughput (the materials and energy society extracts, process, transport and distribute, to consume and to return back to the environment as waste).” We consider this idea close to that presented above on physical de-growth, but the difference is that physical de-growth is oriented towards the end state of GDP reduction, while the sustainable de-growth represents more a political concept of social transformation. Criticizing the price mechanism, it targets the development of a balanced mechanism between GPD, throughput and welfare. Kallis stated it as “the goal of sustainable de- growth is not to de-grow GDP. GDP will inevitably decline as an outcome of sustainable de-growth, but the question is whether this can happen in a socially and environmentally sustainable way.”

However all six approaches target slightly different aspects, we should highlight similarities of the de-growth ideas that suit the further development of the concept. Thus, first, de-growth does not necessarily imply GDP reduction, however its consequence may be a decline in GDP. The second aspect is the reduction of the large-scale, resource- intensive industries, while the main concern aims at the reduction of the “ environmentally unfriendly ” consumption and production activities. The third feature is kind of “ multi speed growth ”, that does not mean across the board de-growth for all industries (e.g. renewable energy, shared transportation system), and approved groups still may grow, but at the national level, the macroeconomic growth may be stabilized at the zero rate (Schneider et al., 2010 a). And finally fourth, it is social acceptance and preservation of human wellbeing, thus labour market restructuring and a solid social security policy are required. From this discussion it can be derived that de-growth should be a socially acceptable policy mix with the broad government intervention where the end-state should be sustainable, while being environmentally and socially beneficial (Schneider 2010).

3. Economics of the concepts for sustainability

In this chapter we have a look at the main trends in environmental concepts, which currently prevail in the macroeconomic analysis. In comparison to conventional economic theory where one of the main stumbling blocks for the two biggest economic streams is the role of investment, the role of economics in environmental concepts is treated from the different angle. The main question, which divides the environmental ideas in two camps, is resource substitution and if the economy should be treated as an independent domain or subsystem of the biosphere (Hediger, 2000).

Hence, in the first part, environmental economics will be discussed, which incorporates weak sustainability, based on resource substitution and the neoclassical school of thought. In the second part the author introduces the ecological economists’ views, who argue in favour of strong sustainability, and share the economic methodologies of different economic streams. And in the third part we want briefly conclude, what post-Keynesians economists may add to the environmental debates.

3.1. Neoclassical environmental approach to sustainability

Environmental economics is the orthodox approach to apply economic methods to environmental problems. As the main methodological framework, it implies the neoclassical theory both at macro and micro levels. The macroeconomic perspective is derived from the circular flow of income, representing the interdependences of the households, firms, governments and markets, where the environment is treated as a subsection of the economic processes. Starting already from this angle of economic thought, the environmentalists’ vision inclines to adopt the neoclassical concept: that supply creates its own demand (SERI, 2010, pp. 21-23).

Accepting the neoclassical framework, environmental economics incorporates the neoclassical theory of economic growth, developed by Solow and Swan and its various models, based on the circular flow of income, to understanding sustainable development (ibid.). The classic macroeconomic growth approach consists of the simplest production function Y= F(K,L), where capital and labour are substituted. The main extension of the environmentalists is the addition of natural resources (R) to the production function as the third component, while the increase in the production depends on the technological innovation, improved labour skills or improved organization (Krugman et al., 2008).

Considering the new production factor, the environmentalists claim that the increase in the extraction of the non-renewable resource makes it scarce. It leads to the rise of its price and consequently to a substitution of this resource with another or by capital (technology), and finally, to a substitution away from products that uses this resource intensively. Thus, due to the substitution of the production’s factors the scarcity of resources cannot be considered as an environmental limit for growth. The rise in the resource’s price fosters not only resource substitution, but also recycling. Hence, in order to sustain such economic growth, technological progress and production, the desire for costs’ minimization makes the extraction of lower quality resources more efficient (SERI, 2010, pp. 21-23).

This approach is well known as “weak sustainability”: the depletion of natural resources can be compensated via investments in other forms of capital. Hence, economic growth remains the essential part of sustainable development framework. However this conclusion is the biggest criticism from the ecological perspective, as there is no relevant substitution because of the inappropriate price mechanism and undervaluation of the natural resources and environmental capacities (ibid.).

Thus, the environment is mainly the topic of microeconomics, where it is explained in the context of the market failures: information asymmetry and externalities. Hence, the main proposal to tackle environmental problems is through the price mechanism based on the efficient functioning of markets. R. Nedeau (2008) summarises the environmental economics instruments mostly into taxation and tradable permit systems. The fathers of these policy instruments were A. Pigou, who argued in favour of the introduction of the taxation mechanism to reduce externalities, and R. Coase, who actually criticized taxation as the tool to “correct the market”, but proposed the assignment of ownership rights to environmental resources. These two basic ideas were implemented later in the Kyoto protocol (ibid.).

Environmental economics considers cost-benefit analysis as the main tool to measure the appropriateness of proposed policy regulation. This point is the second solid criticism of the neoclassical micro approach, claiming there is no relevant measurement system that may reflect the possible scale and threat of the problem.

The neoclassical environmental approach is the dominating framework to reach sustainability and to prevent environmental degradation, and relies on the market mechanism. In recent SERI report (2010) around 70 models were compiled. The majority of the models focus on links between the economy and energy use, defined by quantitative computer-based tools. The method is to check the visibility of the environmental measures such as taxes, subsidies and price mechanisms and different industrial effects. However, it does not address the environmental problems as the consequences of economic and human activity, but rather as the mistake of the inefficient market functioning. The missing aspects such as social inclusion, political situation, resource limitation and consumption behaviour, physical limits etc., do not allow us to go beyond economic thinking, and to establish a new economic system required for the new generation.



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Title: The Macroeconomics of de-growth - Can a de-growth strategy be stable?