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Malthus is right. Eventually growth will hit a brick wall and the only question is when it will happen. Considering the massive number of variables--many of which are in a constant state of flux--that's nearly impossible to predict.

The whole limits to growth thing is a dead end and I wish it would go away because it has seriously undermined the efforts to convince people to stop wrecking the planet. Telling people that they have to save the planet by being poorer is a guaranteed loser. Offering win-win ideas, on the other hand, might actually work. For example, why not lower taxes on income and raise them on pollution? A 'green shift', as it were.

Yeah, that'll be a political winner.

I think it was Paul Romer who remarked that much of economic growth consists of finding new recipes for re-arranging stuff, not producing more of it. And there's no obvious reason why there should be a limit on the number of recipes we can come up with re-arranging stuff in better ways.

"If an economy consists of people singing songs to each other, and every year the songs get more beautiful, that is an economy with GDP growth."

That is an interesting viewpoint. But is the beauty of songs included in GDP today? Could it ever be? Haydn thought that nothing that he had written could match the beauty of some Irish folk songs.

"And most of the stuff we produce today isn't even really stuff; it's services. Stop thinking about GDP in terms of kilograms. It ain't kilograms; it's value."

Gee, when we compare service over time, it is hard to see how services in general are increasing in value over time. If anything, they have degraded over time or disappeared. Remember when we used to have service stations?

" The limit on growth is then human brains, not natural resources."

An important point. One lesson to take from this viewpoint is that we can conserve natural resources and control pollution and still have economic growth. :)

To paraphrase Keynes, in the long run, we are all better off. The trouble is, that if the population consuming resources increases faster than technological progress for a while, then we may get worse off until technology catches up. As I commented on your previous post, Nick, this is how I see the effective introduction of China into the global economy. The existing developed world will probably get worse off for a while. Fortunately for Canada, it is rich in the limited natural resources for which competition has increased, so it will probably fare relatively well among developed countries.

Allow me to conflate. Recipes, you mean like algorithms?

Well, yeah. But recipe is probably a better word for a broader audience.

Thanks, Nick, for posting this topic, your notes, as well as participating as a panelist. It’s THE critical issue of our times.

Sadly, little has changed since discussing it in my 1960s college days: emotional deniers camped on one side; emotional enviros on the other – and Loof was stuck between on no man’s land. As an old goat he has probably being on more panels discussing this issue than anyone alive on Earth. As a metatheorist and radical practitioner Loof can hardly remember his timetables anymore let alone teach THE “dismal science” issue: but hopefully can contribute to discussion here as he still has some recall of growth in the 70s; sustainable development in 80s; economic paradigm issues in the 90s – and work on catastrophe theory with action research in the new millennium.

To begin again: though not a psychologist, Loof did a series of seminars (published in a peer reviewed journal) in England and Ireland for psychologists integrating aspects of Analytical and Individual Psychology. As such, he knows a little about “denial” to suggest movement from a subjective camp position on both sides, towards an objective place. Denial generally works for each sides biased self-interest. Though not impossible to turn off (as Buddha exemplified with his non-ego)it’s not likely: just realize and recognize it to move towards impartiality, relative to ego and empathy. If so, perhaps people discussing this issue, here and on CBC, can make a synthetic breakthrough. It’s about time.

"Governments tax GDP growth"

No, not really. It's called tax, but it really is insurance premiums for consumer services. Insurance premiums generally are good for a market economy, not a drag/tax on a market economy.

If you are going to refer to limits to growth it's probably a good idea to get what "The Limits to Growth" actually said. The important part of that book was not the standard model, which was their best guess at what would happen if nothing changed, but the sensitivity analysis of the system model they built. The upshot was that long term exponential population growth would eventually do an overshoot and collapse.

The good news is that we no longer have exponential population growth. As long as we keep educating young women we are in relatively good shape. The demand for large families by religious fundamentalists (of all stripes) is a problem, especially with the multipliers of consumption in rich economies but I expect we can cope with that.

Malthus was set up to be wrong in timescales measured in low single digit centuries. The very tools and techniques he was using to identify and analyze the problem were being used to ameliorate it. The early days of science and technology grabbed a lot of low hanging fruit.

Computer scientists bump up against the issue of polynomial vs exponential functions all the time. A polynomial function (the growth of stuff) can be larger than an exponential function (the growth of population) for an arbitrarily long time. However, eventually the exponential function always wins.

I noticed something timely that might be of interest to you, Nick:


It's a discussion of whether economics is consistent with the laws of physics. I think you have a point that economic growth is about value more than producing more watts of work or more tonnes of stuff, and that the need for more physical output is an assumption read in by these critics.

The Limits of Growth (1971) modeled the main variables of population growth, industrial growth, food production and ecosystem limitations. A number of peer reviewed papers have reinforced the predictions; the latest is from Graham Turner, Australia’s top expert in coupling physical and economic models. He published “A Comparison of `The Limits to Growth` with Thirty Years of Reality" (2008) and found that changes were in line with the main criteria and the original predictions.

Relative to growth theory the work of Georgescu-Roegen (The Entropy Law and the Economic Process, 1971) is still outstanding. Paul Samuelson referred to him as a “scholar’s scholar, an economist’s economist”—and was recognized as a professor of professors in physics, while ignored in his own field of mathematical economics. While not understanding his mathematical proofs apparently he went right to the core of growth theory. I got the picture that the theory is an up in the air perpetual motion machine defying the laws of thermodynamics in practice. In other words, the mechanistic foundation of neoclassical economics derived from Newtonian physics is basically wrong. A new paradigm is needed, and Georgescu-Roegen could be the outstanding example of how mass denial can infect a whole academic discipline, prevent progress and reinforce regress.

I think the issue is that value is not a physical property, like mass, speed, temperature, etc.

“The” issue is in the valuation of physical and psychical properties: the former is typically undervalued failing to internalize externalities for a viable future; the latter is typically overvalued maximizing self-interest to the point of selfishness that sacrifices children’s needs for greedy wants. Physically and psychically the prevailing paradigm of economics is passé and part of the problem for qualifying growth with diminishing resources and sustainable development for our children.

"Can we continue to outrun the Malthusian demons indefinitely? Or is the last 200 years just a random error in the history of biology?"

That's really the question, isn't it.

"The difference is that cheap Ontario wine used to taste like crud, and now it tastes good. And yes, that is economic growth."

An interesting choice of example. Ontario wine of 20 years ago was probably better than any wine produced in the 18th century, wine that was reserved for kings to drink and treated as one of the highest gastronomic pleasures available. Are we just running without getting anywhere? Will people 20 years from now dismiss the wine you're currently enjoying as 'crud'. In what sense it that progress?

"Growth is not something imposed on us by governments. Governments tax GDP growth, as if they were trying to discourage it, like they do smoking. If I try to grow my GDP by producing and selling $100 more goods, I only get to keep about $45 after income and sales taxes. That doesn't look like a pro-growth agenda."

I recommend leaving this meaningless right-wing nonsense out of the forum - unless you believe that GDP would be higher under anarchy, since if not you must admit that the taxation you decry does in fact encourage GDP growth.

"If we all decided we would be just as happy consuming half as much stuff, we would all decide we only needed to earn half as much income too. The demand for goods and labour would halve, and so would the supply of goods and labour. No general glut of unsold goods. No mass unemployment."

I know a lot of people with 25-35 years left on their mortgage who might disagree with this assessment (if they thought through the implications for them - paying the same mortgage with half the income...)

But back to the main point...

"The "pro-growth agenda" is a people's agenda. We get growth because individuals want growth for themselves, and their kids, and are prepared to work, save, invest, and think up better ways to produce better stuff."

We get growth because people want to get ahead (of each other) - an unwinnable zero sum game that we're destroying the planet to play.

"If an economy consists of people singing songs to each other, and every year the songs get more beautiful, that is an economy with GDP growth."

Imagine the recession that occurs when the 10th generation decides they liked the first batch of songs best after all...

"But personally I'm still glad that cheap Ontario wine tastes a lot better than it used to. And that I can eat Thai food in Ottawa restaurants. And that my 2000 Mazda is a better car than Mother's 1960 Mercedes Benz. And that's GDP growth."

But are you glad that you still can't afford the 'good' wine, or that every city in the world pretty much has the same restaurants now, or that in 1960 gas for the car was plentiful and now we're looking in the arctic and in the deep sea and sifting through mud for the stuff because most of the good stuff is gone?

My (devil advocating) point being, there's two sides to the question and ignoring one doesn't help to advance the argument. I think Loof is on the right track, although instead of distinguishing between physical and psychical properties, I'd distinguish between absolute and relative (positional) goods. To the extent that pursuit of growth is simply reshuffling a relative deck while imposing absolute externalities on people, GDP will go up while our quality of life goes down.

Andrew F. I think value is reduced entropy. Something that is more statistically rare.

I'm done sniping. I just wanted to prove that I wasn't crazy.
But that's all I can add.

Here's a paper on entropy theory of value, Jing Chen UNBC, http://web.unbc.ca/~chenj/2.pdf

And following, this post by Professor Rowe, where he highlighted Catastrophe Theory, and non-linear dynamics. Found this book. By Barkley Rosser I'm reading through his stuff.

My last comment was eaten. Here is an essay, on the entropy theory of value Jing Chen UNBC, http://web.unbc.ca/~chenj/2.pdf

"The more people there are, the more new ideas people have, and ideas have increasing returns, offsetting the diminishing returns to natural resources."

Isn't part of the story that we started using other natural resources that were either unknown to us, or unavailable before? (In particular fossil fuels). You left that out of the story and it is important. Have you read "A Green History of the World"?

Thanks for all your comments. Not sure I can give useful replies to all of them. Here's a small sample:

On taxes (asp and Declan): Sure, we need governments, and governments need tax. But suppose we decided that growth per se creates negative externalities. What would we do? We would impose a Pigou tax on growth. Oh look! We're already doing it, at 55% (whether we're doing it for other reasons is irrelevant). That's perhaps a better way of saying what I should have been trying to say.

The "materialist fallacy" (thinking of growth in physical units) is I think the biggest problem. And we all promote that fallacy; I know I do, when I teach ECON1000 and give an example like "in 2008 we produce 1 apple at $1 and 2 bananas at $2 , and in 2009 we produce 2 apples at $3 and 3 bananas at $4, what's the real GDP growth rate?". Once you realise growth is about value, not kilograms or kilojoules, you realise that saying economic growth violates the laws of physics is just wrong. I agree with Andrew F. That assumption about growth being growth is stuff is very explicit in that Sci Am article he links.

If growth is going to stop, because we will have picked all the low-hanging fruit, why hasn't it stopped already? We have always been picking the lowest hanging fruit. Why will ladders grow more slowly than the height of the margin of fruit-picking in the future? They haven't in the past.

Along the ridge road of the Gatineau park, you walk past where people used to farm. Nobody in their right minds would farm that land today; it's horrible land (for farming). We were higher up that particular tree in the past. I own land in England that was cleared of scrub and ploughed in 1800, exactly when Malthus was writing. It's now growing trees again. Archeologists keep finding Bronze Age plough marks in land that is now heath. Newcombe's steam engine, used to pump water out of coal mines, was horribly energy-inefficient. It was only used because the coal was free, since you couldn't get the coal unless you pumped the water. Add in transport costs, before canals and rail, and the energy-efficiency of mining coal and getting it to the customer must have been horribly low in the past.

My guess is that pure Ricardian rents on natural resources are a smaller share of GDP than they were in the past. The whole of the English aristocracy essentially lived off Ricardian rents in 1800. The rising share of rents in national income, confidently predicted by the Malthus/Ricardo growth model, just hasn't happened. Does anyone reading this no anyone for whom the bulk of their lifetime income comes from Ricardian rents?

Malthus only introduced that distinction between geometric growth of population and arithmetic growth of food output in the second edition of his Essay, IIRC. It caught the popular imagination, but it is not central to his theoretical argument. If population grew arithmetically you would still hit diminishing returns.

reason: "Isn't part of the story that we started using other natural resources that were either unknown to us, or unavailable before? (In particular fossil fuels). You left that out of the story and it is important." Yes. Oil used to be just a form of natural pollution, that clogged up the horses' hooves. "The Stone Age didn't end because we ran out of stones" (Sheikh somebody from Saudi Arabia).

Cars are positional goods. The guy with the best car gets the girls. Guitar playing is a positional good. The guy who plays guitar best gets the girls. If that's the argument against growth, we should tax all projects, not just economic growth.

Declan: "I know a lot of people with 25-35 years left on their mortgage who might disagree with this assessment (if they thought through the implications for them - paying the same mortgage with half the income...)." But they would sell half their house, if they decided they would be just as happy with half as much stuff. (And yes, as I said, this would create problems if it happened to everyone, overnight, but it won't happen overnight.)

Correction: I said "I agree with Andrew F. That assumption about growth being growth i(n) stuff is very explicit in that Sci Am article he links."

It's not explicit. It's implicit, but obvious once you've noted it.

Certainly value (and hence growth) can be increased through non-material means. A modern doctor, for example, provides better service than a medieval leech-proscribing counterpart. But the fact is today's doctor is consuming much more "kilograms" than his predecessor. Service-led growth is occuring at the same time as "kilogram"-led growth.

The latter is clearly unsustainable at today's level of technology and technological deployment. The fact is today humans are consuming more natural resources than at any time in history, and that consumption is projected to do nothing but increase. The figures indicate that we would need somewhere between 2 to 5 Earth's to sustain just today's rate of consumption.

Can we grow in future through better services, etc? Sure. But until we do something about our consumption of more and more finite raw materials ("kilograms"), our way of life is clearly unsustainable.

That over-consumption of natural resources is a result of market failure, and is not inherent to economic growth.

Andrew F, I agree with your market failure comment. But is it feasible to correct this kind of problem with the global economy structured as it is urrently? With an open economy world order, no one country is willing to address a global problem at the state level if their trading partners aren't too. The last 20 years of climate change negotiations are exhibit A in this regard. Even the upcoming Copenhagen conference on a successor to Kyoto is likely to fall flat on its face.

your answer to my comment and the answer after about positional goods border on laziness. If they were questions in an exam and that was your answer you would definitely get an F. My comment implied that what happened about 1800 was that we started exploiting more resources. Not only that we started exploiting them in a non-sustainable fashion. Saying that we solved the problem is just not true. It was not just technology that improved - new resources were exploited.

And have you read Ponting's A green history of the world. I recommend you do.

As regards positional goods, the significance is the zero sum nature of CONSUMPTION of these goods. Consumption of these goods by one person, has a negative externality to another. We tend to be obsessed with efficiency of production but totally indifferent about efficiency of consumption (presumably because we assume that people are fully rational and fully informed as consumers). Plenty of evidence, suggests this is not true.

"But suppose we decided that growth per se creates negative externalities. What would we do? We would impose a Pigou tax on growth. Oh look! We're already doing it, at 55% (whether we're doing it for other reasons is irrelevant). That's perhaps a better way of saying what I should have been trying to say."

That's much clearer, thanks for clarifying. Still, I think the North Korean example suggests that government could do more (to cause us to do less), if they really wanted to (and had the necessary votes/guns).

"But they would sell half their house, if they decided they would be just as happy with half as much stuff. (And yes, as I said, this would create problems if it happened to everyone, overnight, but it won't happen overnight.)"

Sure, but what I was getting at is that if some people decide to cut their lifestyle by half, it will cause trouble for other people who haven't made that decision. Sometimes I wonder if this dynamic is part of what's been happening in Japan for the last 20 years or so...

On the topic of growth without increased material consumption, I tend to agree with MJ - it seems like it should be possible (assuming there is no population growth), but how likely is it?


"If they were questions in an exam and that was your answer you would definitely get an F"

One of the nice things about this blog is that the comments are polite and high quality. So disagree all you want, but don't be a jackass.

he is a teacher, a bit of light ribbing is sometimes in order. I was just suggesting he didn't think too hard about it before answering. If he goes on to the panel like that, he might get in trouble.

And Patrick,
I wasn't disagreeing with him, it is just that what he said was not sufficient to really address the point.

MJ, that is a game theory problem, and I think there is a potential mechanism to get parties to agree to a desirable equilibrium. I imagine something like a coalition of players who want to cooperate, and the means to exclude those that don't through punishment. It requires most of the big players to play along, though. The US seems somewhat sincere at the moment, and I believe they would be willing to participate if they could get the OECD, China, India and perhaps Brazil on board. If this coalition imposed tariffs on non-participants, it seems likely that the rest of the world would fall in line.

"Materialist fallacy" indeed, professor! You’re stuck with sticky prices in the mud of materialism due to the “fallacy of misplaced concreteness.” It’s no good preaching old testament while ignoring new testaments such as the teachings of ecological economics. Georgescu-Roegen aside, the measure of “ecological footprint” in ecological economics originated by William Rees at UBC is outstanding. Globally, Greedy Archimedes is economically munching on ecological services almost one and a half times faster than the Earth can renew them. Putting differences aside, can we agree that that the main physical challenge (after solving a minor but critical psychological one) is qualifying growth relative to a diminishing quantity of non renewal resources and increasing the quality of renewable resources?

I’m not sure if the dominant school in orthodox economics can’t see the new teaching being blinded by past preaching or if it is simply in their selfish-interest not to consider it, as it might go against their establishment; affect school funding; rub the collective interests they primarily serve the wrong way, etc. A handful of studies have shown that economic students become more self-serving during their schooling at university. Imagine the affect on those who profess self-love economics with hedonistic calculations! You guys need a dose of empathy.

On Oct. 9th (on the topic of That’s not shadow banking…) Loof presented a picture of the paradigm relative to Schumpeter’s Vision of the prevailing economic paradigm represented by the familiar “circular flow diagram” centred by self-interest. He then changed its shape to an “elliptical flow diagram” with two pivotal points (self-interest and others-interest). What he didn’t say was that this Big Picture, though originating with Loof, was created from a peer reviewed paper in ecological economics that shifts the neoclassical paradigm (Hayes, W. M. & Lynne, G. D. “Towards a Centerpiece for Ecological Economics” Ecological Economics 49 (2004): 287-301). Oddly this shift in the neoclassical tradition has no recognition in orthodox economics; though it has some in land economics, agricultural economics, socio-economics and ecological economics. Maybe this is because the authors didn’t market it properly and wasn’t noticed; but perhaps the orthodox school is so entrenched with past ideology they can’t see the forest with so many logs in their eyes. The various disciplines of the economics profession certainly appear divided amongst themselves.

A relevant quote regarding the scientific Ego’n’Empathy Hypothesis: “Affirming the Hypothesis also indicates an over paradigm shift when making a place for empathy as an equal opposite and complement to ego [self-interest]…but does not stray far from the dominant neoclassical economic theory of the day in that we use similar analytical devices….Intriguingly, neoclassical economics and the microeconomic tool of homo economicus as we know it becomes a special case of the metaeconomic model. If empirical testing results in failure to reject the null hypothesis of ‘no empathic, other-interest at work’ and ‘no lack of substitution possibilities’, we are back to the standard neoclassical economic model. All testing to date, however, suggests we cannot go back.” P. 299.

Now Loof isn’t a mathematician or a scientist but now uses this Hypothesis in social theory with grounded proofs relative to his fieldwork in Cambodia. It’d be appreciated of the professors here on Worthwhile Canadian Initiative could provide a critique of the science, mathematical method, empirical evidence, falsifiable criterion or anything that would void or affirm this work as a paradigm shift for orthodox economics?

Anyway, this work by Hayes and Lynne would have been an ace up Loof's sleeve twenty years ago on a panel discussing economic growth and fundamental change that would create a win-win-win situation for all involved with the common aim of long-term well-being. On the other hand, Loof is just a backwards fool;)

Thanks for the reference Loof, looks interesting, I'll have to try and track down a copy somewhere/somehow.

For the record, I'm impressed Nick puts as much effort as he does into the posts and particularly the comment threads...

The paper is available online at www.sciencedirect.com, but I believe they charge about $30US for a copy to the public. Its free with a university affiliation.

I’m also impressed with the effort and quality Nick and Stephen put into their blog. Hopefully, the criticism comes across constructively. This was intended in the comment seeking a synthesis with the question: “Putting differences aside, can we agree that that the main physical challenge...is qualifying growth relative to a diminishing quantity of non renewal resources and increasing the quality of renewable resources?” It was also the intent ending with the “win-win-win situation for…our long-term well-being”.

Patrick, Nick,
I seriously meant no offence. But I do think it is better not to answer at all, than to answer with a non-answer.

Well, we did the panel last night, and I think it went very well. An audience of over 100, and they gave good intelligent comments and questions too. And were tolerant of me, even though I was probably the only enviro-sceptic in the room.

Two points in particular stuck in my mind, perhaps because they were new (to me):

Chris Henderson's point that there is a sense in which governments are addicted to GDP growth, because sustainability of deficits and debt depends on the debt/GDP ratio not growing indefinitely, which depends on the growth rate of GDP.

Mike Nickerson's point (in response to my observation that he was like a marketing man in reverse, persuading people not to consume more stuff and to consume more leisure instead) that the other marketing guys get a big budget to support their efforts, but he gets none.

Declan was right to call me on the tax thing, because what I wrote originally wasn't clear. And what I wrote wasn't clear because my mind wasn't clear on the point I was trying to make. I thought about it a lot, and got my mind clearer. But I still don't think what I wrote the second time is 100% right. Let me try a third time:

We need governments, and governments need tax revenue. But the key parameter is not tax revenue, but the marginal tax rate. Governments set the marginal tax rates at 50% (or whatever) because they care about equality/fairness/distribution, not because they want to discourage growth. But those marginal tax rates nevertheless have the side-effect of taxing GDP growth. And this tax on GDP growth is a strong counterbalance to the advertising budgets and positional effects that might cause us to do too much market activity.

reason: I can't always tell when people are ribbing me, but anyway, no offence. But I'm not sure I understand your point, or maybe you misunderstood me. Sure, over the last few hundred years, we have moved from one resource to another. Wood to coal to oil, etc. We figured out ways to use resources that we didn't know how to use before. And that is important as a description of history. But what does it mean about the future? Are you saying that this is something we won't be able to do in future, because there are no new resources we might figure out how to use? If that's what you are saying, I would reply by saying that it must have looked the same way 300 years ago. What will we do when we run out of trees for charcoal? Predicting our own future new ideas (technology) is hard by the very nature of new ideas.

I mean we can't count on it. And read the book and think about entropy. The resources that we used first were ones that were easy to get hold of. The ones we use now are harder, and obtaining them costs more and creates more of a (sometimes subtly hidden) mess. That mess is growing globally even if it is sometimes shrinking locally.

Essentially Nick I think you are saying -
there is a free lunch out there, and I'm confident we'll find it. You claimed that sometime in the past we found such a free lunch. I don't think we did - because you in fact left out the bit about the huge amount of extra resources we irreplaceably used to obtain that free lunch.
And all I'm saying about the future is, don't bet the farm (planet) on finding such a free lunch.

you may disagree with what I have just written, but I don't think you can honestly say that it is not a valid way of looking at things. Until you actually have a strategy for sustainable development, claiming that it must exist is not much more than wishful thinking.

"those marginal tax rates nevertheless have the side-effect of taxing GDP growth. "

Nick I'm not sure this is the correct way of looking at it. If it was, then it would be clear in the historical record that higher marginal tax rates mean lower growth. I'm pretty sure the evidence is a best ambiguous. That is of course because while the substitution effect goes in one direction, the income effect goes in the other. Isn't this always the rule, relative prices generally move resources from one good to another. What is the alternative to GDP whose relative price is being changed? Leisure? Even if I ignore that in fact you need money to enjoy leisure, the fact is that while higher income increases its opportunity cost, it also increases its value (because leisure is a superior good). So outcome indeterminate.

Very interesting discussion! This is perhaps a bit tangential, but the comments on postional goods and such made me think of Adam Smith. You know the passage in the Theory of Moral Sentiments where he sounds like Robert Frank on consumption arms races, describing the disappointment of the ambitious seeker of wealth? So what he says (and this is a very sloppy paraphrase, sorry) is that is a good thing that we are so constituted that we persist in this futile and unsuccessful attempt to better our condition, because that's in effect why we have, in effect, civilization. He's much more eloquent than I am - we've turned the barren ocean into a highway, intermingled cultures etc. This is an interesting position. Like Frank and others he seems to say that in many cases growth doesn't increase utility, but, unlike Frank, he doesn't conclude from this that we ought to limit growth. Because his criterion for judging good outcomes is not whether there is more utilty in one state than another, but whether, objectively you might say, we have built a better civilization. As usual, Smith is on to something, I think.

Loof is naturally infected by economic illiteracy (especially the mathematical sort), but is surprised when economic professors basically misunderstand major contributors to their profession. This is particularly relevant to Georgescu-Roegen and his work on the nature of value, the economic value of entropy and growth theory. In the spirit of learning I took the liberty to post some footnotes from "The Evolution of Georgescu-Roegen's Bioeconomics" in Review of Social Economy (Google the title to get the paper).

“The list of Georgescu-Roegen's contributions to economic theory is as tragic as it is remarkable. He was the first to postulate several major theorems in economics that are invariably attributed to others. In his 1936 paper in the Quarterly Journal of Economics, "The Pure Theory of Consumer's Behavior," he postulated the "principle of perseverance of nonpreference directions" upon which Paul Samuelson based his idea of revealed preference. The "non-substitution theorem "relating to Leontief s static system is usually attributed to Samuelson although Georgescu-Roegen (1950b) proposed it first. (Samuelson himself has always acknowledged Georgescu's priority.) Likewise the Hawkins-Simon condition was formulated first and in a more general way by Georgescu-Roegen (1950b). The continuity postulate, necessary for the existence of indifference curves, is attributed to Herman Wold, who formulated his version in papers published in 1943 and 1944, several years after Georgescu-Roegen's (1936b).” P.

This is up to 1950 – and for the next forty years it got far worse, until:

“After a series of professional incidents in which his work was treated cavalierly and even with disrespect (described in Georgescu-Roegen 1992a), and after some particularly questionable articles were published in The American Economic Review, Georgescu-Roegen resigned from the American Economic Association."If I finally realized that I was running against one current or another, it was not from any crossing of intellectual swords with my fellow economists, who have systematically shunned such an encounter, but from their personal attitudes toward me. I was a darling of the mathematical economists as long as I kept contributing pieces on mathematical economics." (Georgescu-Roegen 1992a; 156).”

G-R died a bitter, reclusive man in 1994. He was a remarkable economist, a professor of professors, yet intellectually shunned by his fellow economists. Why? Read the paper.

"those marginal tax rates nevertheless have the side-effect of taxing GDP growth."

Be careful with that argument - once inequality passes a certain point, the tax system that minimizes marginal tax rates paid by people is not a flat tax, it's a cliff tax. i.e. for a hypothetical economy where there are 5 people who have incomes of $5, $5, $5, $5 and $80, a tax rate of 0% on the first forty dollars and 50% on everything above $40 will raise $20 in revenue while applying an average marginal tax rate of 10% [(0+0+0+0+50)/5].

A flat tax would have to be set at 20% to raise $20 in income, and would impose an average marginal tax rate of 20% - double what the cliff tax imposed.

A good way to tell which people use the argument about marginal tax rates because they are shilling for the rich vs. those who honestly believe in the theory is to see how they react in situations where it implies that we should impose extremely progressive tax rates.

that is an interesting point. I have never heard it before.

Declan: Yes, if there is a finite number of "types", so the distribution of income is not continuous, there should be little cliffs between the types, and plateaus around each type. But paradoxically, optimal tax theory (according to my limited understanding) generally implies (with a continuous distribution of types) that the marginal tax rate should actually fall as income rises, and be zero for the richest person! This doesn't affect my argument here though.

As in understand it, the distinction is not so much between discrete and continuous distributions (people are generally discrete in my experience, even when they have trouble keeping secrets :) - but rather between distributions with different levels of skew. With enough skew towards the high end of the income distribution, you can lower average marginal rates by heavily taxing the 'outliers'.

* Sorry for the math geek 'humour'

Here's my understanding:

If you raise the marginal tax rate on people at (say) the lowest ten percentile, the costs is a bigger distortion for those people, but the benefit is more tax revenue from the 90% of people with income above theirs.

If you raise the marginal tax rate on people at the top ten percentile, the cost is a bigger distortion for those people, but the benefit is more tax revenue from the 10% of people with income above theirs.

So the benefit falls as you move higher up the distribution. Unless the rich have a lower labour supply elasticity than the poor, the optimal tax schedule has declining marginal tax rates, declining to zero in the limit as you approach the richest person in the distribution.

My guess is that skew matters too, and I think in the direction you are saying, so it would tend to offset the effect I'm talking about above, because I think what you say makes sense. But I can't quite get my head around it with 100% confidence.

reason @8.32: (By the way, I have been very sloppy on the distinction between changing the level of output vs changing the growth rate of output).

But anyway: I'm not sure that taxes do create an income effect, in macro. If all the tax revenue is returned to the taxpayers, in aggregate, either in cash or in kind, there should be no net aggregate income effect. The only income effects would be if government spending were either more or less efficient, at the margin, than private expenditure.

(This is part of my general rule: price changes have substitution effects and income effects in micro, but only substitution effects in macro, because the changes in real income for buyers and sellers are equal and opposite in sign. OK, there may be distribution effects, if buyers and sellers have different income elasticities of demand/marginal propensities to consume.)

reason @8.21 and prior 2 comments: I wasn't clear enough. I'm not confident that technology will outrun diminishing returns/natural resources. But I'm also not confident it won't. We don't know. I don't think we can know.

But the one thing I should have mentioned, but didn't, is prices. Does the current price of natural resources correctly balance the chances that technology will or won't continue to outrun diminishing returns?

isn't the correct question whether the current price of natural resources correctly balance ensures that technology will continue to outrun diminishing returns.
Do you want to gamble with your grandchildrens survival chances?

And Nick the bit about taxes and income effects is cheating. You ask a question about taxes and then give an answer about the whole government sector.

"I'm not confident that technology will outrun diminishing returns/natural resources. But I'm also not confident it won't. We don't know. I don't think we can know"

Seems to me that the most pressing environmental problems are not (yet) a lack of natural resources and limits to growth, but rather the effects of extraction and use of those resources, and more specifically who pays to fix the resulting mess. Most of the time the people and firms who wreck the environment and benefit from it do not pay for the damage they cause. And all too often, regular citizens are explicitly blocked from seeking damages. AB is particularly bad for that. Landowners in AB have the gov't and oil companies wrecking their land all the time, but the laws have been rigged so that they can't keep them out and it's basically impossible to sue for damages.

It's similar for lumber companies. I bet lumber companies wouldn't be so eager to rape and pillage the way they do on crown land if they owned the land they logged, and getting more land required paying market price for it.

Anyway, I read an interesting book titled "Property Rights in the Defence of Nature" by Elizabeth Brubaker (it was online at one point, but seems to be gone now). It had an interesting story about the farmer in England who used trespass law to prevent the city of Manchester from fouling the river his cows drank from... in the 18th century. Good doing that today. People with a conservative/libertarian political outlook might find it interesting. Property rights and tort reform might be way to get people who might otherwise be skeptical to support what is effectively stronger environmental protection.

reason: "And Nick the bit about taxes and income effects is cheating. You ask a question about taxes and then give an answer about the whole government sector."

That's not cheating; that's just respecting an accounting identity ;). The money's got to go somewhere!

Loof will later (in the next few days he hopes) stand on his soap box (and maybe slip off) to show that neo-classical economics as well as bioeconomics both suffer from the “fallacy of misplaced concreteness” in opposite ways. But let’s put that aside for now. Also, let’s put aside Nick’s valid point regarding the positive values derived from squeezing more from the entropic flow with better technique; versus wasting so many valuable resources with better techniques (G-R’s point)—and briefly look at some evidence of how long the world's non renewal resources will last in quantitative terms relative to supply and demand. And, if demand grows...?

Here is a diagram published by New Scientist that simply lays it out: http://www.newscientist.com/data/images/archive/2605/26051202.jpg

While Loof’s initial reaction was one of shock and denial a little investigation of one of the authors turned is a world class authority on the subject. Thomas Graedel, of Yale University, was elected to the U.S. National Academy of Engineering for outstanding contributions to the theory and practice of industrial ecology, 2002. He is Professor of Industrial Ecology, Professor of Chemical Engineering, Professor of Geology and Geophysics, and Director of the Center for Industrial Ecology.

I agree that Declan's point is brilliant, and I had never heard it before either, but shouldn't the marginal tax rate be weighted by income (or maybe income affected), rather than by people? - eg (5x0 + 5x0 +5x0 +5x0 + 80x50) / (5+5+5+5+80) = 33%

I was planning to add a comment but I see RebelEconomist has already made my main point.

The example I gave depended on treating everybody as an equal potential source of added output (given the right incentive). Support for cutting taxes on the wealthy despite the current levels of inequality is conditional on instead weighting each person as a source of added output based on their current income.

The right approach (assuming a simplistic goal of maximizing measured output) is to weight people based on their marginal productivity. Problem being, we have no way of really measuring that! - at least that I've seen, maybe some enterprising economists have undertaken such an effort. It seems likely to me that there would be some significant mean reversion meaning that incomes are not a great proxy for marginal productivity, but it also seems plausible that just treating everyone the same (as in my previous comment) would understate the greater contribution of higher income people.

Point being, that even if we leave aside the huge pile of other issues and assume that we've all agreed that our only goal is to maximize output based on minimizing the marginal tax rate on potential added output, the right answer is still far from cut and dried.

Declan - "weight people based on their marginal productivity" don't wages, in theory, already do that?

I would expect that wages would cover a person's entire productivity, not just their marginal productivity, but maybe I'm missing something.


Assume competitive firms choose the amount of labour to hire to maximise profits taking prices and wages as given.

Profits = Price x output - wage x employment - other input prices x quantity of other inputs.

Differentiate with respect to employment, holding other inputs constant:

dprofit/demployment = Price x marginal product of labour - wage

Set dprofit/demployment = 0 for a maximum.

Price x marginal product of labour = wage.

Sorry Nick, it's been too long since I took any economics courses (Patrick's comment did trigger some distant memory, hence the comment about how I might be missing something :) - but thanks for the refresher on the theory! Any word on how well it works in practice - I can't imagine how you would set about measuring people's marginal productivity accurately.

I realised after I posted it, Declan, I should have used words rather than math! Typical math snow-job!

In my New Keynesian guise, believing in imperfect competition, I don't think it works too well. Wage = marginal productivity(1/(1-1/elasticity demand)), and firms in the real world do not face infinitely elastic demand curves. Dunno.

The math is fine by me, not to worry, I was apologizing for making you take the time to write out such basic economics due to my faulty memory, not complaining about having to deal with a little calculus.

I'll stop writing comments now, so that you can focus on your next post (back on the blogging treadmill! :)

That's not cheating; that's just respecting an accounting identity ;). The money's got to go somewhere!

No it doesn't. We can run loose fiscal policy and tight monetary or vice-versa.

I'm sure the diagram is excellent, but on my monitor it is unreadable.

Re Taxes and income and substitution effects,
I just realised that of course you are cheating. If you want to offset the income effect of government spending, then you also have to offset the substitution effect. Government spending increases demand.

Imagine an income that taxes progressively but gives back exactly so progressively (in fact in this case regressively) with respect to income in government services. Then why should that depress GDP exactly? We are just exactly replacing private expenditure with public expenditure.

On the other hand, I'm sure there are elasticities of demand for leisure such that a perfectly redistributive government policy, would also not have any impact on GDP. (Sketch briefly - redistribution to people with a low marginal value of leisure - less than what they are forced to take by hours/holiday legislation for instance from people with a very high marginal value of leisure).

From Nick:

So the benefit falls as you move higher up the distribution. Unless the rich have a lower labour supply elasticity than the poor, the optimal tax schedule has declining marginal tax rates, declining to zero in the limit as you approach the richest person in the distribution.

It took me a long time to deal with this.

You do understand that this is tax policy that drove the French Revolution, don't you?

Jim: and I think it's a difficult thing for optimal tax theorists to deal with too. One of the dirty little secrets of optimal tax theory they don't know quite how to handle. Their logic leads to this conclusion, but they don't like it. (Perhaps it's a bit like Greg Mankiw's argument that a tax on height would be desirable too if you believed optimal tax theory; he's not arguing in favour of a height tax, but pointing out a paradox).

If you think you will get theoretical support for higher taxes on the rich from a generalised utilitarian social welfare function framework, the logic doesn't always lead you where you want it to lead you.

But declining marginal tax rates could (I think?) be compatible with rising average tax rates, if you had a negative income tax system.

I'm not an optimal tax theorist, by the way, and I'm sure some other commenter knows more about this than I do.

I said: "But declining marginal tax rates could (I think?) be compatible with rising average tax rates, if you had a negative income tax system."

Nope, I was wrong there. Or rather, if marginal tax rates decline with income, eventually hitting zero, then average tax rates may initially rise (and will initially rise if taxes are negative for lowest income people), but eventually must fall with income (beginning at the point where average equals marginal tax rate). ECON1000. Embarrassing mistake on my part.

The economic value of entropy measures the qualitative difference between useful resources and useless waste. Georgescu-Roegen (G-R) focused on “entropy degradation”: what’s wasted and squandered away and, oddly enough, I’m not aware of him seeing the positive in the neoclassical approach of being smarter, using better technology getting more from throughput. It’s why I said G-R appears to suffer from “the fallacy of misplaced concreteness”; while neoclassical economics suffer the same oppositely: being practically blind to increasing degradation with better technique: economically and ecologically. They consistently overvalue the values of maximizing self-interest and utility as I see it; and undervalue the problem of Greedy. Loof calls it Greedy’s Law: where bad utility with the best technique drives our good utility with better technique. I will give an example from experience when I get the time, but am too busy to do the thinking and will be beyond the pale for awhile.

But, G-R’s prime example of “entropy degradation” was the wanton wastage of nuclear material used every which way. Not just waste in heaps of pollution with nowhere to go and forever here; also the waste in using a non-renewable resource for offensive weaponry that has no real utility (except as a value for MAD it seems). He also saw the waste of human labour involved. Humanity has brilliant minds making better bad bombs. What if they were progressively employed? Waste, waste, waste -- and wasting time with fearful states in delusional politics fearing fearful Iran will get the bomb: while each state can push a button to destroy the world in minutes.

What does neoclassical economics have to say about this top-dog under-god basket case? It seems if the price is right maximizing self-interest and maximizing utility they’d recommend mining all nuclear material as fast as possible - and invoke Greedy's Law.

As such, the abstract values of maximizing self-interest and utility are wrongheaded: the neoclassical school is riding a dead horse and flogging it to find the right price. How did Einstein define insanity? The orthodox economic paradigm is dead; part of the problem forever seeking the right price when key abstract values are misguided in theory and misguiding in practice. But, heh, the horse can be resurrected with a slight shift, eh.

Of course
"... the rich have a lower labour supply elasticity than the poor"
Otherwise they would all be "working" 24 hours a day.

reason: as we move along the income distribution, starting with the lowest wage workers and ending with the highest wage workers, two things happen.

First, the substitution effect from higher wages ( a higher price of leisure relative to goods) leads people to substitute away from leisure (i.e. work longer hours).

Second, the income effect makes people richer, and rich people demand more goods and more leisure (i.e. work shorter hours).

So, what we observe is the sum of substitution and income effects, pointing in opposite directions. So we can't tell from looking at the distribution of hours worked and wages/income whether the rich have higher or lower labour supply elasticities.

But you might nevertheless be right about the rich having lower labour supply elasticities. That would be my hunch too.

Well, Loof is back from the pale to comment on Gresham’s Law, where bad money drives out good money enabled by positive law, is analogous to Greedy’s Law where bad utility drives out good utility likewise enabled legally.

Simply look at the utility of maximizing standard clear-cut logging in law by BC. Clear-cutting is generally unsustainable (please, pretty please, someone challenge Loof here;), though clear-cutting may be possible on fire regenerated ecosystems like pine species. The worldwide empirical evidence in temperate forests (20 yrs ago) has Scots pine doing the least worst losing about 1/3 of its logging productivity over 3 generations. However, in some BC pine forests simply not cutting the forests and gathering Pine mushrooms (destroyed by clearcutting) each year over the 70 yrs needed for the forest to regenerate was worth more. And, buried 20 yrs ago in BC government files is a study of dozens (68?)of marketable products that would be available if the bad utility of the clear-cut wasn’t legalized (and regionally monopolized by a half dozen corporations throughout BC)-- and the good utility of other cuts: select cut, shelter woods, strip cuts, etc. to enable utility optimization from logging as well as other productivities. Greedy’s Law can also be applied to agricultural economics relative to monocultures where it’s bad utility drives out good utility. Come to think of it, the present financial crisis relative to Greedy’s Law appears like the bad utility (value) of Wall Street's economy is legally driving out the good utility of Main Street's economy.

Geez, I'm starting to see Greedy Archimedes everywhere. Must be an illusion or perhaps delusional, eh? As such, this backwards fool doesn't know where the analogy between Gresham’s Law and Greedy’s Law breaks down. Perhaps it has something to do with the quantification of Gresham's Law in modern economics and the qualification of the same principle with the ancient Greeks seeing bad politicians driving out good politicians.

Ps. Here’s a recent related news from another angle on pine forests headlined “Pine beetle runs out of food, B.C. mills to run out of wood” regarding the unsustainability of 110 communities of BC totally dependent on industrial forestry’s clear-cutting and the government putting all BC forests in one basket case. http://rlch.org/content/view/1930/62/

What do you mean sustainable? If it's returning to a forest-like state then it isn't, but if it's founding tree-plantations then it is.

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