When Dr. Herman Daly was working at the World Bank, his assistants brought him this diagram, showing the standard firms/households model of the economy. Resources go in, products come out, GDP goes up, whoopty-doo. As Dr. Tom Murphy tells the story:
Dr. Daly said: “great, now draw a box around this and label it: The Environment.” The obvious point is that all economic activity takes place inside the environment. The next draft came back sporting a box drawn around the figure, but no label. Dr. Daly’s response: “It looks nice, but unless the box is labeled The Environment, it’s only a decorative frame.” The next draft eliminated the figure altogether.
This is the stubbornness of modern (re: classical) economists. They have a belief as rigid as thinking the sun revolves around the Earth. They are so caught up in their model of the world that they miss the environment their model operates within. As Daly says in his book Beyond Growth:
In microeconomics every enterprise has an optimal scale beyond which it should not grow. But when we aggregate all microeconomic units into the macroeconomy, the notion of an optimal scale, beyond which further growth becomes antieconomic, disappears completely!There are several reasons for this. First, all microeconomic activities are seen as parts of a larger whole, and it is the relationship to the larger whole that limits the scale of the part to some proper or optimal size. The macroeconomy is not seen as a part of anything larger — rather it is the whole. It can grow forever, and by so doing it removes the temporary constraints on each of its sectors that result from bottlenecks imposed by shortages in other complementary sectors of the economy. As long as the proportions are right, the total, and its parts, can grow forever. Each firm may still reach an optimal scale due to managerial limits, but the industry or sector can grow forever by adding new firms. Prices measure relative scarcity and guide us in keeping everything in the right. “Prices measure relative scarcity and guide us in keeping everything in the right proportion relative to everything else — but there is no…
