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Monday, November 18, 2013

Ecological Economics: Supply Side Solutions

If the primary goal of a steady-state economy is to shrink the economy so that it provides only what is needed for the current population, leaving large swaths of natural capital untouched, then one natural outgrowth of this would be full employment. One of the principal ways that companies produce “growth” is through efficiency by reducing the workforce and cutting costs, while simultaneously getting more out of that reduced workforce. This produces the illusion of economic growth, but it also continues the dramatic increase in resource use we’ve seen over the last 4 or 5 decades, and produces a systemic unemployment problem since all companies are using the same tactics to produce growth. Some companies may hire more workers in the future because the company is growing at too fast a clip, but the increase in workers rarely sops up the growing pool of unemployed, since other companies are off-loading workers are fast as the growing companies are picking them up.

One way to slow economic growth would be to simply re-introduce inefficiency back into the system by hiring back workers and making processes more labor intensive. Given that most workers are wasting a full 1/3 of their time at work, a company could hire twice and many workers and have them work 25 or 30 hour weeks. The key is that the company would still need to pay them for a full 40 hour week. This would, of course, increase costs, but since the goal is to decrease profits and slow the speed of resource consumption, this is precisely the goal.

Two obvious issues stem from this scenario: 1. giving more workers a decent living wage and more free time could paradoxically produce more resource consumption; and 2. there is no way that companies are going to voluntarily increase costs and lower profits.

I will look at the second issue first, since decreasing consumption is a much stickier wicket. The goal of making the economy less efficient ideally would be taken up by the companies themselves as they began to understand that continued growth threatens their existence as well as their customers. Since this is unlikely, the inefficiency would either need to be mandated or taken up by the government itself. Inefficiency could be mandated by a variety of ways, but some of the most obvious would be putting a maximum cap on profits or by abolishing exempt employees and limiting the hours worked to 30 or less. Putting a cap on profits would force successful companies to find outlets for their additional revenue in order to remain under the cap, and labor would likely be one of those investments since investments in further efficiency producing capital would make no sense. Abolishing exempt employees and limiting the work week would force many companies to hire extra workers since they would still need X number of hours filled by, say, engineers to complete projects. Government can induce inefficiency itself by raising taxes and then using those taxes to hire workers directly to complete important public works projects.

The bigger issue with this supply side scenario is that if companies are laden with additional costs they will either have to raise their prices, which will lower demand (hence resource consumption) or they will increase production since they will have the labor and the profit motive to do so. Hopefully, in this scenario greed would win out and the company would raise prices in hopes of retaining the sorts of profits they were getting before, thus decreasing demand. However, if they increase production we will be in exactly the same situation we are in now, with exponential increases in resource consumption.

A possible solution to this would be to employ all of these tactics at once: limit worked hours, install a profit cap, and raise taxes so that the government would be able to hire additional workers for public works projects. This would not directly affect how companies chose to price their products in order to deal with these changes, but it would put the government in a position to change the physical landscape in order to make American cities more resource efficient, thus making increasing production a losing strategy for companies.

I have spent this post discussing supply side solutions to the issue of economic growth, but as has probably become clear resource scarcity cannot be addressed on the supply side alone. In the end people simply have to use less. And while the government can constrain companies so that they produce less, if demand stays high, then companies will increase supply to meet that demand and there is little the government can do about that. But there is a ton that the people can do. Next post I’ll discuss some demand-side solutions to resource scarcity, and hopefully get closer to a vision of what a steady-state/full employment society might look like.