The Great Simplification with Nate Hagens - Herman Daly: "Toward an Ecological Economics"

Episode Date: February 2, 2022

On this episode, we meet with ecological economist and professor emeritus at the University of Maryland, Herman Daly. Daly discusses the biophysical underpinnings of human economies, and how a social system that is more tethered to our ecological reality might come into being. Daly explains how the transformation from classical economics to neoclassical economics created an understanding of the world that prioritized utility and money above all else. How did neoclassical economics contribute to our current predicament? Further, Daly explores what he believes to be the best-case scenario humans face in the next decade. About Herman Daly Herman Daly is Professor Emeritus of economics at the University of Maryland School of Public Policy, former senior economist at the World Bank, and a founder of the field of ecological economics. He is the author of For The Common Good, Valuing the Earth, the textbook Ecological Economics, and many other books, essays, and academic papers For Show Notes and Transcript visit: https://www.thegreatsimplification.com/episode/06-herman-daly

You're listening to The Great Simplification with Nate Higgins. That's me. On this show, we try to explore and simplify what's happening with energy, the economy, the environment, and our society. Together with scientists, experts, and leaders, this show is about understanding the bird's-eye view of how everything fits together, where we go from here and what we can do about it as a society and as individuals. Today's guest is my friend and educational mentor, Herman Daly. For many of my listeners, Herman will need no introduction. He is an emeritus professor of economics at the University of Maryland, a former senior economist at the World Bank, and one of the founders of the field of ecological economics.

Reading his book, Valuing the Earth over 20 years ago, was one of the key things that caused me to leave Wall Street and study natural resources in ecological economics. Those who have been lucky enough to interact with Herman would probably all concur that he brings wisdom and insight to a conversation, but he does it with a humility, light, and grace that is becoming lost in the modern, supernormal stimuli culture. Today, Herman and I talk about the biophysical underpinnings of human economies and how a social system that is more tethered to our ecological reality might come into being. I hope you learn from and are inspired by my conversation with Herman Daly.

Hello, Herman. Hello, Nate. Good to see you again, sir. It's a pleasure. So you may or may not know this or may not remember this, but 20 years ago this month, I read for the common good, soon followed by valuing the earth. and it was the main thing that propelled me to leave my Wall Street career a year later. And I think you do remember that around that time I called you, I emailed you and then I called you

and asked if I could be your student. And you told me that you were not accepting any students for PhD programs and you connected me with your colleague Josh Farley. So I ended up getting my PhD at University of Vermont. but I owe leaving the dark side largely to you and you're thinking. Well, I probably cost you a lot of money. Well, I was going to say, I wish I would have waited five years before I read your books and then I would have had some money saved.

But it's all good. I traded real capital knowledge and relationships for financial capital. And I'm happy with that. That's good. You know, the reason I didn't accept students was I was I was, I was at that time on the outs with my department at LSU, and I was such a minority that any student who studied with me was a disadvantage. I could not put together a committee of five people that would likely accept a dissertation done with me and I shortly after left LSU and went to the

World Bank, which in some ways was out of the frying pan and into the fire, but in other ways was a big improvement. So let's talk about that a little bit. First of all, give us a little bit a background. Like me, you know, I was doing one thing and I moved to study this stuff and live it and teach it and I'll try to understand it better. What was your change in thinking from the conventional way? I know you were a graduate student of Nikolai, Jorgesko Rogan. How did you start thinking that the stories we're told in conventional textbooks and parlance are not exactly what's going on. Yeah, I hadn't changed my mind. I started out as an ordinary growth economist. And I grew up in Texas and I right there in contact with Mexico. And I thought I saw a lot of poverty in Mexico and in Texas.

and I felt that my little contribution to the world would be to, through economics, help to eliminate poverty or reduce it at least. So I went to study as an undergraduate at Rice University in Houston. I guess, you know, and it's interesting, all undergraduates at some point has to choose a major. And I was having real difficulty choosing a major because I liked science and I liked humanities. And I didn't want to give up either one in preference for the other, particularly. And so I thought social science, well, there's a compromise. That's right in the middle, you know. And economics looks like the most interesting of the social sciences to me.

It has one foot in the world of ethics and humanities and the other foot in the world of physical science. So that's what I'll choose. And I was aided in that choice, but because the first course I took was the history of economic thought. And that was sort of the way it was. But quickly, I realized when I got into microeconomics, macroeconomics and so forth, more advanced courses, that I'd made a mistake that economics being taught had sort of both feet in the air. There wasn't any grounding in physical science. There wasn't any grounding in ethics to speak of.

But I was already committed to that. And I did like it. And I thought there was, I was still interested in the poverty aspect in Latin America. So I went to Vanderbilt University because of the Latin American Development Program there, not because of Nicholas Georgusky Rogan. In fact, all the students in Vanderbilt were school. scared of Jurid Eskirogan because he was kind of fierce. But I was required to take his course. And I did. And it really opened my eyes. I said, well, this guy's really, really got it right.

And so I became his devoted student. Like what were one or two things that opened your eyes back then in the same way that my eyes were opened from your work? Well, you know, I'd been unhappy with the lack of grounding of economics and something more solid. At that time, he himself went through a transition. He was a mathematical, statistical economist, and then he got interested in the intuby law and as a foundation of economic. So while I was taking his course, he was working on his magnum opus, which was the entropy law and economic court. So I got a preview of that book in his course. And that really opened. in my eyes. I mean, to see the importance of, you know, economics deals with scarcity. One of the

roots of scarcity in the physical world is the entropy law and the laws of thermodynamics generally. So that turned me on and I just thought, you know, I was in presence of a real intellect, switched my view. It didn't, I was still interested in going to Latin America and working in development. And so I eventually did that, went to Northeast Brazil with the Ford Foundation professor at the University of Sera. And seeing the population problem in the northeast of Brazil at that time, I guess further gave emphasis to my interest in the balance between population and resources and scarcity and environment. And so, and then I really, read Rachel Carson's book, Silent Spring. And that was an eye-opener because I said, well,

it's not just pesticides that are screwing things up. It's the whole waste streamed from the entropic use of resources. So that's more or less what led me away. So the main two things that I learned from your work 20 years ago, and I've continued to learn them, and now they just seem obvious to me is number one, we live in an energy and materials economy, not a monetary economy. Money is just a marker for the real biophysical things. And the second thing is that the damages to nature and other species and ecosystems and the environment are not included in the prices of things we pay for. And that is called an externality. And it just shock me that, you know, we go and consume and live our lives, but a lot of the negative impacts

are not included in our prices. And I just never thought of that before. And now it just seems so obvious. So these are two of the aspects of the field that you were one of the founders of ecological economics, which is what I got my Ph.D. in your own words, how would you describe ecological economics in contrast to conventional economics? You know, going back to the common first syllable, eco, ecological economics repeats that syllable. And for ecology, that means the household. Eco comes from the Greek Oikos, meaning household, and for ecology, it's a study of the total household of mankind, the natural ecosystem, the biosphere. And economics then is the more narrow household of mankind and

that, the economy. And so ecological economics studies the relationship between the human household and the larger household of nature. What flows across the boundary of those household? And how does the economy fit within the larger biosphere? And more importantly, I guess, how does it fail to fit? How does it fit badly and what can be done to correct it? You know, why wasn't that always the way we looked at it? You know, I think the earlier economists looked at it as the economy was everything. And indeed, that made sense if the economy was very, very small relative to the total ecosystem. You could therefore assume that the larger system was basically infinite.

And then you couldn't hurt it. You could take from it without depleting it. And you could throw waste into it without polluting it because it was so large relative to the system. Well, then as the economy grew, this is a great insight by the, the economist Kenneth Bolding, he told us that when something grows, it gets bigger. And sure enough, when the economy grows, it gets bigger and bigger and bigger. And the ecosystem stays basically the same size.

So we have a bigger and bigger impact, and that's where these externalities come from. They used to be maybe negligible, but now they occupy center stage and have to be taken into account. So one way of putting it is if new classical economics has to consider the capacity of the biosphere to support life as an externality, something outside of its theory, while it's destroying that capacity, then it's really past time to.

change the theory to take into account. And that's what ecological economics tries to do. But that was two generations ago. And things have gotten so much worse and so much more obvious, which leads me to question, is it people's ignorance or lack of knowledge that is limiting, including ecological economics principles into our operating system, or is it something else? Is it that the power and the metabolism and the momentum and the politics of our situation will not allow for these better long-term sustainability governance things to be incorporated in our system? What do you think about that? Well, I started out thinking that it was a question of ignorance.

and that once we explain things more clearly, we would gain adherence and the total mainstream economics would move in our direction. And so we were not trying to start ecological economics. We were trying to influence mainstream economics, but we couldn't do it. There was no acceptance. So that has led me more to accept the likelihood of your second explanation that their real systemic and vested interests, not only material economic vested interests of people who benefit from the growth system and don't want to see it changed, but also intellectual vested interests from economists and thinkers who have invested their time and mental effort into elaborating and studying all these complex models of growth. And then I think there's just a, I would

call it almost a religious or ideological or indeed idolatrous mindset that human beings are all powerful. You know, we are not creatures subject to the limits of a larger creation. We are the creators. And, you know, look at what's going on now with our billionaires racing each other to the moon to sell short-term flights to other billionaires and touting this as the wave of the future and the evidence that we can do anything while the world is burning, flooding, and pestilence is raising, is rape. How does that happen? Yeah. It's amazing to me. First of all, that Stephen Hawking and

Elon Musk are saying that we need to colonize Mars because of climate change and nuclear risks and other things. On the worst possible Mad Max Armageddon post-nuclear collapse, the world that we live on would be a paradise compared to Mars. So it's, even if it were physically possible, it's just delusional. But did you see a couple days ago, Herman, William Shatner's response after he flew on Bezos's ship and came back into from space that was amazing wasn't it I mean he felt a profound sadness he's like out there is death this is life and I and he's Captain Kirk so I was thinking this could be an Overton window maybe of of the preciousness of what we have and what we're losing yeah I couldn't help wondering if if Bezos at that moment when he was speaking

he might be telling him, hey, don't say that. That's not what I wanted to hear. I don't know. I don't know what went on there. But I will say this, and I think I've told you this on our previous chat with you, I've talked to parliamentarians and senators and governors and world leaders over the last decade on our existential risks that we face with energy, climate, finance, you know, the whole story. Invariably, Herman, these high-level people are always directly flanked by an economist or an MBA that's kind of acting as the idea gatekeeper. And so all this, we have an energy and materials economy, not a monetary one. You know, climate change is an existential risk. All these things are poo-poot away under the

framework of neoclassical economics. So let me ask you a question. The power and the influence aside, do standard economists truly believe intellectually that things in our economy have perfect substitutability and that we actually can physically grow for centuries or millennia? Do they really believe that? Well, goodness. I think some do. Julian Simon, I think, believed it. Others don't. I've been thinking about that. I read an article that impressed me a while back,

comparing two economic ways of things. I believe that economists study, what are they studying? They are studying their model. In other words, they have a number of what they have taken to calling canonical assumptions. And you make those assumptions, and then the rest is a model studied and elaborated mathematically and worked out in all its implications. And that's the subject matter. That's what you study. And you contrast that with what you're talking about here, which is the matter-energy economy, sort of the real world, the physical world, the thing that I didn't want to give

up is an undergraduate, that is another subject. That's often the physics department or chemistry or ecology or something in the university. That's not economics, economics studies the model. And so I think that's a case of what the philosopher Alfred North Whitehead called the fallacy of misplaced concreteness. We have to deal with abstraction. in order to understand things. But then when you forget the level of abstraction and you begin to treat your abstractions as if they were, in fact, the real world,

then that's what he call the fallacy of misplaced concrete. And I think economics commits that wholesale. Was it always that way? Or did the early economists have a tighter link to physics and the real world? The earlier economies were much more connected to the... the real world, the classical economists, were much more tied to. And one example of that is, I mean, they didn't have the laws of thermodynamics at that time,

but they, well, Alfred Marshall did, and he did refer to the fact that you can either create or destroy matter and energy, but he failed to go on, you know, the idea with degradation of entropyically of matter and energy. And all of the classical economists in their textbooks always had a chapter on population. That was part of the total picture, you know, population. And they looked at resources. You know, the law of diminishing returns, the fixed factor production is land, and you keep adding labor, you're not going to continue to get the same returns.

So they were much more connected to the real world. And when did that change? Yeah. How did that change? That was, I think, when classical economics sort of changed to neoclassical economics, the theory of values shifted from labor and a more physical concept of value to utility, a psychic notion of value. And I think while he perceived limits to the physical limits to labor and capital and land,

Utility, a psychic experience, didn't seem to have any obvious physical limitations. You know, enjoyment could, you could just go on enjoying things more and more. Utility could increase without limit, or at least so it seemed. So I think that pushed the physics into the background. So I'm going to come back to that in a second, but in your excellent essay, economics for a full world, you write that neoclassical economics. Economics is essentially economic imperialism. And here's a quote from that essay.

Subjective individual preferences, however, whimsical or unconstructed, are taken as the ultimate source of value. So maximizing utility is the goal of humans in an economy. But what is utility? It's self-referential. It's kind of like what you were saying before that you're not studying the real world. You're studying the model. Because if you define as our objective as utility and you define utility as that which what we want more of, isn't that this tautology is circular reasoning, like untethered from biology or physics?

Yes, I think it is. I do think that value in economic has two roots. One is a root in the physical world of scarcity entropy, matter, energy, and so forth. And the other route is in the psychic world of wants and satisfaction. I mean, you can spend all the energy you want, but if it's on something that nobody cares for, it's not going to be valuable.

So you can't have a total cost, simply a cost theory of value. And I think you can't have just a utility theory of value either. You have to have the, as Alfred Marshall, a great economist put it, you know, to ask, you know, what causes value or in his moon price. Is it supplier? Is it demand? Well, it's the intersection of the two that determines price.

And price has something to do with value the way we operate today. But isn't a lot of that based on the ability to pay? And how does that involve in this? Because, you know, an obese, a Westerner, another slice of pizza brings them more utility when that same amount of dollars would feed a family in Nigeria or whatever. How does the market treat that or doesn't it? That is what you just described there is the law of diminishing marginal utility, which was a fundamental concept of neoclassical economics, part of the breaking away from classical economics,

the diamonds water paradox was something of a conundrum to early economists. How is it that diamonds, which are totally useless, could come in such a high price, while water, which is necessary for life, is zero price. Well, they resolve that by the law of diminishing margin of utility. There's such a great abundance of water that are, marginal wants, our least important wants for water, can be easily satisfied because there's so much of it, whereas our diamonds are very scarce and hard to come by. And so even though our wants for our total utility of diamonds is very low, the marginal utility, the extra, the least

important use we have for diamonds is still important to us because the diamonds are so rare. And so that was the resolution of the Diamond's Water Paradox by diminishing margin of utility. And then, of course, marginal utility is what determines price. That's when you go into the market to exchange things, you exchange them on the basis of marginal utility, not on the basis of their total utility. So that was a real advance of neoclassical economics. But then I don't know, then that you got into the growth business, which I think obscured a lot of that reasoning. Here's what I think about that and tell me if you concur or take it a little deeper.

Classical economists used to have land, land productivity as variables. And then when we started to access fossil carbon. and added to our economies, it was so powerful. Just a barrel of oil does around five years of yours or my physical work. And that was like all of a sudden our productivity and our growth took a moonshot. And over time, they attributed that to our cleverness and technology because all we were doing was paying for the marginal cost of extraction, not the cost of creation or the pollution. We've underpaid for the main input to our economies for over a century.

And the main flaw in macroeconomics, neoclassical economics, is they treat energy the same as any other input into our system. It's not special. But from an ecological economic standpoint or a biophysical economic standpoint, energy cannot be substituted by anything other than energy or another form of energy. And so the Cobb Douglas function in economic theory describes where our wealth comes from, where our productivity comes from. And neoclassical economics treats capital and labor with a little bit of a productivity factor in there as describing our wealth. But energy is completely absent.

Yeah, you're absolutely right. The Cobb Douglas production function, as it represents. presented in textbooks, nearly always omits any resources, energy materials, any natural resources, only labor and capital. And the amazing thing to me and to many others is that the work of Robert Solo, they fitted the Cobb Douglas production function to the data on production. and he explained the total increase in production by increases in labor and capital.

But then statistically he had this huge residual of unexplained. That was unexplained. It was like 60% unexplained residual. So what do you do? You'd say, oh, that's technology. You know, that's the, so you just, attribute that all to technology. Well, you could attribute it all to energy. And that's what other economists have done. They say, well, if you don't call it technically advanced, and just call it energy,

and you get an explanation of just about everything. You have very little residual if you put in energy. So that just seems to me to be a very bad mistake on the part of the economy. Reiner Kumal, who was on our board a few years ago, wrote papers on this. showing that almost the entire residual is due to energy. And I think if there were more funding for this research, it could be shown that the vast majority of that is due to energy inputs. But this seems so obvious, Herman, why is it persisted to this day that this isn't breaking through other than heterodox economics?

I can't give you a definite answer, but my suspicion going back is that It's, again, this bias in favor of human beings. Human beings want to consider themselves the star of the show, not nature or other things. So labor and man-made capital are human things, where they're controlled by human beings. So this is what accounts for production. These are things that we do that we're controlled. Nature, well, that's just a pile of... indifferent stuff. That's just stuff that we use and it doesn't have any particular properties that

we need to pay any attention to. Well, and I think the further away that we get from a biophysical, ecological equilibrium, the harder it is to actually make these hard choices to change the system to something more sustainable, which is why I'm of the opinion. I don't know if you read my paper about the superorganism economics for the future, I think we're going to continue to kick cans until we have no cans to kick and there's going to be a recalibration. I mean, right now, stock markets are making all-time highs. It's not because the world is a healthy place. It's because central banks, artificially low interest rates, too big to fail guarantees,

quantitative easing, all these prop-ups and this flood of liquidity into. financial markets. This is not a response to a healthy system. Meanwhile, 20% of Americans during COVID went broke. So the wealth divide and the income divide is still accelerating. But in any case, I personally am of the opinion. We're not going to make incremental steps to change our policies and change our underlying structures. We have to build plans for when there's a crisis, because there is going to be a crisis. Right now, we are getting back to the core of a biophysical worldview. We are creating money and monetary claims on an exponential trajectory.

And our low entropy, high potential energy and resources are declining. And the disparity between those curves is growing by the month. So what do you think about all that? Well, you know, what you say is very well put. I got into ecological economics, and I think all of us in the early days of ecological economics, we said, well, money is simply a veil, which economists have always sort of believed, but let's just deal with the real stuff, energy and materials and what happens. I think we've been a little bit too far in that direction, and I was brought up short

by discovering after I did the work of Frederick Soddy. Frederick Sadie, just a word, he was a chemist who won the Nobel Prize. This was like in the 1920s, right? Yeah, this was 1926 that he won the Nobel, I think, won the Nobel Prize around then. Saadie was a chemist. He worked with Rutherford in developing atomic. theory. And he realized that as a result of the theories that he had helped develop, what they then called subatomic energy would become available. And he said, well, what will people do

with this new source of energy? Well, hell, they'll blow each other up with it. They'll make bombs with it. That's the first thing they'll do. And I, Frederick Soddy, I'm putting this, imagining that he thought this, and partly responsible for this, although I didn't intend it. So I should do something to correct it. Why do we use the gifts of science in such a bad way? And so he said, well, it's because of the economy. Our economy screwed up and we don't know what we're doing. So he went to study economics, and what did he just find out?

Very much like what you just said a minute ago. He said, we have what really governs our economic life, in addition to wants and satisfied, are the laws of thermodynamics. And look at all the magnitudes of economics, production, consumption, energy, materials. All of that obeys the laws of thermodynamics. You don't create matter out of nothing. You don't dispose it into nothing, so forth. what is it that doesn't obey the laws of thermodynamics? Well, it's money.

We create money out of nothing, and we destroy it into nothing, and money is supposed to be the symbol or counter for real wealth. So if the symbol by which we calculate and operate and govern the production and consumption of wealth, if the symbol we use can do things which the reality that it's supposed to symbolize cannot do, then we're going to screw up. And we already are, and we have been, and the big problem is with the banking system and the commercial banking system's ability to create money, which was based at the time it still is, on fractional reserve banking.

So he advocated very strongly 100% reserve. requirements for the banking system to take away their ability to create and destroy money. So that would at least be a step in the direction of controlling money. Was Saudi the guy that had the example of the negative pigs? Or was that? Yeah, right. Can you describe that? Yeah, Saudi said, well, it's like negative pigs and positive pigs.

If you have a positive pig, you can increase the number. Yeah, pig on a farm. If he's on the farm, you have to feed the pig. The pig takes up space. The pig needs to be cared for and fed and cleaned up after, et cetera. So there's kind of a limit to how many positive pigs you can have because it costs money to have positive pigs. But negative pigs, that is, a debt claim on a pig in the future, a negative pig, that's subject to the loss of mathematics, not to the loss of physics. And so you can increase the number of negative pigs all you want.

And so we have too many negative pigs and not enough positive pigs. We have a whole lot of negative pigs right now because, as you know, from an ecological economic standpoint, money is a claim on energy and debt is a claim on future energy. Every dollar bill or electron in yours or my bank account, when we eventually spend, it, it will be spent on something requiring energy. So when we are issuing all these debt, bailouts, stimulus plans, some of that will go to a real productive investment, but we're creating it by increasing our debt, which means basically we're borrowing physical resources from someone in the future. Yeah. The debt will have to be redeemed in

out of future production, if it is ever to be redeemed. And it probably won't be when it gets to be too big. Yeah. So in your essay that I referenced, you had a large list of recommendations near the end. But I just want to talk about a couple of them. One, you have reforming national accounts, separate GDP into a cost account and a benefits account so that throughput growth can be stopped when the margin. marginal cost equal to marginal benefits. Could you talk about that for a bit? We didn't vote to have GDP as our goal. It started out as an econometric measure that wasn't ever intended to be a goal around 1930s or something, right? That's right. GDP started out as a way, really, I think it was more a way of trying to have a measure of how much of productive activity of the economy could be diverted into the war effort.

and still, and what would you have left over in a way of just keeping account of what was going on in the economy. It was never intended as a measure of welfare or benefit or something to be maximized. And indeed, economics itself, if you look at microeconomics, this is where that idea of equating marginal cost and marginal benefit, the whole idea of microeconomics is not for a firm to grow forever. It's to grow to the point in which they're maximizing profits. And when do you maximize profits? You maximize profits when marginal revenue equals marginal cost. And so you grow up to that point, and then that's sort of what's been called the

when to stop rule in microeconomics. You stop growing a micro entity when marginal cost equal marginal benefit. Okay, jump over to macroeconomics now. oh, where's the wind of stop, well, it's not there anymore. So we just keep on adding more and more microactivities with no notion or counting of the limits of the total scale of the system. One way I like to say is we don't have anything in economics currently,

which is analogous to the Plymseau line on a ship. You know, the Plymseau line is a mark on the hull of a ship, and when the water level reaches the Plymseau line, that's the signal that the ship is fully loaded, and you don't go beyond that or for danger of seeking. Well, I mean, we can allocate weight in the boat in the optimal manner. If you put it all in one place, you'll sink the boat faster, and you can distribute among the passengers in all sorts of different ways.

So you've got the distribution of the load among passengers. You've got the allocation of the load in different parts of the boat by efficiency, and then you've got the total limit, load limit of the boat, the plimsaw line. Our economy doesn't have any plimsaw line. We talk about allocation among different parts of the boat, different commodities. We talk some about distribution. We ought to deal with that a whole lot more. And we don't talk at all about the total load limit of the scale of the economy. So I think that's a major effort or contribution of ecological economics

is to build that into analysis. So let me ask you about that. If we were to have a Plymshaw line, would that have to be global? because if, for example, the United States created such a limit and lived within our limits, then other countries would outcompete us, at least economically, though maybe that would no longer be our goal. But does such a governance potential structure, even theoretically, have to be global? I would say that maybe, you know, thinking really logically in the long run, yes. but I think if we try to go directly first step global, we won't get anywhere, in my opinion.

I think you can do a lot at the local level. You can live within the confines of your national geography and have a plimsal. You can consider that, you know, what's the carrying capacity of our natural ecosystem within our country and try to live within that? And then you'll, but that does mean you'll have to control international trade. You will not be able to really have free trade with that kind of system. So I think, and then eventually you might broaden the area to the world. But I don't have any faith whatsoever after six years working in the World Bank of going to a global control policy of a plimso line, I'd be very happy to see us approximated at a national

level and then gradually attempt to influence other nations to do similar things. I mean, my belief is the boat is going to have leaks and have to go to shore and be rebuilt or things like that. I mean, as you know, when I called you a few weeks ago, I was in D.C. What I'm trying to do is work with politicians and future politicians, meaning current staffers and analysts and such, to understand the systemic predicament that we face, to build in a Plimshaw line, break glass in case of emergency plans for when there is a crisis, because I just don't see all the things that we need to do now to make our future more sustainable

are going to require pain in the near term that no one is going to vote for. So we have to anticipate that on mass as a society, we are not going to keep the carbon in the ground. We're not going to constrain our consumption as individuals we can. But as a society, I just don't see that's going to happen. So if you understand that, you know that eventually there will be a crisis. And we want to build in as many possible speed bumps and metaphorical parachute. etc., to prepare for that moment.

And I know on your long list, you have a ton of big ideas, one of which overlaps with a big project we're working on. I'd love your input on it. You talk about changing the prices via taxes. And given that we've underpaid for the main input to our economies for the last century, just for an example, a barrel of oil does four and a half years of my work. the average American at $50,000 a year, four and a half years, that's $200,000 worth of productivity in one sense that you get for $60. So if we were able to put a tax on non-renewable inputs to our economy and remove a tax on labor, which is 95% of what's taxed right now, so that if you make $50,000 a year,

You get to keep all 50,000, but a lot of things in your life are substantially more expensive. You might have to do without some things. You might have to repair things and have them last longer. And such attacks would spur innovation tethered to our reality. And it would spur conservation. So what do you think about that? What work have you done on that? Well, I think that just, I agree with you.

That's a very important and obvious thing to do. And I, for the life of me, cannot understand the fixation economists and others, politicians have had on the so-called value-added tax. You've got two things. You've got the flow of matter and energy through the economy, which we call it, you know, the throughput. Now, that is what we're adding value to. What is it when we add value, what is it you're adding value to? You're adding value to the natural resource energy and materials going through the what is adding the value?

Labor and capital are adding the value to. Now, what is the limiting factor in the long run? Well, back in the old days in the empty world, the limiting factor used to be labor and capital. We had a whole lot of natural resources, very little limited. That was the limiting factor. Nowadays, the limiting factor is natural resources, energy, and structured materials. So let's raise the price. Let's tax the limiting factor, raise its price, use it more efficiently, garner our public revenue, which we need in any case from that largely. And let's say, ease up on taxing value added. Actually, we want to add more value. The more value we can add, the better.

So that's almost the definition of efficiency to add more value to what's basically scarce. So I would like to, as you outlined, shift the tax burden, the tax base, away from value added and onto that to which value is added, the labor flow. I think that would help. So that would indirectly help the environment as well because we would be using less, and therefore there would be less waste. But are there any other wider boundary recommendations

that you would have? Well, as you know, there's this sort of a debate about the carbon tax versus cap and trade sort of things. That, I think, is a difficult debate. And I personally think that quantitative limits, theoretically, are better than price limits, taxes. If you limit that quantity, then given a demand curve, you'll determine the price. But demand curves are really not known. You can draw one on the blackboard, but they're shifting all around, and there's errors and omissions.

And so if you fix a price, then a shifting demand curve will result in quantity variations. The ecosystem cares about quantities. The ecosystem doesn't really care about prices. So it's safer ecologically, I think, to fix the quantity, and then let the variance. variations in errors and omissions work themselves out in price variations. That would be my preference theoretically. Politically, there's a good argument counter to that saying, yeah, but that's complicated. You have to set up all these auction systems and so forth. And the carbon tax is much simpler. In fact, all you'd have to do is just change the algebraic sign

of the depletion allowance to the oil companies, change that from a subsidy to a tax, and you're almost there. So I could see that being an immediate policy, a first step, something that's easier to do right now. You can try them both out, but I do think I do prefer limiting quantities and letting the price work itself out rather than. trying to limit the tax, or increase the price and think that that's going to control the quantity. Because as you pointed out earlier, you know, look at what the Fed's doing with the money

supply. You could increase the money supply to finance the tax that you just impose and end up not limiting quantity much at all. Yeah. I mean, I often ask my climate friends, what is the carbon impact of quantitative easing? And they don't really make the connection that when we're issuing all this debt, it's an immediate claim on energy that is tethered to carbon. So these financial crises in 2009 and 2020 have made our carbon, our climate situation, much worse. So not to put you on the spot, but what do you think about the future?

we won't discuss worst case, but what do you expect as a base case of the next coming decades? And if some of your prescriptions and others come to pass, what would be the best case of our society heading in the direction of an ecological economy? I guess you might say I'm, I try to be a hopeful pessimist. I mean, I just, I think one has to work with the idea that there is a possibility. I can't really foresee the future. There may be an in-breaking of understanding that is a surprise. So I'm glad to see people continuing with ecological economics, and I continue with it for my few remaining years.

But for reasons you've indicated, that really may not work out. And as my students would frequently say, just as you did at the end of a semester, yeah, yeah, Professor Daly, all this steady state, you know, what you advocate looks reasonable, your assumptions, we can't find anything wrong with them. Your logic sounds true. We can't find an error yet. But you know, this is never going to, Congress will never enact these kinds of programs that you suggest and that follow. So, you know, are you sure you haven't wasted our time? Maybe we should

be doing something else. And my answer to that, it's not a very good answer, but it's an answer. I say, well, you know, what are you going to do after it all crashes? And every day it looks like we're hitting more and more to a crash, what are you going to do then? It would be good to have some ideas on the shelf for rebuilding and reconstructing whatever is left after we crash in a way that it may not crash again. So I see that as a justification, even in the worst-case scenario of doom and gloom. I mean, that's my similar philosophy. And by the way, your work has created an Overton window if nothing else, for hundreds of thousands of people or more. Because, you know, my class called Reality 101, a lot of my students are already worried

about climate change and they take my class and they learn a lot more things that are risks, energy, financial depletion, geopolitics. But at the end of the semester, they feel energized because they understand what's happening. And the understanding resolves some uncertainty. And it just makes their actions a little clearer. So I think we have a biophysical bill coming due this decade. And it doesn't have to be a disaster. But if we prepare as individuals, as communities, as a nation,

and start to change, I mean, not our consciousness in a metaphysics, sort of view, but change our values and our consciousness of what matters. We don't need a hundred to one exosomatic surplus of energy to be happy, healthy, and live meaningful lives. I mean, Europe has half of what we have. And most Europeans are as happy or more than Americans. Oh, yeah. So it's this that's right. It's this giant monkey trap. We've got our hand on the banana, which is economic growth. and we cannot let it go. All we need to do, you know, you've had a long and illustrious career and you've influenced so many people, including me.

If you had to do anything different looking back professionally or educationally, would you change anything? Well, that's a good question, and it's a very hard one to answer because so many things looking back on one's life are the result of apparently trivial coincidences or changes, you know, I mean, I came under the influence of Georgesque Rogan. But that didn't have to happen, you know.

I didn't have to be interested in population. So it's really hard to know to put together all of the influences on one's life. Growing up in Texas, you know, I might have, I probably wasted a lot of time in junior high school and high school. So does everyone, Herman. Any interesting stories about your experience at the World Bank? Oh, well, yeah, there are a number. But a story that I think is very instructive in the World Bank.

Yes, you probably know the World Bank comes out with a World Development Report every year or sometimes two years. Back in 1992, a couple of years after I had just gone to the World Bank, they were going to do one on sustainable development, which at that time was the big new concept that had just come down from the UN and they had to deal with it. I was not on the team which was going to write the report because I was too low in the hierarchy, but because I was environmentalist in the Environment Department, I was on the review panel to comment on successive drafts of the report. And I thought that was very important.

Here's something really the World Bank comes out and says, okay, first draft comes. I eagerly start reading it. In the first chapter, there's a diagram, which is titled, the relation of the economy to the environment. And it consisted of a rectangle labeled economy and an arrow coming in from the left labeled inputs

and an arrow exiting to the right labeled outputs. Nothing else. That was a relationship of the economy to the environment. So I said, okay, so I wrote a comment. I said, this is a really good beginning here. We've got a picture of the economy. It depends on inputs, and it generates these outputs. But the caption says relation of economy to the environment.

Where's the environment? You know, these inputs are coming from nowhere. The outputs are going nowhere. So let's draw a big circle around the rectangle and label and label that environment. And then we'll see that the inputs are coming from the environment. We could talk then about depletion. The outputs are going back to the environment as waste. We can talk about pollution.

We can talk about the capacity of the environment to regenerate the waste, so that some might be reusable again. We can talk about the balance between the two inputs and outputs in terms of the loss of thermodynamics and the size of the subsystem relative to the total system. How big can the subsystem be relative to the total system? We can talk about the entropic nature of this throughput of matter, energy, etc., etc.

We can really develop this picture into something important. And so I sent that back in as my comment. Here comes the second draft of the thing. I look at the diagram again. There's the same diagram, but this time with a great big rectangle drawn around the original rectangle

that's basically a picture frame. You just took the same picture and put it in a frame. No labeling, no change in the text, no discussion of anything. So I said, well, okay, I said this is really the same thing. I repeated the things I'd said before, tried to be more diplomatic, sent it back in. Here comes the third draft. Third drafts, I look.

No more diagram. Completely abandoned any attempt to draw a diagram of the relation of the economy to the environment. Now, you know, that's something, isn't it? That's not hard to do. I mean, this is kindergarten, you know. You've got a large system and a smaller system inside it and a relation of dependence.

Why won't they look at it that way? Why do they not want to do it? Well, I realized slowly the reason is that picture threatens you with questions to which you cannot give a good answer within the context of the World Bank. Because it immediately says if the economy is a subsystem of a larger system, the larger system is finite, non-growing, and materially closed, how big can the subsystem be relative to the total system before it disrupts it? Oh, limits to growth. Holy cow, we can't talk about that.

entropic relation to pollution laws of thermodynamics. Hell, nobody understands that. Nobody's going to listen to that. We don't understand it either. It's going to limit growth. We understand that much. And we can't do that because the World Bank is in the business of growth. So better to abandon it.

How soon after that did you leave the World Bank? I struggled. That was in 1992. I left in, I guess it was 94. Okay. So it's a lot later. You know, on all these things, it is truth is outcompeted by identity and job and tribal affiliation. And that's very discouraging.

But I will tell you, in talking to former politicians, very senior people, these ideas are finally staring us in the face. And people are wanting explanations for the human ecosystem, how do things fit together. And they're still threatened and scared about the answers because the answers are not going to be politically or socially sanguine. But they are fundamentally aware in a way that 20 years ago or even 10 years ago they weren't. I mean, people on both sides of the aisle are very worried about climate change. And resources, I think people are becoming aware. I mean, the United States, we've squandered our endowment of high quality ores and oil and resources. We've effectively drained America first, and now we're left with the source rock, which is depleting at, you know, 40% a year on balance.

What could we do with that energy 20, 50, 80 years from now if we had adopted your kind of principles 40 years ago? So, Herman, thank you so much for this hour. You know, as a long-term educator, and I was able to teach for seven years, you've been a teacher your whole life. Would you, what kind of advice would you give to young Americans, young humans who are alive during this time, have a whole lifetime ahead of them about preparing for learning about playing a role in our collective future? What kind of advice or thoughts would you have?

Yeah, of course, I guess the obvious one would be to pay attention to ecological economics and to politically, you know, try to push it and to recognize that so-called economic growth, which we've been pursuing for so long, has now become uneconomic. It's increasing illth faster than wealth. It's making us worse off. so we have to reverse our long-held positions. I mean, in a way, back to the idea of scale, you know, what is the scale of the human niche in the total biosphere?

Well, we've been increasing that scale over and over, and that just plays into our natural anthropocentrism. The more of us, the better. That's progress. The more we are, the better, and the more things we have, the better. Well, that's going to have to reverse. That's going to have to contract. We're going to have to go back and say, no, for at least a while, the less of us and the less of those things, the better.

So when I say things like that, people say, oh, you're anti-human, you're a misanthropist, et cetera, et cetera. Well, no, my answer to that is, I think more people are better than fewer people. More lives are better than fewer lives, as long as they're not. not all lived at the same time. You know, so we have to spread out our life and our identity into the future. That's sort of what we mean by sustainability. If you have too many people alive at the same time, you're elbowing each other and God's other creatures off the planet.

To a good approximation, it's kind of a disgusting factoid to, or shocking fact. around 10% of all humans that have ever lived are alive today. I mean, we have 8 billion, and the estimate is around 100 billion have ever lived. So, you know, I mean, it's a pretty profound thing. Your recommendations to young people. Oh, recommendations. Well, I think, you know, we're going to have to pay more attention to, I see a big danger in material.

And I don't mean materialism so much just in the sense of consumerism and that, but philosophical materialism. I mean, the basic notion that the world consists only of matter in motion, and that determines everything and including our thoughts and so forth. And so I think determinism, if you're a philosophical materialist, you're pretty sure to be a determinist also. And I think that's a real danger philosophically that's going to undercut any sort of policy efforts that we try to take. Because if your fundamental view of the way the world is, is that it's determined, then it doesn't make sense to try to have policy. And so I think

that's a very deep underlying philosophical problem that young people need to think about. because they've been fed a whole lot of a lot of determinism in the colleges. Yeah. Well, I mean, that dovetails with my view that I think we have some emergence on the horizon, and that's why you and I are doing what we're doing. We're trying to change the initial conditions of future moments so that humans rise to the occasion, as we have many times before. Yes, we have a hell of a lot of constraints, but I think no one knows the future.

future. I think using ecological economics framework gives us an ability to see what's likely not to happen, but it doesn't tell us what's going to happen. And I think we have to keep breathing life into those opportunities. Any closing thoughts, Herman? Well, I'm just very glad that you're devoting your youthful energy to these things. And I'm delighted by what you're doing, and I hope you keep it up because it's certainly needed. Thanks so much, Herman, for everything that you've done and everything you've done to influence my life. Well, thank you, Nate. God bless you in your work. If you enjoyed or learned from this episode of The Great Simplification, please subscribe to us on your

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