U.S. economic growth from 1976 to 1986

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U.S. economic growth from 1976 to 1986
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Table of Contents
    Front Cover
        Page i
        Page ii
    Letters of transmittal
        Page iii
        Page iv
        Page v
        Page vi
    Table of Contents
        Page vii
        Page viii
    Current, medium, and long-term economic prospects
        Page 1
        Page 2
        Page 3
        Page 4
        Page 5
        Page 6
        Page 7
        Page 8
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        Page 40
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        Page 42
        Page 43
        Page 44
        Page 45
    The new state of the economy: The challenging prospect
        Page 46
        Page 47
        Page 48
        Page 49
        Page 50
        Page 51
        Page 52
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        Page 55
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    Economics and mankind’s ecological problem
        Page 62
        Page 63
        Page 64
        Page 65
        Page 66
        Page 67
        Page 68
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    Back Cover
        Page 92
Full Text
4.Ec


7:. & 9116 V.7


94th Congress JOINT COMMITTEE PRINT
2d Session J





U.S. ECONOMIC GROWTH FROM 1976 TO 1986:


PROSPECTS, PROBLEMS,


AND PATTERNS


Volume 7-The Limits to Growth



STUDIES
PREPARED FOR THE USE OF THE


JOINT


ECONOMIIC


COMMITTEE


CONGRESS OF THE UNITED STATES


DECEMBER 17, 1976


Printed for the use of the Joint Economic Committee

U.S. GOVERNMENT PRINTING OFFICE


WASHINGTON : 1976


78-734



























JOINT ECONOMIC COMMITTEE


(Created pursuant to sec. 5 (a) of Public Law 304, 79th Cong.)
HUBERT H. HUMPHREY, Minnesota, Chairman
RICHARD BOLLING, Missouri, Vice Chairman


SENATE
JOHN SPARKMAN, Alabama
WILLIAM PROXMIRE, Wisconsin
ABRAHAM RIBICOFF, Connecticut
LLOYD M. BENTSEN, JR., Texas
EDWARD M. KENNEDY, Massachusetts
JACOB K. JAVITS, New York
CHARLES H. PERCY, Illinois
ROBERT TAFT, J-., Ohio
WILLIAM V. ROTH, JR., Delaware


HOUSE OF REPRESENTATIVES
HENRY S. REUSS, Wisconsin
WILLIAM S. MOORHEAD, Pennsylvania
LEE H. HAMILTON, Indiana
GILLIS W. LONG, Louisiana
OTIS G. PIKE, New York
CLARENCE J. BROWN, Ohio
GARRY BROWN, Michigan
MARGARET M. HECKLER, Massachusetts
JOHN H. ROUSSELOT, California


JOHN R. STARK, Executive Director
RICHARD F. KAUFMAN, General Oounsel

ECONOMISTs


WILLIAM R. BUECHNER
G. THOMAS CATOR
WILLIAM A. Cox
LUCy A. FALCONS


CHARLZS H. BRADFORD


ROBERT D. HAMRIN
SARAH JACKSON
JOHN R. KARLIK
L. DOUGLAS LEE


MINORITY
GEORGE D. KRUMBHAAR, Jr.
MARK R. POLICINSKI


PHILIP MCMARTIN
RALPH L. SCHLOGSTUIN
COURTBMAY I SLATER
GEORGB R. TYLER


M]. CATHBrMINB MILLER


(II)











LETTERS OF TRANSMITTAL


DECEMBER 15,1976.
To the Members of the Joint Economic Committee:
Transmitted herewith is the seventh volume of the Joint Economic
Committee study series entitled "U.S. Economic Growth From 1976
to 1986: Prospects, Problems, and Patterns." This series of over 40
studies forms an important part of the Joint Economic Committee's
30th anniversary study series, which was undertaken to provide in-
sight to the Members of Congress and to the public at large on the
important subject of full employment and economic growth. The Em-
ployment Act of 1946, which established the Joint Economic Com-
mittee, requires that the Committee make reports and recommenda-
tions to the Congress on the subject of maximizing employment,
production and purchasing power.
Volume 7 comprises three studies which examine whether there are
"limits to growth" in the United States and if so, what their nature
is. The authors of the studies were Mr. Herman Kahn, Profs. Fred
Allvine and Fred Tarpley, and Prof. Nicholas Georgescu-Roegen.
The Committee is indebted to these authors for their fine contribu-
tions which we hope will serve to stimulate interest and discussion
among economists, policymakers and the general public, and thereby
to improvement in public policy formulation.
The views expressed are those of the authors and do not necessarily
represent the views of the Committee Members or Committee staff.
Sincerely,
HUBERT H. HUMPHREiY,
Chairman, Joint Economic Committee.

DECEMBER 10, 1976.
Hon. HUBERT H. HUMPHREY,
Chairman, Johit Economic Committee,
U.S. Congress, Washington, D.C.
DE.AR MIR. CHAIRMAN: Transmitted herewith are three studies en-
titled "Current, Medium, and Long-Term Prospects" by Mr. Her-
man Kahn, "The New State of the Economy: The Challenging
Prospect" by Profs. Fred Allvine and Fred Tarpley, and "Economics
and Mankind's Ecological Problem" by Prof. Nicholas Georgescu-
Roegen. These three studies comprise volume 7 of the Joint Economic
Committee's study series "U.S. Economic Growth From 1976 to 1986:
Prospects, Problems, and Patterns." This series forms a substantial
part of the Joint Economic Committee's 30th anniversary study serip'.
These studies make very clear two things concerning the limits to
growth debate: First, the debate still exists, and second, the debate
has evolved to where the primary types of limits being considered are
(III)







l1nt physical ones bult 'rather cultural, eco(lonoic, social and moral in
.itllrt' c. Thl'se papers, like many others published in this series so far,
,mhpl:itsize lie importance of noneconomic factors in determining tlhe
rate anl pattern of economic growth.
For the next decade, which is the focus of this study series, Herman
Kahn foresees continued economic growth but he is not so sanguine
in his vision of the years leading up to the year 2000. His optimism is
based on his assessment that the forces making for growth are at the
moment, so strong and have such great intrinsic momentum that in
spite of all the roadblocks thrown in their way in the last decade
or so. they are almost certainly going to triumph in the short run.
One of these roadblocks which he discusses is the limits to growth
perspective, a "movement" that he asserts now seems to be in retreat
after peaking in early 1976. The principal reason he cites for the
rapid and pervasive spread of this perspective was that so many spe-
cial interests and social groups really wanted to believe it, especially
what hlie terms the "New Class." Rather than dismissing these "New
Class values," he goes on to assert that these types of changing values,
attitudes and beliefs will be the social and cultural factors that will
intervene long before physical constraints set serious limits on either
population or economic growth. Perhaps the most important and
basic of these social and cultural factors, according to Kahn, is simply
satiation-or at least a satisfaction of the most urgent needs and a
corresponding change in priorities rather than a change in values
though the latter is also important. He specifically cites 13 trends or
new emphases which can be identified that seem particularly likely
to play an increasing role in U.S. values, priorities, and attitudes, even-
tually causing economic growth to sloW.
Professors Allvine and Tarpley provide a much more negative
assessment of future economic growth prospects. They maintain that
despite considerable effort, few careful examinations have identified
what they feel are the fundamental causes for the U.S. malaise. Their
basic thesis is that in the late 1960's and early 1970's, certain funda-
mental conditions supporting an expanding economy changed, and
we have entered into a new period. The U.S. economy they feel is suf-
ferinc from diminished support of several of the major sources of
long.-run economic growth. They discuss in considerable detail three
major sources: (1) A shift in societal attitude from a "pro growth" to
to a "conservation ethic"; (2) a decline in the pace and impact of eco-
nomic innovation in U.S. industry, wherein many of the spectacular
postwar World War II growth industries are maturing and new in-
novations are not occurring in significant enough numbers; and (3)
the rapid rise in the cost of energy that fuels our economy which is
expected to continue rising for years to come. They make four recom-
mendations to aid in the reconciliation to these new conditions, among
which are: (1) That the fires of excessive expectation must be banked
and society has to grow to expect less in order to have more and (2)
societally oriented laws must be evaluated not only in terms of the
problems they are designed to correct, but also from the standpoint
of their impact on the economy.
They challenge economists to leave the sophisticated world where
they have dwelled the past 30 years in order that they may help in







solving the critical long-run problems which usually are on the supply
side.
Professor Georgescu-Roegen preseiits a theoretical argument sub-
stantiating the limits to growth thesis. The crux of mankind's ecologi-
cal problems lies in the fact that our terrestrial dowry is finite and
can be used only once. Economics, he feels, cannot help in solving it.
This stems from the fact that the role played by natural resources
in the economic process is completely ignored. Having said this, he
argues that we cannot avoid the necessity of keeping books in terms
of energy and matter. In the ultimate analysis, he asserts, the eco-
nomy of resources hinges mainly on demand. When things become in-
creasingly scarcer, we must do with less. Hle states that there are
numberless activities which almost invite us to eliminate or slow them
down. Also, the developed must come to realize they are over de-
veloped. Since growth is wrong ecologically, decrease according to
him appears to be the right prescription in some parts even today,
and in all parts in the long-run and on the average.
The Committee is deeply grateful to these authors for these extreme-
ly challenging papers. Mr. Kahn is Director of the Hudson Institute,
Professors Allvine and Tarpley are faculty members at Georgia In-
stitute of Technology, and Professor Georgescu-Roegen is with the
Regional Research Institute at West Virginia University.
Dr. Robert D. Hamrin of the Committee staff is responsible for the
planning and compilation of this study series with suggestions from
other members of the staff. The administrative assistance of Beverly
Mitchell of the Committee staff is also appreciated.
The views expressed are those of the authors and do not necessarily
represent the views of the Members of the Committee or the Com-
mittee staff.
Sincerely,
JoHN R. STARK,
Executive Director, Joint Economic Committee.

































*j











CONTENTS

Page
Letters of transmittal ------------------- III

CURRENT, MEDIUM, AND LONG-TERM ECONOMIC PROSPECTS

By Herman Kahn
Summary ------------------------------------------------------- 1
A. Introduction and overview -------------------------------------- 2
B. The current pessimism, sense of illegitimacy, and general anxiety and
malaise ----------------------------------------------7
C. Some comments on inflation---------------- ----------------... 11
D. Expectations, morale, and self-fulfilling and self-defeating prophecies- 15
E. A realistic image of the current world-wide situation and future
trends ----------------------------------------------------17
F. But why should the growth rate continue during the 1976-86 period
and then slow down so soon?--------------------------------- 21
Annexes:
1. The current inflation in perspective--------------------------- 26
2. Thirteen "new" emphases and trends for U.S. values, attitudes,
and goals---------------------------------------------- 37

THE NEW STATE OF THE ECONOMY: THE CHALLENGING
PROSPECT

By Fred C. Allvine and Fred A. Tarpley, Jr.
Summary, conclusion, and recommendation---------------------------- 46
The analysis-------------------- ---------------------------- 50
From a pro-growth to a conservation ethic----------------------- 50
Innovation and economic growth----------------------------------- 53
Escalating energy costs--------------------------------------- 58
Economics profession and the new reality----------------------- ---- 60

ECONOMICS AND MANKIND'S ECOLOGICAL PROBLEM

By Nicholas Georgescu-Roegen
Summary ------------------------------------------------------ 62
I. The mechanistic philosophy of standard economics----------------- 65
II. Thermodynamics and the nature of the economic process----------- 68
III. The necessary dualism: Energy and matter---------------------- 71
IV. The general flow matrix of the economic process--------------- 75
V. The ABC of bioeconomics-------------------------- ------ 77
VI. Bioeconomics and economics----------------------------------- 82
References -----------------------------------------------------90


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CURRENT, MEDIUM, AND LONG-TERM ECONOMIC
PROSPECTS

fly IIERMAN KAIIN*


SUMMARY
With reasonably good luck and good management, the U.S. econ-
omy should be able to grow, on the average, almost 5 percent a year
from 1976 to 1986. Starting from a GNP of $12/ trillion in 1976 the
U.S. economy would then reach about $2% trillion in 1986 (in fixed
1976 dollars)-i.e., a 60 percent increase in 10 years.
This projection is optimistic and perhaps more of a goal than a
prediction, although with proper policies over the next two-three
years-and reasonable luck-I would argue the chances of this predic-
tion coming true are about even. But the caveat is important.
We deal with the likelihood of the above scenario by considering
the following three phases:
1. Recovery from the current recession.
2. Continuing problems of inflation and confidence.
3. Basic economic variables and trends, and changing values
and priorities (such as working force, productivity, the general
psychological climate or milieu, changing values and emphases,
government regulations and other interference, etc.)
With regard to the first point, the most obvious scenario for some
degree of financial collapse would be a program by the incoming
administration of excessive stimulation of the economy, a "bailing
out" of the cities, a series of anti-business acts and regulations, and
ineffective price and wage controls. Fear alone of the above scenario
could inhibit recovery-its actuality or imminence could cause a
financial disaster.
Clearly, the new administration will do things in the above direc-
tion, but hopefully only to a degree that will leave the many claimants
"sullen but not mutinous." Otherwise, one can confidently predict
inflation and a financial collapse, which might be short but could be
very severe. Savers, lenders, borrowers, and investors are now all
very skittish, and there is an unprecedented technology and institu-
tions for touching off a panic disintermediation or other disastrous
reaction if there is a general apprehension by the financial community
*Founding director, Hudson Institute, Inc., Croton-on-Hudson, N.Y.
Hudson Institute Discussion Papers are intended to be used as part of the Informal
exchange of ideas and information within the Institute's program of studies. They may
present tentative ideas or statements designed to provoke controversy, and they do not
necessarily represent the considered opinions even of the author.
Discussion papers are reproduced at the discretion of the author, with no Institute
review procedure, and thus no opinions, sta-tements of fact, or conclusions contained in
this document can be attributed to the Institute, its staff, its members, or its contractinlz
agencies.
(1)







of I ,e al)ove neai(-Ires. Tihe possibility of insufficient stinulation I
wo10ll1 regard as relatively low, but, certainly conceivable.
With reward to the second point, "inflation and confidencee" to some
ldei'rre it is two aspects of the same issue, but to somne extent lley are
-elparate. If llire were no inflation and long-termn money were avail-
able -t 4 percent in guaranteed mortgage loans or to AAA Corporate
borrowers., millions of families would be willing to borrow at this
4 percent rate and millions of loans would be available at the same
rate. Simllilarly, business would find many projects wlichli would look
reasonable :at 4 peIrcent. One can argue that the current nominal S-10
percent is al)ouit. 4 percent in real terms, since an inflation rate of 5-6
percent is anticipated, but. because of current instit utional arrange-
ments. it does not work like this. Both borrowers and lenders are
subject to real penalties because of the large difference in nominal and
real interest rates.
It should be noted that. in a modern economy consumers can cut
their expenditures by a factor of two and businessmen can defer most
of their capital improvements if they lack confidence in the general
economic outlook. Without confidence, no early recovery will occur.
Let us turn now to the third point. Most of the objective variables
(expanding working force, possibilities for increasing productivity,
plent-up domestic and foreign demand, unexploited teclmologies, and
so on) would argue for a high rate of increase in production. But
in addition to the first two phases or issues, what we call tihe new
emphasis on such things as risk aversion, localism, health, safety,
comfort, protection of environment and ecology, and so on-and ac-
companied by anti-technological, anti-industrial, anti-business at-
titudes and acts-may slow down economic growth. We argue that
this was of increasing importance from 1965-1975, should become less
important for awhile, and then come back very strongly, particularly
because of the influence of what we call the New Class, which is
temporarily in abeyance, but is apt to reemerge within the decade
stronger than ever.
A. INxTRODUCTION AND OvMrVIEW
We are concerned here mostly with the rate of growtlli of tlhe U.S.
economy during the next decade, 1976-1986. We s.trt by assuming
flihat, with reasonably good luck and reasonably good management, the
U.S. economy should be able to achieve something like tlhe following:
(1) produce about 1 and % trillion dollars of goods and services in
1976; (2) grow a little under 5 percent (at albot. 4.8 percent per year)
from 1976 to 1986. This would yield a 60 percent increase in the GNP
in ten years or an additional trillion dollars over the current 1` trillion
(all in fixed 1976 dollars).
We would not expect this high growth rate to continue: in fact we
would argue that the next 15 years are likely to see an increase of
only about 50 percent or a GNP of about 4 trillion dollars in the year
2000 which is a relatively sharp decline to less than 3 percent (actually
2 and 3 percent) average annual growth.
The ten-year projection is obviously an optimistic estimate-per-
haps more of a goal to aim at than a prediction. The 10-year 4goal could
be achieved if we would average 6 percent growth in the next four
years and 4 percent for the next six years. This would be consistent







with a picture in which there is a teay 4 -rc' t i ',ic ,-'"wth
in the economy for the entire decade. Oiltyiut would be aul'mnented in
the first four years by putting to work resout' .- an-1 ma.npower which
have been idled by the recession, thus increasing th, .:-:sic 4 pDrcent
rate to a 6-percent rate.
Actually we would not asi ine that growth durir' t!e cade would
be smooth. Rather we would expect the poSt.-var patte ,i of a re(e-Zion
every 5 years or so to continue, which would su'. cr .t two simill reces-
sionis in the decade. And we arg iue in the text tl,,lt if we try to avoid
these small recessions, we would risk getting a sol1ew,\1,ht big*g'er one,
even if somewhat latter.
How sure am I of these predictions? Obviously qitlte unsure, though
I would certainly be surprised if growth were very much higher dur-
ing the decade (say 20 percent higher). I would not be very sullrprised
if it were much lower. One can easily write scenarios for the future of
the United States in which the average growth is 1 or 2 points ].,-low
that assumed, or even lower.
It should be clear that a number of things could cal-e:, low growth
rates. First and most obviously, the U.S. economy mi-ight not recover
fully from the current recession; in particular, we might enter an ex-
tended period of economic stop and go or stagflation. The first would
most likely be caused by a burst of inflation which, in addition to its
direct effects, had a disastrous impact on business and consumer con-
fidence. This in turn would have catastrophic effects on the economy-
at least in the short run. Equally possible is an extended stagflation.
:Most likely this would be caused by an acceptance of the current 5
percent inflation as livable, but not adequ.att ly correcting for it. Low
growth could also result from a bad environment for business, perhaps
as a result of government acts of commission and omssion, or an
intensification of the recent anti-growth psychological milieu.
Although these and other po.-silbilities have ) been extensively dis-
cussed already, including by hearings before the Joint Economic
Committee, it still seems to mie that some very major points are often
overlooked or under'einphasized.
For example, many current projections assume that the GNP de-
flator will continue to increase at about 5 percent over the next decade
and that construction costs will go up by about 10 percent. The im-
plication is that we can live with these two trends, even without doing
anything special to correct for the inflation, such as some additional
indexing. However, my basic assumption is that the inflation can and
should be brought down to roughly a zero rate. I would also argue
that temporary indexing would help to bring the economy down to a
soft landing from the current inflation-i.e., the high growth rate
scenario assumes that the inflation is dealt with either by controlling
it or by suitable indexing or other suitable arrangement.
Since business and consumer expectations about the future play a
central role in the actual performance of the economy, prophecies can
play both self-fulfilling and self-defeating functions. Some aspects
of this phenomenon seem to us insufficiently discussed even though
many businessmen seem well aware of them. Thus, while anticipating
inflation may well provide momentum for further inflation, it also
actuates some political and economic mechanisms which may force a
decrease in inflation, particularly if at the same time some appropri-







aite indexing lelps business and individuals avoid the need for hedg-
ing against continued or increased inflation.
The complex effects of current unemployment on business and con-
sumer confidence are both extremely important and usually overesti-
nmated. Issues of the differences between list prices and transaction
prices also merit, attention, in terms both of effect on the indices
(which in turn affects expectations) and the fact that the differences
may lae quite large-often depending upon expectations about the
possibility of price and wage controls (fear of these can induce arti-
ficially high list prices and much unofficial or hidden discounting).
There are of course many other uncertainties and changing trends.
Mo:t important in the long run, and almost as important during the
decade, will be the effects of changing priorities and values. This is
an extraordinarily complicated subject. We would like to oversimplify
our discussion here by couching much of it in terms of an artificially
simplified clash bet ween what we call "New Class" 1 values and tradi-
tional values.
The New Class largely comes from upper middle class origins, but
whose income and status are largely gained through the possession of
knowledge, language skills, and/or formal academic education rather
than from being a member of privileged families, having property,
possessing entrepreneurial or business skills, or working with one's
hands (except for artists of various sorts). Expressly excluded are
almo--t all blue collar workers and many of the white collar workers
nt the lower levels of the hierarchy or even professionals who tend
to work with relatively hard and "practical" skills such as dentists,
civil c-ngineers, and geologists. We might also note here that the "New
Class" includes much of the educational and media establishments and
that part of the government and business world which is closely allied
to these establishments. From the "ethnic" and religious point of view,
they are often drawn from liberal members of mainstream Protestant
sects (Episcopalian, Presbyterian, Northern Methodist, Congrega-
tio ialist, Quaker, and Unitarian).
They also include many liberal Reformed or secular Jews, the
Ethical Culture society ,nd Catholics who are now assimilating to
emelrgiig. upper middle-class standards. The New Class is not identi-
cal with the liberal establishment or even upper middle class liberal
intellectuals, though they are largely a sub-group of these. For
our purl)oses, we can contrast the New Class with what we call
square or middle class Americans.2
While many in the New Class are not indifferent to growth, many
of them would be willing to see it slow down or would give it lower
priority than what we call in the text the New Emphases and Trends.2
By contrast, the middle class on the whole puts the highest priority
on tra(litional values as listed in what we call the Traditional Levers 2
and would place much less priority and effort on the New Emphases
and Trends.
We believe flthat, in the long run, most o.f these New Emphases and
Trends will be given an overwhelming priority by most of the Ameri-
1 Tli term was coined by Milov.in DjIlas to denote the upper levels of the bureaucracy
and intelltgentsia in Yugoslavia. It has been used by Irving Kristol and B. Bruce-Brigga
in mimih the same way we do here.
2Trhe reader might contrast the list of New Emphasis and Trends on annex 2, p. 37, with
the Traditional Levers as set forth on p. 43 in the same annex.





5

can people; this is one of the main reasons for tlhe slowing (ldown of
economic growth in the long run. The issue dividing the two 2rOUp);
is probably more a question of timing and tactics and short runit goals
than basic principles.
It is very simplified to talk about these groups as if they vwere holmo-
geneous and distinctt or as if they were the only two actors in what
is an extraordinarily large and complex number of other groups and
players. But we do not believe that the disci.sion of ba-ic issues is
terribly distorted by this simplific;ition, though it will be very alnnoy-
ing to many.
In order to attain the economic projections given, it will be neces-
sary, first of all, to re-tore the idea of legitimacy and desirabilitv
of economic growth and technological advancemennt and to eliminate
or curb the common current mental attitude that encourage-. low
morale or hostility to economic growth and technological adv:ance-
that in effect acts as a kind of sand in the gears in slowing down or
obstructing movement.
Such a change-at least in the short run-seems plausible to ime
because, in effect, I expect a counterreformation in American politi-
cal, social, and cultural life that will tend to counteract or correct
many of the recent excesses of the New Class and its allies in )both
fiscal, regulatory, and morale matters. As a result, there should be
less deficit spending at every level of government and a reasonable
and practical due process should become a substitute .for confronta-
tion and delaying tactics. Furthermore, measures to facilitate invest-
ment in the needed infrastructure and other facilities would be en-
couraged-at least for the next decade or so. Finally individiil and
group motivation and morale should be greatly improved.
The projection also depends upon certain technical factors such
as a rather large increase in the working force, a relatively low de-
pendency ratio in terms of the number of old people and young who
have to be supported by the working population, and other fa.vor-
able factors (such as a continued emphasis on income over leisure
by the bulk of the work force) many of which begin to clihani, by
the end of the decade or soon afterwards.
Finally, I would argue that regardless of the result of the election,
there is likely to be a continuation of current policies (even if there
is a change in rhetoric) which gives high priority to controlling infla-
tion. This current policy includes a reluctant willingness to tolern:te-
at least for a time (in part because it probably cannot be prevented )
relatively high unemployment, relatively low utilization of capacity,
relatively tight money, a moderately tight fiscal policy, and a "rifle'
(struictuiral) approach to unemployment rather than a"shotgun" ap-
proach. Actually we would argue that any early attempt to promotee
much faster growth would bring about a new outburst of inflation
which in turn would cause a new recession somewhat more intense,
though not necessarily longer, than the recent one.
We can summarize much of the above in Table 1, a slightly revi-ed
version of the following document which was originally published
in 1975.









TABL: 1.-TirTwo 1975 Economic-Social Scenurios for 1975-1985


EXTRAPOI.ATION OF MANY 1975
EXPI'F'TATIONS AND D DISCUSSIONS


1. U.S. lboomnlet and bust (because of
insutfficienit stimulatiol of econ-
omy, credit crunch in late 1976,
twVo-digit inflation in 1977,) or just
the expectation of any of these.
(a) GNI' growth rate:
4 to 6 percent in 1976
Low growth or reces-
sion in 1977-78


(b) Inflation rate:
>5 percent in 1976
~10 percent in 1977
Stays high (5 to 10 per-
cent) 1978 to 1985
(c) Unemployment rate:
S percent in 1976
>9 percent in 1977
Uncertain 1978-19S5
2. Energy
(a) Little expansion and conver-
sion to coal. OPEC oil
price continues gradual
real increase reaches
about $15 in 1980 and
about $20 in 1985 (in 1974
dollars). OPEC export
volume reaches about 35
million barrels per day or
more.
(b) U.S. Project Independence
drifts on inconclusively:
No large expansion of
U.S. coal production or
infrastructure (ports,
railroads, ate.)
Problems of nuclear
powerl)lauts safetyt,
pollution, siting prob-
lems, waste disposal,
plutonium processing,
other regulatory red
tape) unsolved. Local-
ismin increases and pre-
vents many other ener-
gy projects.
U.S. consumption of pe-
troleum grows to more
than 20 million barrels
per day.
U.S. oil industry is the
recipient of hostile
governmental "re-
forms" which cripple
its ability to expand
rapidly.

3. U.S. and world capital shortage (as-
sociated with 5 to 10 percent infla-
tion everywhere).


HUDSON PREFERRED SCENARIO


1. Relatively steady U.S. recovery and
growth


(a) GNP growth rate:
6 to 7 percent in 1976.
About. 5 to 6 percent
1977-80.
About 3 to 5 percent
1981-85.
(b) Inflation rate:
5 percent in 1976.
<5 percent in 1977.
Low 1978-80.
Could be t1981-85.
(c) Unemployment rate:
Below 8 percent in 1976.
Declining to 5 percent
in 1980.
Uncertain 1981 to 85.
2. Energy
(a) Some conversion to coal and
beneficiated oil. OPEC ex-
port volume stays below 35
million barrels per day.
Average real OPEC oil
price (including concealed
discounts) stays roughly
constant in terms of 1974
dollars.
(b) Project Independence hans a
limited success.
(c) In any case-
Steady expansion of coal
production and infra-
structure.
Huge expansion of nu-
clear and coal power-
plants.
Pilot program for 10 to
20 $1 billion plants for
conversion of coal to
gas and liquid fuel.
Program itself may or
may not be completed,
but is "schlieduled"-as
is also a later phase in
which 20 to 50 full-
sized 50 to 100,000 bar-
rels per day plants may
be built before 1990.
U.S. consumption stays
below 20 million bar-
rels per day.
Only moderate and ac-
ceptable reforms in oil
industry.
3. Adequate supplies of capital here
and abroad (as inflation recedes
and savings and investment are en-
couraged).









T.r'.i;,.: .-I-'wo 1975 Economic-Social S,' ,itrios for 95-5--C tiued


EXTRAPOLATION OF MANY 1975
EXPECTATIONS AND DISCUSSIONS
4. World living standards increase very
slowly:
Food prices keep rising-famine
and starvation threaten or be-
come reality.
Raw materials prices keep ris-
ing.
Fear of nationalism prevents
many investments in Third
World.
Increasing number of cartel-like
arrangements and acnets of ex-
treme economic nationalism
disrupt orderly trade.
5. Social, political, and cultural erosion
in the U.S. (continuation of such
events as Agnew scandal, Water-
gate, assassination attempts, ex-
posure of corrupt business prac-
tices; resultant further decline of
public confidence in U.S. institu-
tions).
6. Continuing rejection of traditional
U.S. ideology and values (limits to
growth ethic and attitude replaces
work orientation, advancement ori-
entation, achievement orientation
ethic and attitude; science, tech-
nology, and affluence recede as im-
portant values).
7. Growing (economically) counterpro-
ductive governmental interference;
increased redtape; punitive meas-
ures against business.

8. Development of two separate socie-
ties-white and black in the United
States. Many cities are taken over
by blacks, white flight to suburbs
accelerates. Fiscal mismanagement
and tactics of confrontation and
blackmail produce a financial dis-
aster in municipalities, revenue
sharing encourages a business as
as usual attitude toward all the
above.
9. Disastrous collapse of free world po-
sitions in Mediterranean, South-
east Asia, and much of Africa. Cas-
tro gains new prestige and energy
out of Angola adventure. Insecure
countries everywhere rush to make
a deal with one Communist group
or another.


H1UI,-ON ]':'[ 1ERBED SCENARIO
4. World living standards steadily in-
crease :
Food prices stabilize or decline.
Raw liaterials pries decline.
Developed world and OPEC in-
vest heavily in third and
fourth worlds, and in them-
selves.





5. Things calm down (norm.ial cyclical
phenomenon ) -fewer confronta-
tions, shift of attention away from
disturbing events. Ideological re-
newal government in United States.


6. Conscious counterreformation rein-
forces point 5 above and encour-
ages some return to traditional
values, some synthesis with the
new values.



7. Decrease and even elimination of
many Government regulatory ac-
tivitis; rationalization and reform
of others. Dividends are paid out
of pretax receipt.
8. Elimination of forced long-distance
school busing; growing Negro emi-
gration to suburbs; some white re-
turn to cities; central city schools
improve; encouragement of volun-
tary busing-produced less tense
atmosphere and more racially inte-
grated society; integration is in-
complete but acceptable.


9. Such losses are very limited. Indeed
general growth of the world im-
plies a relative weakening of bith
the United States and the U.S.S.R.
and a strengthening of multipo-
larity.


B. THE CURRENT PESSIMISM, SENSE OF IILEGITIMACY, AND GENE \L
ANXIETY AXD LMALAISE

An extraordinary atmosphere of doom and gloom has dominated
many current and recent discussions of U.S. and world economic pros-







l,,,,t Tl'l* s tetenrv \wa. particularlyv strong in 1974 an(l 1975; to a
*i'it extent, it .( ill'coqntinues today. IPerlhlps the most influential sin-
gle .ontriblltor to thllis pesimiisnli were some of the various "limits to
,'rowthl and iUnite carth" concepts. Their influence was not fully
a;ipreciated because these theories were accepted so readily and coni-
plt'tlv by so many as obvious truths (which simply described reality
vatlher than containing sonme extraordinarily negative and pessimistic
a-s.i1nmptions and pro.gnoses). At the same tine, many professionals-
pairtifni rlv economists and some senior governmental oflicial?-re-
ii,(tel them so firmly that they did not realize how pervasive and im-
)portant their influence was in the general intellectual and ideological
nilieu-particularly among many min the New Class.
I am not referring here to concepts based on the idea that certain
sociological. cultural, and value trends could cause growth to be lim-
ited eventually (a concept we accept ourselves), but instead to the
idea that mankind is running into a brick wall because of basic and
unalterable physical limitations on energy and other resources, similar
limitations on technology and available space for controlling or getting
rid of pollution, and, finally, equally basic (if unspecified) limitations
on man's ability to manage change and complexity. The addition of
the fixed pie concept implies that there is also a basic illegitimacy and
immorality to any society which blithely uses up the world's non-
renewable resources in luxurious and wasteful activities to the great
detriment of the poor today and of future generations.
A Harris Poll conducted in 1975 found that a 61-23 majority of the
American people felt that it was morally wrong for this country, with
6 percent of the world's population, to consume 40 percent of the
world's output of energy. and raw materials. Fully 90 percent agreed
that "we here in this country will have to find ways to cut back on the
amount of things we consume and waste." Almost two-thirds of the
public anticipated a consequent reduction in living standards.
It is often thought that the above results, at least in pait, from guilt
feeling by many Americans. This is probably true, but the guilt itself
derives from the acceptance of a fixed pie concept. Thus, ten years ago
most Americans were proud of the fact that they had about one-six-
teenth of the world's population and used up about one-third of the
world's raw materials. This showed their high state of development.
Today many feel that this use of raw materials must hurt the poor, or
at least appear to hurt the poor, and therefore is-or seems-imminoral
and probably, in fact, will not be allowed to continue for very much
longer. These new attitudes came out of the "limits-to-growth" move-
ment and now, rather paradoxically, support the movement, even when
the original reasoning has been shown to be false.
The influence of this perspective probably peaked in early 1976.
Tins "movement" now seems to be in retreat, led by some prominent
members of the well-known Club of Rome who were among the first
to urge a drastic slowing down of growth. Our own book 3 seems to
be having a. major iml)act. in the U.S. and abroad. Very recently (see
T[e Neit, Yori" T mne.q of October 14, 1976) a U.N. study group on
"The Future of the World Economy" led by Wassily Leontief also
argued that physical limits to growth, pollution control, and the man-
a Herman Knhn. Willinniam Brown and Leon Martel, "The Next 200 Years: A Scenario for
America and the World" (New York: William Morrow & Co., Inc., 1976).







agement of change would not raise any insurmountable problems-at
least not in the long run.
One reason for the rapid and pervasive spread of the "limits to
growth" perspective was that so many special interests and social
groups really wanted to believe it, especially what we have ,';lled tlhe
New Class in the Atlantic Protestant countries (United States, Scan-
dinavia, England, Holland. Canada, and Aum:tralia) and in Japai :
they were attracted to the "limits to growth" position by r.a-,ons of
self interest, guilt, and ideology, as well as tlhe persuasiveness of the
argument. Many people accepted these findings who normally are
skeptical or even hostile toward controversial and elaborate computer
studies-indeed many of these had been wont to use the term GIGO 3a
freely.
At about the same time that this "limits to growth" view was be-
coming widespread, various specific problems arose from the oil em-
bargo, the commodity boom, the environmental movement, the infla-
tion, and the recession. To many observers, these problems seemingly
demonstrated that there was indeed a disastrous lack of resources and
living space, or an even more disastrous and uncontrolled pollution
and a humanly unmanageable complexity. It was terribly easy to be-
lieve that all these problems were natural and inevitable, and were
precursors of the doom and/or enforced austerity which were expected
soon to be the common lot of mankind. On the other hand, the "limits
to growth" perspective created a receptivity for any kind of doom and
gloom thinkers. As a result, a vicious circle of reinforcement and am-
plification was created. Set in this context, almost all discussion of the
likely future became extraordinarily pessimistic.
We list below some 25 possibilities that dominated much thinking
about what seemed likely to happen in 1975 and 1976. Although almost
none of these worries were totally groundless, I certainly do not believe
that more than a fourth of them should have been taken seriously,
and almost none of them as seriously as they were taken.
1. A catastrophic credit crunch in U.S. and/or world financial
markets.
2. A truly runaway inflation or even a return to two-digit inflation.
3. A collapse of the Euro-dollar market.
4. Financial or economic collapse of Italy, the United Kingdom, or
the bankruptcy of another really big U.S. company or bank (i.e., in
addition to W. T. Grant and the Franklin Bank) or a big foreign
company or bank.
5. Domestic orders and/or overwhelming political pressures (in
almost any country) for inflationary policies because of inadequate
programs against unemployment and recession.
6. Crippling of world economy because of a renewed oil embargo
(touched off by a U.S. or Israeli-Arab confrontation) or further dra-
matic increase in energy prices with oil going to $15-20 a barrel (in
1974 dollars).
7. Total inability of the world financial system to handle the re-
cycling of OPEC dollars acceptably.
8. Collapse of current recovery because of insufficient stimulation of
demand.
f At the time, this term stood for Garbage In, Garbage Out. It is now often taken to
stand for Garbage In, Gospel Out.


78-734-76--2





10


!I. Flri",. ,ti4n of iiuiaiy iiccessful cartels in addition to those in
fcrili...S ;1nd (il (tlicer i.-. in fact. almost a breakdown of the recent
lfrt il i/.e ''art 'i ).
1,. w'ni iri;i;it;( in thle Club of Rome thesis that the world is run-
j. ;t tof iC-u01IoCs aind pollution spacc.
11. IJ:.einrlce, )f ,'o i ilnl niAs-dominnated governments in Italy, Por-
t L,:!, 5i, > :,'L'i. ,,i1i iplrDaps elsewliere.
1-. A pi','ipii.;i., withdrawal of the United States from Asia-or
jil-t froim T;,'iiwan and/or Korea.
1.. As ; 1 -ilt (-:f the recent commnnunist takeover in Indo-China, a
p1,1 itiall. ec(iollic. or military collapse of any ASEAN nation, or at
1;1-,t lhailand and Malaysia iindergoing great political pressure and
, It I**t l',.'V ie .- .in :. Ibversive activity ies.
34. T'i:oe i r,.tion of a real (and disastrous) "new international eco-
,, c ,:,I.r" (.s opposed to a "cbang-inc international order") or a
,l;:,.'.tic alb d.-ruptive confrontation between the first and third
\-'orld-.
15. An c-':tbur:-t of "'beg:par thy neighbor" export and monetary
1W. A ,,lnapSe of world trade for one reason or another (perhaps
br::'11hc of lioat ing exchange rates).
17. An outbreak of a new Mid-East war.
1,. Di-a-trous financial collapse of New York City.
19. Collapse of U.S. municipal bond market brought about for rea-
ots ter h than a New York City collapse.
A. A collapse of the Third World because of balance of payments
pr.-dlems (about 40 billion dollars of new and renewed loans were
,made to the Third World in 1975-about half private and about half
from international organizations and governments).
21. Serious communist pressures against (or takeover of) Taiwan
or Soutli Korea-or a serious slowdown in their economic growth be-
('; aMe of lack of confidence in their future (or other pressures).
2M. Major starvation in some large area (millions dying) followed
by international political disorder-or at least very strong feelings of
,guilt and a backlash against, the current system.
23. A continuation of various "food anomalies" of 1973 and 1974
(i.e. continued disappearance of Peruvian anchovies, drought in India
and Soviet Union. etc.).
24. An end to increases in industrial and agricultural productivity
in the U.S.
2.). Massive Communist pressure on Western Europe, Middle East,
or Indian Ocean.
None of these disasters predicted for 1975 and 1976 have actually
occurred. And most (perhaps all) do not seem likely to materialize in
the near future, though there are scenarios which could make some of
them quite possible.
For the sake of balance we list also 10 desirable events which did
mnt happen, but either should have happened or would have been very
helpful if they had happened:
1. Serious energy programs by the U.S. and/or International
Energy Agency.
2. Settlement, even temporarily, or one or more of the many
Middle East confrontations (but there is a precarious status quo







between Egypt and Israel and the events in LebaMnon make un-
likely a serious Arab/Israeli confrontation in thle near future).
3. Emergence of any really recognizable and generally accepted
exciting domestic or international leadership anywhere in the
West.
4. A persuasive answer to the Club of Rome or to the syndrome
it represents and exploits (but perhaps The N',':t 200 Years 4 will
do the trick!) In any case there has been both a "backing down"
and "topping out" of the "Limits to Growth" movement but it still
has a most pervasive influence on thinking and acting of the New
Class and many others.
5. A breakup of OPEC (though there has clearly been some
strain, serious market pressures, and a sobering of expectations
and rhetoric).
6. A reinvigorated EEC, NATO, or other western grouping.
7. A useful SALT II treaty.
8. Other effective moves (actual or potential) toward control of
arms, terrorism, or other excessive use of violence.
9. Adequate recovery in Japan.
10. A serious owning up to responsibilities by Mayor Be Governor Carey, the New York Times, or other relevant spokes-
men on New York City's financial problem. (But progress -oems
to be being made in reforming New York City's finances and even
more in other local governments, i.e., New York City's plight was
a good lesson.)
While their failure to happen tended to confirm a general feeling
that leadership and competence are lacking, their non-occurrence was
not disastrous.
In this atmosphere of an almost manic pessimism in many quarters,
any reasonable perspective or observation often appeared at least to
the pessimists to be either blind optimism or a feeble and ineffective
effort at traditional boosterism-i.e., an ignorant or despairing effort
to counteract the doom-and-gloom atmosphere in order to restore con-
fidence and morale because confidence and morale are (rood things in
their own right-an effort more akin to public relations and paid
propaganda than to honest objective analysis and scholarship or in-
formed judgment. Thus, many who accepted the general "limits to
growth" perspective simply could not believe that rea unable and com-
petent people could honestly disagree.
Further, this belief in the illegitimacy, immorality, and incompe-
tency of the system and the need for reform or even revolution created
a sense of ancien regime morale which legitimized and encouraged all
kinds of passive, or active obstructionism-and occasionally active
sabotage by well meaning but ideologically motivated individuals in
and out of governments. These people often regarded attempts to make
the system work better as being immoral and contemptible, and even
more so for attempts to justify the system. In many places, the atmos-
phere was more conducive to facilitate drop-outs, obstructionism, and
despair than sober, cooperative and constructive activities.
C. SOME CoMEMNxTs ow INFLATION
Let, us turn to what is likely to be the central issue both now and
for the next few years: inflation and, to some degree, a lingering stag-
4 Ibid.







flation. I do not believe that continued inflation is anywhere near
;is in.vitalble as most commentators and menibers of the financial and
planning communities seem to believe. Thus almost every long-range
planning study I have seen in the last two years that attempted to look
10 to 15 years ahead liqa assumed an almost automatic annual inflation
rate of live percent or more. They also usually assumed that con-
striu'tion costs would be rising at about twice the assumed inflation
a:te. I believe that both of these assumptions are most improbable. I
an not saving. one could not live with a five percent inflation if it
were .ttablle, if the accounting were done properly, and if all kinds of
indexed financial instruments and indexed contracts were made avail-
able: but this would be like making a double somersault in order to
stand up straight. It may be necessary (at least for a time) to have
indexed financial instruments and contracts in order to facilitate the
transition to slow or zero inflation and to provide a hedge against the
reemergence., of inflation. (Probably the strongest reason for some
additional indexation today is that it can be used to reduce the possi-
bilit N of further inflation and facilitate the suppression of the current
in flation with a relatively soft landing.)
It is very important to understand that indexing may be essential
to the operation of the economy if one cannot accurately predict the
future rate of inflation. Many economic ills which really arise from
this problem are often mistakenly blamed on other factors. For ex-
ample, assume that the law forbade the indexing of raw material
prices. If so, it would be almost impossible to close a long-range con-
tract between a producer and a buyer. The producer would have to
assume a 10 percent inflation rate and build that into the contract
price; otherwise he would feel unprotected. But the buyer would
almost certainly be unwilling to accept more than five percent, if that
much. Under these circumstances the raw material market would
collapse. Although the collapse would doubtless be ascribed to all sorts
of other things, the overriding reason would really be the outlawing
of indexing.
Similarly for long-term contracts in the labor market. If indexing
or cost of living increases were not permitted, the union would again
have to assume ten percent inflation, the employer couldn't afford
to go more than five, and one couldn't write contracts. Incredible labor
problems would result, which once again would be ascribed to multiple
causes.
Actually, wherever possible, businessmen and special interests have
"invented" indexing. One could argue that something like two-thirds
of the U.S. economy is indexed in one way or another, e.g. pension
schemes, social security, welfare, financial instruments whose interest
is tied to some prior rate, cost of living contracts, and so on. But this
hlas been done haphazardly. Further, in many areas where it has been
possible to use indexing, or wliere it has not been "invented," the
economy is often in trouble. This shows up today, most dramatically,
in the lags in housing and capital investment.
Currently mortgage rates of 8 or 9 percent are considered a very
high price indeed. But if one believes that inflation will be 5 or 6 per-
cent, one. can argue that these 8 or 9 percent mortgage rates are nomi-
nal and that the real interest rates are more like 3 to 5 percent. In this
same perspective, short-term money can now be obtained for less than





13


6 percent-a rate that is about equal to the expected inflation. So rather
than talking about a capital shortage, we should be talking about capi-
tal availability. Real interest rates are at a very low level. However,
under current tax policies and accounting principles, having such a
difference in real and nominal interest rates not only makes capital
look expensive; it subjects both borrowers and lenders to real burdens
which discourage both of them, for both economic and psychological
1rea sons.
We would argue that if there were no inflation and no expectation
of inflation, there literally would be millions of families willing to
borrow at greater than 4 percent real interest and millions of loans
available at less than 4 percent real interest; therefore, there would
be many housing starts in which the mortgage was 4 percent or so.
However, today when somebody lends at 9 percent, he not only per-
ceives himself as probably getting less than 4 percent but also of run-
ning a great risk of having his equity wiped out if the inflation in-
creases to 10 percent or so. Furthermore, he has to pay income taxes on
the full 9 percent. All this is extraordinarily discouraging to lenders.
The borrower may also perceive himself as paying 9 percent. If it is
a business proposition, he certainly has to carry the 9 percent on his
books as an expense. If he actually believes in the inflation, lihe thinks
of his property as getting more valuable by about 5 or 6 percent a year
or even more, and considers this increased equity as something to be
weighed against his payment. In effect, 5 or 6 percent of the nominal
9 percent interest represents increased equity, and therefore is really
repayment on the principal (which however is now more rapid than in-
tended). Furthermore, he is not paying any taxes on this increased
equity and can deduct the 9 percent nominal interest as a full expense.
This is a subsidy to the borrower, but it is a subsidy which rarely out-
weighs the negative aspect of, in effect, too rapid repayment on the
principle and the need to carry the 9 percent on the books as a real
expense.
This is a "mono-cause" theory on the lack of housing starts and, like
all mono-cause theories should be suspect. However, we are not saying
that there are not many other things affecting the situation. We are
saying that this is a sufficient reason for the problem and that, until
this is faced, we do not expect housing to recover anywhere near as
much as it could and should.
We also expect a slowdown, if a continuing pressure of prices is
maintained, in the recent rapid increase in housing costs. In part, this
should occur because of increasing difficulties which union labor is hav-
ing in maintaining their share of the housing market and, in part,
because there is a good chance that the growth in taxes, which is such
a large part of the cost of owning a home today, will also be slowed
down.
It should be noted that price controls are not likely to be very effec-
tive, in part because businessmen are now very conscious of the possi-
bilities of price and wage control and many of them are now opTerating
in such a way as to protect themselves from future price control. This
causes some problems which are touched upon below.
First, a serious attempt is mad-- to keep list prices high often while
giving price concessions, in either a disguised form (such as the re-
bates given by the automobile companies in 1975) or are just hidden





14


1y iii 1:ild 'lil,, i .-, p'Cial treAilenit, Special colces.ons., or other ruse.
1)E .'. vc,'., .1 Iiort pei:ods ill the la-t two years, our economy oper-
-it',l in a Tniii ,i:,r rntlivr close to that, of a Turki'sh bazaar. Purchasing
iicn s we ra 1'!i^r over t1he cinti-v, tryvinzr to f-et ti e best discounts
lt'" co'll1. .iirh'h di.O',1its did not Show lup in official prices or in price
.,. F,,.c':, m yany businesses would rather lose their share of
ue mal'e. t tL,, ,porarily t,1lin find themselve-. frozen into prices wlhiclh
Ihev coni1^- '.,r, t, even over pay temporarily because they fear that in the long rin re-
sit nct io- wi"cd by wage or salary controls could be even more dainm-
.mi9,.r by inducinir a hiirh turnover in employees and other difficulties.
Thus the mere prospect of price controls can be very damaging in
terms of currei'it operations.
Jawboning can also be counterproductive. American labor has
a,'cepted quite reasonable settlements in 1975-76. Nevertheless, if the
President asked working people to accept more than their fair share
of the sacrifices which the community must bear in order to cope with
inflation, most labor union people would be very hostile to any union
leader who publicly went along with such an appeal. Rather paradoxi-
cally, much better behavior results from depending upon the innate
common sense and feeling of responsibility of labor leaders and many
of their followers instead of publicly appealing to them for special
a-ncrifices. In this sense, jawboning can do more harm than good.
But let me return to the main point: Why I believe that inflation
can be controlled. First and foremost, I think that in many countries,
particularly the U.S., a steady inflation is very difficult to live with.
Either it will escalate and then collapse or it will be forced down to
lower levels. While most of the analysts whom I respect tend to pre-
dict the former, mny personal guess is that the latter is not unlikely to
occur. If one looks at the policies now being followed by the United
States. Japan, and West Germany, they can be more or less charac-
terized by the phrases "relatively tight money," "relatively tight fiscal
policy," "relatively hi 'h unemployment policy," and "relatively low
utilization of capacity policy." If these policies are continued over the
next 3-5 years, as is certainly currently envisioned by the current
administration in the U.S., Japan, and West Germany, then itseems to
me that. even given all the rigidities of a modern economy, these three
countries ow.irht to be able to squeeze most or all of the inflation out of
the system. It also turns out that these three countries together produce
more than half of the gross product of the market-oriented economies
of the world. In fact, together they produce about 40 percent of the
gross world product. If just these three countries succeed in controlling
theii inflation, a world environment would very probably be created
in which other countries could also control inflation. (Presumably, this
world environment would have to include some restraints-self-im-
posed or not-on the "creation of money"' by the Eurodollar banks and
other suchl organizationss)
In order to get a perspective on our current problems, it is terribly
important to understand the extent to which they are due to structural
i.;iies within the society or to broad general economic trends. I have
tried to make the point here that, in the current circumstances in
which there is, if anything an over anticipation of inflation and of







inflationary momentumn, thle "(sjiiIOt-l
inflationary momentum, the m(,st important issue is living with or sup-
pressing inflation and creating confidence that this can be doie.
Until we learn how to do this, it is not likely that there will be
very satisfactory economic performance.
When inflation is greater than anticipated, a de facto transfer of
income occurs to businessmen and to government. Under these, condi-
tions, the society can perform relatively easily, so long a- those wNi%-c.
income is being taken don't get too angry or disruptive.
In a society where inflation is being overanticipated (as is true
today), governments and business tend to lose, and the reaction when
significant inflation does occur tends to be very disruptive. Some
countries have learned to live with a continuing and erratic inflation
but not those in which most businesses keep one set of relatively open
and objective books and there is an "arms length" relationship be-
tween government and business. For more discussion of the-'. issues.
see Annex I.

D. EXPECTATIONS, MORALE, AND SELF-FULFILLING AND SELF-D .',TATIN-G
PROPHECIES
It is terribly important that confidence be restored to both consum-
ers and businessmen. A modern economy depends upon confidence to a
degree which is not adequately recognized. For example, since almost
every consumer has a closet full of clothing, he really would not have
to buy any more for a number of years if he was willing to repair old
clothes and "make do" with what he had. Similarly, the average con-
sumer does not have to buy furniture or a new house: he can repair
the old and double up. He does not have to buy a new car: he can
repair the old one. And so on down the line. All anyone really has to
buy, in the shortrun is energy, food. and some other maintenance and
operating items, upon all of which one can economize. If really
frightened, most consumers could economize to the extent of about
fifty percent of their purchases and not suffer great hardships, or even
without seriously changing their standard of living (this is shown
very dramatically in wartime when something like this often happens).
Similar remarks can be made about capital spending. When the
question of investing in new plant and equipment comes up today,
almost any corporate finance committee says something like the fol-
lowing: the future is very uncertain, the calculations are dubious
(particularly because they have to count the high nominal interest
rate as a genuine cost), and really, for the time beinz, we would be
better off to patch up existing capacity to increase its output rather
than making expensive, long term, irreversible commitments for new
plants: son whv don't we. just do that and wait a year and then recheck
the situation? This willingness and ability to defer such droisions for
a year or more can play hell with capital expansion. I would argue
that the expansion we all hope for will be seriously delayed unless
something is done wlich will help businessmen reach more favorable
and reliable calculations than can be done under current conditions.
It is clear that many people have been a little spoiled in their view
of what is normal; this in turn affects their expectations and morale.
Thus almost everyone now taker the post-World War II economic
performance for granted. Nevertheless, this performance w:- mo-t





16


extraordinary, and it clearly cannot simply continue for decade after
d,.a'de. Between 1950 and 1973 Gross World Product (GWP) in-
creased bv about a factor of 3, Gross World Product per Capita
(GWP/C) by a factor of about 2, and world population by a factor
of about 1.5. During this period many economists believed that they
1had learned how to operate a rapidly growing, dynamically changing
economy in such a way as to avoid even moderate recessions. Although
VO. at Hudson regard this possibility as illusory, we also think that
rleces('sions can be limited to moderate proportions, perhaps less than
the recent one. which itself was not extraordinarily severe. I am dis-
mayed by the frequent remark that the recent recession is the worst
since the Great Depression. That is a little bit like describing a rela-
tively mild tremor in San Francisco as the worst since the Great Fire
of 1906: technically accurate though it is, the comparison gives rise
to some extremely unreasonable images and expectations.
In my opinion, almost any serious U.S. recession in the first hun-
dred and fifty years of our national existence caused greater trauma
and proportionately greater suffering than the recent one. However, I
:\}]o doubt the inevitability of the sort of recessions which occurred
regularly before World War II, with all the accompanying human
tragedy and other costs. At the same time. it is very important that
tlere be both perceived and real "downside risks" in the system.
Furthermore, occasional actual recessions, painful and costly as they
may be, do perform important social and economic functions: first,
to "teach lessons" on prudence and sound management; second, to
facilitate the sneezing and elimination of marginal activities: third,
to allow for adjustments in lagging sectors, a slowing down of exces-
sive growth sectors. and liquidation oQf excessive inventory; fourth, to
put pressures on increased costs, waste, and inflationary trends; and
fifthli. to provide a kind of pause and motivation for other necessary
adiiisttments.
Both the knowledge of "downside risks" and the experience of
actual reers.ions create forces and environments that facilitate the
normal operation of tlhe system, promote adjustments to changed con-
ditions, nand provide some useful breathing space and opportunities.
Furthermore, recessions, particularly mild ones, are a lot less painful
under modern conditions than they used to 1)e, and thus should not. raise
the ,qrne mor.l] and political issues that the old style did. Unfortu-
nately, many in our current generation of political leaders and lead-
ing ecronomists do not see this. They have been so traumatized and
sensltized by the great depression that, they are almost immune to cur-
rent dnt, and observation. Nevertheless, a well managed dynamic econ-
omy is likely to have mild and relatively frequent recessions as a mat-
ter of course-nnd the fact that various groups lose out in such a reces-
sion should not be thonffht of as a disastrous trend but, for most of
them, as a temporary, if painful, phenomenon that will be more than
wiped out by the basic steady progress.
A useful analoyv can be made with conditions in a seismic area. Rela-
tively frequent b)it moderate earthquakes tend to relieve geologic
prs.i rs and strains. greatly decreasing the likelihood of a really big
ePrthqfiiake. Furthermore, people in such an area are often reminded of







the problem and thereby encouraged to build better, move elsewhere,
or otherwise adjust to the possibility of an earthquake. If the earth-
quakes are sufficiently frequent and not overly intense, then structures
which have been deteriorating or are badly maintain ned are, much more
likely to suffer partial damage than be completely demolished. Such
partial damage, painful as it is, is not as painful as total destruction,
nor is it usually permanent or even unflexible. Indeed, after even a mild
earthquake, many shortcomings become glaringly apparent and there-
fore are more likely to be fixed or modified. If, however mod-
erate earthquakes do not occur relatively often, then the earth-
quake when it finally comes, tends to relieve all the stresses that have
built up over a long period and be very destructive indeed, especially
since neither structures nor people will be well prepared to endure
even small shocks. Any attempt to operate the U.S. economy without
even moderate occasional downs, as well as ups, is likely to face
similar problems. Every year cannot be a "vintage year"; real econ-
omies and societies do not move smoothly from peak to peak without
interruption.
It is also worth stressing again that the 5 percent annual average
growth in gross world product that characterized the 1950-1973 period
was indeed extraordinary. There can be little doubt that growth will
be at a much lower pace in the long-range future; however, I would
speculate that the decade from 1975 through 1985 will quite probably
experience an even more rapid growth rate, say 6 percent or so, in
gross world product. (This last point is slightly misleading since
part of this high growth 'rate represents a. return to use of capacity
and labor that had been idled by the recession, i.e., it is a catchup
phenomenon. But most of it is caused by the likely rapid growth of
what we later call Middle Income Countries and the growth that their
growth stimulates.)
My basic reason for doubting that 5 percent annual growth in GWP
can continue for any very lengthy period emerges from Hudson's
studies of various countervailing social and cultural forces (discussed
below). Another very good reason is that the resulting numbers stag-
ger the imagination. Five percent annual growth means a doubling
every 14 years; a factor of almost 12 in 50 years; a factor of 130 in a
century; a factor of 17,000 in 200 years. Need more be said? There
must be very few people indeed who, even without further thought and
study, would not reject the idea that 200 years from now the Gross
World Product will be some 15-20,000 times larger than today, i.e.,
about $10 quadrillion in terms of 4975 dollars.
E. A REALISTIC IMAGE OF THE CURRENT WORLD-W'IDE SITUATION AND
FUTURE TRENDS
Two hundred years ago, almost everywhere human beings were coim-
paratively few, poor, and at the mercy of the forces of nature; two
centuries hence, barring some combination of very bad luck and/or
very bad management, they should almost everywhere be numerous,
rich, and in control of the forces of nature. This scenario is summar-
ized in chart 1 which follows:












'fhle Great T'-a"sitiofl


T.7SU Ilillinn PCn|'le
-4S00 Billper n (pita
-'-s00 rcr r'Jpita


4 Billion I'cele
S6 Trillion CMW
SISin per Capitai


' .n 'I l i Ii Ilt j
* I *.'iI.KH )fr1 C(Huut;t


l'hi 1775 All societies are pre-*ii!Iustriai', -borxe lltiio (ratio of riklh's.
THE GAP OPENS 10.to poorest In'.) .l it I to 1
(100 YEARS) 1775-I375 1)00 Ycirs for initial ilist rial iVt ion ulf '.."'h Wrestrnt lir,'li.
Jap.n and North ..r"rric nclin-ic Ratio gocs to 20 to I


TilE CAP IN
OPERATION
(150 YEARS)


1875-1950 EJmrgence of mass ccrnspticn societies in !arC;,I, *Ip.in aind
worth ~.crica and start 1950-1990 Friur decades of rapid worldwide, economic :nd ,-,.I.I 1.v1 iou &',.lh:
initial emergence of saper-i ndst rial ccoltwvis, lc.-hKlr..i:zc.i l
crises, and rany historic tiansiti*n,F e.g., inflection pr- i t -
in world population. and perhaps gross product cu-Yves .(akio first
steps into Space)
19 -.'' 232S l:'-.'rt.c-re of pof t in'u'ist ri.ul e< ,,,i w i'" in m^':st I4f.sk-.ii :i'.l *Iri*
NeO-Sinic [cul urcs* -- i it >:. *;ilso i U. .,. lK. I ull d'vlI ."v.i(
of super-industrial cultlures* ;ind s I first signs of a worldwide maturing econemi'. II first serious MvVCS
to colonize space), Income R.-toin of ZO0 to 1


THE GAP CLOSES
(150 YEARS?)


2025-2175 Worldwide slowinpg dcnn in ixetilation n1M econ-ic i.rri,,li i".ic.,
(not only in percent bIut also in ahsolute i.adirsl. Ass i result
it takes almost 15 .c.'ir- for (r-c.rcnc of pust-iilustriIl leon-
mites almost c',i.r-.-.imerr. "cul ',', also tl,' esti l i.lr'cut f all
independent solar ystcm Siety.) Income Rutin;O (MI eartlhl "0
to I or less--mt.il ';'* ri hi h: l<:v -
Pui>< 2175 Post-inlustrial Society sta liei cs, ossifies, or Ate inmoxt t.%'\l"n-
mcnt in mankind r-cr-,r',.


We list inu ih lctit'euu v bIW ) i, in? i tnlt ioip culli. .mil ;.ulivt' ;:k; liii I ';:
Eoe m)0y: ce npiuJc mid tti l l,1l i 1.;1 liil Z
Institutions: las and ori-;'iizations
Culture:* style, values, nt ional charaictcr dnd at i titI--
.'cict,. the wlhlc
.uper-Ilndustrial Iconomv refers to large si-c --nl c.alle f rnd lkni nietll'ri : a 1 l*ti
-,cr t.ancc of its ir -i .ct oi t he exten i. ci)l ;r p; v s '. .il tu ii,'n cil.
Post- Industrial Iconryv refers to .a f vturc Wvci ;AffCm'i1 '>' N | it'll ,i, ;t tA:, iii,'ii-
trial an materials ne-d; with > n .nll I-|I'r-..nI u it:% :,1rk -,i 1n n 1,, iif ..i < .irl
Prcstu.ably first Hie economy crerj;es, then tlx i ilTiiutl-i ., ti.e ;aII I i (IMI tl.u
finally one has a hanroinios society.
Japan, Fingaporc, and I l,.:n l',,nii; e' ::, I.i,. i., :m;i' 'ull ki,'i..
CHART 1

I do not argue that this scenario is inevitable, but only that it is
likely and plausible, given the data and trends which are known
today. We have already mentioned that this flies in the face of much
currently fashionable conventional wisdom, especially the view that
even a brief continuation of recent trends of population growth and
resource consumption, would lead inexorably to the collapse of modern
civilization.
On(. key to this model of past and future history is that o.f a "Great
Transition," expressed min the S-shaped (or logistical) curve depicted
on the chart. After having been almost dormant for many millennia,
growth rates for world population and gross world product began to


AN O P "I\ I lC. & I'l:,1' ""'VUS 0 17!1 \ 11 !!1 (:l'" "' Ai 1 IL*1I'* i- l Ir| !I *.
1 '), '*IIL PAl~I. V I' .\I"T. & I 1-1!, iI

In fix.,' I '1; r ',*" ,
L .0' 1l'.r,'- .1 : '. 1 I I






19

accelerate appreciably in the 18th century, and recently attained a
pace which, if continued for a century or so, might indeed lead to over-
wlielming problems. I believe that both rates have peaked (or soon
will) and we will now see. a gradual levclinig-off process, which will
eventually stabilize at very high levels in the late 21st century. In
my view, this slowing down will occur as the social consequence of
free choices brought about by urbanization, changing priorities and
values, and the proliferation of better standards of health, safety,
literacy, affluence, and similar factors throughout the world. In brief,
under current or similar conditions, as the average person becomes
better off, he tends first to show less interest in having a large family
and eventually in acquiring more material goods or income over hIis
lifetime than his parents. (He may still be in the business of acquiring
more material goods during his lifetime much as his father did.)
I do not, of course, suggest that progress will be smooth or auto-
matic. On the contrary, mankind will certainly be plagued by many
age-old problems for a long time to come, and will encounter many
new ones along the way, some of which are unforeseeable today.
It should be emphasized once again that we also expect that under
current trends growth in both the population and the economy will
very likely flatten out at some point in the early twenty-first century
for the United States, and perhaps a century or so later in those parts
of the world which are just beginning their higfh growth rates. If we
look at the four billion people in the world today, we note that they
can be grouped into seven categories as shown in chart 2 below. About
30 percent of fhese people are poor by current and historic standards,
but 70 percent are rich by historic standards. Of these 70 percent, 26
percent are rich by current standards, leaving 4-1 percent we could
classify as neither affluent nor poor, i.e., middle income.

THERE WERE 4 BILLION PEOPLE IN 1975
DISTRIBUTED AS FOLLO,,WS*"

-DESPKRATELY POO`. ( 2V
POOJ0i f1165 OR 30R:) --
C-- OPING POOR. f(95.. 5l',^

--- .CO ',",Uc N1 ST AS IV. :('. 2I 5 : 0)
H 'I D D L E r
I NCOt ME (1775 OR '') 'TP.ANSriONA. (5OG, &500)

,-OSTLY p VEL[.r.. (35,, 5 s3 )

-CCI~~rST EtL L (3?5. c30c).
AFFLUE U (1060 OP. 2R 16 .
CAPITALI 1ST
(INCLUDES GIL -RICH4)


THE TV'O NUMBERS IN PARENTHESIS ARE o-LLIONS OF PEOPLE IN
THAT CATEGORY ANiD EITHER OF WORLD POPULATION -R ESTIMATE DriOS5
PRODUCT PER CAPITAL (1I 1q7q DOLLARS).


CHART 2





20


Tf one wanted to know why the 30 percent are still poor, it is because
they ha:ve(n't become rich. This is not a frivolous remark. Economic
growth. even in relatively homogenous countries, has often been un-
even. hlence even more so around the world. Those we classify as poor
today : are actually not very poor by traditional standards in which
anvthi !.r in the ranIre $,10 0-$3(00 per capita was considered more or
less norm iial, i.e.. about, thlree-quarters of the poor are in this range
w ich would be considered "normal" by traditional measurements or
lby traditional judgments.
We al.o biMlieve that. under current circumstances, the income gap is
the nimot constructive force ever devised for 1) creating a middle in-
colle, gror,1up and 2) for moving them soon into a category of being rich.
Further, after this middle income group has become rich, we believe
mo-t of tlie poor will also move quite rapidly to becoming rich. Indeed,
with proper malnagelnent, this movement might start among many of
then in the imm(lediate future.
One of the main reasons for wanting growth to continue is to main-
tain or even increase the gap, in order to maintain or increase the
growth rate of the middle income and the poor. It should not be one of
the primary objects of public policy to decrease the income gap but
rather to make everybody rich, to make sure that within the next fiftv
years almost everybody has attained a level of over $500 per capital
(in 1975 dollars). Actually with good luck and reasonable manage-
ment we might even reach $1.000 per capital. There would still be a
hard core poor group but this is inevitable. The point is that the hard
core poor can probably easily be reduced to 5 to 10 percent of the
world's population in fifty years, rather than the current 30 percent
(and of course, we are leaving out here the many poor people who live
in countries which we have labeled middle income and rich-but the
lot of these can also be greatly improved with more growth). Absolute
poverty is a much more disgraceful and deplorablesituation than rela-
tive poverty. Reducing it therefore deserves the highest priority. And
one of our most important objections to the no-growth society, is that
it makes this reduction quite difficult.
Probably the most important comment one can make about the no-
growth society is that by definition it is a fixed pie society. If there is
a fixed population and a fixed gross national product, then when
somebody goes up, somebody else has to go down; if somebody con-
sumes more, somebody else has to consume less. This is almost certain
to mean that it is not only stagnant in overall growth, but probably
relatively stagnant in terms of the mobility of its members. To the
extent that people do go up and down in such a society, they probably
do so as a result of individual efforts rather than as a class, because
any class movements would bring about extraordinary social conflicts.
Furthermore, people who find themselves at the bottom of society will
run into enormous difficulties if they want to improve themselves rela-
tive to their own past and current status. People at the very bottom
end to be the least mobile part of our society; they tend to rise more as a
result of trickle down from an increased pie than through their own
unaided efforts. Once these people acquire skills, get started on their
way, and become oriented toward work, advancement, and achieve-
ment, they can climb upward, but this is much more easily done in an
expanding economy than in a stagnant one. A society which is stag-





21


nant at a very high level of consumption would be much more accept-
able in terms of modern concepts of fairness than a society which is
stagnant at a: low level and in which people at the bottom really have
serious problems in just getting along.
While we will not discuss it further here, I would like to assert
that the problem of relative poverty-of inequality of income between
nations that is so often addressed-is really more a problem of the
"guilty" rich than of the poor. I do not believe that there are many
businessmen, and even fewer peasants or workers, in Latin America,
Africa, or Asia who would be willing to give up even a fraction of a
percent increase of income and wealth in order to narrow the gap
between the rich and the poor. This remark is not true of many of
the governmental and intellectual leaders and even of some business-
men, but apparently it is true of an overwhelming majority of work-
ers, peasants and, to almost the same extent, of businessmen. Let us,
therefore, make our highest priority goal the ending of absolute
poverty and not the ending of relative poverty. This might well be
secondary and therefore a much lower priority goal. But it should
probably never become a primary goal.
F. BUT WHY SHOULD TIHE GROWTH- RATE CONTINUE DURING THE
1976-86 PERIOD AND THEN SLOW DOWN So SOON?
The world growth situation is analogous to that of an adolescent
boy. If one naively extrapolated (i.e., assumed a fixed exponential
growth rate) the current growth rate of a 13 vy(,- r old boy to the age of
25, he will turn out to be very big indeed. Some well-intentioned indi-
viduals might therefore argue, "Let's stop him by starving him as
close to death as is feasible. This will be terribly uncomfortable, and
perhaps dangerous, but the alternative is worse." But the fact is that
his minimal nutritional needs are really quite high, and natural
processes will slow down his growth. Perhaps the worst thing his
self-appointed--or real-guardian can do at this point, is to persuade
or force him to stop-or even slow down-his growth by putting him
on an unnatural and harsh diet. He needs every bit of protein he
can get. If one wanted to make him into a small man, it was really
necessary to start with his heredity or his diet in early infancy and
childhood. Thirteen is just the wrong time to do it-and it is also
unnecessary. Furthermore, the child probably would like to be a rela-
tively big man-and who can say he is wrong in holding these values
(or the other set if he happens to hold them) ?
What we are suggesting here is that the forces making for growth
are at the moment so strong and have such great intrinsic momentum
that despite all the roadblocks thrown in their way in the last decade
or so, they are almost certainly going to triumph in the short run.
We would argue that this is shown in p, rt by the fact that both Presi-
dential candidates represent part of what we call the counterrefor-
mation, a movement towards square values and away from the new
values associated with the last decade.
My belief that the long-term rnt.e of economic growth will drop off
in the United States and worldwide is not baNsed on fears of pollution
or lack of energy or other resources. Under some circiinstances these
factors iiii,,ht eventually cause a slowdown, but it now seems much





22

more likely that long before these physical constraints set serious limits
on either population or economic growth, social and cultural factors
will intervene. The physical factors are almost irrelevant; though they
could become critical at some point, the system simply does not seem
likely to get very close to that point in any scenario tat is plausible
today.5 On the other hand, the cultural and social factors are, on the
whole, more or less "natural" and probably inevitable. As a policy mat-
ter it can be asserted that most of them should be discouraged rather
than encouraged in order to defer the timing and rate of turndown
of the growth rate, but even this is arguable. In any case it is much
easier overall and less traumatic to many groups to have this slow
down deferred.
Perhaps the most important and basic of these social and cultural
factors making for a slow down in economic growth is simply satia-
tion-or at least a satisfaction of the most urgent needs and a corre-
sponding change m priorities rather than a change in values, though
this last is important too. These changing priorities are reflected in the
size and composition of government budgets. Several recent studies
point to the conclusion that the larger the public sector of an economy,
the slower its real growth. The following chart 3 supports this view.

The larger the public sector of an economy, the slower its real growth
,* -- n-- 1972 public saector-
10lthough this finin is obiul con annual o[h in tersII r ofih



71
10 L B
*. 1 "... ** 4'' *' *' *"


Av 4%

"Puylilc '.iwda Q eitClud~q transfet paymeii. ts. as a pecetcn of ivswb le incotB W

CHART 3
Although this finding is obviously controversial both in terms of the
observed correlation and in terms of what is case and what is effect,
I am strongly inclined to think that the correlation exists and that it
is enhanced by some seemingly obvious cause-effect relations.
As mentioned above, chances in values and attitudes are important,
whether or not they are rejected in governmental budgets. People
raised in a permissive, upper-middle-class suburban type of environ-
ment or shnilar environments have, on the one hand, been the recipient
of ample benefits and, on the other, are simply no longer excited by
economic growth and the opportunities it makes available. These
people have not only always lived with the benefits of growth, they
tend to take them more or less for granted and not see why other peo-
ple, so desperately desire them. In particular, they have a tendency to
strike many balances on the pluses and minuses of our society in a pe-:
cL1liar way. Very conscious of the costs of economic growth, they often
See The Next 200 Years, Chapters II-VI for discussion.





23


ascribe all the evils and negative aspects of society to this one factor.
As a result, the economic system is blamed for all the bad things it
does do and for many it does not do, but gets little or no credit for the
good it has already achieved and the bad it has prevented or alleviated
(especially since this last is neither present nor visible). Naturally,
this creates a very negative attitude among groups which think this
way.
In addition, as people get richer, they naturally want to live better
and more safely, which means that they will accept less environmental
and ecological damage, less hassle, less bother, and less risk, while
demanding more comfort and more leisure. In particular, thirteen
trends or new emphases can be identified which seem particularly
likely to play an increasing role in U.S. values, priorities, and atti-
tudes, eventually (and perhaps prematurely) causing economic
growth to slow:
1. Risk aversion.
2. Localism.
3. Comfort, safety, leisure and health.
4. Protection of environment and ecology.
5. Loss of nerve, will, optimism, confidence, and morale.
6. Public welfare and social justice (including equality of
result).
7. Happiness and hedonism.
8. General anti-technology, anti-economic development, anti-
middle class attitudes (e.g., "small is better" and "limits-to-
growth" movements).
9. Many modern family values.
10. General de-emphasis of (or even hostility to) the thirteen
traditional levers.
11. Increasing social control and "overall planning" of the
economy of the "wrong kind."
12. Adversary regulatory attitudes.
13. Inner space omphaloskepsiss) and/or concern with self
generally-also a turning to nonmaterial or even mystical
and transcendental values.
A number of these "new" emphases and trends in the U.S. are not
clearly new (hence we put the word in quotes), but now have a more
intense and more pervasive effect, both in their own right and in com-
petition with other values, attitudes, and goals. On the whole, these
new emphases and trends are going to slow down economic growth and
probably eventually cause it to be very low indeed or even become
negative. It is, of course, impossible to estimate quantitatively the rate
at which these trends will increase, and even more impossible to esti-
mate the rate at which they will slow down economic growth, but we
believe, quite strongly, that both these effects will occur and have some
more or less intuitive judgments on the quantitative rates.
However, we also argue that, in many cases, a very extreme
version of these emphases and trends has at least temporarily peaked
during the last decade, and that a backlash or corrective phenomena
will occur in the next decade, making them, for a while, less important
than they have been in recent past. We expect this not only because
of these countervailling forces and corrections, but also because society
will deal with measures to advance these values and with clashes with





24


,)ther vNalies more efficiently and smoothly and will therefore be able
to live with them iore satisfactorily, i.e., with less damage to other
elements and trends. But we still believe that these forces will be more
or loss overwhelming in the long run (post-1986 period). We would
;i1>o arixe that in some sense, nothing would be wrong with this out-
co.me (even if some would find nothing particularly right with it
either).
It Should be clear that some of tliese trends arise as a direct attempt
to ada)t to existing problems which have simply become more severe.
Our whole concept of the superindustrial society emphasizes this point.
However on the whole we do not worry more about the protection of
environment and ecology because of the growing scale and destructive-
ness of the superindustrial society (though that is happening), but
rather because standards are increasing rapidly. What was formerly
acceptable, no longer is. It is this increase in standards, rather than an
increase of stress, that raises the main issue and greatest costs.
Theio list is ordered roughly in terms of our judgment as to their cur-
rent importance in slowing down economic growth during the decade
to come. But we would argue that in the long run items 6 through 10
will probably be more important than 1 through 5. While the last three
arc potentially very important, they will probably be kept under rea-
sonable control. Though No. 12 has been quite important in the last
five years, we Fimply don't expect these adversary attitudes to continue.
Although Annex 2 discusses these emphases in detail, perhaps a few
comments might be useful here.
Prisk version mens an attempt to reduce the risk associated with
innovations and operations or to compensate people fully who have suf-
fered dainaYe. If this occurs, the associated economic costs can become
unreaz-onably large. Furthermore, the desire to avoid errors of commis-
sion can become so great that errors of omission (i.e., errors caused by
not doing things) become very costly.
Localism simply implies that conflicts very often arise between the
national or regional good and the interests of a local area. Such con-
flict should sometimes be resolved in favor of the former, sometimes
in favor of the latter. For a number of reasons, we expect local inter-
ests to become increasingly effective at the expense of the regional or
national good. As this trend gets stronger, economic losses will grow.
For example, there are no deep ports on the East coast of tlhe United
States, and no refineries have been built there for more than a decade.
Although the region badly needs both, local opposition has blocked
them. We need not explain why Nos. 3-6 can result in increasing eco-
nomic inefficiency.
Rather surprisingly, many people don't realize that No. 7 can also
conflict with economic growth, particularly if tlhe concept is "happi-
ness and hedonism" in the short run. The potential effects of No. 9
(many modern family values) are reasonably obvious; if these values
got out of control, they could presumably stop economic growth, all by
themselves-as they have in many preindustrial societies. Point No. 10
suggests that the traditional American national character, particularly
in the form it took in the middle class, was extraordinarily favorable
to economic growth (as is now true in many East Asian countries);
that any great change in these traditional values can easily weaken a
major source of economic growth.





25


The main point about social control and overall planiiing of the
economy is that market forces are likely to be weakened while opl)or-
tunities to gain control are increased for people whlo, for one r.:ji son or
another, are either adverse to, or do not care much about, economnie
growth-or who just don't know wliat they are doing. Furthernilore he
term "planning" today is to some degreee, a code word for a certain
kind of planning and outlook which coul(1 easily be (destructive to
economic growth and technological advancement. Indeed more and
often better planning, usually takes place in so-called unplanned sys-
tems which depend on market forces and decentralized decision akinuig
than in these relatively naive, and unsophisticated attempts to apply
complex mathematical models or preci.-e optimization procedures to
the overall economy.
Not only are most of the above emphases and trends going to be
major reasons tending to cause a future slowdown in economic growth
(in addition to a basic lack of motivation and need), but it would not
be surprising if they did not, at least among some groups (i.e., the
New Class) become overriding goals (much as the goal of economic
growth has been in the recent past). Eventually we expect that the
new values, attitudes, and goals will become quite widespread-even
if modified-and largely replace the goal of economic growth. We
expect this process to be largely suppressed and then re-emerge dur-
ing the next decade, and to have gone quite far by the year 2000.
Certain unfavorable demographic changes and other factors should
also help cause a relatively rapid slowing down in economic growth
by the end of the century to perhaps half the rate expected in the
next decade.
All of this, to repeat, is more or lezs normal and to be expected.
Nevertheless, very good arguments can be made at this time for slow-
ing down the rate at which the slowdown occurs, and for moderating
the excesses of the "safety fascists" and "eco-nuts" (to use two unfair,
but increasingly common, expletives). We are not so rich or wi-e that
we can afford to look only at the impact of these trends on growth.
We should look also at their general economic impact, and examine
and judge how they narrow and curb freedom of choice, inventiveness,
creativity, and flexibility for both the individual and for various
public and private institutions. Indeed, it would be almost disastrous
from many perspectives-material, economic, political, moral, and
ethical-to attempt too rapid a slowdown in the rate of growth be-
cause of an excessive emphasis on risk aversion, localism, increased
safety, health, comfort, environment, and so on-desirable as thee
may be. This is particularly true if this "excessive emphasis" is mani-
fested mainly by a relatively small, articulate, active, and influential
minority-e.g. the "New Class". Furthermore, to a very large degree,
hasty and badly thought out programs and policies pursuing these
new goals have backfired, even in the short-run and even when
measured by the criteria of those pursuing them. Good examples of
this are provided by the decision to regulate gas prices, many aspects
of the Nixon price and wage controls, many EPA programs, and -o
on-see Annex 2 for more discussion of this point.
In fact it is very easy to have' excessive emphasis on these new
trends and such an emphasis if continued is almost certain to have


78-734-76t--3






26


disastrous effects by almost all criteria, even if it proves successful,
as measured by some criteria, in the short run.
Much concern is of course expressed that the population explosion
will overwhelm the system. In my view, however, the system is more
likely to be characterized, as suggested earlier, by a "gross world
product explosion" than by a population explosion. Furthermore, I
expect this "gross world product explosion" to be one of the major
factors. if not the major factor, in helping resolve the population
explosion more or less satisfactorily. Othlier factors tending in this
direction include changing values, distribution of birth control in-
formation and techniques, urbanization, declining need for child to
provide economic and social security (and the decreasing effectiveness
of children in doing this), declining economic value of children in
contributing to family income and welfare or in providing discretion-
ary income, and other changing priorities. This has occurred in part
because of the greater cost, of children, combined with their declining
value (to put it in blunt terms, children have changed from being
"producers" to being "consumers"). It should be noted that economic
growth acts largely to limit population because it furthers almost all
of the above tendencies.
ANNEX 1
THE CURRENT INFLATION IN PERSPECTIVE
Why Stagflation
Table 1 lists the factors which we feel have been important in causing the
rec-ent stagflation. It serves to show that the stagflation was a highly complex
phenomenon, but not complex enough to be beyond comprehension. Any objec-
tive economist who studied the various relevant policies of the late '60s and
early '70s and who had some reasonable sense of cause and effect might have
been able to predict the stagflation. In fact Peter Drucker (in earlier works)
and Milton Friedman (at the time) seem to have done so (and to a lesser
extent Hudson in its January 1974 report to the Corporate Environment Pro-
gram; and to an even lesser extent Galbiraith in his concern for managed mar-
kets and union-distorted wages). Many, of course, (in the early '70s) predicted
inflation and many predicted collapse, but few seem to have expected the two to-
gether-though it now seems obvious.
Another important reason for presenting this rather lengthy and complex
list is to emphasize that the causes were multiple and interacted in a mutually-
reinfircing manner. The result was an almost worldwide wave of two digit
inflation. It is equally important to notice that as one or more of these causes
vanish, is corrected or absorbed, very likely the force behind the continuing
inflation decreases, perhaps more than one would have thought, since these "old"
frres. reinforced each other. In particular we would argue that the reader who
studies the causes carefully will note that very few of them are likely to remain
or recur in the next five years or so, assuming of course that at least the U.S.
and the Japanese retain their current policies. However similar events and
attitudes could recur in the longer run future when the lessonsn" learned and
poli(is adopted biecavne of the current recession have eroded. And, of course,
currc-nt (self-fulfilling) momentum and expectations of inflation continue.
TABLE 1.-More or less accidental factors contributing to current stagflation
1. Excess erpation of money and bad management of subsequent inflation:
A. U.S. financial policies from 1969 to 1973 which increased U.S. dollar
slplr)i)ly directly and also sent an unwanted $60 billion overseas (with
corresponding increases in world liquidity).
B. Growth of an uncontrolled Euro-dollar market.
C. "Dumping" of U.S. dollars in 1972 and 1973 by the Japanese.
D. "Runaway" speculation and speculative practices by many banks and
businesses.









E. Decline of real working capital available to non-financial firms in U.S.
an U.K. because of taxation and dividends paid out of illusory inven-
tory profits and understated depreciation allowances.
F. Fixed exchange rates acted as an engine of money creation.
2. Pressure on capacity and resources:
A. Rate of growlih in gross world product from mid/late 1972 to mid/late
1973 about 40 percent above normal (almost all countries in phase
with each other).
B. But increasing difficulties of investment in and other (,xlpjansion of
capacity-particularly of raw materials.
1. Many aspects of the environmental movement.
2. Such irrational policies as U.S. keeping the price of natural gas
very low.
3. Special issues of Alaska and Alaska pipeline and the North
Slope.
4. "Limits to Growth" propaganda cau11ed worldwide lack of romnfi-
dence and strengthened "localism" and other opposition to
growth.
5. Other sources of hostility to growth-particularly amoni; ut)per
middle class elites and intellectuals in Japan and the Atlantic
Protestant culture.
6. Surge of nationalism with regard to raw materials in Canada,
Australia, and Third World.
3. Various pressures on food prices in 1973 including:
A. A withdrawal in 1972 by United States, Canada, and Aus.tr:lia of mu-ch
land from food production in order to keep prices from dropping.
B. Bad weather in a number of places.
C. A temporary decline in the anchovy fishing of Peru.
D. A general shift to meat and a willingness by the Soviet Union to buy
foreign grain to protect the Soviet version of this shift.
E. An inadequate expansion of fertilizer industry due to over exp;aZion in
mid/late sixties.
F. A decision by the Indian Government in 1969 to shift empia.-i from
food production to industrialization.
0. Relative short-term inelasticity of both supply and demIi:.nd of food.
4. The energy crisis (which contained a number of accidental elements) and the
relative (only food and energy have these characLeristics) short-term in-
elasticity of both supply and (demnland of energy.6
5. Other contributions came from:
A. A general and almost congenital fear of depression, willingness to ac-
cept almost any anti-depression policies. A general and increasing
distrust in fiat currencies, a g-eneral acceptance and ainfliciprftion of
inflation, and almost no fear of a "downside" risk in investment and
even speculation.
B. In the United States a combination of the Vietnamese war with .re:it
pressure to expand welfare and city prograijs--also the decade of
social malaise aInd edn::ated im opa(.i ty.
D. The.existence of extremely we:iL- governments almost everywhlere.
E. A number of bad governmental decisions and unfortuimiate events.

Four Uscful Points
Next, let us make four umeful points even if only in Fa-sing. First, the infla-
tion had been very sulbstanti'l even before the ris-,. in oil price.., in late 1973 and
early 1974. Table 2 shows that from 1950 to 1970 the currencies of OECDI coun-
tries lost at least 40 percent of their value; in many countries tle I,-s was o1imnst
100 l)ercent. Thus very big losses oe.-urrd even \\lien the anmni:l inflation rate
was relatively low (but almost continuous over the 20-yt,:i r periodd. Nevorhtie'-l.
and this is my second point, inflation is not a normal condition. No long-term
inflationary trend exists for Eir'ope and North Aiieri..'. despite the ctr.i et
widespread belief that such a trend is a normal l:i rt of the system. Such a trend
is apparent only since World War II. Actually there have only 1.si1 two amiajr
long-term inflations in Western cullii',e in the 1,1i 5.9') year'. The firyt urr ,
in sixteenth century, when Sp.lsh go(,ld7-drove up prices more or less per:wa-

6 Tlis is in part because of the ability anI williii,_,1u:s of public and private sources
to finance the third world aind the welfare state Zciirally. As a result even the relatively
poor can maintain most of their consumptions.







28


]I.ently ; the seeon(ld tok placi1 after World War II. When people remark that the
U.S. has Iha, an inflation since 1895. they are making an extrapolation (the dotted
line ii, i lie right in Figure 1) which ignores the drop in prices which occurred
after World War I.
TABLE 2.-CHANGE IN THE VALUE OF MONEY 1960-70

1970 value of
money as of Annual rate of
Country 1950 value depieciation

Switzerlan J....................................-.................. ... 62 2.3
West Ge'mny.................... ..-. ......--- --- ...--- ....---.- .. 61 2.4
United States------........-----------------.--------------......----------------------.. 60 2. b
Australia -....------------------------- --... .. 56 2.9
Italy............... ........-- ....-....- ....-- ..---.. 51 3.3
Swveden........-............-.................. ...................... 48 3.6
United Kingdom...... ........-----------..-...--..-...-........ 48 3.6
Japan.......--------------------............. 44 4.0
Mexico .............................. .--------------------.-.. 42 4.2
Fiance- ..--.--------------------------------------------. 41 4.4
Inoia.....------------------------....---------.-.-.-.......... 40 4.5
Israel......-.-..---------.. ----------------------------------- -39 5.1
Spain_ ......------------------- 35 5.1
Yugoslavia .........------.------------------------------... 20 7.7
Vietnam..------ -.. .......--.--- ---- ..---.---.. .------------......... 14 9.4
Chile -----------------........--.....--..-...-..... 7 12.5
Brazil -------......-- -----.-----------.---------------... 5 14.0


WHOLESALE PRI CE L VE L IN- Il'E UNITE[) IA-U



9 220 7

100

.,, ,

o-- 'O -- > ^,/ *



LLLI


I.-
0* I I .

1.50 1800 0l50 1900 111 I'; -)

FIGURUP.E 1

Since World War II (as a result of the Great Depression and the resulting
iltellct.tual, 1iilitical, and pisycliologieal context), tlie syt4iemj (.intaiins s)o i1ny
anut i-deflationary saftguards that, on the one lur,, it ea mnie alni .st inca)alile
,if excr'ting alm-ost any effective 'pressure against prices. -n1l on the other hand,
Ilie price anid vwaie stru.tture became so rigid tli;it influtiin (cmild not in fact
blie effectively countered (without either first going into a catastrophic d(efla-
ti,,mnary -fiage or by having continues ])ressumre ovPr som. years). To((lay it seem,
lilkily tilat Hlie world miglit stay on a permanently higlier price level but will not
II.r-.fssnrily le permanently subject to conti nu'us iifla;tion (i.e. move onto ian
even Ililier pi ice level). Indeed I have already asserted my belief that current
.S..-.JTiianpep-West iGerm;in policies. if continued for the next five years or so
(a l ,li.y ,f relatively tight money, relatively tighlit credit, relatively high unused
li,;Lit (':i ldoyment ), should result in crintrlling inflation in these two countries. Further-
mire. I believe there is a goo(l likelihood that the Policies will be continued.
Therefore, I do not share the view that the next decade or so is going to be







29


-ha racterized by steady 5 to 6 percent inflation. In fact, I would argZilo that
in a country like the United States. such inflation would result in a htsically
unstable situation, easily (,s.illating and then restingg a fiunilc'iil collapsI,
\ ithl subsequent deflation. Therefore, I would find a continuous 5 to 6 percent
inflation over the next decade or so most improbable, even though almniost every
study, governmental or j'riv:ite, I have seen in the 1at two yi.'rs wlich tries
to predict the price level over the next d(.-:ide makes suh an assi umIption.
The third point is that the recent "runaway" inflation wA:s well under way
before the oil crisis. Thus, not only did the oil shock have very little to do
with starting this inflation. I think that its continuing inflation; ry inp:;(ft hias
been much exaggerated. This misIapprehension results, to some extent, from an
accident of the U.S. price index. It counts oil as a raw product, as part of inter-
l.diate products such as petrochemicals, and as part of the end products.
This oil is counted three times. A change in the oil price therefore has a dis-
pr)oportionate inipact on U.S. wholesale price index. But the reason is sImply
techniical-an accidental quirk of the index.


150


114 0


130


120


110


100


90


So


70


60


O4F iLSE AiC ?_Np-DO[F[?SE _BUGETS
""'"['o!Sf,'r T rY. i']59tj Oc LAaS'sT


o
/
/
/
I
I
I
I
1
*
I
/
*,
I#
/

0* /
p
i
I.
I
0
f
I

'p/^
/'/


'p
p
.~


0
a -
S


DVE S F


-ON- D L LNSE


4 -- -- -- ^ 4 I -- -- f -(.-4-4 4 4 - - -., -- -. --J^ -.4._t
9952 3 5 7 8 ( 60 1 2 3 4 6 7 "0 I 2 '

U'\ADJOSTDEO BY APRPROPRIATE PRICE DEFLATORS


SOURCE:


OFFICE OF MANAGEMENT ANiD BUDGET


FIGURE 2






30


Finally, a minor point which is much misunderstood. The idea is widespread
that oiur inflationary troubles are diue alnimot solely to the Vietnam War mili-
tary exIpenditures. Figure 2 tends to refute this concept. Thus, in terms of
incr-a.(t.d spending, the non-military budget was four times as large as the
military budget. People who blame inflation solely on the military Vietnamese
Wair often d(in't understand that programs which they often favored also con-
tribtitvd to tlhe inflation. I have shown this Figure 2 to literally hundreds of
peollie in this country. Although nobody challenges the numbers, as far as I
(an tell, I have not succeeded in affecting public discourse on the subject-even
by i ,'st of those with whoIm I have discussed the point. It continues to be a
form of conventional wisdom to assert that the Vietnamese War military
expenditures caused the UL'.S. inflation. People who make this assertion seem
,blivivus of simple reality. Although every American economist who is interested
In ilnflation must be aware of these facts, nevertheless the discussion of the
c:!,-.sS of infl.ition in this country gui-es forwardl as if these facts were kept
secret. None of this is to challenge the idea that the Vietnamese War con-
tributted heavily to tlhe inflation. Thus, to some extent during the Vietnamese
War -,,ine Congressmen who were willing to support the war said, "if you vote
fur my war I'll voLe for your city program." A sort of trade took place along
these lIes. And President Johnson himself specifically tried to carry on the
Groat S,.iety proLram and the war simultaneously. But the fact remains that
the main inflationary pressure in our economy during the past 15 years came
from the increase in civilian expenditures rather than from the mounting mili-
tary expenditures---even at the height of the Vietnamese War.

Unanticipated vs. Anticipated Inflation
I believe that a very significant and much underestimated change has taken
place during the last four years both in the nature of inflation and in public
attitudes toward inflation which has caused much confusion. The non-communist
world has moved from what could be called a situation of largely "unantici-
p:ited" and "acceptable" inflation to one of largely "anticipated" and "unaccept-
ablde" inflation. Unanticipated inflation simply means that the real level of
current inflation was larger than people generally expected (not that no inflation
at all was expected). Anticipated inflation means that the current inflation is
less than expected---or at least that people are trying to do something about the
high level of inflation which they expected. They are correcting for the coming
inflation, or trying to do so.
During an unanticipated inflation a large amount of income is transferred from
credit rs. to debtors. About 2 trillion dollars worth of debt is said to exist in the
United St.tes. Since a substantial part of this amount is held by people who
are al:-o creditors, inflation is canceled out for them to some degree. However, it
trn- out tlht. households, in general, are net creditors to the amount of about a
trillion dollars through pensions, insurance holdings, cash, and ownership of
deposits in banks and fixed obligations such as bonds. Almost every other seg-
ment of our society is a net debtor. As a result, if interest rates do not ac-
curately reflect the rate of inflation, a huge transfer of resources occurs from
households to government, business institutions, and so on. Thus. it seems plausi-
ible that an inflation rate of say three percent-which many would consider very
acceptable-would result in the transfer of about 30 billion dollars a year by this
mee.lanii-mi alone, not a small sum of money. Also, if wages and governmental
pn -i,,iii- I:m- behind the inflation, then employers re'-eive a similar net gain. The
largest single bleneficiary from such gains is undoubtedly the government, at least
under normal circumstances. The government gains from unanticipated inflation
as follows:
TABLE 3
1. As a debtor and disburser of fixed payments (pensions. welfare, interest and
principal on the national debt).
2. As a recipient of seit.nioraee profits-(can be considered as a debasement
of ,.irrency or a tax on cash balances).
3. As a tax collector (brackets are moved upwards in real terms; understated
depreciation allowances, and nominal inventory gains result in taxable if illu-
sory profits).
4. As an employer.









5. As an advocate of full employment, high farm prices, etc.
6. As a permissive umpire and bargainer, i.e., as a supporter of satisfaction and
contentment (e.g., can exploit money illusion) and a reluctant appeaser of
squeaking wheels and strong or activist pressure groups.
Many other organizations, especially in business, also gain from an un:irintici-
pated inflation. It can plausibly be argued that tlhe-, gains to both government
and business have been the main reason that the inflation occurred.
When inflation is anticipated, however, many of these relationships are altered.
First and foremost, wages, welfare, income from interest, and similar 1'aym, ,its
now tend to have excessive corrections for inflation. This occurs il-irtly becai-e
the usual indices tend to overestimate the rate of inflation and ipairtly bs.;iuse
the affected groups wield very considerable economic and political po\'"-r ,,ce
they become aroused and militant. The Phillips Curve turns around, as do busi-
ness expectations: that is, unemployment tends to go up if the future looks more
inflationary than the present and even stock market prices tend to go down. At-
tempts to stimulate the economy are apt to backfire becau-e they bring :ilout
expectations of increased inflation, and therefore decrease confidence in the
future. In general, gainers and losers exchange places in an anticipated infliti..n,
but now there are many more losers than g.iners-and the losers are now mili-
tant and vocal. As a result of all these changes, inflation becomes politically
more unpopular than unemployment. Political parties and leaders who are per-
ceived to be more likely to control inflation than their opponents are therefore
more likely to be elected. Governments which continue to focus their primary at-
tention on the traditional problems of unemployment and deflation find that their
programs and concerns fail to attract nearly as much approval as they expected.
One reason for all that is of course that the unemployment today is far less
unpleasant than it once was.
We do not want, however, to give the reader the impression that a condition
of anticipated inflation is preferable to its counterpart; the opposite is more
likely to be true. Thus, the cost of anticipating inflation and hedging against it
can be extremely high in economic terms. In some cases, no effective means can
be devised to put one's anticipation of inflation into action. One method of an-
ticipating inflation is indexing. Indeed the operation of the U.S. economy is prob-
ably more than half indexed at the present time (i.e. wages, pensions, welfare,
many loans, sale and purchase contracts, etc.). Since the index is normally tied
to the cost of living in urban areas, it tends to overcompensate for inflation. It
should be noted that indexing can be absolutely essential in some situations. For
example, it is difficult to see how a long term contract could be signed for the
production of a mine or the procurement of other raw materials unless the con-
tract were indexed to the rate of inflation. In the absence of indexing, the sreller
would certainly insist on something like a 7-8 percent increase in price per year to
protect against possible inflation; the buyer would probably be unwillilii to
accept more than 3 or 4 percent. If either party wero to budge from his position,
he would face the possibility of large losses (consider what happened to We.t-
inghouse) and therefore it would be impossible to get such a contract signed.
Fortunately, contracts can be readjusted every year to take account of the actual
inflation rate (i.e., to index) ; this of courts" makes it possible to sign such con-
tracts. A similar case could be made for lonz term (three to five year) labor
contracts or even for the purchase of producer goods which generally involve con-
tracts of from 6 months to 6 years. Furthermore, groups with political power,
such as government employees, pensioners, and welfare recipients have all man-
aged to have their payments indexed. This means that these people no longer
lose from inflation-and may even gain-since the index chosen probably over-
estimates the impact of inflation on them. (It can be argued that social security
payments are now doubly indexed, so that the real income of recipients now goes
up about twice as fast as inflation.)
I believe that the main problem with capital acrumulation in the United State.
today is that the financial system is not properly indexed. As a result, the
borrower is forced to treat all of his interest rate as an expense whlien in fact
somp portion represents the early repayment of capital (most of that portion,
of the interest which is actually due to inflationary expectations). Even whlien
normal interest rates were as high as 12 percent for quality borrowers (in late
'74 and early '75), inflation was also running at a rate about 12 percent. Since
many people's inilationay expei.tatioiis were very high, the "real" interest rate







32


wa,; hi fact very l1iw. Thus. if borrowers are paying 8-9 percent on their money,
liit hIwi eId(ler amd borrowers expect 5-6 percent inflation, rhen the real interest
r;ite i-. ',rily n v ,it 3 prn eut, which is not a high rate at all. But since the
l','ri '.r does Iis acoiinig in such a way as to treat the 8-9 percent as a
real ci,,.t, thlie ciist of capital looks very high indeed. Futhermore, the lender
must pay inJ.',nie tax on the inflationary (and therefore non-income) part of the
iniirl -t. IfTccts such as these ainke us argue later on that a healthy recovery
need, to lih:ive a liiitled and perhaps temporary indexing of instruments like
lmJrtg;ages and 1oiii^-terxzi linds.
One of the most rtmnarkalle characteristics of the current inflation is the
.l.ii,,st re-kless Jnn,1j1.er in which some companies are willing to lock themselves
iito lung term londs with very high interest rates. Many companies seemni to have
fo,,Koti 1 ci it a a(liwunside risk in interest rates still exists; inflation might well
i1e AIl,.-iald. and then anyliody who has signed an uncallable loan for 10 or so
pen 1,.1t will le laying perhaps two or three times that which should be paid.
On the otlier hand. if the inflation stays between 5 and 10 percent, then such
a loan jmay turn out to ble a bargain since the assets it covers will increase in
value (or not decrease as fast as the normal depreciation). Of course, the under-
stated depreciatiom allowance may itself cause a problem.

Othicr Effects of the Current Inflation and the Lack of Inflation Correcting
Accounting
This brings us to a most important current issue: the incredible degree to
which nominal earnings by U.S. manufacturing corporations have depended upon
illusionary inventory profits and understated depreciation. This is shown in
Figure 3 below which compares nominal retained earnings and dividends with
"real" retained earnings (earnings corrected for understated depreciation allow-
an-es and inventory profits-"i income" which does not add to the usable cash
flow of tlhe organization but is taxed as if it were real profits). Seen from this
perfectly reasonable perspective. U.S. non-financial corporations have, since
about lfk). paid out as dividends on the average close to 100 percent of their
real earnings. As a result, no net increase has occurred in the assets of these
companies as a result of retained earnings, even though in many cases their
nominal volume of business has increased enormously. This brings about ex-
cessive requirements for debt financing, especially for short term circulating
debt, which is indeed a very precarious way to operate. This problem is one of
the main reasons why the American firms were in such a sad state in 1975. In
fact U.S. firms have improved their position enormously in this respect, but a
year or two ago many were very close to being in critical condition. I consider
it remarkable that more bankruptcies of the W. T. Grant's sort have not occurred.
*
Stickiness of Prices
As many economists have noted, big companies and big labor unions-working
together, in effect-can prevent prices from dropping because of the large influ-
ence their wage settlements have on other sectors of the economy. While we agree
that prices and wages are much less elastic on the downside than on the upside,
we also feel that the stickiness is exaggerated-especially against long term con-
tinut-d pressure. In any case. fear of continued inflation adds to this tilt against
a po-sible drop in wages and prices. For example a businessman's fear of being
stuck with price controls some months ahead will lead to his emphasizing high
li1t prices, concealing discounts, and giving up a share of the market on the
assumption that the loss will be temporary and more acceptable than being
locked by government fiat into a seemingly permanent lower price level. By the
same token, individual businessmen in an industry would he taking an extraor-
din;iry risk to lower prices significantly, for fear that if the rest of the industry
actually followed through with a general price decrease, the whole group might
then lie faced, after the imposition of price controls, with an unprofitable price
level. A typical example of this phenomenon occurred in the auto industry.







33


NONFINANCIAL CORPORATIONS:
EARNINGS & DIVIDENDS Nomi nal R cta i cd
3 ($. Billions) N in l
IN-- iiNrO iNING / Earn i nqs-
3 .. f.ITA7N(O WARNINGG APJUSIIO FOR /
lIPLACIVtIN COSI OIPnICiAIIOR & IVA /
n,- .___ omvoiNos / l *ivi n i
21 / Dividcnds
14o --/ % /



::^N\ /


\ ./ \
\- \
4-



- \-'Rcal" ReLained
-u I___ L .... L___L I lI, IIJL-J E a r i ii nq s
1 B0 l l '6 1Z I *6 *iS S 1 *II II 71 l '71 "7 '7 "
""Coi o q*v"ji--% at Clac d ive. tell"109.

FIG 'RE 3

Chrysler wanted to cut prices in 1974, but did so only in the form of "relat,."
uitaninig that it could keep its list price.-, exactly as planned, in the event price
controls were clamped on. Other co nlianies followed ('hrysler's lead, but, again
through rebates, not tiffici-il price decreases. Finally, a continued excess in the
money supply feeds other upward pressures on price.

Ind'.ring as a Temporary Solution
Much interest is currently being devoted to indexing as a means of enpine with
inflation; so ietimes it is even hailed as a cure-all. Inldexing is certainly no
panacea. Indeed it will work only under certain circumstances; thus, other
government policies must facilitate and complement indexing and put it into its
proper context. I have often argued that, in the alpSl.e of indexin.-. the govern-
mient cannot solve the problem of inflation unless it displays couravey. integrity.
wisdom, common sense, and political power. The -iuie qualities are also ie.,ied
if indexing is employed, but the amount reqtiired is much sim aller-and this dif-
ference is important. But indexing is not necessarily desirable. Table 4 shows at
least five ways that inappropriate indexing can cause trouble.

TABLE 4.-Inappropriate indexing cin hurt-eren caui.e a disaster
1. Can try to compensate for the uncompensable.
2. Can destroy certain automatic compensatory measures that normally miti-
gate an inflation and add automatic compensatory measures that increase an
inflation.
3. Can eliminate important lags, austerities, and political pressures.
4. Can destroy important utilities associated with the monetary illuhision.
5. Can cause degree of inflation to be even more politi, :'lly motivated and in
effect create a new area for "bungling government interference" and for mak-
ing the simple complex.
For this reason alone, I oppose indexing under normal circumstances. I cer-
tainly don't recommend indexing as permanent pervasive policy. Nevertlieles,
I strongly advocate an expansion of indexing in this c.munl ry at the present time.






34


Lt's look at -,ome sample situations, Inmagine (again I am talking about the
I'uit.d Siates. but believe the case to have universal application) that indexing
wert, forjiddln, that all contracts ha.d to lie written in fixed prices. What would
1i;Il..c?I Well as we already suggested it would be impossible to sign a 20-year
contract, :,.iy fur mine production. Because obviously the producers are going
t) wvnit to protect themselves against the possibility of a 5 to 10 percent infla-
tin mind tlhe buyer is going to argue f-r 0-5 percent. Differences of this size
would inilhriz.ine the entire raw materials industry. After the industry had
.,1;..iel woNvll people have understood why? Not necessarily. Many would
citt twenty diffinr-nt reasons. only one of which was the inflation and the uncer-
tainites it caused. In fact, tlis would have only been the real reason. But who
would understand that? Thus a gimmick-in this case indexing-can make all
tlih diff('rell-e.
D)urii- tini c,-ntury all economic recoveries in this country have been led by
housing or automobiles. Although I expect the current recovery to be sustained
evi-n thuilh it Nwas led in-tead by cos uminer goods pirchlasing (but automobile
..I', Live no,,w also revived), I would feel much more comfortable if thle housing
,*Wt, r was mnuch rt ronger than it is likely to be. Why aren't we likely to have
a hlimiTin recovery? Because current mortgag-s cost 9 percent-at least nomi-
.i lly. Sie.', the inflation is about 6 percent, the real rate is about 3 percent.
v>,ih nlrt liuyers (.cmiuld afford. Actually, millions of people in the country are
I r;'( rly willing to pay a real interest rate of 5-6 percent to buy a house, and.
to iiz of thou-ands are willing to lend at a real 4-5 percent rate. Why can't
they 't.. together? Because indexed mortgages are not permitted here. Although
other reasons can be found, this single circumstance accounts for the collapse
and slow recovery of the housing industry.
But this is only part of the story. I have given many speeches before savings
and loan associations since December of 1974. I open my speeches by saying:
"Ninety-five percent of you work for organizations which are technically in-
solvent." What do I mean by technically insolvent? I mean that if one examined
the market value of their assets (which include 5 percent mortgages made for
20 years) many of these assets discount today at 65, 70, or 80 percent. BRt the
Market worth of the liabilities (mostly deposits) is valued at 100 cents on the
driollair. If one actually had to liquidate these organizations, he would find that
they have a nopative net worth. That is also true, I believe, for many savings
and commercial banks in the United States (if they wrote off fully or carried at
,'ri-rent niarki-t va;iu, many of their loan and other investments-e.g., tankers,
olftie buildings. REITS, municipal bonds, etc.) but I don't really know.
ITuitead of getting angry, as they should, my audience invariably reacts by
i,'lia.ting that "we're all in the same boat." Now that was a shaky situation!
(No(te, conditions have been much improved since December 1974 and January
19T.\)
I ank these people in the saving and loan associ- lions to assume that no in-
flation occurs. for five years. Would they then be willing to make a 3/-4 per-
,.*!it "overnment-guaranteed loan (which is roughly what the interest rate
should be)? Textbooks say that a risk-free loan has earned empirically about
21/2 ierceent; tlei actual record according to recent research is more like 1-11
1I'rint. The United States has historically had government-guaranteed mort-
-:-I, of aronmid 4 percent. I ask these people whether they would be willing once
a,;iin to make' a "risk-free" government-guaranteed loan of 3Y2-4 percent. They
rn6ply--a-solutely not, because it is not risk free. If inflation recurs, they would
lose their money. If inflation hits 8 percent, they would lose 4 percent annually,
instead of earning 4 percent. The market value of the mortgage would go down
,Ind they would lbe insol(vent once again. When I ask what minimum interest they
would charge if no inflation happens for five years, they never say less than 7
percent. In other words, savings and loan associations would charge at least 3
prr-'ent as a hedge against inflation. This means that It is not possible to return
easily to a situation where inflation is not anticipated. Indexing is the only way
to avoid paying the exorbitant sum of 3 percent as an anti-inflationary hedge.
As ,ve explained in iHudson Corporate Environment Research Memorandum #9.
the principal of the mortgage should be indexed rather than the payments in
order to smooth out variations in payments.






35


It is my considered opinion that indexing (even if temporary) is one of several
measures which could help to promote a satisfactory economic recovery in this
country. It can do this by:

TABLE 5.-Indexing can: (If appropriately used)
1. Reduce or terminate expectations of inflation and restore faith and credibil-
ity in money and contracts.
2. Prevent inflationary gains to Government and other.
3. Increase flexibility of prices and wages and otherwise facilitate a soft land-
ing from an ongoing inflation.
4. Serve ends of relative social justice and business stability.
5. Prevent disastrous "anti-inflationary reactions" to a near inflation by a
population which has already been made "allergic" or at least educated.
6. Encourage savings and mobilize capital.
7. Can make accounting realistic and otherwise improve operation of economic
system.
8. Be done gradually.

"Do-Nothing" or Doing-Too-Huch?

Figure 4 dates from the early '75 briefings to the Savings and Loan A.s,-ia-
tion and others. It deals with government policy, which will be discussed later in
more detail. The Ford Administration is explicitly pursuing the policy shown.

A BASIC (BUT OPTIMISTIC) ECONOMIC SCENARIO
(BOTH GOOD STATESMANSHIP AND.GCO0 POLITICS)-



14-

12


I .......... .......... ......
. ... * ..:****i: *. ......... ... L
.....................
.I
:.':I:: ::.: -: .: INFLATION
o '* : * ..' .'.*''**'.'' : :: : ';: ::.::: ':: ::
"::: :' END OFr HIGH PRESSURE
2 ::" ::, -- DEFLATION PHASE



0 N D J March
8.7% UNEMPLOYMENT YEAR

FIGURE 4

The present administration is pursuing a policy of tight money, tight credit.
fiscal restraint, high unemployment, and high unuinseil capacity and intends to do
so for five years more. The official Japanese policy is the same. I don't fully believe
all of the official Japanese policy in the following sense. They talk about an
annual growth rate of 5 or 6 percent. In my view, a Jalpanese 9 percent growth
rate would correspond to tight ni, ey, tight credit, reasonable fiscal policy, high
unemployment (for Japan), and low capacity utilizatioi. There is no a priori







36


reason to d tri. I will dist uss other ieasllres which wmuld make the cmintrol faster and more
reliable. It is easy to fiind reas ,ns for nit pursuing such a puliry in the United
States. S'me Ire listiedil beljw:

TAI.r (,.--Bt?.ie obiccfionif
1. Requires pa'tivnce.7 courage. and stoicism.
ligh probability of depression.8 (Somewhat lower than in 1975).
8. 1n.-l c'oni olic ,,i-lTering: Uniemiplyn ment, bankruptcies and uLother losses.
4. i: ,,rt:i! i: i of deflatioin to other countries.
i. Not as well designed as it could be.9
Thle m.nt impo rtant obl stable is that such policies require her,,ic-and scarce-
qiiiliitis. They are very slow. If something goes wrming and a really serious
(lelirssi,,nl results. nlol,4dy will think it was blad luck. President Ford would
g, il>\wn ac the dmnilest mania in history : he took an entire ciintry over a cliff
with hik; eyes open. Reniflmber now, this policy has been criticized by 95 percent
of the uilual conimentators. So it takes ral courage and stoiicisim. There was a
high prnlbability of depression and the econo.P uy was very )pr-ca''i(us. Almst any
really big bankruptcy could have sent the economy v over tlhe brink : possibly
even New York City, though I don't believe it would have. Or a big failure of
a Euro-dollar bank. a failure of payment by Italy or England. It is easy to write
ten scenarios for a serious depression. One problem of the current recession.
and it is a problem as well as an asset, is that the liquidity has not really been
squeezed out. Normally a depression causes lots of bankrul)pties. A lot of debt
is written off, which is very painful. But when it is all over, the economy can
really take off. Relatively little debt has been written off in this depression. Al-
though it may be objected that many billions of dollars in loans have recently
been written off, I still insist that very little debt has buen written off in
perentages terms.
The U.S. and world economy was actually out of control in 1973. In some ways
OPEC helped the non-communist economies of the world out of a very dangerous
situation. If tlhe world economic systemui had .ontiuLted to be rn for two more
years in the same way it was in 1973, I think the whole sy!-tem might have
collap.sedl. I am thinking of a crash on the 1929 model-in depth but not length.
Much economic suffering. unemployment, bankruptcies and other losses would
have occurred. It is very odd that such a collapse was not foreseen. OPEC. by
precipiitating this crisis helped prevent tlhe general speculation from getting
even more out of control. The U.S. tight money policy goes back to the summer
of 1974. It was started by Nixon, not Ford. When the policy was instituted, it
was welcomed almost unanimously. Arthur Okun, perhaps the leading Democratic
economist, commented: "like a stopped clock that is right twice a day, the
administration is right this time." Nevertheless, the public was surprised when the
policy produced the painful results which were intended: unemployment and
midiikruIptries. Thus the recent recession was consciously touched off by the U.S.
and Japanese governments, with an assist by West Germany. They did so be-
cause they preferred trouble to occur sooner rather than later, for very good
reasons.
Reason No. 5 in Table 6 is inimprtant; "not as well designed as it could be."
When lecturing, I try to dramatize this point by making fun of economists who
did not help to raise the level of discussion. I say that I noticed on January 1
that I had a weight problem. I therefore did some empirical research. I weighed
myself and then decided to go on a very strict diet. By eating only 800 calories
a day, I would lose 75 pounds in one year. But something completely unexpected
happened on January 3rd. I got very hungry. This was not a theoretical concept,
you understand, these were real hunger pangs. I therefore decided this was a
do-nothing policy: other people were eating, and I was not. That's a good defi-
nition of a do-nothing policy for a dieter. So I decided that the problem was not
my weight, but hunger, (i.e., not a reeession, but unemployment) and I went
to 1600 calories a day. And on January 4 again something unexpected happened.

As a reuiilt looks like a "do nothing" program to the unsophisticated or biased or dis-
honest opponents. Actually a more reasonable criticism might be attemptingg to do too
much ton faMt."
8 Depression is defined as a catastrophic break in the chain of payments. As we judged
the n .hn miprr.d revolver and one bullet.
9 Fr Xf--np1lp we could use indexed mortgages and Indexed bonds to improve both tough-
ness of system and rate of recovery without increasing inflationary pressures by very much.








I was still hungryv. So I decided on a flexible fine-tuned policy : every day I
would eat correspi id(ling to the needs of that day. But I would keep a record.
And on the average I would make out. So if on a Monday I ate too much, I
would eat less on Tuesdlay. On these wt\igt issues, it is the average which couts.
And that policy works just fine. It has a minor teini.ial flaw, which my staff
is trying to deal with-this nimorning, for example, I had breakfast, January 1st,
19r.9-the books are a little bit out of lbalince. But that is very typical of govern-
mental and private policy. I am convinced that the level of academic discussion
of U.S. economic policy is no higher than that represented by miy story. F,,r
example, many economists label the Ford Administration aliprlach a "do-
nothing policy." Yet if one of these critics is shown Table 6, he usually agrees
with all five objections (sometimes after discussion, sometimes without). So
why then does he call it a do-nothing policy? It might be called a "too-mlucl h
policy" like my diet of 800 calories a day was too-much policy, not a do-nothing
policy. Usually he doe:!'it like the policy because of reasons 2. 3, and 4 and
cO-isiders 1 to be impossible politically. The general expert refusal to recognize
that an "economic (diet" is exemplified by the "tight money, tight credit, fiscal
responsibility, high unemployment, and high unused capacity" and such a
financiall diet," while unpleasant, was the only way to deal with the excess
liquidity and inflationary momentum was all the more ipuzzlin., because the
overwhelming majority of the lay American public recognized the validity and
necessity of the policy.
ANNEX 2

THIRTEEN "NEW" EMPHASES AND TRENDS FOR U.S. VALUES, ATTITUDES, AND GOALS
I would like to discuss here in more detail than in the text the "new" emnphas s
in American life that seem likely to change many of our economic practices and
our way of life in both good and bad ways. In particular, I expect that, over the
long run, the major reason for a slowing down in U.S. economic growth will be an
increasing, perhaps excessive, priority being given to these factors.
The word "new" is plai.cd in quotes because neither the emphaises nor the valu'-s
and goals they reert are really new; these issues and preferences have always
existed. The key point i:s that they are beginning to exist in a much more intens,.,
pervasive, and overwhelmiing w;iy and affect larger and larger areas of our
eci.nomic, social, and )political life.
The new empilaises and trends with which we are most concerned can he listed
as follows (the categories are slightly arbitrary and not completely distinct) :
1. Risk aver-ion.
2. Localism.
3. Comfort, -;.fety, leisure and health.
4. Protection of environment and ecology.
5. L:,;ss of nerve, will, optimism, confidence, and morale.
6. Public welfare and social justice (including equality of result).
7. Hapllines and hedoniisim.
8. General anti-te.hnology, anti-economic development, anti-middle class
attitudes (e.g., "Snmall is Better" and "Limits-to-Growth" Moveminits).
9. Many modern family values.
10. General de-eiiiphasis of (or even hostility to) the thirteen traditional
levers.
11. Increasin,- social control and "Overall Planning" of the economy of the
"Wroiu.L" sort.
12. Adversary regulatory attitude.
13. Inner space (omphaloskepsis.) and/or concern with self generally,
perhaps even an emnliih;asis. on mystic or transcendental values.
Before di:cussing each elemienet on the above list in turn, we should mention
that Americans (ca. choose, anionm a very large number of "p.akna.e." of values
and attitudes. As discussed elsewhere,"0 we believe that if this country is healthy,
they will tend to prefer the following eight possibilities:
1. High consumption, materialismi and other )pursuit of middle cl:iss sensate
and square values.
2. "Neo-gentlemnen" (e.g., ner-atheniauis iniind/or Europeanization of U.S.)
3. Self-actualization (but not consciousness ill).

10H. Kahn and B. Briucep-Brigzs. TJingi To Come (New York: Macmillan. 1072),
*Chapter III.







3S

4. Being a human being (neo-epicureanism, familial and altruistic mniotiva-
tions aild/oIr emphasis on warm interpersonal relations and social
re-p onsibili ty).
5. Special projects or programs that create general or specific esprit, elan,
pride, excitement, charisma and/or chauvinism.
6. Fullilliii a sense of personal responsibility and a commitment to re-
spon.1,ille behavior (neo-stoicism) neu-cynicism.
spoiis..ible behavior (neo-stoicism).
7. Nev,-cynici-mn.
& New religiosity (but again not consciousness ill and probably not under-
grund church ).
We arte suggesting that a general movement towards 1 and 4 is taking place
ri zltt now, particularly among tlhe New Class. Most of the list below would fit
into such a general movemnient.

1. Risk Aversion
We now seem to be trying to decrease many kinds of risks that Americans have
normally run, by both lessening the probability that something will go wrong and
by coinpensating much more fully and reliably if things do go wrong-even if in
part these (lancers are purely hypothetical and may in fact never occur. Even
nmore, we are trying to decrease the possibilities of new risks, even if they are
associated with what would otherwise be very desirable innovations. These two
trends affect every aspect of our life, from medical practice to the construction of
nuclear reactors. In most cases, the new emphasis has occurred not because the
dainrers have gotten larger (though in many cases they are of a different kind),
1but because our willingness to tolerate risk has sharply decreased. In some cases,
of course, the risks are really new and alarming (e.g., manipulating the genetic
inheritance of microbes and viruses, the construction of nuclear reactors, or the
stckiilinfl of nuclear weapons). In many cases programs of "risk aversion" seemni
to have lIeen carried beyond any useful benifit/cost ratio, even to the counterlpro-
(dV.tive point where the very risk one is trying to avoid-or a very similar risk-
is lbing increased rather than decreased. Thus in the med(lical field malpractice
suits attempt to protect and reimburse patients, but are actually resulting in the
praf-tic(e of so-t ailed "defensive medicine" Which causes the quality of medical care
to fall while its cost rises. Our desire to prevent dangerous damage to the environ-
ment may well be restricting the accumulation of economic resources and surpluses
n.s well as the advance of technological capabilities, in both of which may lie the
solution or alternative to most of the problems which might arise from pollution
or if some envir i inental disaster occurs, particularly if it occurs as the result of
natural causes. sucli as a climate change (which need not necessarily be touched
off by human activities).
It is clvar that as people thecomne more affluent, they may well wish to take less
risks due to societal activities (even if paradoxically they also go in for skiing
on d(LiLerois slopese, skin diving at great depths, and hang gliding). And many
new t-clnolozies do often raise the possibility of unprecedented or unknown dan-
ger- in a very alarin:i- way. In fact, they can be even more alarming if the (only
indication of such (ldange' comes from theoretical calculations, involving unreliable
n.-siimptions. The uncertainty still is friizlitening-and the idea of a government
or lbiiuitiess playingng" with such risks or being callously indifferent to them can
be infuriating. Particularly in this case. but even in general, care and prudence
(c',,n also easily be carried to self-defeating or counterproductive levels. Many
me(li.-al .xl)perts now believe that the cost, time. and other difficulties involved in
intr',diiing new drugs for general use in the U.S. have become too large. Not only
1re i1:1ivy us.,fiil remedies never approved at all or are excessively delayed, but
tlle e reniil.-itions are so deterring that inany potentially useful drugs are no longer
cos.id(ered by the c'imp;)!ni(es concerned. The results of all this are probably harm-
inH Ille 1'ahlth and increasing rthe suffering of the community.
In general. aimtliril ies are almost always much more willing to make errors of
ominsimi than risk errors of commiss-ion. Almost inevitably, if pushed in this
directing rithe system will reach the point where the errors of omission are so great
that they verwhielmn many of the excessively feared errors of commission. At that
point almost everyl",d.v would be better off allowing a few more errors of commis-
'iwn in order to d.,'ret-s;' this burden created by excessive fear.
We c.,, l1 e:-Jily include amoni' the c:.-inlidate.s for obsessive concerns various
risks a.s,(.in1t ed with 1ecmpl oymet. business failure, price and quality of con-
sumer ;.(,,ls. major fin:un-ial inve-t'inents, old age, sickness, etc.






39


2. Localism
Increasingly in the United States, but particularly on the East and West C,;itg
but to some degree in the rest of the country, local c.immlunil i. areas and regions have decided that they prefer the status quo or slow dvelop-
ment to many kinds of rapid economic development and sulo,.eluent disturb,:' j(.-
or inconvenience. Almost everyone gains by having highways, inoier:ate income
housing, factories, airports, and power plants soimewhere in his r,.:ion, hut almost
everyone loses by having these facilities located in his immediate neighborhood.
Even more important, if one moves into a community he lik.,. lie usually ( dof- not
like to see it change-even if such cia inge is an inevitable acconiiipJ ii ,iiit of what
would otherwise be desirable growth.
Until the last decade this conflict has not been severe enough to prevent needed
regional facilities from being constructed smnewhere-or to prevent outsiders
from moving into desirable communities. But recently a series of events and tr'-iids
has greatly strengthened the hand of local obstructionists. These include:
1. Disillusionmenct with progress: "You can't fight pro '..s" is no longer
an unanswerable argument.
2. Limits to growth movement: In fact, it's your duty to fight "progress"
and one is not being selfish in doing so.
3. En iron men tvli-:m: (Everything pollutes in some way.)
4. Anti-auto, ant4-noise, anti-traffic agitation: This problem is espiy,.ilily
acute now because many of the New Class are almost maniacally
hostile to the automobile and such technical innovations as supersonic
aircraft.
5. Community control: This concept did little for the poor, but middle-class
communities can use it with a vengeance. This situation could eventu-
ally resemnlle one that plagued China before the First World War.
Since the Chinese people were almost all aiicestor worshippers, any
disturbance to cemeteries was deeply resented. But many Chinese com-
munities had existed for many hundreds of years. As a result, it w:s
almost impossible to build a road or a railroad without di- ',ing
many cemeteries. Constructing public projects was therefore quite
difficult, particularly if the government did not wish to be too author-
itarian.
6. Widespread disillusion ent with governmental and business institutions
and leadership: The dopes or "crooks" either don't know what they
are doing or at least have not considered the public intere-t very much.
7. Greater acceptance of discretionary behaviors11 You can fihrlt city hall
and get away with it.
8. Flaccid and sometimes stupid leadership by establish ent: You can not
only fight city hall and get away with it, you can often win even when
you have a bad case.
9. Growing affluence: Economic growth and a greater tax base are no loiizt'r
so attractive.
10. Increasing Selfishncss: People are more willing both to espou(se openly
their class or personal interests and to hide them under a very thin
veneer of promoting the public interest.
Thus it becomes more difficult to install and op-irat the infrastructure and
facilities for economic development.
The problem may be compounded by tax equalization, revenue sharinza. and other
legislative or judicial acts which de'otuifile local revenues from local economic
activity, thus reducing the incentives for local dcvel.pment.

3. Comfort, Safety, Health and Lci.sure
Everybody knows that poor or ambitious people often work long hours at
tasl:.- which are relatively dangerous, dirty, dull. or otherwise o-erous. It s s
that. thel Unte Sthte,.; owilols It:,t,5
that the United States will soon have standards which will make it .c.ili un-
rvasinable-or even ill.,,l-for anybody to give up much in the \\ay of comfort.
si fety, or health to earn a living-and thitt those who do wirk will wish more

1The term is supposed to evoke an analog, with the conrer.t of li-cr.,tionarv Income.
This is income which a family can send in almost any way it wi~hr. without J", rdiin.
its current or future prospects. Similarly, our current society will tolerate a rather 1 i,;:
rang,' of behavior from people which, if the society wit.s o;,eratin ut ,,,.r d,.cra or
austere conditions, would be judged to be li_.:us.ille.






40

li'+-nre th:1m :. l'sen c('-.I ltiry. 'his iill include not on(ly the poor but also
l r~ld-dirivin_- .:w'rli ive.,.
It ..h411tild lie n1ti ced that executives \lho take three nionth.- off in the summer
:li't wit likrlv to iiitiiitt very uisky en'telrprises which require almobtL hourly
4"'i 'r'i1 ;a i(d (l's. rv;iv ii.
\\'O .s.huld4 ;,1I 6 itile here that certain institutions tendl to force safety and
li.-tllhi intvastire, which rvaIll d(in't matter to muclhi but ;ire adopted anyway
;mid thii ,,en lii turn int to be quite expensive. The whole structure of the unions
ill whiliil they feel obligated to be militantly active for their members is one
xe n ldEt'. Even in 4re relevant ;aItre ill-.idvised or ineffecttive measures by govern-
l,,imt rc't;~i %-ry amih,,ritives whie; increase costs enormously without actually
(.titrili titin, uiiclh to the nioiiiinal values wlhiich they claim to be furthering.
If lici i-nit roll.d, just thie. t\vo istitution.l by themselves can create some bizarre
;1id ',,-tl 1 sit,.tins which ill tur1n can have important impacts on economic
di't, loinii enlt or tei linol(giri'l advance.

4. Protrcetion of Environment and Ecology
I need not einphlinizse here the extraordinary concern about the environment
i11 the ec',ln'"uy vwhi.ci has leen expressed in recent years. Some of it is actually
spurio-us or disingizenuous in that it really reflects other values or motives, such
;i< tho,(e given in 2 above-i.e., disguises a localism that would otherwise be
exlpressed too nHakedly and bIitantly. Indeed. such undisguised localism would
wit: be acceptable since it would appear as too hostile to those who are still
iipwairdly-iihile---or to the sympathizers and well wishers of the upwardly-
motbile. It ik important to (cik this concern for one's own quality of life and
alinot total lack of concern for that of those who would move into one's commu-
nity by identifying, as much as possible, with a general disinterested and altru-
istic concern for the environment or ecology.
Another very ig change from traditional values is an almost total lack of
interest in recent years (this is improving rapidly) by many leaders of the
ienvirnniental aiid ecological movement in the cost of their positions. Thus the
first-vear delay in the Alaska pipeline, which was more or less caused by the
Sierra Club and its collaborators and allies, was probably justified. Since the
pipeiline was originally badly designed, it should have been. and was, redesigned.
But aft(,r the review aind revisions had taken place, the pipeline was probably
rea-onably sitifrictory; tlhe delay over the next 5 years will cost the United
States at le;ast $50 billion in the balance of payments and even more untold
lbillions in other extra costs for energy-many of which will result in more
balanee of payments losses. This is simply too much to pay for so little. Yet
the people who were responsible for this current and future loss do not seem
to have any sense of apology or regret for having done a disservice to their
country.
It -hould be clear to anybody that it i, impossible to operate a country with-
out ca.sing damage soniewhere: we e.nnot preserve everything everywhere.
My own recommendation would be to divide the country into seven areas, as
follows:
Pristine areas :
"A areis": Minimal interference to environment and minimal risk
of damna e.
"B areas": Full restoration of acceptable substitute-e.g., little or
no perceived degradation-or even changes.
Normnil areas:
"C are-s": Almost any "improvement" and many changes are
allowable.
"D) areas": But no eyesores-adequate restoration or substitution.
"E aroes": EFconnmic restoration or substitution encouraged or even
hsubsidized-no real eyesores.
Deogradable area, :
"F areas": Same as "E" but some eyesores and erosion of standards
Is allowable.
'"G area-": Natinnal dumps of various sorts (perhaps as part of A
controlled waste management and economic development program).

5. Lo.if. of Nrrvie, Will, Opftini.-m, Co(nfifr'nee, and. Morale
Tlio nlo,, of nerve is very _eneril: even Hie most dedicated technological
optimniits or enthivuiasts for economic growth tend to have some twinges of fear






41

aiout where wv are gr in-g ald what may go wrong. In (lhe military field even
the i ,st manic advocates of deterrence by M.iti:il Assured Destruction are
(,IC"clt-Ard about the possibility of ac(idetL ;il or uiniiitenadd war. (One might
note that: the acronym for Mutual Assured D)estrmction is, in fact, MAI).)
Almhnost all knowledgeablle people arc concerned about soijme of tlie potential
products. of almost all of the hybrid sciences with the preiIx '"bio." The "n;;aige-
ment of complexity and change" seei,4s to many to be becoming intolerably conm-
plex. Fear of current and fullire developImenlts inevitably causes s(oie( erosion
of will, optimism, and confidence which in turn causes both direct and indirect
' erosi.in in economic growth and technological advancement. I would argue that
in many segments of the population this erosion appi,'trles pat1lological dimen-
sions which are al]nost certainly counter-productive. Althou-h public and pri-
vate decis-ion-makers, engineers, and scientists should undoubtedly be prudent
Sand cautious, even these qualities have their limitations. They should not be
carried to the point where they are self-defeating the extrewme-or even bring
about a cost/benetit ratio which is too low. But the main effect occurs indirectly
in political, social, and cultural mechanisms-on career choices,,, on the attitu(les
of bureaucrats and voters, on the willingns,.s of families and individuals; to
make sacrifices. This is going to be particularly true since much of the educa-
tional establishment stresses limits to growth thinking and manny New Class
perspectives excessively. This is certainly the case today, particularly in the
so-called "better" schools and prestige institutions. One of my d,,ei:.'t concerns
is that these views have been so firmly established and embedded into the
educational establishment that unless a conscious c.ampaigni and other actions
counteract them, they will dominate the education of many young people long
after the limits to growth movement itself has lost all credence among most
knowledgeable and serious groups.

6. Public Welfare and Social Justice (Including Equality of Result)
One of the most important issues of welfare and social justice involves the
direct budgeted cost of these programs. We have already suggested that this
could slow down economic growth and technological advancement. Thus in the
last decade there was almost a doubling of personnel in the cities, many of them
hired for the purposes of furthering public welfare and social justice and yet
they did very little in this direction, certainly much less than was hoped by
those who introduced the programs. But we would like to focus attention here
on more subtle psychological and cultural aspects.
The first of these results when in effect "almost everybody feels the state
owes them a living" (or at least will guarantee one in practice) or when relief
and welfare compete with private industry in terms of economic incentives.
There has been much written on these issues and we have little to add to them.
We might however make a few remarks on the difference between equality of
opportunity and equality of result.
Only recently has a real semblance of equality of opportunity been achieved
in the U.S., in the sense that many undesirable discriminatory practices have
been brought under a reasonable degree of control. Many still exist, but simply
do not have great force. Now, however, many programs of reverse discrimination
and lowering of standards not only attempt to correct for real historical dis-
advantages, but even for assumed historical disadvantages for which there is
no real evidence. For example, for many years theoretical physicists have
tended to be of Jewish origin. This does not occur because of any special bias by
institutions in favor of Jewish physicists. In fact, just the opposite seems to
have been true. Similarly, the Irish were disproportionately represented in the
New York City police force. My point here is that such numerically lopsided
proportions do not represent a prior evidence ,of current discrimination. Fur-
thermore, it is often extremely difficult or costly to correct a historical legacy
by reverse discrimination in hiring practices instead of by attacking the legacy
directly by educating or otherwise affecting the individuals and families con-
cerned. A low level of reverse discrimination would seem to be generally sensible
and constructive in almost every way, and a high level of such policies designed
to achieve some kind of numerical quota would seem to be very reasonable In
such things as television performers in which the image of the entire com-
munity is affected by what they see. BuUtin general, we cannot afford a general
leveling of standards in school, business, and government by paying heavy
costs in motivation and quality.


78-734-76---4






42


'Tlie 11iij:;in i''e hrt* is not the direct li.,ss of productivity which h occurs when
Oin1 is f'r'i(1d ti :accept people who are, relatively speaking, inadequately trained
*1r .skilltd. lbiut thle general decline in thle standards of the society, particularly
in the -cb'h,,l syteni. in order inot to "p*lnalize various minority groups with
r.aist il.lt ",r standards.'" (Cunterprocduictive programs are another big issue.
l-',r example. stime cvidleine no\ seems to indicate that those Puerto Ricans who
live in no(n-Puerto Riran neighborhoods and are more or less forced to raise
their children in an Anglo-Saxon atmosphere achieve about as well as their
neighlbors. But those Puerto Ricans who are able to go to bi-lingual schools
where their old culture is. relatively speaking, preserved and even enhanced
lind tlhei ,elvets falling far behind. Their compatriots who have been less "in-
dulged." but forced instead to accommodate have acculturated more efficiently
;ind actively. Even if emotional and cultural costs are involved in such a pres-
srizcd environment, it is probably still preferable to the alternative, which
may cem moutre sensitive and better tailored to its participants.

7. Happiness and Hcdonisnm
To a degree that seems to be unprecedented in any historical culture I am
aware of, young people in this country are taught that their goal in life should
lie some combination of happiness and hedonism, and that they should achieve
these by searching for them directly. In almost all cultures, people have been
taught that happiness was to be achieved as a more or less reasonable by-product
of another activity-satisfactory job, satisfactory family, achievement or suc-
cess. and so (in. Most cultures have not even particularly recognized happiness
as an important value. Thus, Sorokin has noted that the search for happiness
on earth dues not appear as an issue in any written record that has come down
to us froni European writers of the 6th through the 10th century. In any case,
I would argue that the current emphasis on the legitimacy, need, and require-
ment to search for happiness and hedonism is not only going to cause a great
deal of unhappiness as well as some rather unpleasant experiences; it will also
result in much lowered economic performance by the individuals concerned-
and probably more consumption and less saving. It also can lead to a situation
in which all values except those of the extreme secular humanist are degraded
or ignored.
It should also he noted that rapid economic development has been associated
almost everywhere with sobriety of dress and behavior. This is probably not
acc-idental. Unless people are willing to be extraordinarily business-like and
serious about business, i.e., accept Coolidge's position that "the business of
America is business," it is not likely that the current momentum will be main-
tained for very long.

8. General Anti-Tcchnology, Anti-Economnic Development, Anti-Middle Cla88ss
Attitudes (e.g., "Small is Better" and "Limits-to-Growth" Movements)
Let us take the modern nation-state with its orientation towards rapid eco-
nomic growth and technological and scientific advancement as standing for much
tlat people of this persuasion would disapprove of most. I suspect that an agree-
n:ent with them can be reached by making the following point: The nation-state
seo ,ns to be one of the most effective institutions ever devised for defense and
offense, for promoting.economic growth, for gaining influence over others, both
internally and externally, and for carrying out big projects. If one has no interest
in any of these four activities, then one might well think of the nation-state as a
i.istakf. anid therefore not question that "small is better." On the other hand, if
onE piit: much emnphasis on any of the above four activities, then the above atti-
tude seems to le without foundation and more likely, if followed blindly, to be
counterproductive or destructive than admirable and creative.

9. Modern Family Values
'lThis -refers to a whole cluster of positions which are characterized by such
words as "togetherness," "permissiveness," and "being friends and companions,"
tlio need for ivo-way coniuninications of each side's basic hopes and fears, and
so on.
Actually, these new family values may not actually cause the familiar problems
that they are often charged with in various discussions. More important may be
the change in values which is illustrated by the change in the context of typical
soap operas. Thirty or forty years ago, when one watched American soap operas,






43

one found that if an executive, in the interests of advancement and/or the best
interests of his compIany, drove himself to the point of getting an ulcer, he was
considered a hero wNmndoeil in the bttle for success-and dc.serving a greater
honor than the "unwouinded." Today the :,aeo individual wvuld be portrayed as
a conupulsive neurotic with twisted values. Or to take another illuminating
example: In the old-style soap opera, whenever there was a conflict between job
and family or between success and family, the conflict was always resolved in
favor of the job or success; if not, tragedy would ensue. Today it is reversed.
Unless the conflict is resolved in favor of the family or friendship, a tragedy
ensues.

10. G, ,rral De-Empliasis of (or Eren Ho-stility to) the Thirteen Traditional
Lc Lc'u "12
In some way, the 13 traditional levers listed below are almost, though not
always, the exact antithesis of much of the modern family values referred to in
the 1ircut-ding paragraph and in much of the preceding material:
1. Religion, tradition, and/or authority-i.e., automatic, and perhaps un-
thinking respect for the legacy of the past, for continuity, and for the
"social contact."
2. Biology & physics (e.g., pressures of the physical environment and the
frailty of life and health, the more tragic aspects of the human con-
dition, the basic and natural "unfairness" of the world, etc.)
3. Defense of frontiers (territoriality).
4. Earning a living-e.g., the five, six, or seven guarantees (Chinese com-
munes often explicitly guarantee to their members: 1) adequate food,
2) adequate clothes, 3) adequate shelter, 4) adequate medical care,
and 5) adequate funeral expenses. Sometimes they add: 6) adequate
education and 7) adequate pregnancy leave and expenses.)
5. Defense of vital strategic and economic interests.
6. Defense of vital political, moral and morale interests.
7. Other appeals to economic and/or technological rationality and efficiency
and/or economic survival type interests, community or national.
8. The manly emphasis-in adolescence: team sports, heroic figures, aggres-
sive and competitive activities, rebellion against "female roles"; in
adulthood: playing an adult role (similarly a womanly emphasis).
9. The "puritan ethic" (deferred gratification, work-orientation, advance-
ment-orientation, sublimation of sexual desires, sobriety, good work
habits, etc.)
10. A high (perhaps almost total) loyalty, commitment and/or identification
with nation, state, city, clan, village, extended family, or secret
society.
11. The "martial" virtues-duty, patriotism, honor, heroism, glory, courage,
loyalty, and pride.
12. Other sublimation and/or repression of sexual, aggressive, aesthetic
and/or "other instincts".
13. Other "irrational" and/or restricting taboos, rituals, totems, myths,
customs and charismas.
In many cases, it is perfectly possible to give a rather high priority to these
thirteen traditional levers and still make more than a gesture towards what
we call the "new" emphases. And it is not so much that these 13 traditional
levers neeesarily conflict with the new value systems and goals but that the
New Class is often actively hostile toward these levers, regardless of whether
they conflict with their own values.

11. Increasing Social Control and "Orcrall Planning" of the Economy of the
"Wrong Sort"
Instead of taking the attitude that that government governs best which gov-
erns least (e.g., laissez faire), and leaving to the government things that only a
government can do or which the government clearly does best, it is now increas-
ingly believed that the government should take an active and positive attitude
towards affecting almost every aspect of the economy to achieve ends which
have not normally been thought of as th-e government's business or at least not
within the government's capability. Akt the minimum level, the idea is that the

"See also Thigiis to Come, op. cit.






44

government should establish rules which further all of the new emphases either
lby direct sanctions and orders or by Internalizing costs and benefits of various
actihithis so that the corporation has to take account of these issues. Actually
the planning would presumably be constructive If it were done objectively, realis-
tically and efficiently. The problem is that, first of all, most planners simply
don't know how difficult overall planning really Is. They don't realize how unre-
liable and old the data are, how misleading the theories are, and how superficial
and jmive the basic models are, no matter how sophisticated they seem to be
from the mathematical and computational points of view. Furthermore, the issue
is .,ldoiu should there be planning or not but who should do the planning and
at iwhat levvl. Thus one can have broad guidelines laid down for the develop-
ment of an area, with the actual planning done by builders, contractors, devel-
opers and the individuals who buy the homes. The number of planning hours in
this second case is an order of magnitude greater than would be involved in a
centralized planning authority attempting to carry out the same kind of thing.
Furthermore, the quality and intensity of planning is likely to be much better
as well. The issue therefore, in this case, does not seem to be planning per se,
but who should do the planning and how well will they do it.
In general, even socialist economies are making more active use of market
forces, keeping control of very broad strategic decisions, but allowing a good
deal of the detail, tactics, and even some possible strategic choices to be worked
out by decentralized mechanisms.
It should also be pointed out that so-called indicative planning is not likely
to work well in the United States. Despite the claim that it works well in Japan
and in France, examination shows that these nations do much less planning than
is often assumed and that there is much more coercion and force behind what
planning there is. Furthermore and perhaps most important, this planning is
done by cadres who come from the best universities and form a rather separate
and distinct class which has gained the confidence of businessmen and much of
the population as well. It is almost inconceivable that such a group could be
found, formed, and take over this function in the United States. Very few busi-
nessmen in the United States would accept the idea that the government under-
stooil better what was going on than they did. U.S. businessmen do not feel
this way about their government, even .if they often do in Japan and France.

12. Adversary Regulatory Attitudes
This is particularly relevant not only to point 11 above but to many others as
well. It is conceivable that the government, in carrying through its programs to
promote the "new" emphases, might do so in such a way as to be cooperative
and conciliatory towards the existing system and other values and goals, and
display real ingenuity, creativity, and common sense when clashes occur-arriv-
ing at a genuine synthesis.and compromise-with great attention being paid to
such issues as economic and technological efficiency and practicality. In fact, the
agencies concerned, the legislators, and some of the voters and leaders display
an actual hostility towards the system as it exists, as well as a hostility towards
the 13 traditional levers. As a result, they do not attempt to introduce these
new emphases in the spirit of give-and-take, and with as little disruption and
damage as possible, but instead have often almost disregarded the impact of
their innovations on the existing system, and sometimes in such a way as almost
to deliberately or consciously increase the destructive impact of their new rules
and regulations and other activities. In any case, people who identify with these
new emphases tend to have very closed minds, and negative, if not hostile, atti-
tudes towards needs of the current system and any complaints or suggestions
which originate with its representatives.

13. hm r Space (Omphalosk7epsis) and/or Concern Withi Self Generally-
lJ.-liaps Ecen an Emphasis on Transcendental Values
Young people are increasingly preoccupied, not with any objective issues or
the goals of the organizations or institutions they are working with, but with
"How do I feel about this?" "How am I being changed?" "How do I fit In?" In
an extreme form, this takes the place of a kind of inner consciousness that begins
to approach some of the manifestations of the Indian culture-a culture which
has yet to show much talent at economic development-whatever the worth of
its values may be in other areas. Since these other values can be quite worth-
while, this new emphasis is not necessarily unhealthy indeed it may even be






45

admirable. But such contemplation and preoccupation with one's self are clearly
at odds within the sort of outer-directed attitudes associated with d sty, selIf-
sacrifice, the work ethic, and achievement spurred by competition and advance-
ment orientation.
Although one may not share some of these new emphases or even completely
disagree with them, it can, nevertheless, be a good tling for rur society as a
whole that people who do share them are exerting pressure on their behalf. It
is generally true that things which are everybody's business tend to be nobody's
business, i.e., they can be dominated by narrow special interests. In order to
achieve balanced results on issues of this kind, it can be very useful for these
new strong pressures to counterbalance the influence of groups which normally
exert excessively strong pressures in the opposite direction. If we assume that
both tendencies tend to be extreme, then a more or less balanced result should
usually emerge, which would not of course be the case in the aO-ence of these
new emphases.












THE NEW' STATE OF' T HE ECONOMY:
THE CIIALLENGING PROSPECT

By i'Jr.K C. A-L.\ IFN.1 Utl( IH:I) A. T.\:I'I.KV, Jr.**


SUMMAr.Y, CONCLUSION, AND REI:C M[.IMEND.ATION 1
The record of the U.S. economy during the 1970s has been dismal.
We have recorded two back-to-back recessions, the most recent of
which is the severest downturn since the Great Depression. This
record is in stark relief to the 1960s when we enjoyed the longest
peacetime expansion in our economic history. The dramatic reversal
of the economy raises the question of what went wrong. Unfortunately,
despite considerable effort, few careful examinations have identified
what we feel are the fundamental caui;es for our malaise.
It is the thesis of this paper that in the late 1960s and early 1970s
certain .fundamental conditions supporting an expanding economy
changed, and we have entered into a new era. The problems and
prospects are quite different in the economy of the 1970s to those
experienced over most of the 20-year period immediately following
World War II. A careful assessment must be made of the changed
conditions and new policies developed to stabilize the economy and to
get it growing once again.
The U.S. economy is suffering from diminished support of several
of the major sources of long-run economic growth. Three major
changes are indicated below:
1. There has been a shift in societal attitude from a "pro-
growth" to a conservationn ethic." Numerous laws were passed
in the late 1960s and early 1970s to protect the environment,
improve conditions in the work place, and to change buyer-seller
relationships. As a result of these laws. the efficiency of the busi-
ness process has slowed. Great quantities of capital and labor
are being used to meet new requirements of the broad set of
societally oriented laws.
2. There has been a decline in the pace and impact of economic
innovation in U.S. industry. Many of the spectacular post-World
War II growth industries are maturing. New innovations are not
occurring in significant enough numbers, nor are they o.f tran-
scending import to offset, the maturing of older growth industries.
For example, rapid growth and widespread use of the automobile
*Professor of marketing, College of Industrial Management, Georgia Institute of
Technol ozy.
** I'rofPssor of economics, College of Industrial Management, Georgia Institute of
Teehnol ogry.
1 This paper Is based upon a forthcoming book entitled The Future Wealth of the Nation
to be published by Winthirop IPublishers, Inc. In late 1976.
(46)





47


following the war opened the "suburb, ,m frontier' for conqi(-t.
The consequence wa.s a boom in home building, highway construc-
tion, shopping centers, office and industrial park-. Unfortunately,
suburbia is maturing and the pace of econIomic activity that went
into the conquest of this frontier has declined. Other important
post-World War II industries where, the growth has l-Iowed in-
clude the airlines, television, pharmaceuticals. xerograph"v and
computers. The slowin r wth growth of these 1 ;i-ically post -World
War II industries means diminished oppoit mnity for profitable
capital investments, fewer new ]ol.z. and less economic growth.
3. The cost of energy that fuels our economy has rapidly
increased in the 1970s and is expected to continue to rise for years
to come. In marked contrast, during the late 1950s and through-
out the 1960s the nominal price of oil and coal was basically
constant. This meant, of course, that in real terms the price of
these fuels was decreasing. Energy was cheap, and we used it
lavishly in the production and consumption of goods and services.
The reality of the 1970s is that we can no longer rely on the sub-
stitution of cheap energy for more expensive capital and labor
resources. Instead, a greater proportion of societal resources must
be committed to securing the energy needed to maintain and
expand our productive capabilities. Despite these expenditures
and the increases in employment and business activities they may
bring, the economy will suffer from the realignment among energy
and other factor prices. Higher priced oil, natural gas, and coal
contains the same B.T.U. per barrel, cubic foot or ton as did the
cheaper resources of the past. Society is paying more relatively
without receiving additional benefit and the standard of living is
not improved in the process.
It is the conclusion of this paper that the economy is suffering from
the erosion of three major sources of long-run economic growth. The
shift from a pro-growth to a societal conservation ethic, the decline in
the rate of new product innovation and the rapid increase in the coct,
of energy resources means sluggish economic performance similar to
what we have experienced in the 1970s. If dramatic swings in the
economy are to be avoided and reasonable growth realized, coLnizance
must be given to these fundamental changes.
To aid in the reconciliation to these new conditions, we ma-ke the
following recommendations.
Recommendation 1:
Economists must recognize and respond to the new realities of
the U.S. economy of the 1970s.
Unfortunately, the primary intellectual focus of the economics pro-
fession has been and continues to be on the demand side of the economy.
Elaborate theoretical and mathematical models have been developed
to study and analyze problems of ag.grate demand. The supply
problems which are so important today, and that will continue to bo
a major difficulty for years to come, have largely been ignored. The
economics profession must refocus a good deal of its effort from tlh
demand to the supply side of the economy. It will 1e necessary to
rediscover the origin of economics which was focused on the aUor(,fon
of srlrce resources amonq aternative erAds. We must husband our






48

limited resources and use them in more efficient ways. Ways must also
1be fon(d to stimulate economic innovation, to reduce governmental
iipo-osed restrictions on the efficiency of the business process and to
iliprove upon the productivity of capital and labor.
)One of the obvious ways to increase the efficiency of the business
process and to stimulate growth is through putting greater emphasis
on tlhe competitive process.
lRecoinmendation 2:
The competitive process should be stimulated throughout all
segments of the economy. Particular attention should be directed
to the service side of the economy.
Where monopoly conditions exist, other than the few true cases of
iatlural monopoly where technological conditions argue for regula-
tion, they should be attacked. The effort to combat monopoly has
largely centered on the product side of the economy. However, since
World War II most of the growth in employment has occurred in
t lie service side of the economy where approximately half of the work
force is now employed.la Productivity gains in this segment of the
economy have been relatively poor,2 and the increasing cost of serv-
ices hlias been a major source of inflation." The professions-medicine,
law, dentistry, accounting, pharmacy, etc.-have developed under the
banners of standards and codes of ethics, mechanisms which constrain
competition and lead to higher prices and often to poorer service.
Another major opportunity for improving efficiency of services is in
the regulated industries. There is growing evidence that regulators
often protect the regulated, rather than carrying out their responsi-
bility to the general public. This is particularly true in the transporta-
tion industry-the airlines, truckers, and railroads. In many instances
the cost of the service could be reduced, and the quality of the service
improved, by deregulating the industry. The challenge in these less
economically exuberant times is to gain improved productivity by
introducing long overdue competition into the service side of the
economy.
A legacy of the strong performance of the economy over the twenty-
five year period followifig World War II has been a rising expectation
for more. When the economy was healthier, the demand for more could
b)e reasonably well satisfied, but that is no longer the situation.
Recommendation 3:
The fires of excessive expectation must be banked. Society has to
grow to expect less in order to have more.
la The Bureau of Labor Statistics divides non-agricultural employment into two cate-
'rios--Zoods related (mnininr. construction, and manufacturing) and service related (gov-
f-rnment. services, transportation, and public utilities, finance, insurance, real estate, and
wholesale and retail trade). When this convention is followed the service related employ-
ment Increased from 59.1 percent In 1950 to 71.1 percent in 1975. However, It may be
arried that wholpsalingr and retailing should be included in the goods side as opposed to
the service side. Wlihn this adjustment 19 made the service side of the economy increased
from 38.3 percent in 1950 to 49.2 percent in 1975.
SITnfortunatoly, our knowledge and techniques for meanring service sector productivity
Is quite limited (sp. Second Annual Report of the National Commission on Productivity.
March 1973. p. 11). The genera impression. however, is that "The Increaslng relative
importance of the service sectors, which Is characterized by comparative low levels and
low urnwth rntegs of prodnbitivity as conventionally measured, is also considered a dampen-
inz factnr (see N'ntlonal Commission on Productivity and Work Quality, Fourth Annual
Report, M.qreh 1975. p. 14).
s Thp Consumer Price Index for all products and services. increased 107 percent between
105f and 1974. In Printrnst. the prie- ind-,x fnr all service,, except rent increased 179
percent. Sinimilnrlv. medical costs increased IS0 percent over the same period. Source:
Bureau of Labor Stati-ti es.





49


As most segments of society including labor-white, gray, blue
collar, business, and government press their claim for more, they
diminish the ability of the economy to produce. Attempts by each
group to improve its position under today's conditions of slow or no
economic growth is self defeating. A series of catch-up and co't-of-
living wage increases when unaccompanied by sufficient improvement
in productivity merely feeds the flames of inflation. Inflation in turn
inhibits the efforts of firms to make capital investment in more efficient
plant and equipment as needed to increase productivity. Political and
labor leaders must struggle to re-establish the linkage between war'e
increase (and needed all factor payments) and improvement in pro-
ductivity. The re-establishment of the wage-price guideposts of the
early 1960s might aid in this process. With proper modification the
Council on Wage and Price Stability could be the mechanisms for
mobilizing attention to the relationship between productivity, wages,
prices, and profits. Unless this is done, the cancerous effort of inflation
will spread, destroying the opportunity for the economy to grow at a
level near its potential.
In the second half of the 1960s and during the early 1970s a number
of societally oriented laws were passed that impacted heavily on the
way in which business operates. There were new and costly require-
ments relating to (1) the way businesses could use natural resourcec-
the air, water, and land; (2) conditions under which labor could be
employed-safety requirements and minority employment ratios: and
(3) the relationship between buyers and sellers-a shift from "con-
sumer beware to buyer beware."
Recommendation 4:
Societally oriented laws must be evaluated not only in terms
of the problems they are designed to correct, but also from the
standpoint of their impact on the economy.
The problem with the design of many of these laws is that the stress
is placed largely on the nature of the problem to be corrected without
adequate regard for the cost of meeting the new requirements. For
decades we have turned our back on some of the hidden costs of eco-
nomic progress and pushed these costs off to future generations. It
is important that the overdue recognition of these costs not be trans-
formed into over-reaction. Resources allocated to meeting these new
concerns may well add little in the way of additional output in a tradi-
tional sense, and most likely will come at the expense of added invest-
ment which is productive in terms of goods and services.
The cause and effect relationship between these laws and their effect
on economic growth is complex, but nonetheless capable of measure-
ment. Laws which had little impact on the balance sheets. of either
government or private enterprise when first passed, have become
increasingly visible as mandated agencies gear up for enforcement
and as businessmen respond to these initiatives. An economic impact
statement should be required for each of these laws to determine what
effect. it will have on the economy. The economic impact statemo-l,
should examine the cost to the economy of meeting proposed stanld-
ards over different time intervals. In addition, rather than leaving ore
absolute standard, various standards should be examined and the
cost of each one projected. This would allow explicit recognition of





50


the trade-offs involved. Finally, alternative ways of accomplishing a
Iol I would be studied. For example, incentives or penalties for per-
form e:uico could be used rather than simply applying across-the-board
standards which may or may not deal with the problems and add
,,,, nItcessa.'ry costs where no problem exists.
TiE ANALYSIS
In order to understand the prospects and options before us it is
f letssary to review briefly the quarter century following World
War II. We do this not only to put our recommendations in a his-
torical framework., but also since we feel that. an understanding of
t11 ecoio i iic forces that underoird our economy and of how they have
cjilled is absolutely essential to the development of new economic
programs. policies., and institutions.
The United States came out of the Second World War with not
only a peInt-up demand for goods and services, but also a national
resolve for policies and institutions supportive of economic growth.
The acceleratedl relaearch and development effort during World
War II, coupled with the unexploited reservoir of prewar technology,
left tlhe U.S. at the conclusion of the war with a storehouse of eco-
nomically exploital)le technology. Furthermore, at the end of the war
the U.S. was blessed with access to large and inexpensive stocks of
, (energy, and over much of the twenty-five-year period the nominal
price of energy was constant and the real price was declining. These
three forces-
a pro-growth societal ethic,
a storehouse of technological innovation, and
falling real energy prices,
not only reinforced each other, but also formed the basis of twenty-
five years of extremely large and consistent economic growth.
FnoM A PRO-GROWTH TO A CONSERVATION ETHIC
After the successful'conclusion of World War II there was a na-
tional consensus that the business cycle could be defeated with national
resolution much in the way in which the Axis powers had been
defeated. Notwithstanding predictions by the economics profession of
a post-war recession, the American public reiterated to its political
leaders the desirabilitv of economic growth as a national objective.
This purpose. w-s codified in the Employment Act of 1946. This act
required that thie power of the national government be mobilized to
insure the maximum employment of labor and other resources. Eco-
nomic growth was seen as an unassayed good.
The negative side effects of economic growth-pollution, inequitable
treatment of various seo.gments of society, and problems of buyer-seller
relationships-were all subordinated to the desire for the production
of more goods and service.. Smokestacks were seen as the visible sym-
b)ol of more jobs and more production. Many of America's waterways
'carried away the costly wastes of business enterprise. Bulldozers tore
up sections of cities, and families were forced to relocate to make way
for expressway development. Employment policies were left to the
dlisr.etion of the individual businessman and local custom, regardless







of thle effect onl members of particular minoriti,.s either ethnic or
,-exual. IB3isilie_.-11; en in their coilduct of trade were only lightly rI'.-u-
lated in buyer-seller relation.hiips. I11 1,- numbers of new products
were marketed and snapped up by product-huiI ry h'o1))ppel's.
By the late 9D6Os and early 1970s the national consensus had
changed. Society was increasingly h.:- willing to accept the ne.,tive
externalities associated with growth, and laws were pi-.-..d which
restricted industry's degradation of the envirol iti.,t, ilt erc eded oi
the behalf of minorities in the labor market, and regulated buyer-
seller relationships. We shall review each one of th,.-.. alist.

Pollution
Laws regarding the pollution of the air and water have long exiled.
In general, however, they were either unenforceable, or state and local
authorities having responsibility in this area cho-e not to enforce them.
The 1956 Amendment to the Water Pollution Control Act was si,,-
nificant since it g,,ave the federal government primary authority in
this area. It was only in the late 1960s and more importantly in the
early 1970s that federal standards were passed for both air and water.
The Clean Air Amendments of 1970 declared any and all pollution
of the air illegal and gave the Environmental Protection Agency
independent status and required it to set acceptable standards for
various classes of air pollution.
Similarly, the Water Pollution Amendments of 1972 set as a goal a
zero level of discharge by 1985. An interim goal for 1976 was the instal-
lation of the most practical technology available to control pollutants.
The Federal Council on Environmental Quality estimates that the cost
of meeting new air pollution standards for the period 1972-1985 will be
between $135 and $140 billion. The National Water Commission esti-
mates the cost of meeting standards over the same period to be $200 bil-
lion. Unfortunately, this figure does not include the cost associated with
controlling water pollution caused by mining, farming, and urban run-
off. When all these are added in, the total cost for all pollution con-
trol is $500 billion. The McGraw-Hill Survey estimated that industry
spent 6.2 percent of its total capital expenditure on pollution control
equipment in 1974. This diversion of capital occurred in an economy
which ranks at or near the bottom when compared to other industrial-
ized countries in percent of G.N.P. dedicated to capital investment.
Human Resoa. recs
In the area of human resources the change has been equally dramatic,
and can be illustrated by the increased concern over safety of the work
place and job discrimination. After years of relative neglect, it was in
the late 1960s and early 1970s that federal regulation became prom-
inent in this area. The Coal Mine Health and Safety Act of 1969 and
the much broader Occupational Safety and Health Act of 1970 are the
most important pieces of legislation.
The Coal Mine Health and Safety Act imposed rigid standards on
underground coal mining. Small coa] operators, either unwilling or un-
aible to meet the new standards, were forced to close down their opera-
tions. Mine owners meeting the new standards were forced to inc-rease





52


the pri,'e of their coail by as much as one third. Thle OSHA required the
Labor Department to set standards for every aspect of a firm's opera-
tion. ()SIIA. in)pectors had the power to close down operations
lit ,iet inz these standards. One estimate is that 3.3 percent of total
.. .:pital1 invest inent in manufacturing from 1975-1978 will be
si,,nt t,) comliply with these new standards.
'T'he eo,(,lid major focus of societal concern and federal legislation
in the area of hiiinai resources is in ending job discrimination and
((jilt;ljizijn' access in the labor market. The Equal Employment Oppor-
tiuni v Coinmission was established under the Civil Rights Act of 1964.
Tn 1.72, EEOC waNs given independent status and power to sue em-
ployers to enforce its orders. By 1974 the case back-log of this corn-
,ini--ion had reaclied 100,000. Also under its aegis and that of its sister
airnv, lthe Office of Federal Contract Compliance, companies, federal
contnictors, state government agencies, and educational institutions
have had to develop and implement affirmative action programs. These
programs have complicated the recruitment, hiring, and promotion
process- and have required expensive and extensive record keeping.
Oftentimes those less qualified have been hired to meet the new re-
quirements. The impact of all this legislation has been to diminish the
rate of gain in worker productivity.*

Marketing Practices

Another area of societal concern involves the control of the buyer-
seller relationships. Early legislation in this area was initiated in
1966 with the Automobile Safety Act. It was merely the vanguard in
consumer legislation and was followed by the Fair Packaging and
Labeling, Truth in Lending, Toy Safety, Cigarette Packaging and
Advertising, and Consumer Product Safety acts. The result of these
efforts is that product recalls, corrective advertising, and various other
limits on merchandising and promotion have been imposed. An in-
creasing proportion of marketing budgets have been expended on
enlarged legal staffs, and efforts have been diverted away from new
product development toameeting requirements of various laws. Putting
marketing on the defensive has slowed the pace of innovation and new
product introduction and has increased the price of existing products.
Tlhe legislation discussed above is but a highly visible representation
of a fundamental change in societal values. Society has an increasing
sensitivity in the areas of environmental quality, human rights, and
marketing practices. Strict standards have been set in all of these areas.
The effect of each piece of legislation individually, and especially when
taken in concert, has been to increase the cost and complexity of pro-
Specific data on the relationship between societal laws and worker productivity Is
difficultt to obtain. The time lag between passage of the legislation and its full implementa-
tion will of course influence the extent of the impact on productivity. Furthermore, pro-
ductivity fi-ures are very sensitive to stages of the business cycle. An indication of the
effpet of specific legislation on output per employee can be deduced from the coal Industry,
before and after the implementation of the Coal Mine Health and Safety Act of 1969. From
1i9fl to 1970 output increased from 58.4 to 100.3 (1967=100). From 1970 to 1973. after
implementation ot the act, productivity declined from 100.3 to 89.3. All of these changes
cannot bi, ascribed to the passage of this act, but most authorities argue that the act
was the most Important occurrence affecting produclvity In this industry (Source: Bureau
of Labor Statistics). Unfortunately, the effects of the new laws on productivity In other
industries are much more subtle and hard to measure. Laws are more general in nature
and the time period over which they are implemented is much longer.






53


d1Icin" ~b)oo(Is and service'. (Ca.pital used .or ':virun'eIiail ,ol ;:,1 is
I '.
not available to expadil tlie c(')Iacitv product 'e. manageriall andi ai-
llinistrative t im ,s,,ent 1ee W ini/reqiuiremwent- o f (SI IA an d the EIl( (',
is not available for malkin/ more entrepl*eiirLW:'l decisions, Restr ic-

fraud may end u1) protecting' hlim 'roi harin.". abov<1ut prod1cfs which
miffht o'i-ve him uAtility.
Tho objectIvO of eCCOons desMICrow t II ht(as no been s-i-1ippeIc i'ciii d by
quality of li 1e* conICertns. It mIayl well lbe that at oo4 "ta/2e od develop-
iiienit comner1 ove' the en1viiroiment) hluan va1es and Ia ket plaVe
relationship '. is l;1ong overdue. But it minst also be remembered that
economics teaches thfat chicei(s Care nee-.aywith limited, 1 -,oHnVOs.
Economic 1rowth Is is jow list one aioinoi. IIaI IoaIs. I )plicitly s(ciety
lhas been a,2,reeina to pyv tle price for tto.-se .)comlitiients t, Sc.i1etal
con(er'ns by actievi;, less production. U1nf>ortlnately, it lias-: t been led to believe thiat liese maddit ional cone'( Is \V(were .costl1ess..

I NNOVATION AND EN 'ANO:,11 14 I (x ROWI ''il
TechnIolo',()ical novto contributes, to ,c(Ionomic. ri-rowt-li by devel-
oping new products, by i roin existing prodwts, ant y develop-
ino i more efficient methl0ods of p)Odluction. I)urin" the twenty-five year"1
from the end of World War1 II to 1970. tlhe IT.S. ecoionly benefilted
from each of these aspects of techiolo00ical innovation. II fact. few
]period of history lt 0erncd tIle l nqueiq set of circumstalces that
produced th;is ,'olIlden era in tline development and exploitation of
ilnovation.
Conditions conspired to bunch iniovatios alnd their exploita:ion
into a short time period. IDuriing thle depression of tlie 1930s ree5
and develo)menlt expendl tures were sever'elv c(irltailed, if not elimi-
nated altogether. Ideas for new products anid imliprovei(eltt in exisj-
\ ing products and processes languishled for lack of funds. 'I'is inattei-
tion clhann,'ed drastically wit]i tle adve i t of tlie Second( World War.
Tie threat to tilis country required that all of AmeIrica's resource i-. and
particularly its g'enius f r research 'and innovation, be Inmarsh1alled or
tlie wvar effort. IFocused research ad dlevelolpmnent was praclicet d and
succeedled to all extent never before even imagined. (O)ut of t1 is -.e'-:irclI
effort aimied at ti2'litin"r a land, sea, and air world war we idevelopedl
literally thousands of new ideas wI]icl (ldirectlyv or indirectlv could
later b1 applied( tlo t 'ivilian e.ooml. (O)f equal illp tance, Vwe dte-
veloped tle ide,(a tHiat) l1ppose fu r4searc1 and developmeIjh nt could pro-
vide a flow of product 11and prOC.., iiprovementits.
At the enrl of the war our 'conversion to a (civilian econo.V \v: w'as-
Ibuttre-,,(d by not only a catalog of new product and pro+ ce>s in ov a-
tion0s that Iawnaited( exploitation, but also by rcsearrch1 a1 to dei
and develop new products. In addition., tlihe skills of tlew work fori'ce 1)1ad
e)(en enhanced as a bypuroduct of tilie war effort. When tiis capacity y is
matched against a society v wlervc tle prodiction of civilian g ood"s hi:td
Ieen interrupted by. firit, ten years of depr!e-ion and then 1ive yea,
of war. the opport unities were prodigiotus.
The exploitation of the backlogd-Tf innovations provided mIuch of0
the momentu11111 for the postwar expand-ion of the e,.onomy. To wiunder-


78-734-76 5-,








-1.1 1 fiI natuivic of thi, force, it is important to examine the various
-tAl.2,, of ililliat in Iil] their effect. Major innovations such as tele-
vi-ion. coIplute'rs. xerox photocopying, etc., create two types of eco-
,iiiiiC atit i i.NHe. In order to pro(lduce the product, investment has to
IeW miidtle in plalit and equipiiient. Sales of tlie product follow after
iniizuf:icttiria, and miarklet effort are undertaken (see Figure 1).
Adlditional ilnve.t- ient i- attracted into an industry when e arlieri profit
xip, iti:tioiis "itr rcalizedl. If market demnland continues to grow and
tillimO\:it ion is well received, capital will continue to be attracted
into the inliistry to expand capacity. When sales growth levels off as
a ii i:irkei mait tr':, the anticipated and real return from capital de-
clii,,-. thus discoira'ino further investment.

Life Cycle of a 13ajor Innovation
MILLIONS
OF DOLLARS


(4) ANNUAL SALES
'- ......... ". ..... s

y3)* *-...(or decline)
INVE STMENT "'
% % // %

/ \ Replacement Sales
I I \
// | \"
I // \
t
a (
IFI
SI HNew Sales \

-- I -= -- ...... --
4' i

0 10 15 20 25 YEAnS

(1) PIONEErnlG (2) RAPID GROWTH (3) SLOW GROWTH (4} MATURITY (5) DECLINE

FIGURE 1
The "S" shaped sales curve presents a life cycle view of the market
.Icceptance of a new product or service. In the pioneering stage of a
new product, sales volume is low as final technical problems are being
worked out and marketing activities are begun. Next follows a period
of rpI;d mnUl.-:t q/roith during which there is broad public acceptance
of the product. Often during this stage there are incremental refine-
ments in the product which further enlarge the size of the market. A
PIiod of .sow growth then sets in during which replacement sales
in.ciist(e in imiportaicme. Market maturity is reached when sales volume
1 0 no longer growing and replacement. sales are dominant. The final
stiiL-, of the life cycle, which may occur only after a long period of
1 imne. is t ;i.t of at i Ial sJ< s decline.








During the investment stages and period of rapid sales Trow, th of
the innovation, new jobs are created which pump purclhasing power
into the economic. It is in thllis manner thal u ew pd l 1'it )ll pflte
economy. But when inarket frrowtb slows and iat'i s etV in. I i inl-
diistry will do well to nmintain ur'eIT(lit level of eI'plo )V1,illeiWl. '1w
economy will have lost a source of economic' sti llmlat ion.
The demand for Iteclhnologicallv superior 1prodt'ct liais O, nlpolv -
vided millions of new jobs for tlhe economy !ir ;1.:,,r ..ad-ed tble ,.l)ar-
acter of the economy. A dynanic cconomniv is 0lea ly one in which -'ieu-
tific knowledge is being translated into new technology. The con-
tinued flow of innovations is of utmost. importance for the long-run
health of the economy. The twenty-five-year rocket ride was a period
supported by major product innovations. The United States entered
the period of the 1970s as many of its important innovations were
maturing. Unfortunately, they wefn, not being replaced by tlhe new
breakthrough advances nece.sarv to generate expansionary waves of
investment and emnployinent through the economy.
lbwo~td Lnno,'-ltiov s

The most important innovation of the twentieth century was the
development of the private motorcar and a series of subsequent innova-
tions based upon it. The full exploitation of this series of innovations
was truncated first by the depression and later by the war. At the
end of the war in 19045 there were 25 million aged automobiles reg-
istered in the United States. By the early 1970s car registration had
increased fourfold to over 100 million cars. The U.S. was converted
from a society heavily dependent on public transit to a society domi-
nated and formed by the automobile. The importance of the auto-
mobile on the U.S. economy is evidenced by the fact that one out of
every six workers was employed directly or indirectly in this industry.
As important as the automobile itself was for sulp)porting economicl
growth, its greater impact may well be in providing additional streams
of investment in other economic activity. The development of the
suburban living style would surely have been different in form and
extent without the automobile. Tlie boom in subuvln single-famnily
housing was followed, and in turn followed, vast expenditur':- on
highway and expressway costri mtion. Merchandisers bid against
each other to meet the needs of the expanding and affluent suburbs.
Neighborhood, community, and regional shopping centers plus dis-
count stores grew to provide a myriad of shopping opportunities for
liel mobile customers. Office and industrial parks joined the niove to
the suburbs and added an employment base to the-e erstwhile bledlrool
comnmtuninties. All of these movemnents required large capital expendi-
ture and in the process provided expanded employment opportunitic-
and gave a large boost to economic growth.
By the 1970s much of the frontier which we labeled suburbia had
Seen conquered. .[ost urban expressw:iays are in place and manyu cities
have rejected, as either impractical or undesirable, additions to this
transportation capacity. Shopping facilities met and often exceed, .
the requirements of affluent subumlbia. For example, in the discmnint
store field which now accounts for some -10 percent of ._,eneral mei-clian-





,6


,li -:I .Ii-. ,w ci)ll-t i11,'tion i- al t li lowes\ t level illn Iio t haln -I AIe'-a(,'
,vi'n :{illi"es ,f-- e :'.1X0 vac'anti disoun01t slores. similar decline
11:'-., iL I II ill the a re: of -l1o,)piiiL enlterl-. F rthelr'mo'rI. Ilmost of

Srack andl t.r si' l,-le-f.ily housing. :s. lb rbai I I l ,e. ,me fk,1ll"y
,, .11i111. *l,,.lia too on m of' the proble is ltilat had preio sl0
))'rniilt+;, intfercity. Conlyestion increased. the( ;umlistiiiisrtivp (.0-4
of lI, L. ,-,,v( itrint -,iarc l. /h ,iiiL, prjlt ilnls Dm ltiplied. as din t local
1 ;I It it ,,w ''-timatcdl thIat with the iv\er-eI f pr, of IPww sinl(-
i';iil I :',ii-,i]., (xc,,., .it 4 i ') O). Iinder "25 percent of t1ie fina ilies c.an
.l',r I,'h v..lliii'-. W iti tI fllc acceleration of t1le pu'rliase price.
intei--' ', i.t. taxes and operaitilin, expenses for sinlile-fain ilydweliins.
I; .i ,m-, I:aili,- are re1 ,r;ted to liInlti-fiimi1iv holisinl ind 0mo)ile

'I ii :1 tT',()i, ;iid1 -111)liilidzatioin piovid(ld tle( impetils for an
inv.''.,-,, in activity wlihich conltrl>l)ited mi litily to 'coonni,,, growth
fIIn 194 to 1970. While the aiitmnoiobile industry will continmip to be
llii 'i,1t:lit. ;IMd v' while additional investment will be made in tlhe
snlmi. -. hlie inct of tl-e:, wftivitiEs' i- not .ioing to appiroich wlhat
h1-: o, ''d'i ,l in tile 1:,.-(.

/^'i ~f- lVf/' (r! r u'f/h Jnduf h/'ipx
Tlie peri,(dI of the latte 1940s. 19as, m,.d up thrmoigh the middle
19.0ws was particiil.irly fmind for innovation. Some of these innova-
!iop- could i ri ce tlieir technologifal antecedents to the prevwar period.
'-Omee Were diirectlv derivative to thle massive R and D efforts of the
wa :1r, and still others w,'e, e:-sntiailly po- --World War IT plhenomlena.
To.'.,-thev' they providleht :n impetus seldom mat'elid.
Television i- an)) example of a prewar innovation thal had to wait
tintil thie end of ,hostilities to havoc an impact. In 1947 apprl)oxi"lately
2()O.()O(1)( television -ets were produced. Only three years later, the
.,"',, wz- 7..5 million televi-ion sets. By 19(f)0 black and white televi-
-or- lnd n'.atirrd rem'.'hing a :saturation level of 90 percent. with
thi','.-f,'mrtl- of new :-;ileq for replacement purposes. Tlhe intrioduction
of ,'$lo. teIlevisio) in the early 1960s iniiiated a new wave of growth
in this ndu stfr'. F'm 150,000 sets in 196)-_. production climbed to 5
million color '-is by 1966'C. The S ir.,'e in ,economic activity not only
inlclwded that directly involved in tooling-up mand pi'oduein-new color
ctis. Ibitt al:- inv-estment and activity involved in expandin television
i 'oad,':ia-tin (':a lijlil i+s at the network and local level alone with a
variety of support indlistfries. Today, however, color television is in
tui, l- iiit'rii with 70 percent of the homes having color sets. and
wvith 6 1,0,prcent of sales for replaceilent of existinm1 color sets. The
li:'l.llood of another wave of technological innovation,. tlat would
':t!']t te economic impact of either the advent of black and whliite
tlee-vision ;tid later color television, seems remote.
A..l!o.rli civilian aviation exi:sted lpio," to World Wa1r TI. its sitr-
niti'-an., in thle overall tr':insplo l tat iion sche4e was minimal; (Over the
perid tfr, n 1945-19(70 the niiumilber of pas.'-eiirer miles flown increased
37 timie's nd "(1-*le- revenue 34 tinimes while real (GNP itself increased
bv 'ny one and at h-ilf time-. Trir rapid development ociviliil avia-








tion w\a:- built on the foundations and experience- guided during tin.
Second World War. From 1941 through 1945 over .5 billion dolla:-.
wa. spent on the production of alml,,t 00),0)0t) airplae.,. A happy
consequence of the \iar was tle new skill of all-wealthr navigation,
a seriesof technological adlvalcT- in aircraIft design, ;i ; I Ir e of trai.edt
pilots, production and maintenance persoel, and m,(( i imlllportanitly
a consciousni:-.- of the potentialities of civilian aviation.
Just as in the c:-: of television, tlhe I .S. explrien.1itcd tl, 1-timilliattiig,
effect of two waves of aircraft (4evelopmlent anl(I invest ment. Thlie fil'-t
wave was underwritten by thie four' engine propellor aircraft. The-
planes could i v at twice the speedt. 'arry four timell the number of
passen1ger-, at liglier andl more com.1,oI.t't hibe altitude- than tlie two
engine planes they rl'epla-ed. With tlli- imprIovement in aircraft.
civilian flying -v'ew rapidly in the latter 194)-s alnd duriii thle fil-t
half of the 1950s. Towvard tlie ,end of the 19.5sA the rate of growth in
flying had significantly diminished.
In the e rlyv 1960s. tlhe rate of growth in civilif;i' aviation accelerated
once again as the jet era got underway. Thie introduction of this ,,on-
ev'tion of ire'ft increa"-. l tlie speed. range and in turn the comfort
and desirability of flying. Tlhe econ()l ic impetus provided( by the in-
troduction of the jet airer.ift lasted intil the late 1960.s, when d(e1-pite
vario,- modifications and confilgur:,tions thlie rowtlh in civilian avia-
tion appreciablyv slowed. The aircraft technology tlat will lbe used for
tlhe next decade is ialrea(ldy in pbl: ce. AttenImpts to introiluce super-,nic
jet airc'aft on 1doilestic rolltes is doom ied( to failltre on economic and(l
environmental gromnds. The, aircraft prodNetiom indut-trv is in a re-
placement mode. 1t is very uliely.v tflat this -.ctor of the economy will
provide the ecolonoic impetils tV'4t it 1did i] the recent past.
Similar palttern- eC-^t fo. -,vorf i otli!' ip :--', o ,A I1I in There has been a si nificant le-'ofninrof single entity an(l combination
druls. Likewise, the photoeopyiu, idiu4trv hias reprodn',d mAn almost
identical pattern. Thie leading, firm in thi indilstrv Xerox. saw its
sales increase some 47 tiil!,- durinim the (leca(lde of thie 19600<. E plov-
ment leaped( from 3.000 in 19(60 to -.5.000 in 1970 and stockholder
ifnvlc.Y,,ive- increased 1]v aln,'-t 5(0 ti ,s. By f 1i l;at(, 1970-. Ner'ox
lbvy its own forecast will 1.. .rowin( at n modest -9 per't ; y:r.
As Om, biwiof review of four of the milorp ilmortint indutri-.4 lhas
shown. teehnolofic:l mitvritv haif1 come to "n,-tilme iliportant "I',owth
indnttries, of the T .S. econo!-v. Tlih, incr i.ease i iol-. invest- e meant oppor-
tunities ald (]onomlic (rowtli a -ociltPd with tio1:11 an,] otl-,,r ,"''wt1
industries is hard to replaee. Technologii-a1 aidvne- and l pro(bdict
i,.novations will continlme to occur. Thle imlortamt q!u,,( ion i- wilethler
they will be in suffiient qiIantitv and im u,'rt to replace tplie -'imuls
pr,1'vi led lbv thle novw matuliP ,r_ terhinoloaoi,
The )pecliar jixtqpo-itinoi of i depr,'--ion followed IlW w: Wr, led
1o a unique _rou])iP2r of expl.'itv.1ble innov\";tions ans T: 'ie
iMnovaItions were of -clh nliaffnituil.e and import to -,rv'e :1- 1l' 1,:,sis
for rev~tali'i/ ,," Tiio 'il itd ildH-1i'i'- -n.1 r def'oel oloim 1 11i,, ,,,w
i1Fl41ies. Jiifnrt'nnailely. event- 15Ayve ronsp>l-- to limit tile nlb)'r
.d J1(ipot(lial of traus fhiruill r tyv1p- of ilmovvntioH- ;1 thle fove-.I-:,bb,
"fitill'(\ -Mom- of tfi(1 recent. old Iw~()-] )-.t ve( *miiovjlo:it iolsbvo b1)'*11!
iitin 'rneietal rather tlan transeori ,in ill cI-I-., 'ctr. The lirital watci..
solid state television, am]l : ini-,.i.cm lators i- .l i)''- ,,nt :aidvai,... ut





58


1a ,.-icall\ perfrimu thle .a;mc tinuctioii albeit miore rap idly and con-
venientfy than their predecessors. A look at the future shows a few
bright spots suirrounded by dark images. For example, MPUs, the
co1p1)uite.r oni a chli)p. is the kind of advance which could d be more than
incr1ementn1. Unfortunately, there is a dearth of such innovations on
tlie horizon. As we ioN-ve away from a goods economy toward a service
t,(,:,lO.IIy, iIim)vations become more difficult. Recent figures on expendi-
tres for reea rcl and develop ient, of both government and the pri-
vaIte .-e(tor, reinforce our judgment.
F.-CAIATING IN.:N,;Y COSTS
Mzimv of tin pot.-', world War II Ic( -,l,,oI(ir'Ll adv.iiwi'.ltts WcreI
energV intensive. TI'1 nature of many product and process innovations
and their extent of development resulted from the U.S. having large
stocks of cheap energy resour-ce-. The prominence of America in
,tjergzv con-umption is both a cause of. and results from. its high level
of economicc attaiinent. With only .Six percent of the world's popula-
tion, the U.S. consumIes approximately one third of the worlds energy.
From the latter 19DOs until 1970, the nominal price of petroleum,
coal and eleciricitvy decreased. Over this same period, natural gas
price- increased, but at a relatively modest. rate. When account is
taken of general inflat ion in the economy, the teal price of these energy
Iresources11 declined draIn-mtically. This, encouraged the process of sub-
stituthtin relatively less expensive ener.v for more expensive labor.
,'ap-ital and material resources. The favorable energy prices facilitated
and extended our record of economic, growth. Whether by design
or accident, it is nonetheless true tlint from 1.945 to 1970 the increase
in real GNP and the increased i-e of energy almo.4 exactly tracked
each othlier.
Energy does not abide by the laws of Newtonian physics would hold
that everything is reversible. Instead, it more nearly conforms to fi,
laws of thermo(dynamics which hold that eneryV once used is lost for-
ever. Energy is clearly a depletable resource. As a depletable resource
it is foolish to expect it to be provided at constant or falling pricese.
This is an Tm possible Dream. It runs confrnrv to the log'ic of resoiurr
,.0o,-Ihic S '%ieh l-jl ,igc.fsts thla:t increasing ntili:,ition of dplpet in ye-
sout','- cannot Ions, occur at falling pri,'s,. but ii4te-l ait bi!her
prine,.. We delayedl bnt could not repeal the principles of resource
econonnics. The day of reckoning is at hand. Our enerfry dream is in
the process of beinz exchanged for a nightmare.
To understand liow we achieved nnd nmintanned onr fnvornlhl
energy posture it is necessary to brieflyv review our Pnor!'-v cirrum-
stnncep. T110 re;n-arv zmrovz of aneravr'nl. oil -Ind if, tnrl *i-
are hi rhlv sull ituitable. Purinffthe 20-vear postwar period, petroleum, in
and naf ral Lr:i: was increasingly ernrl ing the trndiftional minrkets long"
dominated byv conl. For the period ns n whole the enrergv derived
frol II'etrol,,im triplnd.fl f'r0m ntul'rql _,a quintuplecd, while conl
ucQaP dlroppwd slightly. Electricity consumption increpised sixfold.
Petroleum mpintainPd its finvorable competitive relatonnshin ipri-
marilv due to in'r'asiii( imports from South America and the Middlo
F.Ist. N:IturaI rns prilvs v-Pre held down Ivy th Feeornil Power- Con-
mi'cc-on whicl relinte(l wellihend price. Coal was cfiriiglinz rnihtilv







to maintain its largest reiminij lmarket-tile electrical tiliti--
against the combined blows of cheap imported oil, low price natural
gas and a future nimade itticertainl 1y lie mro.wj- ct1- for uelear pOwVer.
The economic impact from the thermiodydnaiiics imperative caj ie
postponed, as the quarter century following the war demonstrated.
However, ('ventlallv the dlay of reckollinl' oTccu. a> events of t lie
1970s clearly demol,:t rte. The Oil Producing andl Exporting Coun-
tries (abbreviated (O)PEC) formed an effective cartel which lused
supply limitation to (quintuiple tlie price tHei, cJharIredt for oil flomi
19T7 to 16 .. ()ver tHie '-:tin e period of (hite etirly l)ThV.. doucIi(-tic
p)rodltctiont of oil peaked and lja;. sin(e declined. The t .S. wz.- al
to meet foreign supply restrietions with increased domestic produc-
tion. Fifteen years of holding down the price of natural gas has
stimulated demand and retarded exploration. As a result iatural gas
production also lhas t.caked aiid declined ill t11e early 11970-. Tlie
coal industry faced witlhi uncertain pro'-pects failed to increase its
capacity. The comlbinatIion of 11tl th-t forctes resulted in a -evere
energy shortage with rapidly -.,alating fuel prices.
Even liee m,.s -:ang2i*eI formeca.sl indi ,ated ouir coniiitiued, depend-
e(ice oni the traditional sotources of energy for the remainder of the
(Ientury. UnJfortimatelv. fut re energy is going to be developed and
made available at higher prices. OPEC appreciates the extent and
the growing nature of our dependence on foreign oil resoiurce-, and lha
given every indication of continued price increase. Additional pro-
duction of increasingly more costly domestic oil and gas means higher
and higher prices. Further, utilization of our abundant coal resources
will also lbe at Itiohier prices ldue to more stringent environmental
standards.
Optimistic forecasts have eeiri made for new energy souirce- whicli
hopefully would ameliorate our present energy problem. Coal g a-ifi-
cation and shale oil hold some promiise in meeting our future energy
needs. HItowever, many problems must be solved before the-e tech-
nologies become commercially feasible. Current estimates indicate
that their contribution will be minimal to meetillg our growing
energy needs.
Almost from its inception nuclear power has been promoted as the
coming energy source. But three decades of experience has mode rated
its expected contribution. Continued escalation of plant and fuel cost
have combined with continuing questions concerning reliability and
safety to adve'-vly impact on the economic and political aaceptability
of nuclear power. Any hope of nuele:;ir pow,'r playing a dominant
role in our eniergv future awaits the development and commercial iza-
tioni of thlie breeder reactor. Many experts question the feasibility of
their br.eder reactor and mo?-( agree that if it is to> make a contribu-
tion this will be after the turn of the cent iiry.
Solar energy utilizes a nondepletable energy resource :mad as s-chl
it provides new hope for the future. However, most analysts ag-re,
that solar energy will become economically attiractive only when the
price of traditiomwil energy rezour'ees i:- much higher than it is at the
prec:elt time.
Chtap and abundant energy was, a major factor contributing to tl,,
twenty-five year period of economiic growth following the war. Event





60


I Nve cu.i I,-iir ) II t, t li-i iiiite. tills fa;'tor ini SIusppirt of grlowtII. ('heap
cli i *ir 'ill! r1 1(111, l! r 1e Subli-titilted for (t er resolirves. indeed tilhe
-il,-titlutioi will 1,l, in the other directions. (Co-erivation rather than
pll .il'ji-ttA iist i- the cI1allelLre of tfle ti'et,. "hle n;w e(llgy cliiiate
,uiltitj. i ,ensidiered :i ne'al liv f;v'.toir ill :.-es.sil. flutulre *rowth
1 10. :i f ,'' *t -*

i*':' ,,-;t r. iCW1ViFSllON AN'i THE NW lEAl.\LiTY
Tl 1~'l 3t,-\',rld War II quarter century found thi' (ecollolict1 P)ro-
f.- ill, pl: ii0 :ill inc th;i ,ilglY pro(mlilint hole in di.-i.ssionl of eco-
iiolIilc aiid ,',ial !)'licy. This iuew-foluid ploiii1wi'lce of tlie 'coiliomics
i'. sioin l'-il (m two pillar-. First, Ke. v.,i'an economic.- ,a e tlihe
I,) h 1f,1..-.1,i i n| allertilal frai ev,.-ork wliili \',';.is coind cive to pre-
I' i Lv lll1i-1(I 4)11 t 4, )_1fil.1.1.Z.Flrt .
bin I olicv illi)i ti *c- f<;r "liort-ii 11iiilniana 'linelt of tle t'eOliOliV.
Fii-' il and in, 4netary policies became tools which political authorities
coUMid ii-t to miove the econnO'my towaird- fuller utiliizationl of labor and
capitalal rc ou't'tItl,' ..
Th'e .ewndl a111 jor pillar oin wl-ichl the il iportlatce (of flit' e'oloilolil"S
lprofe,:sio was erected was the economic record fronii 14.; to 1970.
This t\\wentv-Ive-VCeir time spa Is. ai plerilod of almost continluollS
(econoImic ervowthl tlihat was intellrrupted lby only mild recession.s. The
profe-sion lm.4akd in the reflected glory of the p)erforml'lanlll(a' of the
lt OltilliV,
Muil of the t,,ononii profess.ioni aidl the public at larp'e ascribed a
,crta ili ca;il-aiity to wlhat eollonll-lists were saving a 11d doing and to
what was ]happening in the economy. Unfortunately. imany econoi ists
failed to approprij.telv anialy/e the fundamental strengths of thlie post-
World Wari ITI eoniiomy. They failed to :appreciate that much of tlhe
-tr '' perforlnli Ice of the econlomv v w, due to a pro-growth societal
ethic, cheaply 1 :ind abuiillant (iIergVy, anf a liar-e storehouse of un-
cxploited e(conomie innovations. An exa m createdd importance wai
i,' ill cd to the ,',mvw l-ii4t's ability to ,bta)in growthh and stability
throuiih manipulation of the short-run tools of fiscal and monetary
policy.
Tilhe ecolomic- p)ro.fe4-ion expended 2reuit effort during thle twenty-
five-year period in developing and ela)oratiin" models, theories. and
tools -aimed at controlling sliort-run fluctuations in the economy. The
extenlit of ti.s cominnitillelt is hard to over-emphasize. Indeed the very
natu ire of economics and the economies pli'ofesion ,.lmngred as a result
of tlii- new-found cominitm'nt. The social srielce roots of economics
were greatly de-emphai:e.ed.. and the direction was towards enmulatinr
the Iphysi.il sciences. Tills movemenT t was aidedl and abetted by in-
c'l'';i-llu" attempts to mathematize economics. Statistical imanipilua-
ti(on and t,1e(,i'tic:il sophi)titia(tion were increasinifly valued. The coal
1e.caiii et tit:It of developing a vauiNe-free social -cienee. This led in-
cre:ui.iily to the prof,.-ionalization of economics. In the minds of
the practitionei. and increasinly to the public, economics became a
very 1)Oplii-ticai.'ld -:ird complex -lubject matter. It was accessible only
to pliatitioe's wlio had served lengthy apprenticeships and who
;,rifbd t ttlle. phil,-oplly of the phy.ieal sciences.







Just as much of the economic prof-.-ion failed to identify the
fundamental forces which provided strength to the po,-t-W orld War
11 economy, they have simnilarlv failed to t:('ilge tie ero(ion which
has occurred in the.-c forces. Given tlie imdeq(lua:c\ of ecolnioic knowl-
(edge, most economists have called for diff'ereiit dos.-;icres of li-,.al ad
monetary policy as the remedy for our' pie.-nt ec )nonoic' i ialdy.
Trying to solve long-run growth problems with the short-run tool-
of fiscal and miionetary policy contributed to the worst dowlitulrn in
the economy since the Great Depvression.
In addition, tihe primary focus of the economics pIrofc's-ion has been
lar.,,ely deniaIli( oriented. SupI)ply problems by their very nlaturc tend
to be long-run considerations. Much of recent ecOIlOlic anadl.-i and~
policy prescription have treated elements of supply conditions ;I-
constants. Inadequate attention has been directed to technological
change and innovation, resource development and pricing, the imnil I ct
of government policy on economic growth, and ways to mncreaIc pro-
ductivity. Co ntiued( preoccupation with short-run stabilization p)oli-
cies and procedures just postponles the day when progress can be
made in meeting the long-run problems and concerns.
If we are to experience future economic growth and stability, spe-
cific attention must be given to the supply side of the economy. How-
ever, a change in orientation of the order needed will not be an easy
task. Economiists have invested three decades of primary emphasis on
problems of short-run aggregate demand. Economists must realize
that they have to leave tlhe sophisticated and highly developed world
where they have dwelled the past 30 years, and enter the under-
developed area of long-run supply problems, which remains un-
mapped. This journey requires that the economist accept a different
view of himself and his profes.sion. He no longer is aided by the
sophii-tication of his model and the reassuring belief that lie has the
requisite answers. His major challenge is to accept the enormity of
his own ignorance, and from this humble post begin to develop mean-
ingful theories, analyses, and policy prescriptions.
The rewards of this journey are a new relevance. Economics will be
returning to its roots as a philosophical and social science. Economics
will again become the study of utilizing scarce resources in an efficient
manner. We will again worry about how to increase the wealth of the
nation. ThIe long-run problems that occur on the supply side must be
solved if our future short-run options are to prove both meaningful
and endurable.


78-734-76---G












ECONOMICS AND MANKINI)S ECOLOGICAL PROBLEMr

By NICHOLAkS G:EORGESCU-ROEGEN*


SUMM313ARY
The problem of man's relationship with the environment cannot be
reduced to what the price of gasoline should be tomorrow or how much
oil the. United States will have to import in 1990. This problem is not
economic in that narrow sense. Its nature is bioeconomic, for it in-
volves the special mode of life of mankind as a biological species.
Only if we view it in this very broad perspective can our steps into
the uncertain future be guided in full knowledge of the nature of the
issues of which we have become aware only recently under the pressure
of events, without, however, fully realizing their momentous dimen-
sions. The entire picture may at first appear as a mosaic, but its flaw-
less unity will emerge in full view after the connections between all
the pieces are analyzed and established.
All species, including ours, have evolved through biological muta-
tion.s, which usually (but not always) render the individual better fit
for life. Only the human species transgressed this extremely slow mode
of progress as it began to use and later to produce "detachable limbs"-
a club at first, jet-propelled wings, and electronic brains in our own
time. We have thus acquired organs that do not belong to our bodies-
exosomatic organs, as they may be called-which we could not have
developed on the biological track. But the important point we have
failed to re-alize is that this unique evolutionary feat brought upon
mankind some predicaments which, from what we can tell, are
irreducible.
The first predicament is man's dependence on terrestrial resources
in a staggering degree. Man is now a true geological agent, drilling
and digging the bowels of the earth for the energy and materials with
which to produce his detachable lim!bs. Almost all of mankind
thus became addicted to the comfort and delight offered by these limbs
in a s(.-e of "addicted" for which there is no other correspondent. We
are addicted to that comfort, be it reasonable or extravaffant, just as we
are addicted to food, for example. An abrupt restriction of the use
of our detachable limbs will produce unimaginable withdrawal spasms.
If the use of any exosomatic organ were stopped for only a few weeks
in this country, casualties will most probably exceed by far the num-
ber of dead during the last three wars. Yes, we do not live on bread
alone, but also on natural resources.
*Di.tin-niilied Professor of Economics Emerltus, Vnderbllt University. currently
vi-irin- ; r, B ,rjijmi Profe.ss.r of Eiirrgyv. Regional Research Institute. West Viralnia Univer-
sity. This li.iper wvis prepared while the author was an Earliart Foundation Fellow.
(62)





63


Our addiction to exosomatic enjoynient i.s unique in l-ill another
way. So far no one has died of an o\ver-ldo-v. To wit, \\. in this coit,
feed our addiction far moe intensi veIy thI ant t liC rest of t lie N0 worl I (iII
some ca(:e:, one huinldred tiimles ore), and niieverthelles-s we are still
going strong-or so, we think. Tie United States, in p)articullar, i
thoi,4hit of ';io.,i, ually eliniim t i!,, this difference bet ween the (levelope(
and the under(leveloped. If the s/lb-h-antial effllort lhas remniained with-
out effect, it is beclaio the approi,.'ih was basedi on the standard eco-
nomic view-with money you can do anything. At this late lhour, it is
imperative that the overdeveloped move in ass to s:;ive the indl.er-
developed by s:ciding then factories, not to produce their own -1 xu-
ries (like most. of those built with past aid), but their own food for tlihe
years ahead.
The problem touches our moral fiber, to be site. but it grow- out of
the second predicament brought by the exosomiiiatic evolution. Because
of this evolution, mankind has always been divided into exo:-om nitic
spccc., just as different from one another as biological speci,,- are.
Exosomatically, Homo Americanus may be characterized by the self-
starting, self-cleaning microwave oven; Homno Indicus, instead, cooks
in a primitive contraption which burns dry dung. Since the difference
is bioeconomic in nature, it can be eliminated only by a development at
the exosomatic level of the underdeveloped. We have just developed a
microwave that "has changed America's way of cooking." What is in
fact needed urgently is a cooking utensil that would change the way
the underdeveloped cook. Because we have not been able to see the real
nature of the problem, no R & D, in the developed or underdeveloped
countries, has ever thought of trying to design such a utensil. This is
the tragedy of the inequality that makes the whole world now boiling
with unhappiness and ominous unrest.
For the sake of completion and because the point bears upon some
solutions to mankind's welfare, I shall mention also the third predica-
ment deriving from the exosomatic evolution. Since production of de-
tachable limbs requires an org:i nized society, human commmunitive- came
to be divided from the dawn of civilization into ",governors" and "gov-
erned", in the broadest sense of these terms. The ensuing social conflict
may be kept at a low flame, but it cannot be completely eliminated
(unless man returns to the simple life of the traditional village or even
to a more primitive one). As long as production lias to be organized
and supervised, there will be either presidents or conmmi- ?nrs, either
chairmen of the party or kings and enmperors, and so on down thle line.
This predicament has its second root in the fact that, in eontrnist with
other social species, we have not come to live in society by biological
evolution. Humans are not born so that each individual be fit only for
some particular role. The biological constitution at birth of ,i haman
may fit the rele of a ricksha man just as well as that of a mandarin.
IHistory, past and present, proves that man's struggle to obtain con-
trol over the terrestrial r,,somrces dominates this entire picture. If
standard and Marxist economics have completely disre-:,'ardedl the role
of natural re.ourr-ese, it is only because of the fantastic ninera loloic:il
bonanza which the developed countries (where I)oth economi.- o0riai-
nated) have enjoyed for the last two hundred years or so. It may se,' il
hard, because it is unpleasant, to think that this bonanza may be a
unique episode in lihe long life of mankind. Yet it niot certainly is so.







When oin.': pantry is stocked uil) with far more things than one can
usCe ii ir' l(iatcly'- one not only may lose sight of its finitude but one also
is apt to ])elievc iln n endless availability of resources. In fact, people
on0e1t bliev'dl in perpetual imotions-at first even in the inexhaustible
nattuie of electricity. The science of thermodynamics has cleared iup
iicli mythls, altlhoughll some still linger on dangerously.
In es-ence, thlerilodynamics is a plhy.sics of economic valulie, i.e., a
Scieile concerned witllh the particular physical quality that makes some
things have a value for man. From this anthropomorphic viewpoint,
tliermodynamnics divided energy and matter into two qualities-avail-
.b1le to man for Ills life purposes, and nonavailable. Matter-energy,
while remaining continuously constant, may change its quality, but-
Mnd this is an important point-always by the degradation of av-ailable
into nonavailalble form. The existence of this irrevocable degradation
is the meaning of the Entropy Law-a law much quoted nowadays but
often little understood. The degradation goes on all the time in thle ma-
terial realm, although some living creatures (the green plants) slow
it down, while others (especially, man) accelerate it. When we drive an
automobile or heat our homes with some coal. we cause an irrevocable
degradation of energy available to us into a form no longer useful to
us-dissipated heat, fumes, smoke, ashes, etc., briefly, into waste and
pollution. That we can use the available energy of a gallon of gasoline
only once is by now a commonplace. But an automobile tire, for ex-
ample, can also be used only once. Therefore, the full meaning of the
Entropy Law is that unavailable matter-energy continuously increases.
And since entropy is a relative index of the amount of unavailable en-
ergy in a system, we may also say that entropy continuously increases.
In view of these tiernmodVynanmic laws. it is certainly inept to push
aide the ,cqrcitv of matter by tlie idea that tlhe whole earthly is mnde
of matter. The rulb is that not all the earth is made of matter accessible
to us. The same applies to energy. v,-hich as thermal energy exists in
fantastic amounts in tlhe ocean waters but is complpeteoly unav-ailable
use in the engines of ships.
The fact flthat our terrestrial dowry is finite and can be used only
once is the crux of mankind's ecological problem, for which eco-
nomics cannot b)e of much help. Market prie's fre plro.-iial elements.
And it was because prices were right that deforestation took place on
:i sale wve now bitterly regret. Some future generations will be short
of plowshares just because the present prices of Cadillacs or Rolls
Roy Even technology has not always moved in the right direction of
true ecological econominy. The most salient example is mechanized agri-
culture, which has replaced organic agriculture, a system relying
mainly on solar energy, by a system relying exclusively on terrestrial
energy. Think of the fact that the solar energy received in two weeks
is equal to that of the entire fossil fuel reserves, whereas the sun will
shine for another 200 billion weeks.
Some have claimed that the earth could feed even a population of
fifty billion. But none has stopped to ask the question, "for how long?"
The greater the pressure of population on land. the greater the cost
in scarce terrestrial resource per man. Recently, we have heard of the
ecological salvation lying in a stationary economy. But this thesis fails








to offer any criterion for the op)tilil size of po)uIllatii,,. The ,nlv
criterion is that populati s at I it all a It rei*); :ii a the level wali,'
can be fed by organic agrieultll're. But we :lold not 1' ni-i : 81(eI
even a stationary 1IOl)OIlationl will coitiiuie to (d(',llete the ter -rial
stock of maitter-enlergy and iJ c: ;lae p)op)latio( an tl(,ie Ii-ilaiion of
matter. M-an's mode of life ,.,ii no possibly retain -iatioiary. Strug-
gle is an inevitable feature of life. ,.-pecially, of n011 's.
Given the n r-t rietions and thie pre-l-ire of an in lreasiLg 1)01)1ilatiol),
given aio tie interest w\lii we ouglt to limve in lie welol-ibeing of
the fiutur,. tene.ratiosll, wve 1ust ,'1rriv-e at a re:; -', )able policy to leal
with tlie e'wologic:al problem l)efore it is too late.
Plans like Project Ind1pcidendee as well as advertising tehlinici
means wliich are not yet available (-orme, po-ibly, not evenI fei-,ible
at all) are friiught with (langer'. We must not be guided l)by illhi-ioI
of one S.'tr0 or another. We 1must wait iit inti we ca'l block out fnravitahi-
ticn before we S11ll shares in housi s without staircases and elevators.
The only effective policy is to act onil demiand-as nations have al-
ways done in times of scarcity-and welcome the innovations only
after they take slhapl)e. To economize is the most elementary principle
of economics. There are numberless activities with which we can splen-
didly dispense. Fashion is one of them. The use of two-car garages
and of such things as the golf cart is another one. Still worse, we are
now bciateg the ploW..hares of futuirc generat.1ons into pre.seit swords.
Our ecological temper is, however, dominated by "bigger and better'"
depletion and pollution, by "no deposit-no return," and by "when the
blades ultimately become dull, you iust toss the whole razor away."
For these reasons, the faucets through which terrestrial matter-
energy pours into the economic process and the drains by which waste
*ret irins to the environment must be put under a control independent of
the market or any ownership. Ilowever, the internal allocation should
be left to the market, the only computer which, if well supervised, can
solve for each generation the immense .system of optimnalization of
given ends with given means (as the textbooks say).
Such a bioeconomic program stands no chance of being implemented
if our scale of values is not reoriented, not only in this country, but
everywhere in the world, according to the commandment that seems
to be dictated by the present evolutionary momentum of our species:

"Love thy species as thyself."
These are the points which will be examined in this paper in -omne
detail.
I. THIE MECIANISTIC PlIIO.'SOPIIY OF STAN1DARI) ECON03II "
Standard economic'---that is, the economic science as has been prac-
ticed during the last one hundred year:- or so-defines itself aIs the
study of how scarce resour, c.s are administrated. It is only as ,ie
becotin s acquainted with the t.('Phi;lrs of thil- disciplieii that ,it' dis-
covers that its definition leaves one important thing 1n-aid. Bv "re-
sources" standard economics understands only labor, capital, an:i
Ricardian land (i.e., land as mere-space). The role played by natural
resources in the economic process is completely ignored.






66


'TI, onli--ion is 1ighl1" int riguing. alnd has recently betomie the cause
of .()ini embimiTars:.mcnt. For even a ciursory reading of hi:torv would
]nav, -]cwn that control over tlhe mIinieral resources lias been and
still is o;n., )f the int- important factors, if not the moA-t important
f~ictnr. of p1ditica;l strulg.,les between riations-struggles which have
their fifet'il social re)(lrcussions within each nation. At tlhe same
timeiP, We 11-4t re,'o'iize that standard economists may invoke some
i'rilii-t;i lti;l reasons for that omission.
Firt. the true industrial revolution (which actually began as far
41 ck 's. the thirteenth century) acquired a fantastic momentum be-
ie of the mnineralogical bonanza which paralleled it especially from
the -e(vnd half of the nineteenth century on. Iron, copper, tin, and
le,;l, for example, had been mined and smelted since old. Glass, too,
lad (beein produced by basically the same technique long before what
in economics is called the Industrial Revolution. Only, the fire power
IuIAld to come from wood, instead of coal or oil. Factories had to move
J'roni one place to another after tlhe supply of wood from the neighbor-
ing forests was exhausted. The industrial activity of that epoch was
the main cause of the vast deforestation everywhere in the world.
The emergence of the modern mineralozical bonanza caused a sub-
stantial change in mankind"s evolution. Because of it, man become a
geolongioal agent-an anent that interferes with the geological strata
of the globe. It also led to the belief-so clearly expressed and insist-
c-ntly defended by Karl MAarx-that nature offers us its treasure
grati-.' Standard economists. too, took the position that all one has
to do in order to obtain some iron or coal, or oil, is to expend some "re-
sources"-labor and capital-in an appropriate location. Because of
the i ineralogical bonanza, all were led to believe that such a location
could be found at will with only some additional expenditure of the
saame kind of "resources". Even at this hour, many believe that all we
need to produce more energy and solve the ecological crisis through
some kind of Program Independence is to have command over enough
monev.
Another factor responsible for the omission of natural resources
from thlie vision of the economic process is the mech ni.tic epistemology
to which the founders of standard economic; and their followers to the
present day have clung with a blind force. Mechanics allows only for
a chance of place, .for locomotion, which i. completely reversible. In
no mechanical analogue, therefore, can there be room for irrevocably
exhaustible resources. But, as it happened, the mechanistic dogma en-
joOed an unparalleled prestige until well into the second half of the
nineteenth century. To recall, Laplace felt completely justified to
ni-nirtain in his famous apotheosis of mechanics (1814) that absolutely
everything in the vhlole universe is completely determined by a vast
system of mennhlnical equations. The sole concps.ion he made was that
only 9n intellectual demon could possibly solve such a system. But
some years later, in 146G, a "miracle" happened. Urb.in Leverrier dis-
covered the planet Neptune, not lv scanning the firmament with a
powerful telescope, but at the tip of his pencil following come calcula-
I rciyrlow1 Pvrn Marx noted. however in passing, that "it appears paradoxical to assert
th-it iinea'i-it flh. for instannep. are moan,; of prnrdlietinn in the flshtnz Induntry. But
1thrtrto no one has discovered the art of catching fish in waters that contain none"
(rpifq,. I. p. 201 note).








tions based oil the eq(llations of me,'iai,-. What LapIlace !:id oilv
-envisioned now seemed to beucomi :t hit. \\hat a bi':,utiffl (1, .,ii for
social scientists Leverriers fa; must have tlien ii--pir I! TIhik of
an economist being able to calculate the po-itionll o.f a pa:lrticu lar -:Iare
onil the firmament of the Stock Excinige iL' Market tolimorrow or, evenI
better, one year from now.
The most important .a11 -., ho\etver, of tlhe u1-iqel -i' itt ad-
herence to tie mechanistic eq)isteiologyrv not only of econolist-. but
also of many other students, is one lasting propIel-ity of Jmw h, lutlian
understanding works. Probably because we can act only by I)iV-,ingI
or pulling, i.e., in a imeclianical faishionl, our miini.., feel a tArol,, attrac-
tion for mechanical explanations. A g,':va' physicist, Lord KIelvin,
admitted that "I can never sal i.sf- mi.-slf until I can miiiake a umei *i:li i-
very telling in this re-pect.
Shortly after Laplace extolled the power of mechanics, Sadi Carnot
(an officer in the French Engineer Corps) became interc-tvd not in
celestial affairs-as Laplace and others had always been-but in a
quite pedestrian problem. The problem was the efficiency of steam
engines, of the power of fire, as Carnot described it. His memoir o.f
1824 ultimately forced upon physicists the surprising discovery that,
after all, mechanics cannot account for every happening in the uni-
verse. It cannot explain the simple and faithfully constant phenomenon
,of heat always pa.sizig by itself from the hotter to the colder body,
never in erev,.rse. The laws of mechanics allow any mechanical pheno-
menon to go in reverse: as well, as best exemplified by a pendulum. To
wit, the earth could very well have moved in the opposite direction on
the ecliptic; no mechanical law would have been violated thereby. But
if heat moved by itself from a colder to a hotter body, one law of
thermodynamics-the peculiar science that grew out of Carnot's
memoir-would be defeated. Subsequent discoveries, of the same na-
ture-in radioactivity and quantum mechanic7-caused the miechanis-
tic dogma to be abandoned by physics it.-elf.2 However, although this
reorientation appeared in all open pronouincementes, most physicist.s
have remained mechanicist under the skin. Tl'.ey have continued to
thank "mechanically" and even have -triven to erect a new thermody-
namics-the so-called statistical thermodynammics-on a mechanical
foundation. The attempt, naturally, produced a movement of logical
contradictions and epistemological incongruities., In view of all this,.
the fact that the Kelvinian complex lias gotten tlhe be t er of standard
ecomonists should not surprise us greatly.
The mechanistic foundation of standard economics shows up not
only in the terminology borrowed from mechaniecs-equilibriiiii,
elasticity, statics, dynamics, etc.-but especially in the conventional
argument of how the outcome of a market swings back and forth as
demand and supply schedules shift back and forth. A physicist or an
engineer would be surprised to learn the way in which the outcome of
a market is proved, for that proof is completely identical to that for
static mechanical equilibria by the principle of virtual displacementts.
Just as in mechanics, such shifts and displacements leave no trace of
2Einstein and Infeld (19.-1), ter Haar (115'9).
sGeurgescu-Roegen (1971).






6S


their occurrence. There is no way by which a nieclhanical framework
'ouild reflect the irreversible effect, the indelible marks, left on the
pr.',-; it-elf by an inflation, a drought, or a war. But nothing reveals
tlie deep-e'ited mechanistic philosophy of the current doctrine as the
iilt'.; l'iiili;ir diairm' by which the economic process is portrayed in
pri-atically all economic manuals, including those authored by some of
Slite lhirhest anthiorities of the profession. (See figurIe 1. p. 89.) Accord-
in:' to the standard vision, the economic process is a self-contained and
elf- -ii-ttiining ciruilar affair-a merry-go-round between "produc-
tion" and "consumption". In good agreement with the laws of mechan-
i. th, arrvow-o iin thait iraph could very well have been drawn in the
opposite direction. Because money may seem to rutn in circles, a money
fetishism characteristic of business practice must have constituted still
another cause for the circular vision of the economic process. On fur-
thcir thought, however, one should have realized that even the symbols
of money wear out and must be replenished by new material. The ob-
ject lesson is that an adequate representation of the nature of the
economic process must rest on the notion, however unacceptable on
vulgar grounds, that money does not count at all as far as the essence
of the economic phenomena is concerned.
The main purpose of this paper is to prove what really counts. How-
ever, the foregoing remarks suffice to prove, first, that an economic
cziene con-4trueted on a mechanistic scaffold cannot deal with the eco-
logical problems indissolubly associated with the economic process and
to suggest, second, that without going beyond the monetary veil we
cannot even perceive these problems. However, the full story has still
more details which can be related only in part within the scope of a
single paper.

II. THERMODYNAMICS ANDb THE N"ATTRE OF THE ECON-0oiIC PROCESS
Between the economic process and the life processes of any living
organism, wherever such organisms may exist in the universe, there
exist numberless affinities, for the economic process is nothing but an
extension of the biological evolution. All living creatures, man in-
cluded, have become better adapted to life by the accumulation of one
favorable biological mutation after another. But this mode of pro-
gressing' is extremely slow. It took forty-five million years for the
Eolippus-an animal which in the Eocene era was no bigger than a
beagle-to become by biological evolution the powerful horse of our
time. The human species was able to embark on a faster mode of prog-
ress. Apart from one other species-namely, the marginal, albeit in-
structive case of the woodpecker finch of Galapagos Islands-man
alone began producing "organs" instead of waiting for mutations to
endow him with them. Ever since the dawn of his existence, man has
produced detac'hnble limbs-oranns which do not belong to his bod--
such as a club, a hammer, a knife. and, more recently, a submarine or
an airplane. Moreover, as Joseph A. Schumpeter so admirably showed.
these ccxo.-.omatic mutations 4-viz technological innovations-are gov-
erned by laws analogous to those of biological evolution. The unique
nr':Lr- e of Alfred Mar-1i.l that biology, not mechanical dynamics, is
4 Exosomatlc. because thy are outside the .somnia. the bodyr.





69


the Mecca of the econlOii-t i.- viflldi,.tcd ablve and beyond li- originI.tl
intent.5
Like all life processes, the ecoiiili prov.- is 1i ily i11ili,)ored inll
the material environmniit. This is a -.imipie fart. But wlinit wi. mlust
not fail to relizi.e is lhat the rlatioii.-dip 1,elwcen ;ill tl, ,, i-r ,-' .--.s
and the environment is a dialectical one. As is i 41)rially vi-ille inl
the cas, of the economic process, liis prote.s ,ntinuoi-ly changes;
the environment and is, in turn, affected by tlLt IlN111,LC. (Gr'iziii aid
over-grazillng years on end of the steppes of C-nt'al Asia by li,,p-
E;rowing peoples led to the impoverishment of the soil. Tlis eco-
loic:il cornerinng then triggiered the Great Migration, which lastvdl
for almost one thousand years and changed completely the economic.,
social, and political face of Europe. Thin prrssiiire of population and
land was also responsible in large measure for the more recent miigra-
tion from the Old to the New World. An even more insti-itive ex-
ample: because of the increasing deforestation mentioned earlier, the
old industrial activities had to turn to coal, at first a less profitable
source of fire power. The result was that the art of mining was _,r;id-
nally improved to the extent that mining (not only of coal) became
highly profitable and all minerals became accessible in apparently
endless quantities. Economic historians, as well as anthropologists.
have kept hammering at this dialectical evolution. But their achieve-
ments have met with the indifference-at times even with the dis-
dain-of standard economists.6
One important articulation of the economic process hinges, as I
shall explain in detail presently, on a fact brought to light by the
Carnotian revolution-namely, that the material universe undergoes
from. within itself and by itself a continuous and irrevocable change
in one particular direction. For their failure to take account of this
revolution, standard economists of latter days can no longer invoke
any circumstantial reasons. Actually, this revolution was an accom-
plished fact at the time when one of the Neoclassical forefathers,
AW. Stanley Jevons, set out to build the modern economic science as
"the mechanics of utility and self-infere.t.' 7 Still more aggravating
is the fact that thermodynamics-a well established branch of physics
by that time-is in esseniice a physics of economic value. Indeed, Car-
not, because he was intent to analyze the quantitative efficiency of
fire in steam engines, may be rightly regarded as the first genuine
economet.rician.8
Two disciplines. thermodynamics and biology, are lioe nec..-s-arv
tohliec.-, for illuminating the e',onomic process and discovering its 111min
alr iculations. This advice 9 seems now to have b,,,n largely li',ard. Wit-
ne,- tbe fact that almost evervone-froi ecol,-isI to tlie die-lard
(lefe(ndelrs of the standard conepl)tion-is expatiating 11 the col 0 i(.-
tion b'..,vwmi thermodynamices and tlihe economic pro)(e-s.10 E'ven s,)Ime
Co( oitnucopian economists now recognize that ii illkii dts dowry of ac-
SGeorsescu-Riro!n (1f'T74). (1175n). and (197.51.).
To cite a salient example becausee the author In point Is a very disv ii-:,ishwi econo-
mist). W. J. Baumol (1l170) thinks that vork. such as those of Karl M:irx and Jo-,'T i
':-.hlmpo4er fare "va;-ruile aiil i iiires SIliil curious. only si% yea rs earlier, Jevons aired Ils apprir.i'%:irin about the exhaus-
tion or l.riI.lnlnil's coal in a v(oll 1in,1.1 well-ar.iit.l study, The Coal Question.
s ;,,)r <,.. I ,n (l191m>) .ill i T971 ).
Si) eor. -'r- lu,,,..ri (1l ,'). (lf'IIiL. (1'70). (1971).
10 : 1 .. l>rr. Commoner (1976) ; Robert Sotow (11.74).





70


(.,,silble resoulirces is finite in a sense that. bears upon the survival of
our ,z'cics. Alatilv Aleksandrov, the President of the USSR Aca-
d lmy of Sciences. ghas also recently admitted (however implicitly)
tl:it oil anld gnas are blcominlr increasingly scarce; that nature, after
ill. is no)t :I gratlt Oil, o) provider forever (as Marx held).
A.ltfloulgli no bantd\wagroning has been as spectacular, the new reori-
entattion tdos not seem to have been accomplished by a correct under-
standiniur of tlhe whirlpool of matter and energy on which mankind's
exi--teite depends. To l)ce sure, the thermodynamic principles seem
extremely v-iniple on the surface. llowever, their implications and
applications are quite involved-a fact which most authors have not
evern suspected. As surprising as it may seen. the full truth is that even
thle conventional special literature does not cover all aspects that bear
upon mankind's economic problem.
For a simple exposition of the basic thermodynamic laws, I shall
use the image of Figure 2, p. 89, in which the hourglass represents an
.solated system; i.e.. a system which can exchange neither energy nor
matter with the outside.11 (Besides the whole universe, only some labo-
ratory apparatuses correspond, but only approximately, to this last
condition.)12 If tlhe stuff inside the hourglass represents matter-energy,
the simple fact that the hourglass is completely sealed expresses the
First Law of Thermodynamics, the Conservation of Matter-Energy.
As in any hourglass, in the universe hourglass the stuff continuously
pours down from the upper into the lower half. However, two import-
ant features distinguish the universe hourglass from an ordinary one.
First. as the stuff matter-energy pours down, it changes its quality.
As long as it is in the upper half, it represents available matter-
energy-that is, matter-energy in a form that can be used by us, human
beings, as well as by any living organism of the kind existing on this
planet. When it reaches the lower half, the available matter-energy
loses its important property; it becomes unavailable.
The second difference is that the universe hourglass cannot be turned
upside down, which means that the available matter-energy of an iso-
lated system is continuously and ir'revoeably degraded into the un-
available state. And if we are reminded that the involved concept of
"entropy" is, at bottom, a' relative index of the amount of unavailable
energy, the last statement constitutes a simpler as well as more telling
formulation of the Second Law of Thermodynamics, the Entropy
Law, than that found in the special literature.13 There we read that the
entropy of an isolated system constantly increases.
There are two other laws, the Zeroth Law and the Third Law. Suffice
here to recall that the Third Law says that no hourglass with a com-
pletely empty lower half can be obtained. Instead, other points must
be borne in mind in order to avoid the numerous pitfalls in this field.
u Georgescu-Roegon (1975a), (1975b. (1976a), (1976b).
2 Think of the astronomically immense waves of neutrinos that pass without any diffi-
culty straight through the Earth's mass.
13 A crucial point omitted by this literature is that the degradation parallels the stream
of our consciousness. Without this clarification. "Increase in time" has no operationality.
It is curious, therefore, to hear often that thermodynamic does not involve time at all.
This Is true only for the fiction of reversible cycles, with which instruction starts in all
manuals (and to which I shall come back). The truth is that it was In thermodynamics
that time first entered with its unique characteristic-Irreversibility. All laws of me-
vhanivs are Indifferent to the sign of the time parameter. Georgescu-Roegen (1966),
(1971).







One such point is that the Entropy 1:tw, in content wi t!I ;1I oti. i"
laws of physics andT cl1emiistr, le:v,- tle sp,"',d of tihe (1,'--ni nation and
the striictIIre of the outcolme c()II (ple)(tel iy t e(Ittrnin:Ite. It is I'r4.l '. 1 o
this indeterminancvy that tlhe prh-.',nce of lif, fe iatter- einroi allv. If
solar radiation strikes a I: ire rock, it i in medli:,tel dchradi- ite Iissi-
pated heat, into unavaill lec energy. But if it -t mik, a r' 'I'ln iplalt. )a.t(
of it is stored up as chemical energy. In the long run, however, even iihis
stored-up energy must turn into ( l--ipafted heat. A pile of coal left Iy
itself betgins to radiate heat and "weatts" (be,;n1-. tlhe involved chenI(i-
cal reduction produces, among other things, 1LO). I con -a-t with
the green plants, all other forms of life--iriner, predator,-. ani
deconmposers-speed up the entropic d(tegra(hation. It is. moreover r, be-
cause of the same entropic indeterl1iinancy that life cal exit in the
multifarious forms we know and we can make plans of all sorts and
expect to fulfill tlIe n.14
Considered as an isolated system, any organisms must degrade en-
tropically; in the end, it die-, if isolated from the environment. What
causes an organismn to survive in spite of its entropic degradation is
the fact that it can suck available matter-energy from the environment
and expel into the samie environment its produced unavailable matter-
energy, its wastes. This is exactly what the economic process doe. in
order to maintain in good functioning order the endosomatic .tru:-
tures of people (their bodies) as well as their exosomatic orga7s
(which economstis call capital equipment). Naturally, this is only the
material side of the story. It would be absurd to say that the economic
process merely taps valuable environmental resources only to trans-
form them into waste. The true product of that process is not a mate-
rial flow, but an inmaterial fluix: the enjoyment of life. An entropic
feeling of this sore must exist even in the lowe-t organisms proper.15
Tlhe economic process is, therefore, entropic, not mechanical. And
because the Entropy Law dominates all material transformations as-
sociated with it-with life, in general-that process marches on in ,in
irrevocable way. The depletion of resources cannot be reserved, and
some waste remains waste. In this simple proposition lies the root of
ecological scarcity viewed in an embracing ecological perspective.

III. THE NECESSARY DUALisr: EN"]:nY AND MA.VrrI
In the literature, the scarcity problem has constantly been reduced
to the supply of available energy alone. The concept of net energy,
thought up by Fred Cottrell (1955) for analyzingr the eenomnic ac-
tivity of production, has recently been revived by 11. T. Odum (1973)
as the only criterion for entropic eflicieiicy. Certainly, because we can
always compute differences of the s.,i111e homoge1eous entity, there is
nothing wrong in saying that if one ton of oil is lse(l in obtaining
ten tons of oil from -somne shliale the result is a net energy of nine tons
of oil. But this wiay of keeping entropic books ignores that for what-
ever we do we must see both energy and ,matter. Therefore, according
to the Cottrell-Odum conception, the result of a colIer mining opera-
14 Georgeseu-RoeoP'n (1971).
Georgescu-R.eg,'.'n (1971).







tioli ought to 1)be described as a fantastic ?iegqat;Ve net energy. In fact,
ithat ()operation produces a large positive m'w matter of copper and a
lietAtive net matter of other materials. Extracting oil from some
good -lhale produces not only some positive net energy but an immense
l,):itive net matter of rushedhd rock (which we would rather not have).
It is thus clear that the problem of entropic bookkeeping is not as
simnpl)le as we have been led to believe.
In contrast with the conventional literature, which speaks only of
enllergy, in the foregoing discussion of the thlermodynamic laws I have
ton tiiUOiiu.-ly spoken of matter-energy. The conventional literature
lnot oily leaves out. soJmie essential plhelnomena characteristic of matter,
but it also mnarshlals the exposition in a way that tends to deny their
existence.
In the introductory chapters of the usual thermodynamic manuals
we are taught that, if the internal energy of a closed system remains
constantt,6 then the energy received from or transferred to the out-
side is equal to the work performed by the system or oil tlhe systein,
respectivelyy.7 This theoremli has a historically momentous corollary:
perpetual motion of the first kind (work without energy) is impossible.
Let us note, however, that on the basis of this restriction alone all
material systems may be reversible, for the theorem does not deny
the possibility of converting some energy into work and that work
back into the exact initial amount of energy. This means that per-
petual motion of the second kind-a motion which goes forever on a
finite amount of energy-is possible. Just an ounce of gasoline-
actually, even one millionth of an ounce-would then suffice to drive
an automobile forever. There would be no need for continuously tap-
ping the terrestrial deposits, except for growth (which mnay mean
more people or more automobiles).
However, a somewhat side thought is added to the argument of this
particular topic in the conventional manuals. To be completely re-
versible, as implied by the cyclic conversion between energy and work,
a system must move with an infinitely slow speed.' The obvious, but
rarely noticed conclusion of this amendment is that even a small mo-e-
ment must take an infinite time. This result should suffice by itself to
establish the factual impossibility of reversible systems, hence, of a
world in which the need for additional energy is occasioned only by
growth.
The curious fact is that the real reason for requiring that the speed
be infinitely slow is never revealed in pointed fashion. This reason
is that with an infinitely slow speed there can be no friction. Friction
is a rather poorly understood phenomenon, but it is ubiquitous in the
material world of solids and fluids. A single crystal moving in a per-
fect vacuum does not produce any friction. Even in the few manuals
which in tlie subsequent chapters tell us that not all energy can be
converted into effective work-part of it being always converted into
v .lospd system can exphnnce energy but no mniatter with the out-tde.. To a good
apprnxiinatilon. the E-"irth roprqonts such a system. A system that can excliange both
mnrcy nnd T mtter with the outside (like an organism or like the ongoing economic
Ipro,',.-.,0 Iq open.
17 I': g.. M:ix Planck (1945).
Is li'inck (1945), p. 53.








wori,' Wamn.pt fr/;1(oI- i- the al- .ence of friction conne't'1(l within thle
condition of infiiitely slow miotion.19
On the surface, tlhee ri pl tor 1 to \e two plhenoIm (l :;I that coltillioiil-lYV
rob us of avilable energy" (i-i)ation of tli.nn:-i enerv_. (l,:it) and
friction. ThIev boil ()o\\ I to tihe li-i1p:tilo of a1 Lailale nergy h,-
calL-, frictio()I only (cau--c an additional 1i-mi)aIio1. Wa lti i t ,11 L-
erally realizel is hat iII tlue actiial world availale lia1i(terI al,) (i--
sip tir, conltinnouslv and irrevocably into tntav:;i1al)I(. lelajiterl. Matter
1-so beoollos i1 icrc:isingly diffIsed. And, a-: aimy automobile dlrixver
know f ro mt everyday exp(rieNe, f ictio I- C (a,; 1- not o01ly an al(litioiinil
los- of available energy, but also an addlitional ldi:.-:iltion of matter.
Otherwise, autoloile ties woiild last forever.
Because of this svIrmIetry between mIatter and (e.er1ry. fitom Iny
earliest endea.vors i;;" this direction I have insisted( tliat both tit('-(. ele-
ments of the physical world continlolsll degrade into navilalable
forms.20 The essence of the Entropy Law is that tlhe entrop)y of both
energy nd(l matter continiosly atdI( irrevocably increases. For this
formulation, we need to recall that entropy is a relative index of the
nonavailability of minatter-energy in "sizeable" structmlr(-.
This position is vindic;ited bv a discovery made by J. Willard Gibl),
one hundred years ago.21 The discovery is rarely mentioned( inii tie uilsuial
literature. And, when it is mentioned, it is presented as the Gibbs parIa-
dox, because what Gibbs discovered is that entropy increat:- matter becomes dissipated, specifically, when two differecft ,:ase- inter-
fuse. This practice is indicative of the widespread position tliat only
energy counts and only energy must. therefore, be included ill a thermo-
dynamic framework. Gibbs himself was at a loss for a clear expl:,na-
tion. But a hint-perhaps, the only one-that the entropy inreane dis-
covered by Gibbs corresponds rather to "a dic;ipntiolI of matter than
[to] a dissipation of energy" was made years later by another giant of
physics, Max Planck, in his TreatLi, on Thermodyndmi.s (originally
published in 1897).
Compare the available chemical energy concentrated in a piece of
coal with the dissipated heat (unavailable energy) into which it is con-
verted by burning. Compare also the copper molecules concentrated in
a newly-minted penny with part of the same molecules scattered to the
four winds as the penny wears out by friction. In this perspective, we
can say that low entropy of both energy and mattfrr can be ,.', d -Iloy
once.22
One is apt to interject at this juncture that the equiv:ilence between
work and energy proves that any job can be done provided the supply
of available energy is sufficientlylarge. With sufficient available energy
we are able to reconcentrate the dissipated energy of a glass of water
so as to have again some ice cubes in it. By the same toklen, we ought
to be able to reassemble the scattered copper molecules of a worn olut
penny. Would anyone deny that, if a necklace breaks and its p)earls are
19 R. S. Silver (1971) Is probably the first manual in which work Is, frn the out ret.
Reparatpd Into effeetire work and work against friction. But ervn that auth,'r niisw the
connection mentioned here. which is so cleary seen In the simple fact thliat. ceferi%' pua ib-.,
the greater the qpped. the areiter the friction.
20 Genrepseu-Roeaen l(ffi;. f1971). and chapter I (197;).
"J. Willard (;ihh (1R75-1RS77).
22 georgescu-Roegen (.Icr, p. 94). (1971. 1p. 27 ).








scattered all over the floor, with some energy and the wearing out of
some material objects we are able to pick up all of after some finite
tihnt-? But let us imagine that the same pearls are dissolved into some
ncid and tlhe solution is spread over land and sea. (Something of the
s-ort would in fact happen after the complete wearing out of the
pearls.) Tile point is that to reassemble the pearls in this last case
would take a practically infinite time. For this reason-the same as
that which makes frictionless motion and reversible systems impos-
sible in actuality-we must reject the notion of complete recycling, a
notion which now forms the basis of numberless schemes of resource
savings. To be sure, we can recycle, but only available matter that is no
longer in a shape or a state useful to us. We can recycle only what I
have called "garbojunk"-broken glass, used metal cans, old motors,
etc.23
It is n mii.tal:e (though a popular one) to extrapolate molar opera-
tions. picking up sizeable pearls-to the molecular level-reassembling
the dispersed molecules of the same pearls. There is here a dialectical
thrqeshlold, similar to that pertaining to very small or very large prob-
abilitics or to small or large biological mutations. Although we can
reaSsemble the copper molecules contained in an ordinary copper ore,
the same operation is unavailing if the metal concentration is so low
that it represents unavailable matter. Moreover, even after concentrat-
ing the copper from some good ore into a copper sheet, one should
niot exclaim "Lo! I succeeded in decreasing the entropy." For in pro-
ducing the copper sheet, the entropy of the rest of the isolated system
(practically, the accessible environment) has been increased by more
than the decrease from the copper ore to that sheet. The entropy of
the entire system must increase, as the Entropy Law says. Economists
have long since preached that "there is no such thing' as a free lunch,"
bv wv-hich they meant that each lunch must be paid its economic cost.
From what we have seen above, the ecological predicament is harsher,:
in entropic terms, for every lunch, we pay more than the lunch
represents.24
There remains one final suggestion to be probed. It stems from the
familiar Einsteinian formula E=mc2. This means that we ought to
le able to obtain by conversion as much matter as we please if we
controll a sufficiently large supply of available energy. The snag of
this solution is that tlhe Einsteinian equivalence works primarily in
thle conversion of matter into energy, as is the case of all stars as well
as of anything we burn, whether ordinary or nuclear fuel.25 Matter
may be formed from energy and matter, but not from energy alone,
23 Georgescu-Roegen (1975b), (1976a), (1976b). In connection with this point. It seems
necessary that I shnumld not ignore a technical issue. Schemes by which a mixture of two
d(iffrPrent gaspes can be aeain separated appear now and then in the literature. They are
ba-,d on perfect enmi-permeable membranes (I.e., membranes that each allow only one
of the a'ses to pass through). However, as Max Planck (1945. pp. 210, 239) demonstrated
no iprf, t semi-permeable membrane exists in actuality. \Ve are here again confronted
with still another difference between conceptual and actual.
24Barry Commoner (1971. p. 45) was, therefore, in substantial error to dress lp the
eer-onnmists' slogan as the fourth law of ecology. That sloRan expressed only the Impos-
sibility of the perpetual motion of the first kind; economists have never taken account of
the Spcnn,1 Law.
25The loss of mass In conversion Is hardly measureable for ordinary fuels-a small
fraction of one percent for dynamite, but about one percent for plutonium. At the sun's
-i:7P. the loss becomes staggering: four million tons of mass per second !






75


riot even in the sa1'-, wle:i conditio,-1 III:1y -.rm oI,,r1 favor.l',le f,,r
the fussion of mn o .':"; .,.s pa I t icl,-. *2
Cert;iiiily, becai-M of the entropic d.,r;,l1tinll which in tiL ,;-,
exist. even at tl.he 1inclear level, t0l i :'di,. itixve (el.'ili.s :,,, no 1 ,i-I,.r
in the saile amoui t niowadays ;i-; at tlie fol at1iI of the h:irtle; tCie
Sa1l is true for t lr heir decay pi)rodc(1uts. Btit, -t 1t a.lllOU11ts of St1.Ill, cle-
ment:-. sich I., copr, iroll, tin, etc., t:.ve rel'IalIi'd coi-(;ii lt tlh1,Iughl
out.27
Tli]& c(,nclsion of tlie argiuiiI deveol,,il in tli- -''-tion i is< h:1t we
caniiiiot avoid the ne(c'-:itv of keeping books in teini.- of .' ,rgy ,//,,
matter. The ecolb,,-, 1 1 problems annot 1 reduced ol et e rV,
. .. I l '.'it c a l ( I I' w l y 1 ( ) n e t (c I le 'rg
not even to net energy and net ii a:ltter in sepalration. There i- only
(Ilobal accessibility, which is tlhe c-entitl prip)eIty of a l.1,-j)itibhe
environment vis-a-vis a given te'.1nolo,11, (or biolo(i,: r l mode of life).
Moreover, because of the pIactical imp,,:'ibilit v f the alchemy of hi,-t
chemical elements, the ecologicl(:il book- mnli -t distinui.i*- even betw,..
the various Iasic elements.
Still another important con,,qiuence follows. from the f;-,t that mat-
ter and energy cannot be reduced to a practical coni ii on denominator.
If everything else is left aside, we cannot decide which of two proi's-es
serving the same purpo.-e is the more eflicient--that which 11-k, h.-s
matter and more energy or tlHat which .use.. more matter and 1c.:
ener'ry. This decision remains an economic one lefaiuse, it must ta ke
into account the relative supplies of the ingredients.
This is still not the full cup. Becau,-e the economic process is an-
chored in the material environment, we are completely jui4itieil to
say that its nature is entropic. IHowever, this should not be intei pretl(ed
as meaning_ that economic value c:,in be reduced to some physical coor-
dinate. This would not be possible even if there were a common denonm-
inator for energy and matter. For in the cost of things there enters also
the drudgery of work, which is another immaterial flux that cannot t
be deduced from the physico-chemical laws and which is part of man's
scale of values. As the long forgotten axiom of Sir William Petty
.states, nature is the mother of economic value and labor the father.

IV. THE GENErAL FLOW MATRIX OF THE ECONOMIC PRIOci:Es
As noted earlier, the only purpose of the economic proct.ss is to
maintain its fund elements-the people and their exo:.omatic in.tru-
ments-in their proper state of good function. To be sure, what sta te
is the proper one depends on the social origtanization, the :'ale of
values, and the technological horizon at that moment. But whNatever
this state may be, the funds are subject to the general entropic degra-
dation. All around us there is friction, chipping, cracking, spontaime-
2 The origin of chemical elements In Iho universe Is still an unsettled issue, hut the
Issue turns only on whether the original basis inlhidlodr helium (in addition to liyllr'i-',,l .
Hvydiro)gpen "burns" into helium at a tenmper : hire between 10- and 2.10" dl.-rci.s c THelium burns into carbon at a temperature between 10s aind 2.10. Heaver ,i'enents are
produced at still higher eiiiiperatiUres; but at 4.109 ilegrees e:itigrail.. ., iiibrium be-
tween liht and heavy el-;uiiits is reached.
27 To he correct, one should take into account the meteorite fall and the partili'is which
occrasion-illv may escape the ,.riivitational pull. The meteorite fall, althI ,'-h of :i'pr,'i il,!e
'.eihlit (150,0(.M) tons per year), does not count practically ; it comes m,,tly in the unaivl-
-able state.






'76


ous combustion of various degrees, washing and blowing away, and
s-o on.
But we must also observe that the entropic degradation associated
with thie economic process is not due solely to these entropy producing
phenoniena. The green plants expected, all organisms produce some
adllitional entropy. However, none matches the scale o()f man's produc-
tion of extra entropy. If a tree is left in the woods, it will d(lie, then
rt, and ultimately part of it will be blown or washed away, or
lirned by spontaneous consumption. But if a tree is cut down and
lbrned in a stove or a furnace far away from the forest, an amount
of entropic degradation which otherwise would have taken eons to
produce is effected in a short interval. The same applies to the growing
of food on farms and eatillng it in far away urban agglomerations.
Facts such as these seem to be completely ignored by those who place
in front of our eyes some highly attractive visions of almost self-
c(ontained New Jerusalci'ms on desert lands or those who try to lull
is into believing that matter does not count.28
It is not only for supporting a growth of the fund elements. but for
simply balancing the entropic degradation of tfie existing funds tlat
the economic process must continitiously draw from the environment a
flow of low entropy consisting of both energy and matter. From the
argumienit of the preceding section it follows-a point worthy of strong
emphasis-that an input flow of available matter would be absolutely
necessary even if the economic process were stationary-i.e., if it did
the same thing day after day, hour after hour.
The input flows consist of energy and mater in 'situ-i.e., of environ-
mental energy and matter-to be denoted in our matrix by eE and eM,
respectively. (See Figure 3. p. 89.) Two distinct activities take care of
transforming the eE and eM into controlled energy and matter, E and
M, respectively. Any mining and, if that is the case. any associated re-
fining activity belongs to this category. The economic'process further
includes the familiar activities, the'industry of capital goods, K, the
industry of consumer goods., C, and the household sector, Hh.
For tlhe ecological analysis, we must also set two new activities in a
scpa rate manner. They are the recycling activity, R, and the depollut-
ing, activity, Dp. The first. activity recycles all recyclable garbojunk,
rGJ, produced by all other sectors. (It may safely be a:suiied that R
produces no garbojunk.) The depolluting activity only renders less
harmful that waste, w, produced by the others sectors and capable of
being so changed. Absolutely all sectors produce some w. And abso-
lutely all sectors produce some final outflows into thfle environment
which consist of dissipated energy, dE; dissipated matter, dM; and
final waste, W, waste that cannot be (or is not) reduced or changed by
Dp.29
In Figure 3, p. 89, the thin arrows show the flows between the sectors
of the economic process. For the ecological problem, only the flows be-
tween that process and the environment (represented by thick, shaded
2 E.g., Roger Revelle (1975) ; and II. E. Goeller nnd Alvin Weinberg (1.76).
2 Srme of the activities distinguished In our matrix are not performed separately from
ench other in nctuallty. A coal burning furnace would have a sulphur trap embodied in
it,-lf, for example. The separation adopted above facilitates, however, the analytical
p),rtrait.






77

arrows) count. The picture tells uis a few eleenetaryv 1,,init11'. first'
is that recycling, besides not being coillplete a nreat (dI:,i (of a ;.,i table
matter ends up either as (1 -pated ma itt(e or a()- Wi1al I 11wi fi'
either; it "costs" some additional environment al I v.- etrop a ell *
some additional labor services.e< The -:,m i is true otf II''i )ti I'. l .-i1
ond, the "bigger and better"' tlhe autoniobile-, tle r1efriwerators, i e j t
planes, etc., the bigger and eter et are the iel eti(,)1 (.1 i" ital (> -i.rce,
and the untreatable (or untreated) wast-e. But tiue general 11,'\\ I trix
of Figure 3, p. 89, teaches us also ain import. It a .-s,,n which I. not only
completely novel (as I believe) but also exposes a wi le preatd falloa'y
about mankind's problem crystallized in tihe -o:. a: "l,-**11e what miay,
we shall find a way."

V. TiE ABC OF BIOEr'NOM s 1
This ABC may begin with the probing of an idea set forth more
than one hundred years ago by John Stuart Mill (1S4S) and rl 'eentlv
revised and bolstered by a few writers, in the most peruzasive maner
by Kenneth E. Boulding (1966) and Herman E. Daly (1971). The
quintessence of the thesis is that ecological salvation l ies in a statinM a ry
(also called steady) state. Daly (1971, p. 5) even argues that "the sta-
tionary state economy is . a necessity." The notion of a stationary
state was best described by Karl Marx, who used for it the termn "re-
producible". Indeed, whenever this notion is evicountered in the litera-
lure, in the ultimate analysis it denotes a system which remains identi-
cal to itself in a specific way: the population of its fund element---
that is, the matter scaffold of the system-must re nain constant. To
be sure, Mill's revised theme also specifies that population and capital
equipment-the material funds of the economic process-are to remain
constant in the stationary state.32
Now, from what the Entropy Law tenwhes us, an ;.ohlb, d-vtem
cannot be a steady state unless it has already reached its maximimi en-
tropy, at which stage both its matter and energy are completely di-s:i-
pated. Such a system is a state best described as chlaos, in which no work
of any kind can be performed any more. The elementary conclu-uio, is
that a "living" stationary state cannot be isolated. It could be either
open or closed.33
The case of the open steady state has forined tle object of Spe,,'ial
studies initiated by I. Prigoaine (1967) on the basis of some famoui-
equalities established by L. Onsaaer in 1931.11 The interest in this kind
of system stemmed from its analogy with livint organismns, which all
tend to maintain their individual entropic structures- constant. Tlieir
partial success is due to the fact that they c0n exchM1ane both matter
and energy with the outside. Their ultimate failure reflects the f:int
that stationarines. requires th at Onsager's e(I alities which coi(re-
3 To keep the graph as simple sq possible. itl, ftiyi1-, associated with "'o ir c n vifv
(whirh consist of the three elsslcanl factors ,f .rot' iit'IonI l-Ilior power. ,1 tal I, ; ..r.
ind Ricanrdian !anid) have not been reppr, citedd in Fi-iirer 3. p. SI. 'This does not m!, a, i
that we mnay lose sight of their etistpn 'a See Georgesi'ii-Roegen (1976). ,li-ipter I. and the fortl'oiitliin c volume Bio t'onofmi M
(Princeton lTnivo'rsitv. 1977) by the saim* ;utlior.
32Daly, 1971 (pp. 10, 12).
P ee niinto p. 12.
A: systematic presentation of these results tIs iii-"'l',', hy K:it.l 'l4v i;nd C r't
(1965)). "


7S-731--76-- -7





78


spond to a detailed balance of the flow elements-be satisfied exactly.
No actual system, however, can satisfy such a detailed, rather delicate,
balance exactly. Yet, a stationary economic process may conceivably
exist provided that the input environmental flows, cE and eM, and the
output flows, dE, dM, WV, could be maintained constant and, in addi-
tion, be in complete balance as regards energy and matter. Actually,
so0e past economic systems and even some contemporary ones may
well seem to be steady. The most salient case is the economy of the tra-
ditional village, which has survived over the longest period in history
so far. If such economies may seem steady, it is only because of their
extremely slow consumption of mineral resources and their low popu-
lation density relative to the available productive land. However, even
in the absence of any population increase, the departure from sta-
tionarine.s must, in the end, show itself up in more than one way. With-
out outside compensation for the inevitable entropic degradation, any
topsoil ultimately will degrade. An industrial society as fervent as that
prevailing in most parts of the world today could hardly appear as a
steady process. No coal or iron ore is available at a quasi-constant flow
rate over some relevant period if the productive agents remain con-
stant. Sooner or later-rather sooner than later-we have to dig deeper
or turn to poorer lodes. Hence, either the environmental input flow rate
must decrease or the exosomatic instruments must become more effi-
cient by some innovation. And there is no guarantee whatsoever that
they could become so at just the right moment, not later, and not sooner
either. In any of these cases, the system ceases to be stationary.
The conclusion is inescapable. Stationariness per se is not part of
mankind's lot. What counts, as I shall explain presently in Greater
detail, is the economy of resources, not for only one generation (as
in the narrow horizon of standard economies), but for all genera-
tions, or at least for as many generations as possible. If the prescrip-
tion of stationariness appeals, however, as it does. it is because of
a peculiar error of logic. Since growth is wrong ecologically-as by
now only a few doubt it-no-zrowth became equated with stationari-
ness. In fact, decrease appears to be the right prescription in some
parts even today, in all. parts in the long run and on the average.35
One particular condition of our planet (and, in all probability, for
any other possible planet inhabited by some form of life) has an im-
portant bearing upon the theme of the steady-state economy and also
upon our understanding of environmental economics. The earth, taken
by itself, is not an isolated system, nor is it an open system. For all
practical purposes, the earth is a closed system; it exchanges only
energy with outer space.86 This simple observation suffices to bring
up the idea that, our present hustle and bustle with the energy crisis
notwithstanding, matter will ultimately prove to be the most critical
factor of the environmental dowry.7
Mankind's dowry of accessible low entropy consists of three distinct
items: (1) the flow of solar energy which reaches the upper fringes
of the earth's atmosphere at the rate of 1000 per week (where Q is an
95 (pnrzpr-i, Ropr!pn (1976), chapter I.
s Cf. note on p. 71.
ST`e the author's 1972 lecture at Yale University In Georgescu-Roegen (1976),
chinpt, r I.






79


astronomical unit of ther,:al energy, Q=1011 BTT') ; (2') Hi, .so, '
of available and ae c,-ible terrestrial energy, coii-i-l ing of f'--il :1ud
nuclear fuels ';- well as ecothermial enev' y; (3) tli< so. of :accssiile
material low entropy.
Between solar radi:ition and terestr:tl energy tlier, e.,I -, vc;l1
important a ,',-,ii(tris. We do not hav, and, a1nm-o celI:tinlv, will
never have any control over the flow rate of solar r:i,,itioi)i. 1 ",r, :i11
p':ietil purposs, this rateo is a costicail coii(: i1t. Sin'V we ,':innot
nill., tdie sun. no Lrelneration can deprive futu, -o.Ineraliou, of tIheir
sli:;i e of suil~ighlit.s By conli ra.t, one generation Il;iy concii;ibl y tbur
all tie fo.-sil fuel within just a few years. thus depriving al I future
genern tioi: of that source of eneragv. Solar e;ierLiry does not po-, a
problem of interi',renei ional economics, whereas err al nrr
as well as terrestrial matter, does.39 Thlie coal consumed by us. to'i,,v
is no lol1pr available to any future generation. A d every Cadillac.
Rolls Z IRove, 01or Volga of produced for our present extrav-:-iLr:i/'a
means fewer p)lOw-,ares for -omine future (generations. Worse. still,
instead of forgringr our weapons into plowshares, as the famous Qavy-
inc invites us. are now forging future plowshares into weapons.
The second asymmetry is the relative dimensions of the two sources.
According to the most optimistic estimations, the stock of fo-ssil fuels
amounts to only 200Q-that is, to only two weeks of sunlight! The
same is true of fissionable nuclear fuels, if used in the ordinary re-
actor.40 By contrast, the sun will shine with practically the saiie
intensity for at least another four billion years.41 The sun is. tlhere-
fore, one hundred billion times a greater mine than all fossil fuel
reserves. So the latter energy is a scarce factor; solar ener'v. instead
fits the notion of a free comlmodxlity perfectly y.
A crucial asymmetry is cause by the exceptionally low inteiinit v of
the ultra-abundant solar radiation. Its annual flow over the whole
earth is no less than twenty-five thou:,nd tim.s greater than all the
energy consumed now by tlhe entire world, but it reaches us as an ex-
tremely fine miTt.42 Let us think of such fine rain mist, instead. We
certainly could convert the kinetic energy of it- billions of billions- of
droplets into useful mecelaiial work by catching them on a very
large solid plate. That energy could conceivab)lv crush a metropolis
if the plate were large enough. However, we do need to do so. Rain,
even as a mist, accumulates by itself into stre:viiis, creek-, and riverT's.
so that we only need to place a turbine where the raindrops have ac-
cumulated in a propitious manner. The immense drawbac),k of solar
energy is that it does not accumul ite by itself. We nmust ue an immense
plate if we want to harness it direct ly.
Thi.s means that catching solar radiation directly in concent-r:itioni
as great as those supplied by te'rrestrial fuels we nui-t 1-1, a relatively
It r-i,'.. of course, diprlve future generati,'nq of lh', natural 11.n, Ct from solar radia-
tion, say, by excessive drorestation.
8 Gporgescu-Roreczn (1975a), 975h), (1076), chapter I.
With the help of the brefdr, which converts fertile fi,'l-. too. Into thermal #T,.er,-r.
the pietiirp is greatly, but not essentially, chanze,1. It iiiiliils, i nst,'.:i b.i.l'l i'al as wt'lI
as social incommensurable risks.
41 For still another instructive compnri-on. we should note that the present annual
rate of energy of all i1nds used in the world ;ii.,itmt to only 0 2Q.
42 One should not wish it to be more Intense, for no life wuld then e posibe. 1'.th
too little and too much entropy is Inou.i'.itilble with the terrestrial formt of life, at least
with the human one.






so


greater' amount of matter. Thow much greater this disproportion may
1)e is indicated by the fact that the installation recently inaugurated
1)y ERD)A at an Atlanta elementary school whichl could not be too
1:i'rge) co-.t nearly one million dollars, although it supplies only sixty
per cent of thei' power nele(d for heating and cooling. Even though
pri, ; a1re p: nlroclial (in a sense I shall explain in the next. section),
the cost is (lefinlitely imipre)ssive.
The same point, that a disproportionately great amount of matter
is needed for tlhe corresponding installations, may constitute the main
obl)stale to tl, development of other sources of energy, not only of the
direct use, of solar radiation. The unsuspected rise in the cost of
nuclear reactors tends to support this view. Let. us also bear in mind
that the accelerator at Fermilab, for example, has a diameter of one
and one quarter mile and involves nearly one thousand giant magnets.
As concerns the fussion reactor, no one can at present have any idea
abl)out. what kind of colossu.; it will 1)e. if and when it becomes an opera-
tional (e'vi(e.43
The. present generations are fortunate to live in a phase of man-
kind's exosomniatic evolution when we still can tap the environment for
available mnatter,eM. But assume that eM is eliminated from our gen-
eral flow matrix. Since at least the outflow of dissipated matter must
(ontine to ,result ferom the thermodynamic transformations within
the, economic process, the inevitable conclusion is that this process
cannot persist only on an input'flow of available energy. If the idea
that we need not worry about the supply o.f available matter has a
large currency nowadays, it is only because we still live in a period of
mineralogical bonanza. It is only because of this bonanza that one can
speak of unlimited substantibilityand still be believed.4 'However,
given that, the earth is a closed system, in the long run matter is a
more vital item than energy--a lesson we have learned from Section
III.45 This point is the last straw-if such a straw be needed-to break
tile hack of the stationary statethesis.
(Givenr that mankind's exosamatic existence is an irrevocable fact, the
scarcity of energy from, terrestrial resources-the only energy that
seems capable of the intensity required by industrial activity-also
ti:itters rreatIly. It is. therefore, the amount of terrestrial resources
that dletermines tihe possbile life span of the human species. That exact
1inioulnt may not be known, now or in the future, but it undoubtedly
is finite. And being finite, it sets an upper bound to the "amount of
life" of tlhe human species measured in man-years. The actual amount
of life depends, in addition, on the speed with which those resources
arc used up. It becomes greater or smaller according to whether that
speed is faster or slower."
The upshot is that, in the ultimate analysis, the economy of
resources hinges mainly on demand. Demand simply constitutes the
3 Go,,,;r" --.u-l o.,ii (1976a). In judgiing the value of anny new achlevtPinent, woi mitt
also d(istinr1i.-h between (-xeriha,,nt znil effeetivp operationnlity. In anid experiminent the
:iii- n'tii, (if the (ost diw, not nintter: all that matter. is the realizatiou of some idea
,Iid wlihat we rnmiht learn from it. Think of the man put on the moon.
44TGoeller aind Weinlirg (1976).
'5 Tn fact. one can privet a ilropnQittnn that may be presented as the Fonrtht Law of
Tliirniolyniniic- : the materinl'entropy of a closed system tends to a mn ximuni. Gteurges5'u-
R ,prepn (l.7rna. (19761)).
"Georgescu-Roegen (19T70), (1971), (190T), chapter I.







most direct andl thie suitJ.-i eln ,t fr action ill tlii- re','t. Wilin
things become i nlrVeasin-gly .- irNer, we d1111t do witl i 1.-. Tii- truth
is so old that it i- highly surpri.-ing to lave to (l-i(lnd ourselv.- of it .4
In emphasizing ti(e role of denlian 1l ii I ite econ,,Ill of natural re-
sources, 1 do nll(t iJi,',I by any twist of the langage tli.it we -11Ir11d
not strive to di-,over ( iue ,eh1icient tecfoniqif, for ,ig tI1 iroiiieit.il
low entrol).y, t i. to ire- itr tat st ilT-lupply tro tlieth coi-t;it
stock of ter1i1% ial ii' e., or tli e f't-iie lise of solar radiat ion
flow. What I liin,---and claimn must-i- that 1o sp,,:,v o, l?/ ant in al
extolling i ;iiiner ofi 1111 proIa ble I teliniqu.- I (fore tliey are .iMctally
dis,.over ..1 is to Illl us inhi, a d;l.a.V1'0o1sly- soft ;'ttitlide.
One (c:Il hardly think of a mnore ulwi-.-e advice for tlie Ihumuan -*','i -i
as a whole tlian tinat pvrpoiunded by :,-oe ecoom]iss a id eveii by a
f*w scientists: "c 1,, v,'f;i I may, we shall find a w: yv. 1 FroIi tlIe
u11ndeii.ie hsori', ;Il fact that ever -since tlhe tiie, of Pericl.. (-n l
ev,.n earlier than that) man 1:is bleen able to t i-,,0'ver new D -OurW, .of
low entroopy and new ways of usim) thelm, it do(- not nece- -:1rily follow
tf lit this f, Ai will nec( --arily go on forever witlhin a finite eivi*i n-
mient. For eq(.i;a ly undeniable i: another historical fact, namely. t hat
in nuniberl :b pl::,r-t on the earth oil wells and other m ines did I,-
come (dry, -., dry tdat no technique could ps-illy continue to get any-
thiing out of them. Tlhe history of the e:ifrth, moreover, teaches us that
a legion of biological specie.- have become extinct even though at one
time they were thriving witlhoutt any difficulty in sig'lit. The di a;.,lsalUrs.
for example, disappe.x'red after more tihan one million years of solid
exi-tence. True, they were not intelligent bei-ngs. But, on the other
hand. they were not addicted to terrestrial n,-,,re- and, hence, pro-
duced no iAustrial pollution.
As terrestrial resotr'e- l'.,'omne inevita-bl s'arc (because of the
continuous and irrevocable tranii-formation of cE and eMf and dE,
dM, and W), to "find a way" becomes increasingly more urgent and
more difficult. The task is now extremely urgent because of the compli-
cations by the population explosion. But even with a stationary pop-
ulation, any delay in discovering a new wvay increase:; the
probability of an ecological crisis-a after which any technological- in-
novation would come too late. TIe task be ,es increasingly noie diffi-
cullt because, first, even the efficiency of any l,_,;!l transfornation of
energy into useful work as a theoretical limit -',i!ler tlian one hun-
d(red per cent, and s.,cond even this tlir oretical I Unit cannot byv far
1e. attained becaie-(, of frif' dion, difflii, and imnl-rf.'t Iuiiuin..
lPro'He.-s in increi,-il" the efficiency of actual tral:flormtion- has
been notoriously slow, thlie landslide of teciiuologi,.al innovation of
thlie modern era notwithstanding. (Certainly, thle -it p)ping stones of
technological progre-s are provided )by th li,-ovcri of hoMw to do
either new things or the "sailt," tling in a N( w it a. IIo\\'ever. in con-
temnplating the technological pro i".-, of tlie I'I- one undlred -c.i i
or so, we should not ignore the iliportanit role p1;iy,1 by tlhe uuinvi.4il-
ogical bonanza that has accompanied(I it. Wilitier w',Aitout tit ii- 1.4-
47 Acorling to one recent presentation by a rprescntltiw of :hDA (at the sym on Ronexa.tile Energy Re. s.iir,'s. M.iy 17. 1971'. in New York),. the str114.v ..f that :in<
eImp]etely Ignores "to do with less." It is either iiiiiviiilnt e tt.,ipi,' ,i til.nilitcy or P'r t
i Il e.Pnrldencp .
See especially Wilfred Beckerman (1972)-aud J-h.lin Maild )x (1VT722.





82


nan;:a tlhe technological process would have been just as spectacular
is a t11100t question and m.ay remain so forever. The pawns of history
c11n1not be rearranged as in chess, in order to find out what might have
happened otlherwmle.
Surpri-:ing though it may seem, especially for the worshipers of
technology, lthe spectacular technological progress of the recent past
lhas. more often than not, represented a move against the economy of
resources. A good example is the progress of how to detect new mineral
depoits:. The more easily these deposits could be discovered, the more
energy other innovations have been free to squander. Witness not only
thie automatic drive, the rolling concourses, the flagpoles operated by
electronic eyes, etc., but also the passage from the horsecart and the
bicycle to the Concorde airplane. However, the most salient, albeit
the most ignored, transgression in this respect is that of mechanized
agriculture and the high-yield varieties which nevertheless earned
their discoverer a Nobel prize. Mechanized agriculture means a sub-
stitution of a scarce resource (terrestrial energy) for a free one (solar
radiation) and an increased depletion of mineral deposits. This is
indeed the result of using tractors instead of draft animals, gasoline
instead of fodder, and chemical fertilizers instead of manure and fal-
lowing. High-yield varieties, which depend on all this, cause an addi-
tional squandering because for the same amount of crop they consume
about three times as much chemical fertilizer as the ordinary varieties.
Yet botli mechanized agriculture and high-yield varieties are an im-
perative practice nowadays. The only way to support a large and grow-
ing world population is to increase the yield per acre at any cost.
The theorem is analogous to an engineering one, which though a
commonplace, is totally ignored by all rationalizations of thermody-
namic phenomena. The engineering theorem says that the average
energy per kilogram necessary to set a weight in motion increases,
ceteris par'bus, with the weight. Similarly, the average cost in low
entropy for the maintenance of an individual increases ceteris paribus,
with the size of the world population. To wit, in principle the organic-
capacity of the earth may be able to maintain a population of one bil-
lion. perhaps even over four billion years, but certainly not one of four
hundred billion over ten million years, although both situations rep-
resent the same amount of life in man-years.

VI. BIOECONOMICS AND EcoomlCS
A minimal bioeconomic program emerges irrepressibly from the
thoughts and facts presented in the foregoing pages.
Perhaps the most obvious commandment of all is not only "to beat
our swords into plowshares"-as the unheeded biblical call says-but,.
even more important, to completely stop forging any future plow-
shares into present weapons. The destiny of the human species is not
helped much if only the waging of war is outlawed, while the produc-
tion of armaments is not. In addition to the danger that someday the
weapons will have the better of people, one must think of how much
hunger and misery could be stamped out instead.
Second, the world population must be brought down to the level
of the present organic carrying capacity of the earth and be main-







tained at the coinp,it iIe level \it :fly ch( L',r of tlat .'i 1 )ity.0 Tlis
is the only sound l,:vi- for delini-r opltirmal II,)ultioI.'' I tl,' veryXV
long run, population muiiist coiie dov. n to tli,- ptii:,il level, whether
or not we do anythIinii :bout it: but it is f;ir Ireferabll ir't t, !t.t lii,
reactions occur by )the-l I-,,.e (if we can).
Also, there will nec.-- rily o-.,ur a lar,:' deorr., of ,l,.u.':uIi .:ltin,
Since orga:ic rlllture r.,uire- that ma:lel aii'e the I.iri(1 itli hI-
working partner, the least of biurden,.l which nees( fodLder. An imn\!ii-,.
ad lditional amount of low entropy will 1, saved I:--' :aiuse of t I ii plicit
reduct ion of transportation.
But the issue of population pressure cannot be cel):irat,,l from th:it
of the prevailing exosomatic inequality between the advance, and (lbe
underdeveloped nations. The hungry na.ss are no lojn,.r i.-ol:tt" d
from the oversaturated. They are in their right to demand u propor-
tionate share of mankind's welfare. This demand, together with tlir,
fact that many underdeveloped nations happen to possess large n l
vital mineral resources, sets the stage for an explosion of the conflict
between superpowers, which at the advanced technology of super-
destruction can have only incalculable consequences. The adx-vanLl..ed
nations, if they were the enlightened leaders they claim they are, must
see to it that the underdeveloped is gradually and soundly helped
toward progress-not, however, the progress envisioned by the
growthmania spread all over the world by the standard theory of
economic growth.
As I have argued earlier, we must also slow down demand, espe-
cially in the most advanced countries. The have-nots are right in
pointing out that one new member of these countries degrades about
one hundred times as much, if not much more, low entropy as one
member of the least fortunate nations. Still more saddening is that
in the advanced nations consumption consists in a large measure of
utterly flimsy, even absurd, items-splendidly illustrated by the golf-
cart, the two-garage car, or the "latest" fashion of clothes and furni-
ture. To get rid of our craving for mammoth or futile gad,:,et ry and
to cure ourselves of that disease of the human man, as Abbot Fernando
Galiani qualified our love for fashion, require some change of values.
which may be brought about in diverse manners. But once this chargee
is accomplished, we can rest. assured that all producers v-ill follow
suit in producing only unquestionably useful items, more durable and
more easily repairable as well.
With the disappearance of the craving for the futile. mankind will
ipso facto get rid of another ill, to which I referred s the- circium'dr'Ie
of the shaving machine.51 This is to try to shave faster -o as to hIa '
more time to design a shaving machine that will slave faster so :,- to
have more time to design a still faster s1lavini macline, alnd -, on ilI an
empty infinite regress. People of the indiutrially azIdvasn *d '-untric,-
4 By the orgnnUc carryin crnpn'ity It Is mennt the eapacity to i r..uce f. ...! Mil fodder
only with natural inei nn-. witl'ii, t in:-hn npry', artfircin] fertilizers, etc.
o0',;T ask only how large a population the earth could feed if evwry acre Is cvi '' i ted
nre,-rilii'r to the hptt-known trlhiihiaiie for rin xi imi I.iiL the yI l.!. withInt :,i ;- i a.io h, w
1'P'm such a population could ,urv iv. betrays a narrow :,n, lnei r view itf the issue-the
view that what can bhe done once can be done icuniin aid arn iin on end.
Let us also note that the stationary state thesis providtes no criterion for the deIra' 'e-
size of p"i elationn. Daly ( 1I73. p. 154f.
51 Gi,,rg.scu-I,'.'eL(n (1976), ch.niter I.





84


-eoin to have lost the faculty of enjoying substantial leisure spent in in-
telligent fashion, although such leisure is one of thle essential ingredi-
ents of "good life".
The minimal bioeconomic program should aim at minimizing the
input flows eE and eM-for which Kenneth E. Boulding lhas coined
the fitting term "through-put"-by still another way. Overheating,
overcooling, overspeeding, overlighting. and all such overs must cease.
Aks the case of a stationary state (in which the environmental inflows
and outflows balance out) proves, lowering the input flows by the vari-
oiiu means described above neceesisrily lowers the outflow of global
wa.ste. composed of dE. dM, and W. however, the problem does not
end lere. With respect to pollution, quality, not only quantity, matters.
Soino pollution may be more harmful than another, even though it is
produced in a far smaller quantity. Thermodynamics, which deals only
with one qualitative distinction (that between available and unavail-
aile energy), may explain why lead, for instance, increases the effi-
ciency of gasoline, but it cannot explain why lead is a poisonous
substances, for humans and other biological organisms. The only expla-
nation of this qualitative property of lead and numberless other sub-
stances comes from biochemistry, many only from biology or medical
sciences. Because of this pronounced qualitative aspect, the problem of
the optimal welfare for the entire human species becomes extremely
involved.
There, are, however, a few things which no proposal for improving
that welfare (which is tantamount to avoiding as much as possible
ecological catastrophes) can ignore. The first is the general flow matrix,.
which, among other things, teaches us that the reduction of pollution is
not free. As Harry G. Johnson (1973) noted in countering the environ-
mentalist tlheis, we certainly can reoxygenize a lake. But no econo-
mlist's or engineer's magic wand alone can do it; the operation has a
substantial cost in matter-energy. Moreover, the cost of reoxygenizing
all dead lakes in the world may increase so much with the scale that
the sacrifice may not be worth while. The saving alternative is to try
to mni minimize polluting the lakes.
The second point to bear in mind is that depletion is irrevocable. On
this point, too, we encounter some flights of fancy, such as that "with
enogCg1 l ingenuity" we could reconstruct the depleted mineral de-
po-it.52 Ingenuity, of course, cannot create anything material from
nothing. To recreate energy situn say, a coal mine, we would have to
use .ome controlled energy. It would be absurd, however, to use such
energy, for this purpose, instead of using it directly within thle eco-
nomic process. The circular operation would result, in an unnecessary
additional lo.s of accessible resources. And if one claims that with
enough ingenuity we shall be able to convert ur.lavailablc into available
matter-energy, one must believe in tlhe possibility of refuting tlhe En-
tropy Law. This means to devise a system which derives 'unlimited
work from a finite amount of available energy.
Preoccupations with designing a perpetual motion of tile first kind,
oii,'e very fervent, were soon foiled. But those aimed at a perpetual
I, Harry G. John-on (1973).








motion of thle second kind li,,]e ,. I, Is.-:. I. Willir ld (m ihI
deemed nece-i .r to w leli. l i, WI4, atio.r ,' I, of a I 1i, p -
lished in the J. ,.,trii/'io f ta )i ,d ,ifit; ,.,l fc'tiiSL, r: ,.'rif riil,! i
without wMrk.'" Yc ii.. later. Iax W'-,. ie 0ii/' 'i, '" 77 /,; -
dynatm ic.,^ (pi). lt:f). ,'ritic'izmi the pcshiti, ,,f iho.. *, 1m r.l: iij. ,11!: t



tl. liopui an editor of l:1( / A',1,; l ,, ifl 1>..irv(T '1, t i,
tle m av temay le -i eflt te r. on e ula .S ilu't i.:. 1


tlheQ nhlnllberl( *-< ant i-en vi o~l(tI t :ilist J 1io( :1 1 it .I V, I Iir, re ,-
taif of suih a victory. filile history I)rv,- i,,t ia lave 1,,.-1 V.-
Auted ii the past its evidence in :.I,,rt of11 t wihe Iii hly 10lw is j0lz
aas i pt,'headae t. o that fo: ravitatio l. A, t aly a Ilit tinlT ,II'.-
Pnot be overlooked in aiy ,i-n.usirih f this. isuloe-t( reofiil( tle Lii -


tropy ia'w impliaea to r:eed out do; vita t ilou i.e.. to c.':, I, Hi;ei lits
1'ise from the ground with o. e'h ery Ein/.htl:ui' thre oil-ponding tlie.it li'-
al work achieved iy the risit n a."
the ]ilu hel c a ti-n io e t lss v' Ito. i1 it of /'**,f c r


Ftaina olyf we must accey. t that l oll li tio i-. in lt a1a re.iable ,1< 1:. ..
ftthed inevitable anst its educible. Any .aiofti. ll enery gy 4lwve ted. fj,
another pu'poe such as oeatir or lihtting nevital)ly ein o! u .-
nosipated thermal ooke rne A. i.nso as the fl rate -of thie coHie ll



renm vi~s constant at a low level, this (1 i--i pted leat !., -et no 1prolui)
the earth continues- to been out Ltlodvlttio. ie. qililo uii wiite ,tor
ispae from at a propitious averagewith i-- enpeI tlie. I ol -pout i n the same flw m Ate
decreases or increase, b the crtisl.s od tern na equii iu
disturbed. The mueasth cools or heat.- pollution. reis. irtvel : fact talt .v
not only change tbl he old delicibte Anlvi o tihe eneral clioneted 1)ft
also increapose the sucize of thea ice caps or melt it large pievit ofabl ends up '.
is no way by which thisted thermal poltenergy. A lo as e ored tued" lerr i
revmains constant at a low level. thlis, d'-1.ipated ie-at p- nopole


theno way to heat orntinues to bcool a planet fromn eqvin iltibrwie Itlai o te
space at a propitious average tenmpel~ iat iv. But if t~le same flow !: ,ite
decreases or increases. the ei-rtli's old thlei-nodlynanilc equillibriumisii
dJistu'rbed. The earth -cools or heat.- ilp, 1,0spW'-tiVvel. i fact thatma
not only chiangre the old delicate balance oZtegnea ln'ie _
also increase the size of the ice caps or melt, n largre par 1t of thlemi. 11,0! .1
is no wvay by which this thermal pollution mayI be reduced(.0: there i1-
no wvay to heat or to cool a planet fro wvin ithlinl oewise than1! to
burn more energy in the first case and burn Ie- -- in the -I'ond.
In an ideal experiment analyzed on paper, anixy ( ti"er pollution ';:;i
be reduced. Any chemical reaction c:in lbe rvve,1ed: 1nd so ,',n. in
theory, any diffusion of matter. Any (Qolitralv. to v*,', n i, n I1V i
told nowadays, even the nuclear garb',a,, could( be re(iu(, I1 or dis .
of definitely. On the surface, the reatson whly coilp.te depoptitn0t is
not possible may seem to be the immense c,,- of tlie operation. 1.,
real rea'.so is the truth taught by our gene al ilow mal!x. namnel\,
that the material degradation cau -,(ed by Ilixing or spo ita leous wi( ,(i-
cal reactions cannot be reduced in a c!o-,d -.tem Uin perpetuuni.
Tli, question of how to go about mininmi.'ing the throughpit and
iniilmizing harmful pollution comes lup inevitablyv now. After l-
lution lihas struck alTmost everybody on the face and : :'ter thle (il ile-
Largo o)ffllered a preview of the times to come, stand; ev, 0Onoui-1
T I. Willard Gilhh-. Collected Works, vol. I, p. 404f.
5 Lettr to Dr. Freleprick Forscher.






86


have suddenly beiome aware of mankind's entropic problem and dis-
covlered that "act.:a1lly, they have something important to say to the
wrild".5' What they have to say is that if prices are right, there is
11(1, jqlainlerin -,and no pollution.
The fundamental creed of this claim is that "resources [and pollu-
tion] are properly measured in economic, not physical, terms".56 This
nay seem an innocuous statement. Its fallacy should, however, become
obvious to any one on second thought. The ecological problem exists
even for a species that does not live by the market mechanism. It is,
however, this apparently innocuous statement that provides the step-
ping stone to the more stringent position, namely, that the price mech-
ni-sm, if oiled here and there, can offset any shortages and, hence,
preclude any ecological catastrophy.5 This is indeed the greatest fal-
l i': of the entire hI-torv of economic thought.
Prices cannot constitute, even with a large tolerance, proper eco-
logical criteria. To begin with, prices are parochial coordinates of the
economic process.59 They depend on the taxation structure, on the in-
come distribution, and on the distribution of natural resources. Think
what the oil prices would be today if the oil reserves were more evenly
distributed among nations. Think also what the price of caviar or of
some other luxury would be if there were more millionaires in the
world. Moreover, prices are not proportional to the amounts of low
'ntropy of the corresponding objects as such or of the low entropy de-
.graded and the pollution produced through their production. And yet
it is only the low entropy and the pollution that count ecologically. The
point that the market mechanism, if corrected for its many biases,
results in an allocation not much remote from the optimal one (as de-
fined in the standard theory) is beyond question. But what the stand-
ard position totally ignores in this connection is that market prices are
the result of the play of demand and supply of the actual participants
in each particular market. The market price could be relied upon to
solve the ecological problem-of the allocation of mankind's dowry
and of pollution production-only if all future generations also par-
ticipated in the bidding. Since this is not possible, the market prices
cannot serve as criterion of eologicnl values. It stands to reason that
if in auctioniniw Leonardo's Mona Lisa only people with modest in-
comes were allowed to bid, the auction price could not represent the
value of that painting, for the entire society.59
Standard economists are apt to retort-as they indeed have-that
since people save for the future through the money market, the inter-
est rate together with the price constellation of goods will lead to the
right allocation between present and future generations. This argu-
mnent, too, is unavailing. As is generally recognized, all decisions con-
cerning saving do not have a longer horizon than one generation, that
is, about thirty years at most. This algorithm from one generation to
another cannot possibly avoid possible future crisis sufficiently well in
SRnhort M. Solow (i97.3. p. 4nf).
Carl Kavsen (1972, p. 663). Also Harold J. Barnett and Chandler Morse (1963,
p. "47).
57Thp p-vidlnep for thb position Is abundant: Bnrnett and Morse (196.63. p. 240f)
Bpiprman (1972. p. .27f) : Hirrv Johnson (1973) ; Kaysen (1972, pp. 663. 665) ; Solow
(1974. p. 46f) : Hpnry C. Walich (19721.
6 Gpnr, PnIr, -.v-v1n (!971), chapter I In (1976).
6 Geio.,-,.-cu-Roegen (1976), chapter I.






s7
uadvane to be of any 1-,(. in -olving the problenl of inte.1 riwnle.Itioni:1
allocation. Thiniik of 'a person who l11k- at :t trails comiIL' out of a lun-
Del and itwho ca:n I on.i one or two cars ,e fore, tlwv m1eI, re' fro: tli e
dark; only VII(hei tlie L;- two tar- app,.er in s(l;t ,,n tIat .-1 ,L o.:W
that there are o PI ,or, ca-. B v Ihat ti mle, it v ill 1,, too l1' e.
WTithi t1le Ivrellt delj';e oi elivirnrineta1l i-t-111,. (Coh(jlis1- have
t iirned to ,an .1 article Iv I a rold Ilote1i, (1931), in w(,ii, a -,r-
tiolI of ll w:o Ii1 of finite IV-o i i'.': over t inie was oleirl inder the
fa iia'r : -i-tnition coi (cerlning tlie d1 i-,o til ing of fut[! re1 -.itisfa'-
ti,,",-. Bu t ":n admiirablel,- mathem, atical' piece through it v'. as, IIotelling.'s
81rticle offlc-' no (i1id:lnce rv'arding tlie re:e problem. I)i-.,(< intin th,.
future ntak, -Ll'-,e in the c:-e of a' inMlividuial. :'nd, a- W. Stanlev
Jev-ons (1871) a'rgrueid, only Ibecay-e, tihe individual i- mortal. B."t'-'
there is : probal)ility that he may die in the follov.wing year1 lie natulr-
ally prefers to "e:t" more now and sa:ive "It'- for tlie future. T'I'e
refIsoning is faultless., for if, -ay, one thoii-and per-,,ns of tlie -)ile age
saved according to thi- discounting rule. every survivor would enijov a
constant utility, year after year. The situation changes completely in
the case of a nation and, especially, of the entire mankind. Since a
nation and, even more so, mankind are practically immortal according
to the "year from year" or even "century from century" death proNa-
bility, discounting the future would lead to the wrong solution in their
cases.
For mankind, the optimal allocation of resources must be made so
that the entire dowry is divided between all generations in equal pro-
portions. In the mathematical model, the quota of each year is deter-
mined by the ratio between the amount of the dowry and the amount
of total life until the extinction of the species."0 To be sure, we shall
never know the exact amount of the dowry and, much less. the total
future amount of human life. But the principle is the only one to rguide
us in this situation of a unique complexity.
The present practice, which is not essentially different from that
recommended by future discounting. is to tap r,)i, the mo-t easily :c-
cessible resources, thus leaving the more difficult (and. very probable,
-the scantier) for the future generations. This is the ',--ilt of mpvi-
mizing present satisfaction-the first article of standard fith. The
alternative offered above is based on an entirely new principle. For
quasi-immortal units (and often even for mortal individuals) the
most rational action is to rnhfflZe .utur, rr'al',, rather than maxi-
mize present satisfaction.
The conclusion of tlhe foregoing observations is clear. The only con-
trol levers of any ecological policy are the environmental inflow'S and
outflows. This means that we ought to set same quantitative rel-frictions
on the flows of eE and eM. as well as on the level of harmful pTl-
lution in the global waste. To arrive at some r,,easonable limit will
require a vast effort to establish industry by industry the needed fl',w
of low entropy and the inevitable flow of pollution. Once tlre limits
are set, we may let the market mechlanis"m work out the opt iimal flow
00 In economies, we have plive'd with iinvmnizstion formuiNe zo freely that we liii lost
sigzht (f maximization in corner situations. This is seen In the objection that. w'ith,-* 0i!-
counting. the yenrlv allocation must he zero. The obiection In-nores the f nstr: ni I t Tm-
ming from the minirnmumn of sub,1stspnee, which establishes a corner maximum.






88


mnat rix relating environmental inflows to outflows of waste. We should
contiille to u.'e the price. system as a basis for income redistribution
through taxation (positive or negative). But it would be wrong to
adopt ainy of the schemes now offered by standard economists in which
pp.c,'s are used to deter depletion or pollution. The reasons for this
pl)po-ition are ample. The standard argument assumes that taxes are
operating, i.e., they are not so high as to be completely prohibitive.
(And if they are prolhibiltive, the measure would not differ from the
st raiglit forward regulationss)
First. since we cannot attribute any prices whatsoever to low en-
tropy in sutpt. no price can reflect the entropically valid worth of a
commodity. "bl)epleter pays" and '"polluter pays" may raise no qualms
with economists since to think in terms of prices is their second nature.
It is beyond question, however, that since there is no way to produce
resources or to reduce irreducible pollution both principles just men-
tionled are vacuous.
Second, history proves that prices have not been able to prevent
many ecological offenses in the past. Forests have been destroyed
preci-ely because the prices were "right". Some species are now
being menaced with extinction precisely because the price of a cheetah
fur, for instance, is just right. Also, it was because the market price
of oil was just right relative to that of coal that the automobile in-
dustrv turned to producing mammoth gasoline guzzlers, while coal
technology lagged behind with poverty spread in the mining re-
gions.61 Only quantitative regulations could stop-as they have done
in the case of deforestation-ecological abuses pertaining to deple-
tion or pollution.
Third, taxes on ecological offenses would discriminate in favor
of those who can afford to pay them. The ineptitude of such a policy
explodes without right of appeal if one thinks of' deterring crime
by a tax on crime. That will certainly make crime pay!
Finally, a minor, but. by no means negligible objection, concerns
the ultimate use of ecological taxes. Since the proceeds must in the
end be returned to the people (by one means or another), part of them
will end up. by direct or indirect ways, in the pockets of those who
have paid the tax. To prove this point, analytical examples may be
constructed to show that all proceeds may return only to those who
pay the ecological tax-with no other effect than an increase in the
velocity of money.
In a nutshell, economics does not offer the instrumental frame for
dealing with the ecological issue, simply because the nature of this
issue is entropic. Unless fused with ecology, economics remains a
science of the, welfare of a single generation or, what logically comes
to tl(e same thing, of the fiction of the stationary state. And just
as no physicist should claim that. hlie is at. the same time a biologist (or
feel abashed for not being one), economists should accept the brute
fact that economics is not bioeconomics.
1 Willlam HI. MiPrnyk (17,"5), (197C).





S9


Cons.


Prod.


/


Fig. I


Fig.2


I Economic Process
Envmnt cE I cM K I C I R


E ) |
eM .2 I--- --- i
Ec

McM
!^ i c
40t


I I- E
'A -rGJ

dE

AWN,------
dfM.

w
-II --
/= 1--g.-


Hh






90

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91

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