Ecological Economics, by Herman Daly

Local Futures
10 min readDec 20, 2022


Herman Daly, who died in October of this year, was for 60 years a powerful and articulate critic of mainstream economic thinking. Along with an early stint working at the World Bank, Daly had a distinguished career in academia, authored numerous books, and was the 1996 recipient of the Right Livelihood Award. What follows is a portion of an essay he submitted to Real World Economics Review a few weeks before he died.

Every year the World Bank publishes its World Development Report, dedicated to whatever topic the WB deems most important at the time. In 1992 the topic was “The Economy and the Environment”. I was not on the team that wrote the Report, but was included in a panel of internal reviewers charged with commenting on successive drafts and suggesting improvements. I felt that this was my most important task at the time, and eagerly awaited the first draft.

The first draft arrived and I began reading. In the first chapter there was a diagram entitled “The Relation of the Economy to the Environment”. The diagram consisted of a rectangle labeled “Economy”, with an arrow entering from the left labeled “Inputs”, and an arrow exiting to the right labeled “Outputs”. That was it. Nothing in the diagram or accompanying text indicated what the inputs were, where they came from, what was going on inside the rectangle, what the outputs were, where they were going. And even if that were accepted as a bare-bones representation of the economy, where was the environment? It was simply not there! Undefined inputs came from nowhere and undefined outputs went nowhere, after passing through an empty box. Not a helpful diagram.

After recovering from my disappointment, I said to myself, OK this is only a first draft, and the title of the diagram is on target even if the diagram itself is vacuous. So here is my chance to make some helpful suggestions for how to improve the initial diagram, and give a better pre-analytic vision to guide the subsequent Report.

Here are my suggested revisions with a bit of supporting commentary and evidence from events after 1992.

Let’s draw a big circle around the rectangle and label it “Environment”. The Earth-environment, let us say, has one input from space, solar energy, and one output back to space, waste heat. No significant material inputs from or outputs to space. Materials circulate as energy flows through the environment. The inputs to the economy come from the containing finite environment and constitute depletion, a cost. The final outputs return to the environment as wastes and constitute pollution, also a cost.

For now, focus on the upper “empty world” part of the diagram. The economy (brown stuff, consisting of human bodies and manmade artifacts) is made from matter and energy taken from the environment (green stuff). Thanks to the first law of thermodynamics (no creation or destruction of matter-energy) more brown stuff necessarily means less green stuff. In physical dimensions the economy is an open subsystem of the environmental biosphere (i.e., it both receives matter and energy inputs and returns matter and energy outputs to the larger system).

People die and artifacts wear out or are used up, so there is an inevitable outflow of degraded waste from the economy back to the environment. If the inflow of production and reproduction is equal to the outflow of depreciation and death then the economy (stocks of people and artifacts) remains constant in physical size, a steady state. If inflow is greater than outflow it grows; if less it declines.

In addition to the quantitative difference between inflow and outflow there is also a qualitative difference. The inflow consists of useful natural resources, the outflow of useless wastes. Usefulness is closely correlated with low entropy, and uselessness with high entropy. An economy cannot directly reuse its own wastes any more than an animal can directly re-ingest its own excrement, or a car can run on its own exhaust fumes. This follows from the second law of thermodynamics, the entropy law.

It is true that waste matter is ultimately reused, but only after having been decomposed and restructured by bio-geochemical cycles powered by the sun. Solar energy arrives in low entropy form and exits the earth in high entropy form. Accumulating carbon dioxide in the atmosphere from burning fossil fuels slows down the outflow of heat, forcing a rise in temperature and consequent climate change which has huge economic consequences. Energy is not recycled whether from the current solar flow, or from the stored sunlight of Paleolithic summers concentrated in the form of fossil fuels. As shown in the diagram only matter is recycled, often advantageously, but is far from completely recycled — about 35% for municipal solid waste in the US. Furthermore, it requires an increase in energy throughput, as well as the wearing out of material implements, to carry out the limited recycle. Money flows in a circle. Physical resources ultimately do not. The current enthusiasm in some quarters for a fully “circular economy” is quite misleading, as is the circular flow diagram in the first chapter of mainstream textbooks.

So far, our diagram is in physical terms only. The economy thus appears as a giant machine for converting useful resources into useless wastes — an idiotic process. To make sense of the economy we must recognize that the ultimate value product of the economic process is not a physical thing, but a psychic experience, the conscious enjoyment of life, represented by the word “Welfare”, placed outside the circle of biophysical things. But we are not disembodied spirits. As physical earth-beings our enjoyment of life depends on our physical maintenance, and requires the services of both the natural ecosystem (green arrow to Welfare, e.g. clean air and water) and the services of artifacts that we have produced (brown arrow to Welfare, e.g. bicycles and cell phones).

Looking now at the lower “Full World” version of the diagram we might ask how much larger is the economy than previously. World population in my lifetime has quadrupled, from 2 to 8 billion. That has never happened before. Populations of cars, houses, cell phones, etc., have far more than quadrupled in my lifetime. Human biomass plus that of our cattle, now accounts for some 96% of all mammalian biomass (36% human, 60% cattle, soon to be converted to human biomass). Only 4% is left for wild mammals. As for birds, 70% are chickens and other poultry, with only 30% wild birds. As noted above the atmosphere is now so full of greenhouse gasses that it is altering the climate in extremely costly ways. The world is clearly full in the stock dimension of populations of people and our produced goods and “bads”. As a consequence of the larger stock dimension there is an increased flow dimension of the throughput necessary to maintain the larger stocks. More depletion and more pollution of the smaller remaining biosphere means a reduced flow of ecosystem services. This is obvious without monetary measurement.

Continuing with the “full world” diagram, we see that the larger economy has increased the maintenance throughput (more depletion and pollution, larger throughput arrows). The larger economy also increases the flow of economic services, but the consequently smaller biosphere has diminished the flow of ecological services. If the physical growth of the economy results in an increase in the brown economic services arrow that is greater than the reduction in the green ecosystem services arrow then we have economic growth. Extra benefits greater than extra costs. If the reduction in the green ecosystem services arrow is greater than the increase in the brown economic services arrow then we have uneconomic growth. Extra costs greater than extra benefits. The optimal scale of the economy relative to the biosphere occurs when the sum of ecosystem services and economic services is a maximum.

That completes my suggested revision of the original diagram of “the relation of the economy to the environment”. I sent my suggested revisions off to the World Development Report authors with high hopes. When the second draft arrived, I saw that the original diagram was repeated, with no change in the text. However, a larger rectangle, unlabeled, now enclosed the original diagram, like a picture frame. With some annoyance I wrote back that my suggestion was not simply to put a picture frame around the diagram, but rather to specifically depict the most basic “relationships of the economy to the environment” and explain them.

Time passes and the third draft arrives. No more diagram. Completely omitted. No comment on my suggestions. They abandoned the whole idea of a visual representation of the relation of the economy to the environment. I was very surprised, but gradually began to understand why such a diagram simply could not be included, and why I was naive to have expected it.

Once you depict the economy as a subsystem of a larger system that is finite, non-growing, and materially closed (with a non-growing throughput of solar energy), then it is obvious that the growth of the economic subsystem is limited by the finitude of the containing ecosystem. It is also limited by the entropic nature of the metabolic throughput of matter-energy by which the economy is maintained. The goal of the World Bank and its member countries is growth. It serves this goal by making loans that must be paid back at interest made possible by the growth that the investment generates. To realize that not only is growth limited physically by finitude and entropy, but that it faces an earlier economic limit when the loss of ecosystem services begins to exceed the gains from extra economic services, is a large and bitter pill for the Bank to swallow. It is especially bitter in view of evidence that we have already reached the economic limit and that further growth has become uneconomic, at least in rich countries. So, you might suspect that the WB would advocate reduced resource throughput for rich countries to allow greater throughput in poor countries up to an acceptable standard of living. But no, the rich are urged to grow faster in order to provide markets for the poor to sell in, and to accumulate capital to invest in poor countries. The idea that growth in the global macro-economy could, even theoretically, be uneconomic is very disturbing to economists. You will not (yet?) find the term “uneconomic growth” in the index of any textbook on macroeconomics.

But this is the basic message of Ecological Economics. The economy is a subsystem of the biosphere and has become too large to fit. We have overshot our ecological niche. Our major goal of growth has now become uneconomic, and growth must be replaced by shrinkage — or “degrowth” as some now say.

That is not as dismal as it might at first seem because Ecological Economics distinguishes between growth (quantitative increase in size by accretion or assimilation of matter), and development, (qualitative improvement in technology, design, and ethical priorities). Sustainable development in ecological economics is defined as development without growth (qualitative improvement without quantitative increase) — still possible, but much slower and more difficult than the customary “development with growth” as measured by GDP.

This post was adapted from “Ecological Economics in Four Parables”, real-world economics review, issue no. 102, 18 December 2022, pp. 2–15.

True, an occasional meteor hits the earth (a dangerous involuntary material import) and a few moon rocks were voluntarily imported and now decorate a stained-glass window in the National Cathedral. A few rockets and rovers have been exported to space. A lot of satellites, as well as material detritus, are circulating in earth orbit. Whether we consider material in earth orbit as part of the earth or outer space can be debated. Currently a few billionaires are fixated, along with NASA, on space colonization as necessitated they believe by our overconsumption, overpopulation, and continuing commitment to growth. The problem is real, but their solution is delusional, as the expensive technological effort to migrate to where few intelligent people what to go, and to discover “if we are alone in the Universe”.

Nicholas Georgescu-Roegen, The Entropy Law and the Economic Process, Harvard University Press, 1971.

Rational humans could be expected, as growth continues, to satisfy our most important needs first, and to first sacrifice in exchange our least important ecosystem services, in so far as we are able. Therefore, marginal benefits of growth generally decline while marginal costs of growth increase, tending toward equality at the optimal scale.

And on the subject of measurement, it must be noted that we have only incomplete measures of economic services, and extremely incomplete measures of ecosystem services. Nevertheless, real magnitudes do not cease to exist just because we can’t accurately measure them numerically. We can see and feel their consequences. Also, in spite of Pareto, we know that a pin prick hurts Jones less than a leg amputation hurts Smith. Although analytic thought requires distinct definitions, dialectic thought can reason with partially overlapping categories. For now, we also leave this definition of optimum scale as purely anthropocentric, referring only to human welfare. But other sentient creatures both enjoy their lives and suffer — they have intrinsic as well as instrumental value. It is difficult to account for the welfare of all life beyond recognizing that steps toward counting welfare of non-humans will require greater sharing of the earth with them, and consequently a lower optimum scale for humans.

Timothee Parrique, The Political Economy of Degrowth,

A small like-minded group within the WB decided to provoke external debate with the message of the 1992 World Development Report, given that our internal efforts to influence it had failed. See Robert Goodland, Salah El Serafy, and Herman Daly, eds. Population, Technology, and Lifestyle: The Transition to Sustainability, Island Press, 1992, Washington, D.C. (Also published by UNESCO, 1991, Paris; under the title Environmentally Sustainable Economic Development: Building on Brundtland). This collection’s authority was bolstered by the fact that it contained contributions by two Nobel laureate economists (Trygve Haavelmo and Jan Tinbergen), as well as a supporting introduction by the environmental ministers of two of the Bank’s biggest borrowers (Emil Salim of Indonesia and Jose Lutzemberger of Brazil). But that was not enough to elicit any internal reconsideration of the World Bank’s commitment to growth. A decade later in 2003 another World Development Report on the same topic was more willing to recognize some costs of growth, but it was still firmly within the growthist paradigm. (See “The illth of nations: comments on World Bankd World Development Report, 2003”, in H. Daly, Ecological Economics and Sustainable Development, Edward Elgar, Publishers, 2007.

Originally published at on December 20, 2022.



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