Source: Herman Daly, "Beyond Growth", p.48-50,1996.

The Environmental Macroeconomics of Optimal Scale

Figure: "The Econonomy as an Open Subsystem of the Ecosystem"

Just as the micro unit of the economy (firm or household) operates as part of a larger system (the aggregate or macroeconomy), so the aggregate economy is likewise a part of a larger system, the natural ecosystem. The macroeconomy is an open subsystem of the ecosystem and is totally dependent upon it, both as a source for inputs of low-entropy matter / energy and as a sink for outputs of high-entropy matter / energy. The physical exchanges crossing the boundary between the total ecological system and the economic subsystem constitute the subject matter of environmental macroeconomics. These flows are considered in terms of their scale or total volume relative to the ecosvstem, not in terms of the price of one component of the total flow relative to them and subsystem, rather than the pricing and allocation of each part of the total flow within the human economy or even within the nonhuman part of the ecosystem.

The term "scale" is shorthand for "the physical scale or size of the human presence in the ecosystem, as measured by population times per capita resource use. " Optimal allocation of a given scale of resource flow within the economy is one thing (a microeconomic problem). Optimal scale of the whole economy relative to the ecosystem is an entirely different problem (a macroeconomic problem). The micro allocation problem is analagous to allocating optimally a given amount of weight in a boat. But once the best relative location of weight has been determined, there is still the question of the absolute amount of weight the boat should carry. This absolute optimal scale of load is recognized in the maritime institution of the Plimsoll line. When the watermark hits the Plimsoll line the boat is full, it has reached its safe carrying capacity. Of course, if the weight is badly allocated, the water line will touch the Plimsoll mark sooner. But eventually as the absolute load is increased, the watermark will reach the Plimsoll line even for a boat whose load is optimally allocated. Optimally loaded boats will still sink under too much weight even though they may sink optimally! It should be clear that optimal allocation and optimal scale are quite distinct problems. The major task of environmental macroeconomics is to design an economic institution analogous to the Plimsoll mark-to keep the weight, the absolute scale, of the economy from sinking our biospheric ark.'

The market, of course, functions only within the economic subsystem, where it does only one thing: it solves the allocation problem by providing the necessary information and incentive. It does that one thing very well. What it does not do is solve the problems of optimal scale and of optimal distribution. The market's inability to solve the problem of just distribution is widely recognized, but its similar inability to solve the problem of optimal or even sustainable scale is not as widely appreciated.'