PrepTest 28, Section 4, Question 21

Recently, a new school of economics called steady-state economics has seriously challenged neoclassical economics, the reigning school in Western economic decision making. According to the neoclassical model, an economy is a closed system involving only the circular flow of exchange value between producers and consumers. Therefore, no noneconomic constraints impinge upon the economy and growth has no limits. Indeed, some neoclassical economists argue that growth itself is crucial, because, they claim, the solutions to problems often associated with growth (income inequities, for example) can be found only in the capital that further growth creates.

Steady-state economists believe the neoclassical model to be unrealistic and hold that the economy is dependent on nature. Resources, they argue, enter the economy as raw material and exit as consumed products or waste; the greater the resources, the greater the size of the economy. According to these economists, nature's limited capacity to regenerate raw material and absorb waste suggests that there is an optimal size for the economy, and that growth beyond this ideal point would increase the cost to the environment at a faster rate than the benefit to producers and consumers, generating cycles that impoverish rather than enrich. Steady-state economists thus believe that the concept of an ever growing economy is dangerous, and that the only alternative is to maintain a state in which the economy remains in equilibrium with nature. Neoclassical economists, on the other hand, consider nature to be just one element of the economy rather than an outside constraint, believing that natural resources, if depleted, can be replaced with other elements�i.e., human-made resources�that will allow the economy to continue with its process of unlimited growth.

Some steady-state economists, pointing to the widening disparity between indices of actual growth (which simply count the total monetary value of goods and services) and the index of environmentally sustainable growth (which is based on personal consumption, factoring in depletion of raw materials and production costs), believe that Western economies have already exceeded their optimal size. In response to the warnings from neoclassical economists that checking economic growth only leads to economic stagnation, they argue that there are alternatives to growth that still accomplish what is required of any economy: the satisfaction of human wants. One of these alternatives is conservation. Conservation�for example, increasing the efficiency of resource use through means such as recycling�differs from growth in that it is qualitative, not quantitative, requiring improvement in resource management rather than an increase in the amount of resources. One measure of the success of a steady-state economy would be the degree to which it could implement alternatives to growth, such as conservation, without sacrificing the ability to satisfy the wants of producers and consumers.

Recently, a new school of economics called steady-state economics has seriously challenged neoclassical economics, the reigning school in Western economic decision making. According to the neoclassical model, an economy is a closed system involving only the circular flow of exchange value between producers and consumers. Therefore, no noneconomic constraints impinge upon the economy and growth has no limits. Indeed, some neoclassical economists argue that growth itself is crucial, because, they claim, the solutions to problems often associated with growth (income inequities, for example) can be found only in the capital that further growth creates.

Steady-state economists believe the neoclassical model to be unrealistic and hold that the economy is dependent on nature. Resources, they argue, enter the economy as raw material and exit as consumed products or waste; the greater the resources, the greater the size of the economy. According to these economists, nature's limited capacity to regenerate raw material and absorb waste suggests that there is an optimal size for the economy, and that growth beyond this ideal point would increase the cost to the environment at a faster rate than the benefit to producers and consumers, generating cycles that impoverish rather than enrich. Steady-state economists thus believe that the concept of an ever growing economy is dangerous, and that the only alternative is to maintain a state in which the economy remains in equilibrium with nature. Neoclassical economists, on the other hand, consider nature to be just one element of the economy rather than an outside constraint, believing that natural resources, if depleted, can be replaced with other elements�i.e., human-made resources�that will allow the economy to continue with its process of unlimited growth.

Some steady-state economists, pointing to the widening disparity between indices of actual growth (which simply count the total monetary value of goods and services) and the index of environmentally sustainable growth (which is based on personal consumption, factoring in depletion of raw materials and production costs), believe that Western economies have already exceeded their optimal size. In response to the warnings from neoclassical economists that checking economic growth only leads to economic stagnation, they argue that there are alternatives to growth that still accomplish what is required of any economy: the satisfaction of human wants. One of these alternatives is conservation. Conservation�for example, increasing the efficiency of resource use through means such as recycling�differs from growth in that it is qualitative, not quantitative, requiring improvement in resource management rather than an increase in the amount of resources. One measure of the success of a steady-state economy would be the degree to which it could implement alternatives to growth, such as conservation, without sacrificing the ability to satisfy the wants of producers and consumers.