Home > Growth, The Economy and the Planet > Three Limits to Growth

Three Limits to Growth

from Herman Daly

As production (real GDP) grows, its marginal utility declines, because we satisfy our most important needs first. Likewise, the marginal disutilitiy inflicted by growth increases, because as the economy expands into the ecosphere we sacrifice our least important ecological services first (to the extent we know them). These rising costs and declining benefits of growth at the margin are depicted in the diagram below.

3 Limits Graph

From the diagram we can distinguish three concepts of limits to growth. 

1. The “futility limit” occurs when marginal utility of production falls to zero. Even with no cost of production, there is a limit to how much we can consume and still enjoy it. There is a limit to how many goods we can enjoy in a given time period, as well as a limit to our stomachs and to the sensory capacity of our nervous systems. In a world with considerable poverty, and in which the poor observe the rich apparently still enjoying their extra wealth, this futility limit is thought to be far away, not only for the poor, but for everyone. By its “non satiety” postulate, neoclassical economics formally denies the concept of the futility limit. However, studies showing that beyond a threshold self-evaluated happiness (total utility) ceases to increase with GDP, strengthen the relevance of the futility limit.

2. The “ecological catastrophe limit” is represented by a sharp increase to the vertical of the marginal cost curve. Some human activity, or novel combination of activities, may induce a chain reaction, or tipping point, and collapse our ecological niche. The leading candidate for the catastrophe limit at present is runaway climate change induced by greenhouse gasses emitted in pursuit of economic growth. Where along the horizontal axis it might occur is uncertain. I should note that the assumption of a continuously and smoothly increasing marginal cost (disutility) curve is quite optimistic. Given our limited understanding of how the ecosystem functions, we cannot be sure that we have correctly sequenced our growth-imposed sacrifices of ecological services from least to most important. In making way for growth, we may ignorantly sacrifice a vital ecosystem service ahead of a trivial one. Thus the marginal cost curve might in reality zig-zag up and down discontinuously, making it difficult to separate the catastrophe limit from the third and most important limit, namely the economic limit.

3. The “economic limit” is defined by marginal cost equal to marginal benefit and the consequent maximization of net benefit. The good thing about the economic limit is that it would appear to be the first limit encountered. It certainly occurs before the futility limit, and likely before the catastrophe limit, although as just noted that is uncertain. At worst the catastrophe limit might coincide with and discontinuously determine the economic limit. Therefore it is very important to estimate the risks of catastrophe and include them as costs counted in the disutility curve, as far as possible.

From the graph it is evident that increasing production and consumption is rightly called economic growth only up to the economic limit. Beyond that point it becomes uneconomic growth because it increases costs by more than benefits, making us poorer, not richer. Unfortunately it seems that we perversely continue to call it economic growth! Indeed, you will not find the term “uneconomic growth” in any textbook in macroeconomics. Any increase in real GDP is called “economic growth” even if it increases costs faster than benefits.

Economists will note that the logic just employed is familiar in microeconomics—marginal cost equal to marginal benefit defines the optimal size of a microeconomic unit, be it a firm or household. That logic is not usually applied to the macro-economy, however, because the latter is thought to be the Whole rather than a Part. When a Part expands into the finite Whole, it imposes an opportunity cost on other Parts that must shrink to make room for it. When the Whole itself expands, it is thought to impose no opportunity cost because it displaces nothing, presumably expanding into the void. But the macro-economy is not the Whole. It too is a Part, a part of the larger natural economy, the ecosphere, and its growth does inflict opportunity costs on the finite Whole that must be counted. Ignoring this fact leads many economists to believe that growth in GDP could never be uneconomic.

Standard economists might accept this diagram as a static picture, but argue that in a dynamic world technology will shift the marginal benefit curve upward and the marginal cost curve downward, moving their intersection (economic limit) ever to the right, so that continual growth remains both desirable and possible. However, the macroeconomic curve-shifters need to remember three things. First, the physically growing macro-economy is still limited by its displacement of the finite ecosphere, and by the entropic nature of its maintenance throughput. Second, the timing of new technology is uncertain. The expected technology may not be invented or come on line until after we have passed the economic limit. Do we then endure uneconomic growth while waiting and hoping for the curves to shift? Third, let us remember that the curves can also shift in the wrong directions, moving the economic limit back to the left. Did the technological advances of tetraethyl lead and chlorofluorocarbons shift the cost curve down or up? How about nuclear power? Adopting a steady state economy allows us to avoid being shoved past the economic limit. We could take our time to evaluate new technology rather than letting it blindly push growth that may well be uneconomic. And the steady state gives us some insurance against the risks of ecological catastrophe that increase with growthism and technological impatience.

  1. January 22, 2015 at 1:48 pm

    Thanks to Herman Daly for his lifelong effort to educate his fellow economists ! Keep up this vital work ,Herman, even more important today as economics still ignores finance , where the real mischief is occurring ! This is why our efforts now include Reforming Electronic Markets and Trading ( as described in my report on our expert seminar in new York,Nov , 2014 )
    Hazel Henderson

  2. Garrett Connelly
    January 22, 2015 at 4:26 pm

    “From the graph it is evident that increasing production and consumption is rightly called economic growth only up to the economic limit. Beyond that point it becomes uneconomic growth because it increases costs by more than benefits, making us poorer, not richer. Unfortunately it seems that we perversely continue to call it economic growth! Indeed, you will not find the term “uneconomic growth” in any textbook in macroeconomics. Any increase in real GDP is called “economic growth” even if it increases costs faster than benefits.”

    Uneconomic growth is rational for economic predators who measure success as centralization of wealth in a personal checking account.

  3. January 22, 2015 at 9:56 pm

    The problem is, say, heterogeneous agents or utility functions. Or, people have different time discounting factors. Some people live for today, while others (say, native americans) consider 7 generations ahead. Many in environmental or ecological economics consider the next 50 or 100 years. A few cosmologists and futurists looks millions of years into the future. (I think Freeman Dyson discussed this in Physical Review in the 70’s. Some biologists calculate the length of existence of species, including humans.)

  4. January 23, 2015 at 2:20 am

    Yes, its not so much an economic problem as a problem of sociopathology and underlying that in many cases, psychopathology. It needs to be treated as such: ‘extractivism’ or ‘growth fetishism’ is an ideological/behavioral syndrome that is dangerously dysfunctional and forms an identifiable sub-section of most societies. It is distributed widely in differing concentrations and potencies throughout the society, and is linked with other such groups in other societies. Self-aware concentrations of this behavior should be treated like other criminal gangs, and like clusters of group behaviors that are on the fringe of criminality as that is defined in a society. I think calling them predators is too flattering to the self image they want to create. Parasites would be a more appropriate analogy in terms of the ecology of lifeforms. They are not deliberately trying to kill their host so they can appear to be innocent but their lethality increases as their concentration and potency (accumulated wealth) increases.

    • Garrett Connelly
      January 23, 2015 at 7:50 pm

      Jhint, now you are talking real economics.

      Criminally insane democrats and republicans are running a terrorist false democracy in the US and the flood of people fleeing US terrorism around the world is destabilizing Europe and the entire north American continent.

      Those who talk of growth, equilibrium, substitution, economies of scale etc in such an environment are propagandists, not economists.

  5. merijnknibbe
    January 25, 2015 at 8:28 am

    Though I totally agree with the gist of the article I do take issue with the concept of ‘utility’ used in the article (see also the Ishi comment). Why?

    A) We do not measure ‘national utility’ – as we can’t measure it.
    B) And we can’t measure it as it’s not a well defined or conceptualized variable. Try to find an article which explains the concept of ‘national utility’!
    C) Aside from this, ideas of ‘national'(or in this case: global) quickly lead to the mythological idea (pioneered by John Bates Clark) of the ‘representative consumer’, the idea that (in this case) all of mankind not only acts like but actually IS one consumer. This idea prevents one from analysing problems like inequality (there is only 1 person), unemployment (people are not 100% unemployed, but the representative consumer only works a little less or a little more), debt (what’s the point of lending in a 1 person economy). In this particular case, it gives the mistaken idea that there is anything which can be optimized and actually is optimized. In reality, however, some people live alone, lonely, in large and luxurious houses while billions of others really, really need better, more spacious, healthier and more energy efficient houses in neighbourhoods with good sewer systems. And it seems that another 4 billion will join. Even if the áverage’ house of the representative consumer is all right, billions might actually suffer from not enough good housing.
    D) We do however measure the production of carbon dioxide, the use of oil and coal, iron, renewables, whatever. And we do have the (input-ouput) models which enable us to gauge what whill happen when we do build a few additional houses (auch: building is one of the most energy and material intensive sectors of the economy, though huge gains can be made: http://www.innovativeshelter.tue.nl/iss/information/Ferrocement.pdf).

    It’s better to stick to such measurable concepts. Which all point toward the same conclusion: we will have to do more with less.

  6. John McDonald
    January 27, 2015 at 7:37 pm

    I am not sure why it’s better to stick to “measurable concepts.” If they actually all point to the conclusion that we will have to do “more with less,” then I see a problem. Is it not a problem if none of them point to doing “the same” with less? Or even doing less with “way less?”

  7. January 27, 2015 at 8:33 pm

    Hello merijnknibb,

    What a surprise! I followed your link to see a picture of my younger self on the way to Eindhoven.

    I did experiment further to confirm cost estimates. Then, at a ferrocement conference in Havana, I befriended an indigenous engineering professor from a latin american country who drank a beer with me and discussed what the billions who are not harming Earth so greatly can actually afford.

    In essence, I was told we are correct by a university professor who puts on a suit to teach and then returns to indigenous life in balance with Earth at the end of the day.

    Those billions you refer to will limit the size of their family and provide the opportunity of education to their children when they live with secure pride of place and are not disrupted by military backed commercial conquest of their villages and farms.

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