Steady state economy

[x-punk]

I just came across this term and had a look around to see what it meant. Im still a bit confused as to what it involves. I seemed to glean that it would be kinda like a zeitgeist thing with a technocracy controlling access to resources and the means of production. It seems to promise a wonderful overhaul to the standard of living, but dont all theories.

Could somebody give me a concise and easy to understand definition of this theory and how they view it.

Thanks

[Vladimir Innit Lenin]

It's a standard part of neo-classical economic theory.

I'm going to paraphrase my economics textbook and give you something that may not be totally concise/easy, but is definitive:

Here are some assumptions we will consider factual -

1. Output per worker [total output/number of employed workers] is a function of capital per worker [total capital employed/number of employed workers.

2. Investment = private saving [I=S]. [I-S+(T-G); we are assuming T-G=0, to focus in on private saving]. Assuming private saving is proportional to income, we get S=sY, where S = private saving and s= the saving rate [0<s<1]. Thus, we can derive a simple relationship here:

Investment in some period of time, is equal to Output in that same period of time, multiplied by the saving rate:

I{t}=sY{t}, where {t} = period of time 't'.
So, higher output implies higher saving and, thus, higher investment.

3. We want to derive the change in capital stock per worker now. This is done by the following equation (note we are now shifting to capital per worker, simply by dividing everything by N, the number of employed workers)

(K{t+1}/N) - (K{t}/N) = s(Y{t}/N) - &(K{t}/N), where s = saving rate and & = depreciation (of capital) rate. In short, this means that the change in capital stock per worker between today and tomorrow, is the difference between the saving rate per worker and the depreciation (of capital) per worker.

4. Now, in a steady state economy, the amount of saving per worker is equal to the depreciation of capital stock per worker. As we assume in number 2 that private saving is equal to investment, this means that depreciating capital stock per worker is replenished, but not increased, by an equal amount of saving per worker (translating into investment per worker). We denote this equation as follows:

sf(K*/N) = &K*/N << note that when denoting a steady-state equation, we use asterisks on the numerator.

5. Given what we now know, and given steady-state capital per worker, K*/N, the steady-state value of output per worker, Y*/N, is given by:

Y*/N = f(K*/N). In other words, steady-state capital per worker is an increasing function of capital per worker. More capital per worker equals a greater steady-state output per worker and vice versa.

6. Now, we want to ask how to maximise steady-state consumption per worker, since that is the practical realisation of our hitherto economic problem, right? Now, in steady state, consumption is equal to what is left after savings are used (as investment) to cover depreciation of capital stock, in order to maintain a constant level of capital. I.e.:

C/N = Y/N - &K/N

Consumption per worker can thus be given by: C/N = (s[1-s])/& <<do the maths yourself!

[Vladimir Innit Lenin]

Now, we need to introduce technology!

Technology can lead to larger quantities of output for given quantities of capital and labour.

We can re-write the standard production function as follows, denoting technology as A:

Y = F(K, N, A). I.e. output is an increasing function of capital, labour AND technology. We now need to introduce the notion of effective labour/the effective worker, AN. We alter the production function to:

Y = F(K, AN) < i.e. output is an increasing function of capital and effective labour.

What is effective labour? Well, technological progress increases the output that can be produced with a given number of workers. AN can be thought of thus as the amount of effective labour in the economy. I.e. if labour, N, stays the same, but the state of technology, A, doubles, the practical effect is as if there is double the workforce, N, in the economy.

Doing some maths (which i'll skip for now!), we can get the following function:

Y/AN = f(K/AN). In other words: output per effective worker (left side) is a function of capital per effective worker (right side).

Now, we want to return to investment and find a relation for that. Remember that investment is given by:

I = S = sY (i.e. Investment equals private saving which equals output multiplied by the saving rate).

Divide both sides by AN to get:

I/AN = sY/AN, becomes

I/AN = sf(K/AN). i.e. investment per effective worker is a saving function of capital per worker, i.e. investment per effective worker is a proportion of capital per effective worker, equal to the proportion of capital per effective worker that is saved (saving per effective worker).

Now finally to use some more words to summarise what this theory all means for the steady state model:

all economies, in the long-run (decades and longer) naturally converge [supposedly] to the steady state, where capital per effective worker and output per effective worker (and by extension investment/saving per effective worker) are constant. The required investment (capital per effective worker) to maintain a given level of K/AN is as follows:

(& + g{A} + g{N}), where & = depreciation, g{A} = growth in technology and g{N} = growth in labour.

In a steady state, remember that (K/AN)* = (Y/AN)*, in words steady-state capital per effective worker = steady-state output per effective worker. Both converge to constant values in the long run.

You may want to look up some graphs on this, I don't know how to put them in here but they will make everything a little bit clearer.

[Lynx]

Steady State, as in a 'no growth' economy, where per capita energy consumption remains stable?

[Workers-Control-Over-Prod]

I just came across this term and had a look around to see what it meant. Im still a bit confused as to what it involves. I seemed to glean that it would be kinda like a zeitgeist thing with a technocracy controlling access to resources and the means of production. It seems to promise a wonderful overhaul to the standard of living, but dont all theories.

Could somebody give me a concise and easy to understand definition of this theory and how they view it.

Thanks

Don't know about the Steady State economy really. But i can tell you roughly what i prefer economically (politics incorporated in this as well of course) for socialism (or the transition to the lower phase of communism):
Macro-organisation
•Nationalised Banks (Low Interest Rates and extensive credit/loan system) and money reform
•Nationalised Corporations and crucial economic sectors (energy, communication, transportation etc.)
•Increased monopolisation of the economy, "unionisation" of economic sectors/enterprise conjunction.
•Consumer Markets; subsidization of consumers (social programs, minimum wage etc.), not subsidization of producers, i.e. no price manipulation (in normal conditions).

Micro-organisation
•Workplace committees
•Demarchy for planning bodies, the bureaucracy and supervisory teams (not many planners will be needed with the new computer models which the press writes, deems markets and bureaucrats obsolete)
•
-Democratic workers vote for half of members to the corporate Executive Board as well as direct democratic votes on workplace managers (workers selected at the workplace as workplace managers with instant recall by the workplace committees - Executive Board workplace supervisor collaborates with manager)
-Democratic public/regional vote for the other half of corporate Executive Board, or according to political situation and stakeholders.

•The workplace committees should have passing leverage on fundamental policies, where the factory goes, how large the planning board is etc.
•Each own individual workplace (factory, hospital etc.) having final decisions on which instruments of production to use, should not exclude precise collective funds of the state enterprises to go towards buying and applying new technologies (advanced means of production), collective security funds (stimulus, safety package, factory moving etc.).
•There would need to be an intricate rank system of workers (according to seniority, specialty, work ethic etc.) to categorize which workers with a certain skill could offer their labor in new workplaces (or in case of more highly ranked, elderly workers, they could go to retirement) in case their enterprise of occupation is not needed anymore, for various reasons. This was a problem in the 20th century socialism, old factories were kept because of the workers there and it held back the economy's ability to progress, form itself to change.
•Collective meeting of all workers of State enterprises with Party, stakeholder and public representatives would discuss every few dozen months on fundamental directions, what is done with the workers' surplus.

[Vladimir Innit Lenin]

Steady State, as in a 'no growth' economy, where per capita energy consumption remains stable?

It's more a theory of long-term economic growth. It does not mean a 'no growth' economy. What it means, as i've explained above, is that output per effective worker (i.e. output per worker, given technological progress) and capital per worker are constant and equal, so growth reaches its long-term equilibrium level: the steady state.

[ÑóẊîöʼn]

It's more a theory of long-term economic growth. It does not mean a 'no growth' economy. What it means, as i've explained above, is that output per effective worker (i.e. output per worker, given technological progress) and capital per worker are constant and equal, so growth reaches its long-term equilibrium level: the steady state.

Doesn't capitalism require economic growth of a greater magnitude than suggested by the mathematics you provided? Therefore the idea that any kind of "steady state" can be achieved under capitalism is a non-starter?

[x-punk]

Thanks for the replies. I think I understand this a bit better now. So the theory suggests that as entropy increases the economy will move towards a steady state naturally contained by the limits of the essential natural resources.

Ive heard a few libertarian types expouse similar views that an equilibrium point would be reached but only in a free market economy.

To be fair growth must be contained by resource limits. We need these resources to survive so nature takes care of that. But under the current system with gross wealth disparities, the constant need for growth, and a govt that seems happy to maintain and support all this, diminishing resources (or pre-emptive govt constraints on accessing resources) will surely just lead to horrific social consequences for so many people. Rampant unemployment, poverty and all the other social problems which come from it.

I think this is really something that is being experienced in the west just now. There are rampant govt regulations controlling resource access and use and this does not accord with the current systems need for constant growth and the disparity in the private ownership of the means of production. This is leading to high unemployment and decreasing living standards for many because the wealth is getting clustered in the hands of a small group of people. However, instead of the govt trying to balance this out by redistributing the wealth through things like welfare spending and creation of public sector jobs, its going the other way and cutting back on these redistribution measures.

The only realistic way I can see anything close to a steady state economy being achieved just now without terrible social consequences is through heavy govt regulation, wide-scale govt redistribution programmes and perhaps even population controls. Although such measures could give a more even distribution of wealth, it would result in the state being the dictatorial controllers of our lives even more so than they are today.

[Vladimir Innit Lenin]

Doesn't capitalism require economic growth of a greater magnitude than suggested by the mathematics you provided? Therefore the idea that any kind of "steady state" can be achieved under capitalism is a non-starter?

Well, yes and no.

In practice of course, it's very difficult to tell if an economy is growing at a steady state, since the SS is a long-run theory, thus you can only really assess decades worth of historical evidence, rather than short/medium-term trends. In that sense, the idea that the steady-state can actually be achieved is not hugely practicable.

However, the theory does allow for capital accumulation. In fact, it is a common mis-conception that economies in a steady-state do not grow. In fact they do function exactly like any economy that is moving upwards along the output per effective worker and capital per effective worker curves towards; the difference being that, in a steady state, depreciation of capital is replaced on a 1-for-1 basis. So there is still capital investment and accumulation, but the key here is depreciation - the depreciation of the capital stock is replaced only on a 1-for-1 basis.

You must also remember that we are talking about capital and output per effective worker, i.e. labour x technology. So in a steady state you could have great capital accumulation, but if technological progress is huge, then it is still equally possible for investment to equal the depreciation of the capital stock.

Now, I'd like to qualify what I said above. The second half of my answer is really explaining the theoretical intricacies of the theory. It is a pretty neat theory, and - taken by itself, given the assumptions it makes - it works. But in practice of course there are many reasons why it is quite implausible. Measurement is one issue - how do we 'measure' technological progress across sectors, it's kinda like apples and oranges - not all technological progress is labour saving, so where does that go?

I see it more as a theory that is useful as a general aim - it is perfectly rational to aim for the investment in capital stock (machinery etc.) to be equal to its depreciation (wear and tear). I use the brackets to denote what could be transferred to a Socialist society: we should aim, in the long-run, for investment (equalling saving) to match the wear and tear of the machinery and tools used in the production process.

[Lynx]

Assumptions in any model are a problem though. What exactly is assumed, in this theory?

[Vladimir Innit Lenin]

Essentially, that in the long-run all economies are always, no matter what, moving towards the steady-state.

Moreover, that private saving equals Investment (not the case in modern debt-fuelled economies.

Also, that there is a golden rule for the saving rate, i.e. there is a point, s{g}, between 0 and 1, that is the 'golden' point where saving is high enough that investment can offset depreciation, but not so high that consumption is too low to fuel economic growth.