Paul Craig Roberts was Assistant Secretary of the Treasury under Reagan and was one of the main proponents of his supply-side economics. I thought those policies were totally ridiculous at the time and paid him very little mind. For the past couple of weeks I have been reading his blog, PaulCraigRoberts.org. He has strong opinions and he knows a lot about economics. At least some of what he says is spot on. On Friday, 5 May he published the text of an interview by World Affairs Monthly. He talks about the evil of offshoring jobs and suggests something that could be done to alleviate it. Good stuff.
He then goes on to talk about the limits of growth, a topic rarely discussed by mainstream economists.
A more fundamental problem than economists’ ingrained misconceptions about jobs offshoring and free trade is the Solow-Stiglitz production function that is the basis of modern economics. The Solow-Stiglitz production function assumes that man-made capital is a perfect substitute for nature’s capital. This assumption means that there are no ecological limits to economic growth. When we run out of natural capital, man-made capital simply takes its place.
As Nicholas Georgescu-Roegen demonstrates conclusively, this assumption, which is the basis of modern economics, is “a conjuring trick.” Man-made capital and natural capital are complements, not substitutes. Production transforms resources into useful products and into waste products. Natural resources are what are transformed, and labor and man-made capital are agents of transformation.
What is happening in today’s world is that nature’s capital is being exhausted, both the resources and the waste sinks–the places that the waste products from production can be deposited. The air, soil, water, and oceans themselves are being polluted by the waste products of economic activities. As these “external costs” from pollution are not included in costs of producing GDP, economists have no way of knowing if an increase in GDP is worth more than its cost….
There is a lot more food for thought in the interview. Give it a read.