ECOLOGICAL
ECONOMICS
ELSEVIER Ecological Economics 22 (1997) 261-266
FORUM
Georgescu-Roegen versus SolowjStiglitz
Herman
Schaal af Pub/ie Affairs, University af Maryland, Callege Park, MD 20742-1821, USA
Received 23 September 1996; accepted 25 February 1997
In his Richard T. Ely Lecture to the American
Economics Association, Robert Solow (Solow,
1974, 11) stated that "If it is very easy to substi­
tute other factors for natural resources, then there
is in principIe no 'problem'. The world can, in
effect, get along without natural resources . . . " As
an 'if-then' statement, this is no less true than
saying, 'If wishes were horses then beggars would
ride'. But the facts are that wishes are not horses,
and that natural resources and capital are gener­
ally not substitutes, but complements. While it is
no doubt useful to state this conditional possibil­
ity for the sake of logical completeness in catalog­
ing alternatives, one would expect that the
production-without-resources case, once recog­
nized, would be quickly set aside as unrealistic
and unworthy of further analysis. However,
Solow does not set it aside, but retains it as a real
possibility. In fact, it is precisely this 'real possibil­
ity' that has provided the foundation for a signifi­
cant part of his previous work. His well-known
work in growth theory is based on an aggregate
production function in which resources do not
appear at all, and which takes production to be a
function only of capital and labor. That produc­
tion function is a mathematically clear way of
saying that 'the world can, in effect, get along
without natural resources'.
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E. Daly
What evidence does Solow offer for this re­
markable affirmation about the way the world
works? In the next paragraph he says, '''Fortu­
nately, what little evidence there is suggests that
there is quite a lot of substitutability between
exhaustible resources and renewable or repro­
ducible resources . . . " True enough, but irrelevant.
The issue is not substitution betwcen two types of
natural resource, rather it is one of substitution of
capital for resources, an entirely different matter.
Easy substitution between two types of natural
resource will not help the world to get along
without natural resources!
Since the production function is often explained
as a technical recipe, we might say that Solow's
recipe calls for making a cake with only the cook
and his kitchen. We do not need flour, eggs,
sugar, etc., nor electricity or natural gas, nor even
firewood. If we want a bigger cake, the cook
simply stirs faster in a bigger bowl and cooks the
empty bowl in a bigger oven that somehow heats
itself. Nor does the cook have any cleaning up to
do, because the production recipe produces no
wastes. There are no rinds, peelings, husks, shells,
or residues, I10r is there any waste heat from the
oven to be vented. Furthermore, we can make not
only a cake, but any kind of dish--a gumbo, fried
262 H.E. Daly / Ecological Economics 22 (/997) 261-266
chicken, a paella, bananas foster, cherries ju­
bilee-all without worrying about the qualita­
tively different ingredients, or even about the
quantity of any ingredient at aH! Real recipes in
real cookbooks, by contrast, begin with a list of
specific ingredients and amounts.
A technical production recipe that contradicts
both the first and second laws of thermodynamics,
as well as best practice in cooking, is more than a
little troubling. It led Georgescu-Roegen to the
following verdict on Solow:
One must have a very erroneous view of the
economic process as a whole not to see that
there are no material factors other ihan natural
resources. To maintain further that 'the world
can, in effect, get along without natural re­
sources' is to ignore the difference between the
actual world and the Garden of Eden
(Georgescu-Roegen, 1975, 361).
Perhaps as an unacknowledged concession to
Georgescu-Roegen's criticism, we find sorne years
later a new version of the production function in
which resources appear along with labor and cap­
ital, all multiplied together in a Cobb-Douglas
function. Georgescu-Roegen labeled this the
'Solow-Stiglitz variant', and showed that includ­
ing R (resources) in this type of production func­
tion simply sweeps the contradiction under the
rug, without removing it.
Georgescu-Roegen deserves to be quoted at
length on this point. He writes the 'Solow-Stiglitz
variant' of the Cobb-Douglas function as:
(1)
where Q is output, K is the stock of capital, R
is the flow of natural resources used in produc­
tion, L is the labor supply, and al + a2 + a3 1=
and of course, a¡ > O. From this formula it
follows that with a constant labor power, Lo,
one could obtain any Qo, if the flow of natural
resources satisfies the condition
(2)
This shows that R may be as small as we wish,
provided K is sufficiently large. Ergo, we can
obtain a constant annual product indefinitely
even from a very small stock of resources R >
0, if we decompose R into an infinite series
R I:.R" with R¡ --> 0, use R¡ in year i, and
=
increase the stock of capital each year as re­
quired by (2). But this 'ergo' is not valid in
actuality. In actuality,. the increase of capital
implies an additional depletion of resources.
And if K --> Xi, then R will rapidly b{: exhausted
by the production of capital. Solow and Stiglitz
could not have come out with their conjuring
trick had they borne in mind, first, that any
material process consists in the transformation
of sorne materials into others (the flow ele­
ments) by sorne agents (the fund elements), and
second, that natural resources are the very sap
of the economic process. They are not just like
any other production factor. A change in capi­
tal or labor can only diminish the amount of
waste in the production 01' a commodity: no
agent can create the material on which it works.
Nor can capital create the stuff out of which it
is made. In sorne cases it may also be that the
same service can be provided by a design that
requires less matter or energy. But (:ven in this
direction there exists a limit, unless we believe
that the ultimate fate of the economic process is
an earthly Garden of Eden. The question that
confronts us today is whether we are going to
discover new sources of energy that can be
safely used. No elasticities of sorne Cobb-Dou­
glas function can help us to answer it
(Georgescu-Roegen, 1979, 98) (See also Stiglitz,
1979, 41, fn 5).
To my knowledge neither Solow nor Stiglitz has
ever replied to Georgescu-Roegen's critique. What
reply could they make? Let us consider a few
possibilities that others have put forward in simi­
lar contexts.
First, it might be argued that resources can be
left out of the production function hecause they
are not really scarce. Air is usually necessary for
production, but we do not explicitly enter it in the
function because it is considered a free good. This
argument loses plausibility as soon as we remem-
 H.E. Daly / Ecological Economics 22 (1997) 261-266
ber that most resources are not free goods. Fur­
thermore, we cannot logically use price, even a
zero price, as a coefficient of factors in the pro­
duction function. The production function is a
technical recipe with aH terms in physical units,
not value units.1 The fact that aggregate produc­
tion functions must use prices as weights in calcu­
lating an aggregate quantity index (dollar's worth)
of capital (or labor or resources) is a fundamental
problem that limits the usefulness of aggregate
production functions, not an answer to the
difficuJty just raised. AIso, expressing the quanti­
ties of different factors in units of the same nu­
meraire reflects an assumption, not a and use bigger bowls and ovens. The conjuring
demonstration, that the factors are substitutes.
Second, it is sometimes argued that leaving
resources out of the production function is
justified by the implicit assumption that resources
can be perfectly substituted by reproducible capi­
tal. Nordhaus and Tobin (1972) are quite explicit:
"The prevailing standard model of growth as­
sumes that there are no limits on the feasibility of
expanding the supplies of nonhuman agents of
production. It is basically a two-factor model in
which production depends only on labor and
reproducible capital. Land and resources, the
third member of the classical triad, have generally
been dropped . . . the tacit justification has been
that reproducible capital is a near perfect substi­
tute for land and other exhaustible resources." If
that were the case then we could equally well
leave out capital and include natural resources
(substitution is reversible), yet no one suggests
doing that (for related discussion, see Victor,
1991). To do that would run counter to the whole
1 To see why this must be so, recal! the fol!owing chain of
derivations. From the production function we derive the cost
function by introducing factor prices, and from the cost func­
tion we derive the supply curve by introducing a schedule of
product prices. From the utility function we derive the demand
curve with the aid of an introduced schedule of product prices.
The interaction of supply and demand simultaneously deter­
mines equilibrium prices and quantities. If we already have
those prices included in either the production or utility func­
tions then we are assuming from the beginning that which
ultimately is to be explained. Simultaneous determination by
supply and demand is one thing, but circular reasoning is
something else.
263
animus of neoclassical theory, which is to deny
any important role to nature. 2
The Solow-Stiglitz variant includes resources
explicitly, but implicitly makes a similar assump­
tion about near perfect substitution of capital for
resources-what Georgescu-Roegen aptly dis­
missed as a 'conjuring trick'. In the Solow-·Stightz
variant, to make a cake we need not only the
cook and his kitchen, but also sorne non-zero
amount of flour, sugar, eggs, etc. This seems a
great step forward until we realize that we could
make our cake a thousand times bigger with no
extra ingredients, if we simply would stir faster
trick is to give the appearance of respecting the
first law of thermodynamics (material balance)
without really doing so.
Another argument for the unimportance of re­
sources was offered in the influential book
Scarcity and Growth, (Barnett and Morse, 1963,
11) where it was argued that "Advances in funda­
mental science have made it possible to take
advantage of the uniformity of matterjenergy, a
uniformity that makes it feasible without pre­
assignable limit, to escape the quantitative con­
straints imposed by the character of the earth's
crust. . . Nature imposes particular scarcities, not
an inescapable general scarcity." Just below the
surface lies the alchemist's dream of converting
lead into gold. All we need from nature are
uniform, indestructible building blocks--the al­
chemical 'quintessence' or 'fifth essence' to which
the traditional four essences (earth, air, flre, and
water) are thought to be reducible, and through
which they become convertible one into the other.
2 Acceptance of the dogma that nature makes no contri bu­
tion to production al!ows sorne neoclassical economists to
assume that any increase in production not explained by
increases in labor or capital must be the result of sorne other
humanly created factor, namely technology. Such economists
do not ftinch from claiming that a 50% unexplained residual
must really be a measure of technological progress (human
ingenuity). In fact the residual is a measure of everything that
is not labor and capital, inc\uding, of course, natural re­
sources. To make matters worse, as Georgesc:u-Roegen
pointed out, capital and labor themselves have a necessary and
significant resource content from which neoclassical produc­
tion functions totally abstrae!.
264 H.E. Daly / Ecological Economics 22 (1997) 261-266
Given the building blocks, all the rest is trans­
mutation-value added by capital and labor
(and perhaps a few magic words or symbols).
Technical improvement enables labor and capital
to add more value to the inert building blocks,
but nature remains unnecessary beyond the ini­
tial provision of those blocks. This view at least
respects the first law of thermodynamics, but un­
fortunately crashes headlong into the second
law. While it may be technically possible to con­
vert lead into gold thereby e1iminating the par­
ticular scarcity of gold, we do not thereby
remove general scarcity, because the potential
for making such conversions is ilself scarce.
That potential must be continually used up by
the economy and resupplied by nature in the
form of low-entropy natural resorces.
Another possible reply would be to take off
from Georgescu-Roegen's qualification that in
sorne cases "the same service may be provided
by a design that requires Jess matter or energy."
This implicitly introduces a distinction between
substitution among factors within a given set of
technologies (existing state of the art), and sub­
stitution among factors made possible by a new
technology (improved state of the art). Even the
latter case is limited. Future technologies must
also conform to the laws of thermodynamics,
Georgescu-Roegen insists, but he leaves it at
that. Just how far new technology can ease the
burden of scarcity, within the constraint of phys­
ical laws, remains an open question. But that
really is another subject from the one at hand,
since in constructing their aggregate production
function Solow/Stiglitz aim to represent actual
production processes of today and the recent
past-not unknown future possibilities. It is as
an empirically-based representation of actual
production processes that their production func­
tion is intended, and it is as such that it fails.
That it would also fail to depict future technolo­
gies is an a fortiori criticismo
In an article otherwise critical of neoclassical
theory, Ayres (Ayres, 1996, 12) ofTers a last­
ditch defense of Solow-Stiglitz, in the absence
of which he considers Georgescu-Roegen's cri­
tique 'devastating'. Ayres' too-generous defense
is that, "in the distant future the economic sys-
tem need not produce significant amounts of
material goods at all." Further down the same
page he implicitly conftates the production func­
tion with the utility function to make the claim
that, "nobody can define a finite absolute mini­
mum material input required to produce a unit
of economic welfare." Maybe not, but we were
talking about physical output, not welfare. Even
production functions that yield servioes are pro­
ducing a physical output-the use of something
or somebody for sorne period of time. That is
different from utility or welfare. The service of
my physician may not increase my welfare at all,
and could even reduce it, but it remains a mea­
surable service for which I am charged. But even
without this clarification Ayres found it neces­
sary to immediately condition his statement,
questioning the existence of a minimum material
input, by adding "with the obvious exception of
food and drink." Are there not other obvious
exceptions, e.g. clothing and shelter?
Maybe there are other replies to Georgescu­
Roegen's criticism that are less unconvincing
than those considered aboye, but if so then
Solow or Stiglitz should break their silence and
finally reply to Georgescu-Roegen's criticism of
long standing. Of course Georgescu-Roegen is
now deceased, but his critique did not die with
him. Serious criticism and serious replies are
both essential parts of science. When a funda­
mental cntIque from a very prominent
economist goes for 20 years without a reply, we
should worry about the health of our discipline!
Consider a further major difficulty resulting
from the conjuring trick of just plugging R into a
production function along with K and L. An
immediate consequence is that the marginal phys­
ical products of K and L would have to be zero
once R is included in the function. This is because
the definition of marginal product of one factor
requires that the amounts of all other factors be
held constant as one more unit of the variable
factor is added. But when resources are held
constant then there can be no extra unit of output
as labor or capital is increased because there is no
extra physical substance for the extra output to be
made from. It would have to be produced out of
 H.E. Daly / Ecological Economics 22 (1997) 261-266
nothing, again fracturing the first law of thermody­
namics.3 The point of course is not limited to
Cobb-Douglas functions-any production func­
tion that obeys the first law of thermodynamics
cannot avoid a strict complementarity between
resources on the one hand and capital or labor on
the other hand.4
Zero marginal physical products of labor and
capital, a necessary consequence of including R in
any production function that obeys the most basic
laws of nature, would destroy neoclassical distribu­
tion theory-perhaps too heavy a price to pay for
admission that the world, in effect, cannot get along
without natural resources! And once we admit that
natural processes, as well as labor and capital, add
value to the indestructible building blocks, then we
must ask who has the right to appropriate nature's
contribution? These are not trivial issues! Of
course, we can continue to write mathematical
functions that contradict physical laws, call them
'production' functions, take the partial derivatives
of L and K, and still label them marginal products
of labor and capital. But then, as Georgescu-Roe­
gen put it, this becomes a "mere paper-and-pencil
operation" (PAP was his acronym).
Georgescu's fund-flow model of the production
process is superior to the neoclassical production
function. It emphasizes that physically what we call
'production' is really transformation -of resources
into useful products and waste products. Labor and
capital are agents of transformation (efficient
causes), while resources, low-entropy matter/en­
ergy, are 'that which is being transformed' (material
3 The aggregate production function is taken to be in physical
units, as in microeconomics. The aggregate production functions
of macroeconomics may seem to be in value units because prices
are used to aggregate the variables, but fundamentally a 'dollar's
worth' of capital, labor, or resources is a physical quantity. The
relationship expressed by the function is a relationship among
physical quantities, not values. By expressing physical quantities
as 'dollar's worth' we do not escape the physical laws of mass
balance and entropy!
4 lt is unavailing to appeal to the alternative definition of
marginal product as the decline in total product resulting from
using one less unit of the variable factor, because R still has to
be constant, and if we use one unit less of capital or labor then
we will have sorne R left unneeded. But to keep R constant we
must use the unneeded amount anyway, i.e. use it wastefully.
That means the function is not a technically efficient recipe and
therefore does not qualify as a relevant production function.
265
causes). We can often substitute one efficient cause
for another, or one material cause for another, but
the relation between efficient and material cause is
fundamentally one of complementarity, not substi­
tutability.
If we wish to retain the neoclassical production
function then we must at least include natural
resource inputs and waste outputs, and must adopt
mathematical representations that, unlike the cus­
tomary multiplicative forms, do not assurne that
agents of transformation (funds) can substitute for
the resources undergoing transformation (flows).
Accuracy of analytical representation of reality
must replace mathematical tractability as the main
criterion of a good model. Once we recognize the
reality of inputs from nature then we must inquire
about their scarcity and about the ecological pro­
cesses that regenerate them. Once we recognize the
necessity of returning waste outputs to nature then
we must inquire about the capacities of ecosystems
to absorb those wastes. We will no longer be able
to avoid the ecological economist's vision of the
economy as an open subsystem of a complex
ecosystem that is finite, nongrowing, and materially
closed. In effect, neoclassical economists will be­
come ecological economists!
Toward that happy end it is appropriate to
reissue Georgescu-Roegen's invitation to Solowj
Stiglitz, and the whole community of neodassical
economists for whom they are distinguished
spokesmen, to put an end to 'conjuring tric:ks' -to
mathematical fun and games with infinity in the
Garden of Eden-and to devote their impressive
analytical powers to helping devclop serious eco­
logical economics for the real world.5
5 A perceptive reviewer suggested that the best way to get an
answer to Georgescu-Roegen's critique is probably not to raise
it again with the same people that have ignored it for twenty
years, but rather to somehow get 10000 students to ask their
economics professors the following questions in c1ass: (1) Do you
believe that economic activities must satisfy mass balance? (2)
Why is it that neoclassical production functions do not satisfy
the condition of mass balance? (3) Do you believe that Georgescu­
Roegen's interpretation of production as physical transformation
is correct? (4 ) Do you agree that the economic system i, embedded
in the larger environmental system, and totally depe ndent on it
as both source and sink for the matterjenergy transformed by
economic activity? (5) Do you believe that the matter¡energy
transformations required by economic activity are constrained
by the entropy law� Ten thousand students. please take note!
266 H.E. Daly Ecological Economics 22 (1997) 261-266
/
Acknowledgements
For helpful comments on earlier drafts 1 am
grateful to R. Ayres, S. El Serafy, J. Gowdy, B.
Hannon, G. Lozada, R. Nelson, T. Page and P.
Victor. Of course, remaining shortcomings are
mine alone.
References
Ayres, R.U., 1996. Theories of Econornic Growth. INSEAD,
Septernber 1996, Fontainebleau, France.
Barnett, Harold, Chandler, Morse, 1963. Scarcity and Growth.
RFF and lohns Hopkins Press, Baltirnore, MD.
Georgescu-Roegen, Nicholas, 1975. Energy and econornlC
rnyths. South. Econ. l. 347-381.
Georgescu-Roegen, Nicholas, 1979. Cornrnents on the papers
by Daly and Stiglitz. In: Srnith, V. Kerry (lEd.), Scarcity
and Growth Reconsidered. RFF and lohns Hopkins Press,
Baltimore, MD.
Nordhaus. Williarn, Tobin, lames. 1972. Economic Growth.
National Bureau of Economic Research, Columbia Uni­
yersity Press, New York.
Solow, Robert, 1974. The econornics of resoU[ces or the
resources of economics. Am. Econ. Rey. 1-14.
Stiglit;:: , l. E., 1979. A Neoclassical Analysis of the Econornics
of Natural ResoU[ces. In: Smith, V. Kerry ( Ed.), Scarcity
and Growth Reconsidered. RFF and lohns Hopkins Press,
Baltimore, MD.
Victor, P.A. . 1991. Indicators of sustainable deyeloprnent:
Some lessons from capital theory. Ecol. Econ. 4,191-213.

ELSEVIER Ecological Economics 22 ( 1997) 267-268
REPLY
Georgescu-Roegen versus Solow/Stiglitz
Robert M. Solow
Stern Schvvl vf Business, New York Universiry, New York, NY 10012-1118, USA
Dr Daly's prose tends to dissolve at any mo­
ment into a dense cloud of righteousness. This
makes it very hard to respond rationally to his
performance. 1 think, therefore, that the most
useful thing 1 can do for cooler readers of this
journal is to state very briefly what people like
Stiglitz and 1 thought we were doing when we
wrote on the macroeconomics of natural resources
sorne 20-25 years ago. (The field has come a long
way since then, and 1 urge readers to catch up
with it.)
(1) We were trying to think about an interesting
and important question: how much of a drag on
future growth, or even on the sustainability of
current production, might be exercised by the
limited availability of natural resources and the
inputs they provide?
(2) In a common sense way, one can say that
the answer depends on (a) the importance of
natural resources as inputs into production, (b)
the ease or difficulty with which capital and re­
newable resources can substitute for nonrenewable
resources as the latter become very cost1y or
unavailable, and (c) on the course of technological
progress in the future, for which we have only the
past as a possibly unreliable guide. The role of
economic theory is to explore ways of making
these statements more precise.
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ECONOMICS
(3) Contrary to what Daly says, the substitution
between renewable and nonrenewable resources is
the essence of the matter. (One 01' his lesser prob­
lems is that he does not understand what
economists mean when they speak of comple­
ments and substitutes.) There can be sorne direct
substitution of capital for resource inputs, as when
more precise (not necessarily more massive) ma­
chinery reduces waste, or allows the use of previ­
ously unworkable materials. But the important
margin is likely to be indirect, as when materials
produced from renewable sources, very likely us­
ing highly capital-intensive methods, replace mate­
rials produced from nonrenewable sources.
(4) Sorne renewable resources, like fish stocks
and forests, can be exploited for a very long time
at sustainable levels; and the sustainability con­
straint may already be binding or close to bind­
ing. (In too many cases it is already being
violated.) Whereas the net use of a nonrenewable
resource must eventually dwindle toward zero, the
use 01' these renewable resources can persist in­
definitely at a constant, positive leve!. Other re­
newable resources, like direct solar energy, or
fusion energy (which, if it ever becomes economi­
cally viable, will surely involve high capital inten­
sity) do not seem to have immediately threatening
upper bounds to their use; 'aH' that is required is
268 R.M. Solow / Ecological Economics 22 (1997) 267-268
the right technology and adequate capital. The
first kind of renewable resource is generally capa­
ble of supporting growth only if the burden is
borne mainly by technological progress. The sec­
ond kind, which offers the possibility of generat­
ing useful materials from energy and plentiful
elements, could possibly support growth for a
long time, though, of course, not at any arbitrary
rateo
(5) The role of theory is to explore what logic
and simple assumptions can tell us about what
data to look for and how to interpret them in
connection with the question asked in (1) aboye.
This leads one to investigate such constructs as
the size of appropriately measured factor shares,
elasticities of substitution, the development of a
generalized concept of natural capital, green na­
tional income accounting, etc.
(6) In the same spirit, one can think of environ­
mental amenity as a stock-like quantity that is
diminished by the pollution associated with aggre­
gate production, and augmented by natural repair
processes and by the deliberate diversion of out­
put to abatement activity. The sen'ices of the
stock can serve as an input to production. Neither
of us has worked on this sort of model, though it
is related to what we have done. There is a
continuing literature; a much-cited example is J.
Krautkramer, 'Optimal growth, resource ameni-
ties and the preservation of natural environ­
ments,' Review of Economic Studies, 1985,
153-170, but other models are available.
(7) Precise statements, best cast (1 think) in the
form of transparent models, are better than
grand, heartfelt pronouncements about these is­
sues.
(8) Here are telegraphic answers to the ques­
tions for which Dr Daly proposes to raise an
army of students (whom I would welcome with
open arms if they are willing to learn sorne eco­
nomics):
1. Yeso
2. Because up until now, and at the leve! of
aggregation, geographic scope and temporal
extent considered, mass balance has not been a
contro11ing factor in the growth of industrial
economies.
3. This is, no doubt, one aspect of production.
4. Certainly, and I welcome any attempts to
model the dependence in a transparent way, so
that it can be incorporated into aggregative
economics.
5. No doubt everything is subject to the entropy
law, but this is of no immediate practical
importance for modeling what is, after a11, a
brief instant of time in a sma11 comer of the
umverse.

ELSEVIER Ecological Economics 22 (1997) 269-270
REPLY
Georgescu-Roegen versus SolowjStiglitz
J oseph E.
The World Bank, Washington, De 20433, USA
Daly is right to be concerned about our soci­
ety's use of resources. Environmental degradation
and the wasteful use of natural resources-or any
resources, for that matter-are of concern.
Daly's tirade concerning our work seems moti­
vated by two concerns: a lack of consistency with
basic laws of physics, and the alleged implication
that growth can continue unabated, without even­
tually facing constraints imposed by the limited
supply of natural resources.
Part of the problem arises from a lack of under­
standing of the role of the kind of analytic models
that we (and others) have formulated. They are
intended to help us answer questions like, for the
intermediate run-for the next 50-60 years, is it
possible that growth can be sustained? What does
this possibility entail? We write down models as if
they extend out to infinity, but no one takes these
limits seriously-for one thing, an exponential
increase in the population presents almost
unimaginable problems of congestion on our lim­
ited planet.
In this intermediate run, capital can substitute
for natural resources-and this is true even
though capital itself uses resources. More precise
machines (made out of resources that are rela­
tively abundant) can reduce wastage of resources
that are relatively scarce. Technical change­
sorne of which is the result of investments in
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Sttglitz
R&D, a form of capital-can reduce the amounts
of physical capital and resources required to pro­
duce the unit of output-where output is mea­
sured not in physical units, but in the value of the
services associated with it. To be sure, a pound of
aluminum may continue to embody a pound of
aluminum, but a 1 2-oz soda can today uses far
less aluminum than a soda can of only a few years
ago; and increased efficiency in production may
imply less wastage of bauxite and less coal or oil
lo produce the energy used to make a pound of
aluminum. Or consider the 'resources' that were
required to run a regression only a half-century
ago-pounds and pounds of heavy calculating
machines replaced by mere ounces of a modern
calculator.
Changes in technology also allow us to recycle
resources more efficiently, so that the amount that
is not 'recaptured' for future production may be
reduced.
Perhaps the most important question is: Where
does all of this lead us? Resources are scarce, and
markets, when they function well, reflect that
scarcity, economizing on the use of resources.
There are important instances, especially where
the environment and natural resources are con­
cerned, where markets do not work well. There
are, for instance, the classic problems posed by
pollution externalities. When markets do not
270 l.E. Stiglitz / Ecological Economics 22 (1997) 269-270

work well, it is imperative that actions be taken to
correct these market failures. No one, to our
knowledge, is proposing repealing the laws of
thermodynamics! Doing so would make as little
sense as the act of one state legislature that
thought that students' intellectual resources could
be economized by changing the value of n from
the highly inconvenient 3.1416 . . . to just 3.
In the end, we hope that we have made our
essential points, using somewhat fewer trees and
other resources than Daly did in his 15-page
note.

ELS EVIER Ecological Economics 22 (1997) 271-273
FORUM
Reply to Solow /Stiglitz
Herman E.
School of Pub/ic Ajfairs, Universíty of Maryland, College Park, MD 20742-1821, USA
Criticism and response are both necessary to
science. That is why 1 thought it worthwhile to
revive Georgescu-Roegen's critique of neoclassi­
cal production theory, and why the editors of
Ecological Economics invited replies from Solow
and Stiglitz, whom Georgescu-Roegen took as
leading representatives of the body of thought
that he was criticizing. 1 am grateful to Solow
and Stiglitz for taking the time to reply.
Curiously, neither of their replies even men­
tioned Georgescu-Roegen. That in itself would
not be so bad had their comments been respon­
sive to the criticisms that Georgescu-Roegen
raised 20 years ago, and that 1 restated. But
both Solow and Stiglitz chose, for the most
part, simply to repeat their well-known posi­
tion, rather than to engage Georgescu-Roegen's
arguments against their position. 1 say 'for the
most part' because, in closing, Solow did re­
spond directly, albeit briefiy, to the five ques­
tions raised in my footnote 6. Since this seems
a promising basis for further dialogue 1 will re­
peat the five questions and Solow's answers,
followed by my comment on each. But first a
word on Stiglitz.
Georgescu-Roegen did not misunderstand the
intermediate-run nature of the questions that
Stiglitz claims are the focus of the models un-
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Daly
der discussion. Georgescu-Roegen considered
the 50-year time frame critical because that is
the period in which we will have to shift our
dependence from terrestrial to solar low en­
tropy, as fossil fuels are depleted. His point
was not that the neoclassical model of produc­
tion is 'as ir in the way that all models are,
but rather that it so badly misrepresents the
process of production (see following discussion
of the five questions) that it cannot shed any
light on this critical transition. A reply to that
criticism would be interesting. Nevertheless,
Stiglitz's recognition of limits to population
growth constitutes a real advance within the
neoclassical framework. Building on this insight,
perhaps the World Bank, under his leadership,
will investigate whether limits to the growth of
the population of human bodies might have
some analogs in limits to growth of the popula­
tions of cars, of houses, of refrigerators, of cat­
tle, etc. The aggregate population of all these
dissipative structures (things that require an en­
tropic throughput for their maintenance) is a
concept very relevant to ecological economics,
and worthy of the World Bank's investigation.
Let us turn now to the five questions from
footnote 6, and a consideration of Solow's an­
swers:
272 H.E. Daly / Ecologícal Economícs 22 (1997) 271-273
1. Do you believe that economic activities must
satisfy mass balance?
Solow's answer: 'Yes'.
Comment: Agreed.
2. Why is it that neoclassical production functions
do not satisfy the condition of mass balance?
Solow's answer: 'Because up until now, and at
the level of aggregation, geographic scope and
temporal extent considered, mass balance has not
been a controlling factor in the growth of indus­
trial economies'.
Comment: Mass balance holds at all levels of
aggregation, geographic scope, and temporal ex­
tent-so Solow's qualifications seem beside the
point. I think what Solow means is that material
balance is unimportant because materials them­
selves are unimportant, which is implied by his
use of a production function in which material
flows are either absent or somehow substitutable
by capital stocks. If material flows themselves are
not important then material balances would not
be important either. That is why Georgescu-Roe­
gen criticized Solow for analyzing 'the Garden of
Eden' rather than the real world. The criticism
remains unanswered. Does the qualification 'up
until now' indicate an expectation that the situa­
tion is about to change, that the mass balance
constraint is gaining relevance?
3. Do you believe that Georgescu-Roegen's
interpretation of production as physical
transformation is correct?
Solow's answer: 'This is no doubt one aspect of
production'.
Comment: Yes, but Solow has treated it as a
very unimportant aspect-one that could safely
be abstracted from in the analytical representation
of production. Georgescu-Roegen criticized him
for that-for abstracting from the essential,
rather than from the incidental. If production is
essentially the transformation of a flow of re­
source inputs into product outputs, with capital
and labor funds serving as agents of transforma­
tion, then capital and resources must be more in
the nature of complements than substitutes. As
Georgescu-Roegen noted. agents of transforma­
tion cannot create the materials they transform,
nor the materials out of which the agents them­
selves are made. Agents of transformation and
material undergoing transformation are basically
complements-they can be substitutes only along
the margin of reducing waste of materials-in-pro­
cess to zero-e.g. using a press to make particle
board out of wood chips and sawdust. But then
the press (capital) and the wood chips (resources)
are again complements. Solow makes no recogni­
tion at all of this fundamental complementarity.
Complementarity is pushed further offstage by its
more technical definition based on constant out­
put (which rules complementarity out of existence
in a two-factor world). Georgescu-Roegen re­
mains unanswered.
4. Do you agree that the economic system is
embedded in the larger environmental system, and
totally dependent on it as both source lllnd sink
for the matter/energy transformed by elconomic
activity?
Solow answer: 'Certainly, and 1 we1come any
attempts to model the dependence in a transpar­
ent way, so that it can be incorporated into
aggregative economics'.
Comment: One should take Solow at his word
about what he now we1comes. His recent concern
about the greenhouse effect is certainly we1comed
by ecological economists.
However, if one agrees that the macroeconomy
is a subsystem embedded in an ecosystem that is
finite, nongrowing, and materially closed, then
wouldn't one expect the macroeconomy to have
an optimal scale relative to the total ec:osystem­
a scale beyond which its growth is uneconomic?
Why is it that each micro activity has an optimal
scale, while the aggregate of all microeconomic
activities is supposed to grow forever, uncon­
strained by any notion of optimal scale of the
macroeconomy relative to the ecosystem? Ecologi­
cal economists would we1come any attempts by
 H.E. Daly / Ecological Economics 22 (1997) 271-273
Solow to model the limit to growth resulting
from optimal scale of the macroeconomy.
5. Do you believe tbat tbe matterjenergy
transformations required by economic activity are
constrained by the entropy law?
Solow's answer: 'No doubt everything is sub­
ject to the entropy law, but this is of no imme­
diate practical importance for modeling what is
after all a brief instant of time in a small comer
of the universe'.
Comment: Solow seems to identify the en­
tropy law only with the ultimate heat death of
the universe. 1 don't worry much about that ei­
ther, and neither did Georgescu-Roegen, whose
critique of Solow was not based on such a re­
mote cosmic event. But the entropy law has
more immediate and relevant implications: that
you can't bum the same lump of coal twice;
that when you do bum it once you get soot,
ashes, CO2, and waste heat, as well as useful
heat. The entropy law also tells us that recycling
273
energy is always a losing proposition, that there
are limits to the efficiency of conversion of en­
ergy from one form to another, and that there is
a practical limit to materials recycling--all in
the here and now, not just in the cosmic bye
and bye. W ould Solow suggest to engineers de­
signing real production recipes that they can ne­
glect the second law of thermodynamics because
we are concemed only with 'a brief instant of
time in a small comer of the universe'?
Low-entropy matterjenergy is the physical co­
ordinate of usefulness; the basic necessity that
humans must use up but cannot create, and for
which the human economy is totally dependent
on nature's services. Entropy is the qualitative
difference that distinguishes usefui resources
from an equal quantity of useless waste. Solow's
statement that entropy is 'of no immediate prac­
tical importance' to economic life is evidence in
support of Georgescu-Roegen's indictment that
Solow 'must have a very erroneous view of the
economic process as a whole'. In any event
Georgescu-Roegen's criticisms remain unan­
swered.

ELSEVIER Ecological Economics 22 (1997) 275-276
FORUM
Renewable resources and eCOnOmlC growth
Colin W.
University of British Columbia, Vancouver V6T 1Z2, Canada
The argument about natural resource limita­
tions and Cobb-Douglas production functions has
always struck me as an exercise in inanity, at least
when carried to the limit of supporting the possi­
bility of perpetual economic growth. Both Solow
and Stiglitz claim that economists do not make
this claim ('. . . an exponential increase in the
population on our limited planet.'-Stiglitz). The
question then becomes, when will the Cobb-Dou­
glas argument begin to break down, and what
alternative models should be used? Quoting
Stiglitz again, "They are intended to help us
answer questions like, "for the intermediate run
- for the next 50-60 years, is it possible that
growth can be sustained?" To this 1 would add,
suppose it can be, what then? Will the larger
economy then be sustainable? Indeed. do we
know whether the present economy is sustainable?
Solow tells us we will eventually have to switch to
renewable resources. Has anyone estimated what
human population could be sustained on renew­
able resources alone?
It certainly defuses Daly if the Cobb-Douglas
argument is only intended for the intermediate
runo But then why did Solow write "The world
can, in effect, get along without natural re­
sources"? OK, this was an if-then remark, but
with what purpose? Other writers have been less
cautious in claiming that long-term growth is
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Clark
sustainable because of increasing capital and tech­
nology.
Flat-earth's are said to have abandoned their
claims when photos from space showed an almost
spherical earth. Maybe the problem for Cobb­
Douglas growth proponents is the lack of empiri­
cal evidence that economic growth is being
impeded by resource shortages. Standard eco­
nomic principies ten us why this evidence is lack­
ing - the market system rewards entrepreneurs
who discover and develop new resource supplies,
new technologies and substitutes, when these be­
come profitable. This is not to say that future
shortages are impossible - indeed local resource
shortages have often led to the collapse of
economies, Rome and Fascist Germany being two
obvious examples.
The problem may turn out to be much shorter
term than any of us anticipate. Exhaustible re­
sources like minerals and oil do not appear to be
in danger of running out soon, but renewable
resources are in trouble worldwide. Forests,
fisheries, soils, biodiversity - these are al! being
reduced today at an unsustainable rateo Some
'underdeveloped' (what a euphemism!) countries
have been fueling their growth by depleting these
assets, and will presumably have to switch to
exhaustible resources to sustain their economic
systems.
276 c. W. Clark / Ecological Economics 22 (1997) 275-276
Reliance on Cobb-Douglas-type substitutability
models, even over the intermediate run, surely
tends to downplay the importance of building
ecological constraints into economic analyses
right now. We already rely utterly on renewable
resources for our daily existence; the progressive
degradation and destruction of these natural capi­
tal assets needs urgently to be reversed, and estab­
lishment economists more than anyone need to
analyze and advertise these vital problems. The
problem is intensified when we realize the im-
mense levels of uncertainty underlying our renew­
able resource base and its impact on economic
development and survival. We need to learn a
great deal more, in quantitative terms, about the
role that resources, especially biological renewable
resources, play in our economic well··being. We
also need to develop and implement economic
policies and strategies that would help to defuse
the effects of these major uncertainties, many of
which will not go away regardless of increased
research and development.
 ECOLOGICAL
ECONOMICS
ELSEVIER Ecological Economics 22 (1997) 277-279

FORUM

Is Georgescu-Roegen versus Solow ¡Stiglitz the important point?

Mick Common
Centre for Resource and Environmental Studies, Australian National University, Canberra ACT 0200, Australia

Broadly, Daly and Solow/Stiglitz appear to
agree about two things, First, that economic ac­
tivity involves environmental extractions and in­
sertions, and is therefore subject to the laws of
nature. Second, that the key to long-term eco­
nomic prospects is the matter of substitution pos­
sibilities in production. There is explicit
disagreement about which input substitution pos­
sibilities are most relevant�capital/resources or
resources/resources�and about what the possi­
bilities actually are. There follows an implicit
disagreement about long-run prospects. There is
also implicit disagreement about the usefulness of
Georgescu-Roegen's analytical distinction be­
tween stocks and funds.
Economics claims that it is a science. One might
characterise ecological economics as disputing this
claim. In this regard, the areas of agreement
between Daly and Solow-Stiglitz are as impor­
tant as the areas of disagreement, and differenti­
ate both from the majority of economists. It is
very difficult to avoid the conclusion that eco­
nomics, as opposed to sorne economists such as
Solow and Stiglitz, does not take the material
basis for economic activity, and the arising rele­
vance of the laws of nature, seriously. Standard
micro and macro courses and texts do not con­
sider the interdependence of economic and envi­
ronmental systems. This is the case at the
undergraduate and postgraduate levels. Typically,
students who will become accredited proft�ssional
economists are not required to take courses in
resource andjor environmental economics. Where
such are offered, they are options. and frequently
treated as disjoint.
Exhaustive and rigorous examination of this
claim would be costly and is not really necessary.
However, a couple of representative textbook ex­
amples can usefully be cited.
Varian (1987) is a well-regarded intermediate
micro text. Neither energy nor natural re:sources
appear in the index: nor does the materials bal­
ance principie. 'Depletable resources' is an index
entry, and there is a sub-section in the chapter
'Asset Markets' with that title. It derives the
Hotelling rule noting that: "the argument boils
down to this simple idea: oil in the ground is like
money in the bank" (205). In the next section,
'When to Cut a Forest', it turns out that the
argument here also boils down to the simple idea
that a forest is like money in the bank. In terms of
the way economics looks at natural resources, this
is honest and succinct. There are two index entries
for pollution. The first sends one to the chapter
on externalities, the second to the chapter on
public goods. The externality analysis assumes
one generator and one sufferer, and emphasises
property rights solutions. At the beginning of the

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278 M. Common / Ecological Economics 22 (1997) 277-279
public goods chapter, we learn that: "Unfortu­
nately, not all externalities can be handled in that
manner" (563). It would be fair to say that in so
far as Varian considers the natural environment in
relation to economic activity, it as a source of
contexts for the deployment of the analytical
apparatus of modern micro theory, rather than as
a substantive issue.
Blanchard and Fischer (1989) is an excellent, by
the generally accepted standards, graduate macro
text. The first chapter sets out the domain of
macroeconomics and the purposes of the book:
It is the main purpose of macroeconomics, and
of this book, to characterize and explain these
movements of output, unemployment and
prices. . .
In this chapter we introduce the major issues of
macroeconomics by characterizing the basic
facts that call for explanation. . .
The dominant macroeconomic fact in de­
veloped economies in the last two centuries is
that of output growth... Using Maddison's first
estimate of US real GNP, US growth averaged
3.7% per year for the period 1820-1986. The
average rate of growth has been 3.4% since
1874, 3.0% since 1919, and 3.2% since 1950. . .
What are the sources of this growth? (1-2).
The candidates considered are capital and
labour inputs. Empirically, these cannot fully
account for output growth. Regarding 'the Solow
residual' Blanchard and Fisher note that:
Its rate of change averages 1. 9°/" since 1874,
2.0% since 1919, and 1. 7% since 1950, account­
ing for approximately half of the growth in the
private economy over the whole period (4).
Despite stating that 'persistent Iong-term
growth' is 'the most important fact of modern
economic history', Blanchard and Fischer's dis­
cussion of the explanation for the Solow residual,
which accounts for half of this fact, is just four
Iines long. They state that "we (i.e. economists
generally) have only a limited understanding of
where this residual comes from" (5), and leave it
at that. The material basis for economic activity is
simply ignored. The index to the book does not
contain: energy, natural resources, fue!, environ­
ment, pollution.
The problem is not just at the level of student
texts. In 1992 the prestigious Journal of Economic
Literature published a survey article on environ­
mental economics (Cropper and Oates, 1992).
This uses a production function where there are
material waste emissions for which there is no
material basis-there are no resource input flow
arguments. The materials balance principie is
mentioned once in a footnote (679), which admits
that the model employed "fails to encompass the
complexity of the natural environment," but as­
serts that the model is "useful for our analytical
purposes." There is nothing, by way of argument,
evidence or citation, in the paper to justify the
assertion in general, or in particular cases.
In his contribution here, Daly ends with a
footnote which gives five questions to be put to
'economics professors'. Four of the questions con­
cern what the professors believe. It wouId actually
be more to the point to ask, additionally perhaps,
about what they teach. SoIow answers Daly's
questions to the effect that while he accepts that
economic activity is subject to the laws of nature,
he does not see them as binding constraints in
reIation to questions of 'practical importance'.
Extrapolating to an answer about what they
teach, one could put the following words into the
mouths of thousands of less distinguished profes­
sors of economics. Economics has considered
these matters thoroughly and the consensus is
that they have no direct relevance for the under­
standing of economic activity, so we have decided
not to waste the time of most students on them,
but we do offer special optional courses for those
students who might be interested in such abstruse
matters.
Two questions would then arise. First, is the
judgement (and that is surely what it is) that, for
example, the first and second laws of thermody­
namics are of no relevance to understanding eco­
nomic activity, and of no practical importance,
defensibIe? Consider the use of taxation to control
emissions from fossil fuel combustioll. Whereas
monitoring and enforcement present great prob­
lems if emissions are targeted directly, the knowl­
edge that those emissions must have sorne
material basis directs attention to fossil fuel inputs
 M. Common / Ecological Economics 22 ( 199 7) 277 -279
as tax point. In fact, in the climate change con­
text, what is meant by 'carbon taxation' is actu­
ally fossil fuels taxation at differential rates. At a
somewhat more general level, and as alluded to
aboye, it is difficult to see how one can under­
stand the economic history of the last 200 years if
one ignores the role of fossil fuel inputs to pro­
duction (and consumption). Solow states that "up
until now . . . mass balance has not been a con­
trolling factor in the growth of industrial
economies." Other economists argue that pollu­
tion control has reduced US growth rates in the
last two decades, and yet others claim that ad­
dressing the climatic effects of carbon dioxide
emissions from fossil fuel combustion will be
costly in terms of income growth. Somewhat iron­
ically perhaps, many of those who argue that
dealing with the climate change problem need not
involve large costs do so from a natural science
background and on the basis of detailed techno­
logical studies of energy supply and use systems.
More generally still, one might note that econom­
ics is not generally understood to claim as its
provenance only 'industrial economies' and that
there are respectable arguments, and evidence,
that one important factor in initiating industriali­
sation was resource scarcity.
For the second question, suppose that one
were, as an economist, to come to the informed
279
judgement that while economic activity was ulti­
mately subject to the laws of nature, this was not
currently of 'immediate practical importance' .
Would this justify teaching economics without
noting, and giving emphasis to, the relevan ce of
those laws at the level of principie? Would it not
require explaining in sorne detail the basis for
such a judgement? If the answers to these qUlestion
are 'yes' and 'no', respectively, then surely
economists need to be more circumspect in their
claims for the status of their subject, for it is then
more like engineering than physics or biology. If
economics wants to claim scientific status, then
Georgescu-Roegen, Daly and ecological
economists are surely right to argue that it ought
to deal explicitly and systematically with, in teach­
ing as well as research, the material basis for
economic activity. It is not clear that Solow and
Stiglitz would actually disagree about this.
References
Blanchard, 0.1 . . Fischer, S., 1989. Lectures on Macroeconom­
ics. M lT Press, Cambridge MA.
Cropper, M . L., Oates, W.E . . 1992. Environmental economics:
A survey. J. Econ. Lit. XXX. 675-740.
Varian, H.R. 1987. Intermediate M icroeconomics: A M odern
Approach. Norton, New York.