What Is a Steady-State Economy? Definition and How It Works

What Is a Steady-State Economy?

A steady-state economy is an economy structured to balance growth with environmental integrity. A steady-state economy seeks to find an equilibrium between production growth and population growth. In a steady state economy, the population would be stable with birth rates closely matching death rates and production rates similarly matching the depreciation or consumption of goods.

A steady-state economy aims for the efficient use of natural resources and also seeks fair distribution of the wealth generated from the development of those resources. In a steady-state economy, success would be measured by how stable gross domestic product (GDP) is, rather than by GDP growth being the main measure of economic health.

Understanding a Steady-State Economy

A steady-state economy seeks stability over the long-term and may be judged on a local, regional, or national scale. Steady-state economies would still grow and contract, but the idea is to minimize the severity of these fluctuations. Ecological and environmental economists–major supporters of the idea of a steady-state economy–have long held that the environment cannot support an unlimited growth of production and wealth. Their reasoning is that constant economic growth is closely tied to more rapid consumption of scarce natural resources, and it also comes at the cost of an increasing ecological footprint.

The concept of a steady-state economy actually reaches back to classical economics, although it is now more commonly associated with economist Herman Daly. Economists, such as John Stuart Mill, David Ricardo, and Adam Smith, all assumed that growth would eventually plateau as competitive advantages, the division of labor, and resource availability reached natural limits. Without economic growth, the expectation was that population growth would naturally stabilize. In practice, however, technology and the uneven nature of global economic development have enabled longer periods of growth than were ever thought possible.

Starting in the 1970s, however, ecological economists started to point out that humankind was rapidly depleting resources and impacting natural ecosystems at an unprecedented rate and on an unimaginable scale. These environmentally-focused economists argued that growth must slow and stabilize, and some economies may even need to shrink in a process known as degrowth.

Steady-State Economy vs. Stagnant Economy

It is important to note that a steady-state economy is distinct from a stagnant economy. In a stagnant economy the lack of growth is characterized by unemployment and economic pain. A steady-state economy seeks to distribute wealth from production more broadly, ensuring economic security for the broadest number of people possible.

Although human well-being within ecological constraints is the intention of the steady-state economy, economists have continued to argue over some of how this concept could be applied and what the actual impacts would be. There is no modern day economy that can be truly said to be a steady-state, but economists have started measuring and ranking countries based on biophysical and social indicators. Most countries measured in this way continue to have growing resource consumption with mixed results on how this growth is translating to better lives for their citizens. Many of these studies point to wealthy countries needing to lead in reducing their resource consumption as developing nations have not enjoyed the social gains to a point where stability is desirable yet.

One of the biggest challenges for proponents of a steady-state economy is describing it in terms that people living in growth economies can understand. Stable GDP is meaningless for most people, so supporters have put some effort into providing a more grounded picture of what a steady-state economy might look like.

Example of a Steady-State Economy

For example, under a steady-state economy, a society would be less likely to see sprawling real estate development because of the various pressures and directives put in place to protect ecosystems. That would mean construction activities would likely be focused on redevelopment, repurposing of space, and potentially increasing density rather than clearing out a new property for building.

There would also be a focus to only make use of resources that can be replenished, such as water and sustainable energy sources. This would slow or completely stifle the vigorous development that heavily industrialized societies are used to. There would also be a transition from fossil fuels to renewable energy as quickly as possible.

Furthermore, practices such as creating landfills and other sites where waste is stockpiled or shipped abroad would be curbed. Such an approach also means overall production would have to be balanced with the capacity to accommodate the waste that would be generated, thereby alleviating the piling up of refuse. It would also encourage production wherein the end results are goods that can more readily degrade quickly rather than remain static and not decompose, such as the case with various plastics.

While no nation has reached a steady-state, there have been smaller scale economic units designed to achieve these aims. There is also much more pressure on companies now to consider environmental impacts, largely owing to the rise of environmental, social, and governance (ESG) investing.