Contribution to GTI Roundtable "Limits to Investment"

Herman Daly

This is an admirable article, brief and well-aimed at the problem of bringing the symbolic world of finance into balance with the biophysical world of ecology. I would like to make two observations and raise one question.

(1) Material throughput and the public interest

Given the linkage between throughput and investment, the limits we place on aggregate throughput will largely determine how we invest our surplus. Reduced depletion, for instance, will lead to more investment in recycling and product durability. A reduced physical scale of the macro-economy will also constrain the scale of physical damage resulting from bad decisions and demand that we pay more attention to resource efficiency and social direction. Brazil is now having riots because students and workers want investment in education and public transport, not soccer stadiums for the World Cup and the Olympics. The government of course says growth will provide both, no choice is needed. Demonstrators are tired of this lie. If the investment budget had been limited by savings, then the reality of either/or could not be wishfully displaced by the political fantasy of both/and.

(2) Credit Creation

Transformation of savings into investment is certainly important, but the credit creation process is where the problem lies and, thus, warrants more specific consideration. The classical balance of saving and investment poses significant constraints on investment and growth. Every dollar loaned should be a dollar previously saved, as a 100% reserve banking system requires. In addition to restraining growth, it would also channel it into the most productive investments. The 100% reserve idea, or “Chicago Plan,” has an excellent intellectual pedigree (Frederick Soddy, Frank Knight, Irving Fisher, and others in the present, including IMF economists Benes and Kumhof, and former Congressman Dennis Kucinich). In any case, money is the very basis of finance, and whether we choose private interest-bearing money or public non-interest-bearing money at least deserves discussion.

(3) Interest Rates and Economic Growth

A high interest rate restricts the volume of investment but allocates capital to the most productive projects. A low or indeed zero interest rate, maintained by quantitative easing, increases volume but allows investment in practically anything, thus increasing the probability that growth will be uneconomic. Shall we push growth to maintain full employment, even after growth has become uneconomic? Or shall we back off from growth and seek full employment and distributive equity by job sharing and reallocation toward leisure and public goods?

Herman Daly
Herman Daly is Emeritus Professor at the University of Maryland, a former Senior Economist in the Environment Department of the World Bank, and co-founder of the journal Ecological Economics.

Cite as Herman Daly, contribution to GTI Roundtable "Limits to Investment," Great Transition Initiative (April 2014),

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