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Ecological Economics 44 (2003) 105 /118

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ANALYSIS

A theoretical foundation to support the Index of Sustainable
Economic Welfare (ISEW), Genuine Progress Indicator (GPI),
and other related indexes
Philip A. Lawn *
School of Economics, Flinders University of South Australia, GPO Box 2100, Adelaide 5001, Australia

Received 2 November 2001; received in revised form 3 October 2002; accepted 29 October 2002

Abstract

For some time now, ecological economists have been putting forward a ‘threshold hypothesis’ */the notion that when
macroeconomic systems expand beyond a certain size, the additional cost of growth exceeds the flow of additional
benefits. In order to support their belief, ecological economists have developed a number of similar indexes to measure
and compare the benefits and costs of growth (e.g. the Index of Sustainable Economic Welfare, ISEW, and the Genuine
Progress Indicator, GPI). In virtually every instance where an index of this type has been calculated for a particular
country, the movement of the index appears to reinforce the existence of the threshold hypothesis. Of late, a number of
observers have cast doubt over the validity of these alternative indexes. One of the concerns commonly expressed is the
supposed lack of a theoretical foundation to support the ISEW, the GPI, and other related indexes. By adopting a
concept of income and capital outlined by Fisher (Nature of Capital and Income. A. M. Kelly, New York, 1906), this
paper demonstrates that these alternative indexes are theoretically sound but, in order to be broadly accepted, require
the continuous development of more robust valuation methods.
# 2002 Elsevier Science B.V. All rights reserved.

Keywords: Index of Sustainable Economic Welfare; Genuine Progress Indicator; Threshold hypothesis; Fisher’s concept of income
and capital

1. Introduction hypothesis’ */the notion that when macroeco-
nomic systems expand beyond a certain size, the
Ecological economists have long believed that additional benefits of growth are exceeded by the
the continued growth of macroeconomic systems is attendant costs (Max-Neef, 1995). In order to
both ecologically unsustainable and existentially support their belief, and in view of the inadequa-
undesirable. Consistent with this belief, ecological cies of Gross Domestic Product (GDP) as an
economists have put forward a ‘threshold indicator of human progress, ecological econo-
mists have developed a number of indexes to
measure and compare the benefits and costs of
* Tel.: /61-8-8201-2838; fax: /61-8-8201-5071
E-mail address: phil.lawn@flinders.edu.au (P.A. Lawn).
growth. The first of these was Daly and Cobb’s

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A. Beyond this point. That is. a Genuine Progress services annually produced by domestically lo- Indicator or GPI (Redefining Progress. and Scandinavian countries. 2000) have called into question the value of the goods and services annually produced validity of the ISEW. it is the chosen index calculated for different countries. GDP can be measured in nominal or real been a variation in the disparity between GDP and values. Not surpris. Consequently. located factors of production (i. In view of the notion of sustainable economic . sustainable economic welfare being approximated In all. On the surface changes in real GDP merely reflect differences in the quantity of goods and services produced from at least. I will economic welfare implied here is the welfare a assess the ISEW and other related measures to nation enjoys at a particular point in time given the determine the extent to which they reflect concrete impact of past and present activities. threshold hypothesis (e. Index of Sustainable Economic Welfare gical economists to consider whether their results (ISEW) and Genuine Progress Indicator (GPI) reflect the trend movement in the sustainable net benefits of growth or a subconscious desire to The ISEW and GPI are designed to more closely design an index to vindicate their own threshold approximate the sustainable economic welfare or hypothesis. GNP is much the same Some recent articles (e. annual growth appears to be detrimental. Lawn / Ecological Economics 44 (2003) 105 /118 (1989) Index of Sustainable Economic Welfare Before outlining the theoretical foundation of (ISEW). by the natural ingly. and SNBI as well as the by domestically owned rather than domestically methods used in their calculation. progress of a nation’s citizens. National Product (GNP). Gross Domestic Product (GDP) used to calculate the index have been revised. measured in terms of the prices at the time of the trend movement in the ISEW. the ISEW. Canada. this challenge extends to me. if GDP is mea- is very consistent. GPI.1. GPI. If GDP is measured in nominal values. and SNBI production. in conven- support for the threshold hypothesis and the need tional terms. In addition. For example. 2000). On the other hand. GPI. 2000). Australia.g. as an advocate of these alter. is critical.g. 1995. GPI. Atkinson. the critics of these alternative indicators cast and human-made capital owned by the citizens of doubt over their capacity to substantiate the a particular country). The original ISEW. 1. the ISEW has been given a variety of GDP is a monetary measure of the goods and different names */for example. The notion of reality or the prejudices of ecological economists. Lawn. These are very timely papers since they challenge ecolo.2.e. Neumayer. not. I hope to demonstrate that the ISEW. many of the methods 1. it is measured in terms of the growth of macroeconomic systems is beneficial to prices of all goods in a particular year */often human well-being (see Fig. and Chile. 1999. by the natural a Sustainable Net Benefit Index or SNBI (Lawn and human-made capital located in a particular and Sanders. and SNBI offer solid year to year. up to a point. While there has country).106 P. real GDP is preferred to nominal for countries to eventually abandon the growth GDP as a measure of national income and well- objective and focus on sustainable qualitative being. It is for this reason that. improvement. the sured in real values. better known as sustainable devel- Most readers would have come across Gross opment (SD). Since.e. Over this time. Neu- as GDP except that it measures the monetary mayer. has since been mention something about each of the relevant calculated for the UK. the other which had employed in their calculation. imagine two comparable and SNBI are theoretically sound indexes. most western European indexes. 1). but industrialised nations */one that had long ago would be increasingly accepted if a more robust made the structural adjustment to operate both and consistent set of valuation methods was sustainably and equitably. 1995) and cated factors of production (i. which Daly and the ISEW and other related measures. 1999. I will briefly Cobb calculated for the USA. referred to as the base year. The sustainable native indexes.

but with the extraction from the national accounts tural adjustment. P. 1996). human well-being (Redefining Progress. not with GDP as their base. . 1995). but higher in the present to of the transactions deemed directly relevant to reflect the ensuing benefits. Germany. reflect the cost experienced at the time of struc. The Netherlands. 1. UK. Lawn / Ecological Economics 44 (2003) 105 /118 107 Fig. the ISEW or GPI of the As for the calculation of the ISEW and GPI. welfare outlined above. Comparison of GDP and ISEW for the US. Austria. and Sweden (Jackson and Stymne. former would presumably be lower in the past to both indexes begin.A.

Jackson and Stymne.108 P. It also allows one to compare Cost of lost leisure time (/) The cost of household pollution abatement (/) the benefits and costs of a growing macroecon- The cost of vehicle accidents (/) omy. 1999). the ISEW and GPI used to arrive at the final index number has varied include a number of social and environmental over time.1 This is why a colleague and (/) /positive item I put forward the SNBI (Lawn and Sanders. 1994. al. The following is a list of the typical methods used to calculate the ISEW and GPI for items used in the calculation of the ISEW and GPI different countries (see. If one compares the original ISEW with many benefits and costs of economic activity that recent calculations of the GPI. This approach Cost of noise pollution (/) has the advantage of presenting the results in a Cost of commuting (/) manner consistent with a concept of income and Cost of crime (/) capital superior to standard definitions of income Cost of underemployment (/) (more on this later). the list of items GDP ignores. Guenno and Tiezzi. Sustainable Net Benefit Index (SNBI) Table 1 The SNBI is much the same as the ISEW and Items used to calculate the GPI for USA from 1950 to 1995 GPI. Where the SNBI differs is in the explanation of the rationale for an alternative index and the Personal consumption expenditure (/) Index of distributional inequality (///) presentation of the items used in its calculation. which are similar to those listed in Cost of consumer durables (/) Table 1 (see Lawn and Sanders. The reasons for as are the ISEW and GPI. The Services yielded by roads and highways (/) total of the cost account is subtracted from the Services provided by volunteer work (/) Services provided by non-paid household work (/) benefit account to obtain the SNBI. number. 1995. surprisingly little effort has been devoted TOTAL/sum of all positive and negative items/GPI (valued towards the establishment of a theoretical founda- in dollars) tion to support them. Net capital investment (///) Net foreign lending/borrowing (///) Loss of farmland (/) Cost of resource depletion (/) 2. 1998. as have some of the valuation methods. cher. All items are valued in monetary terms. Hamilton. name only. The theoretical foundation of the ISEW and GPI Cost of ozone depletion (/) Cost of air pollution (/) While the development of the ISEW and GPI Cost of water pollution (/) has been motivated by the inability of GDP to Cost of long-term environmental damage (/) Loss of wetlands (/) serve as a measure of sustainable economic wel- Loss of old-growth forests (/) fare. Accordingly. for instance. Diefenba- (Table 1). In so doing.3. Moffat and Wilson. 1999).A. 1999). Lawn / Ecological Economics 44 (2003) 105 /118 Further adjustments are made to account for the GPI. benefits and costs that invariably escape market One also finds a difference in the valuation valuation. The ISEW and GPI basically differ in for specific valuation methods. 1999. 1996. (/) /negative item (///)/item that may be either positive or negative 1 Perhaps the best attempt so far is that of Stockhammer et Source: Redefining Progress. 1994.. (1997). Rosenberg Table 1 includes a range of positive and negative and Oegema. 1995. The final index number these differences are usually related to the avail- is usually calculated in real rather than nominal ability of data and the preference researchers have values. It is becoming increasingly common for updated calculations to be referred to as the 1. items that are summed to obtain a final index Jackson et al. are sorted Services yielded by consumer durables (/) into separate ‘benefit’ and ‘cost’ accounts. . 1997. it strengthens its own case as The cost of family breakdown (/) well as the case for the ISEW and GPI. Castaneda. Weighted personal consumption expenditure The items.

the answer is an obvious no. show how and in what way the ISEW and GPI are GDP /gross domestic product. the output of many In order to explain the theoretical foundation economic activities is not directly consumed but underlying the existing ISEW and GPI. From a national income perspective. even if one was to subtract from GDP the theoretical foundation underlying the existing depreciation value of all existing producer and ISEW and GPI. the Fisherian view of income and capital and 1996): explain why it is preferable to the Hicksian definition. The most obvious one is that GDP does not capacity to do so in the future. The shortcomings of Gross Domestic Product consumer goods). continuing growth. I will adopt the Fish. keep intact a combined stock of both forms of . I will specifically set aside to defend a nation’s citizens begin by outlining the inadequacies of GDP. Some adjustments to GDP are significant in that they time ago. consumer goods and. obtain a Contrary to some opinions. that is. the SNDP is able to provide a better Many of the shortcomings of GDP have been measure of the maximum amount a nation can outlined in past justifications for the ISEW and produce and consume without undermining its GPI. Yet a measure of GDP commits this income */the definition of income invariably used accounting error by treating all defensive and to calculate adjusted measures of GDP (sometimes rehabilitative expenditures as income. the ISEW and GPI measure of net domestic product (NDP). I will where: SNDP /sustainable net domestic product. produce and consume. a referred to as a measure of sustainable net better measure of national income can be calcu- domestic product or SNDP). Finally. Following this. I will then outline lated by adhering to the following formula (Daly. in doing so. P. SNDP GDPdeprn erian view of income and capital to reveal the of Khdepln of Kndef:andrehab: expenditures shortcomings of both GDP and the SNDP as well (1) as the logical superiority of an economic indicator based on this alternative perspective. (GDP) By making the necessary subtractions from GDP. to produce and consume the same amount in the should a combined stock of human-made and future. Lawn / Ecological Economics 44 (2003) 105 /118 109 Apart from wanting to find out whether Australia production and consumption involves activities had exceeded the welfare-increasing threshold of that are. there is only a need to worn out producer and consumer goods. the are soundly based on a concept of income and resultant NDP would still overestimate the max- capital first advanced by Irving Fisher (1906) that imum net product that a nation could sustainably is far superior to standard definitions of income. some capital is able to serve as an adequate substitute of the annual GDP must be set aside to replace for declining natural capital.A. If human-made reasons. ecologically unsustainable. Finally. Hicks (1946) pointed out that the reflect the basic need to avoid long-term impover- practical purpose of calculating income is to ishment by keeping intact a stock of income- indicate the maximum amount people can produce generating capital. we wanted to highlight the Thus. it is natural capital be kept intact or are the two forms necessary to answer the following question: ‘‘Can of capital sufficiently unique to necessitate their a nation’s entire GDP be consumed without individual maintenance? The answer to this ques- undermining its ability to produce and consume tion depends on whether human-made capital and the same GDP in the future?’’ For a number of natural capital are substitutable. I will from the side-effects of past and present economic do this by adopting the Hicksian definition of activities. First. the need for capital and consume without undermining their capacity intactness leads to a further concern. Kn /natural capital. Second. However. in many cases. Kh /human- consistent with Fisher’s concept of income and made capital in the Irving Fisher (1906) sense of capital. In all. The above constitute a measure of national income. all human-made items that directly or indirectly yield benefits to possessors (all producer and 2.1.

Third. and is the sole cost of commuting. elasticity of substitution tends towards zero as This set aside amount constitutes the ‘user cost’ or.2 Furthermore. merely subtracting ciency. there is no 100% production effi- made capital be complements. 1999).110 P. the replacement cost of capital to offset the impact of declining natural resource depletion. the quantity of natural capital legitimate income. 2001). natural and human. A simple but relevant values of the human-made capital/natural ingenious formula has been put forward by El capital ratio (Lawn. entropy waste generated in the transformation of The final measure of the SNDP in this instance is natural to human-made capital. limit to how much production waste can be Should. To is the sole source of low entropy resources (the begin with. there can never be 100% recycling of the depreciation of human-made capital and the matter. the value is less than one for all a renewable resource substitute. is the sole repository and assim- These include the cost of reduced leisure time. Because of the often referred to as a weak sustainability measure first and second laws of thermodynamics. there is a of national income. approximates the amount that must be invested to ecological economists prefer the calculation of the keep the stock of natural capital intact. natural capital income than GDP. it is necessary to (Lawn. the calculation of the SNDP overlooks availability of which is necessary for human-made a number of important welfare-related factors. To calculate the SNDP. The shortcomings of Sustainable Net Domestic indicates that natural and human-made capital are Product (SNDP) complements for the very reason that natural capital provides a range of services that human- While the SNDP is a better measure of Hicksian made capital cannot. Second. There breakdown. sustainability measure of national income. and the welfare effect of a change two forms of capital exists because the technolo- in the distribution of income. For three good reasons. First. attempts are made to augment human-made as I shall later argue. gical progress embodied in human-made capital can reduce the natural capital needed to fuel the economic process. Lawn / Ecological Economics 44 (2003) 105 /118 capital. on the other hand.A. .e. goods have been produced to offset the combined Technological progress merely reduces the high depreciation of human-made and natural capital. the Serafy (1989) to calculate the set aside amount. To do this. it is 2 A value of at least one is required to demonstrate wrong to call this substitution. Hence. substitution between human-made capital and in the case of non-renewable resources. the required to maintain the life-support services it former is subtracted from GDP but the latter is provides far exceeds the quantity needed to sustain not. the techno. and there is no way to recycle energy at depletion of natural capital from GDP cannot give all. Growing evidence from ecological economists 2. the production of a given quantity of rise to a measure of ‘sustainable’ income unless the human-made capital will always require a mini- estimated depletion value of natural capital reflects mum resource flow and. the value of volunteer and non-paid are. In this situation. therefore. when a production function determine the portion of the proceeds from adhering to the first and second laws of thermo- resource exploitation that must be set aside to dynamics is used to derive the elasticity of cultivate additional renewable resource stocks or. it has its deficiencies too. For instance. capital to exist). the cost of crime and family generator of critical life-support services. reduced */i. to cultivate natural capital.2. For these reasons. this second SNDP to be based on a strong sustainability measure of SNDP is equivalent to a strong measure of national income. The remainder constitutes capital. claims that substitution between the household work. the SNDP constitutes a logical progress embodied in human-made capital measure of ‘sustainable’ income provided enough does not ‘take the place of’ natural capital. adequately substitutability. the ilator of high entropy waste. Often overlooked. a minimum the cost of whatever is required to keep natural amount of resource-providing natural capital resource stocks intact. however. So long as the user cost subtracted from GDP the economic process alone.

the view that economic welfare depends on the gued that the national dividend consists not of the psychic enjoyment of life */a view strongly sup- goods produced in a particular year. while the SNDP as current income. 1971. although panied by a growing income disparity between rich one’s view on this boils down to their preference and the poor. believed Fisher’s approach was both economic process less the sum total of its irksome attractive mathematically and logically correct. The the ISEW and GPI. While it is true that the psychic human-made goods. Hence. Unfortunately. for the Hicksian or Fisherian definition of income. P. 1). Georgescu-Roegen. Although not subject to ownership other than by the individual who possesses productive knowledge and further implication. it will not rendered by capital (income) and the capital that accurately reflect the increase in a nation’s eco. 1979). It down). or psychic outgo-related aspects. Fisher (1906) ar. Lawn / Ecological Economics 44 (2003) 105 /118 111 the redistribution of income from the low marginal this year by non-durable consumer goods and benefit uses of the rich to the higher marginal durable producer and consumer goods manufac- benefit uses of the poor can lead to an overall tured in previous years are part of this year’s increase in the economic welfare enjoyed by income. Very early on in the con. But. this point in time has long been surpassed and so the 3 In the Irving Fisher (1906) sense. labour can also be included as part of the stock of separate.g. Easterlin. This allows one to obtain the theoretical is also interesting to note that one of the fore- notion of ‘net psychic income’ */the sum total of fathers of national income accounting. Abramowitz. the cost of noise pollution. include the ‘psychic outgo’ of the economic and its ownership distribution*/all of which can process (e. services enjoyed by the ultimate consumers of all Daly.’’ This was probably acceptable at a time when the rise in production benefits clearly simply constitutes an addition to the stock of exceeded the rise in production costs. SNDP counts all additions to human-made capital 1974. Second. Pigou all the psychic income-yielding aspects of the (1932). To begin with. Thus. be favourably adjusted without the need for an ing costs. 1962. and SNBI have shown (Fig. By keeping capital and income skills. Fisherian perspective is different in that it takes sideration of national income. as the human-made capital. renders them. there is the issue of whether the SNDP The Fisherian view of income is superior in that is in fact a good measure of national income */a the former wrongly associates economic welfare key factor underpinning the theoretical strength of with the rate of production and consumption. the quality of the stock. it is certainly not come’.A. Most economists refer to psychic income determined by the rate at which goods are as ‘utility satisfaction’. It logical clarity. It is therefore questionable whether nomic welfare if the rise in the SNDP is accom. since the calculation of the society as a whole (Robinson. increased rate of production and consumption. capital is regarded as any great weight of disadvantage now rests with the physical object that is subject to human ownership and capable maintenance of the present system of national of directly or indirectly satisfying human needs and wants. commut. Fisher called the services enjoyment of life cannot be experienced without enjoyed by ultimate consumers as ‘psychic in. any durable from the ordinary use of language involves dis- producer or consumer good manufactured during advantages that seem to outweigh the gain in the current year is not part of this year’s income. and the cost of crime and family break. the SNDP is a true measure of income. GPI. stock of human-made capital depreciates and . but of the ported elsewhere (e. it wrongly conflates the services of a nation can increase over time. It is determined primar- process involves many irksome activities.3 Only the services rendered ISEW. 1979).g. Pigou opted not to follow Fisher’s approach The implications of adopting Fisher’s view of because he believed ‘‘the wide departure it makes income are significant. Because the economic produced and consumed. the ily by the quantity of human-made capital (at least concept of psychic income can be extended to up to a certain amount). human-made capital refers to all producer and Fisher’s concept of income and capital has one consumer goods. the existence of physical goods. it forces one to recognise that since the human-made capital. accounts.

3. income can have a significant impact on a nation’s economic welfare. in turn. sink. contribution to a nation’s economic welfare.g. the calculation of the reflected in other items due to a smaller cost of SNDP overcomes the problem of counting lost pollution or resource depletion or both. for example. it is because Fisher’s concept of income tion (due. Neumayer. accompanied by a reduction in the rate of produc- However. Lawn / Ecological Economics 44 (2003) 105 /118 wears out through use. Thus. of income.112 P. and GPI. This The best way of demonstrating this is to focus on adjustment is made in the calculation of the ISEW the individual items used to construct the ISEW and GPI but not so in the case of the SNDP. and household with personal consumption expenditure. However. of some of the source. Unless personal consumption expenditure is good indicators of both income and sustainable weighted according to changes in the distribution economic welfare precisely because they are con. the ISEW and GPI do not lack a theoretical the rich is less than the marginal benefit uses of the foundation. While an index of sustainable cost is preferable to an index of unsustainable cost.3. If personal consumption expen- diture does not change from one year to the next 3. results in the inevitable loss maintain the stock of human-made capital intact.1. An index of distributional inequality/weighting such as GDP. In or psychic income enjoyed by the ultimate con. (1) showed. to an increase in the and capital treats the production of replacement durability of human-made capital). likely to fall because the marginal benefit uses of 1999). the calculation of the ISEW and GPI. It implies that consump- the production of new goods and production can tion is a ‘necessary evil’. Personal consumption expenditure Included in personal consumption expenditure Unlike the SNDP.A. This is furniture. the cost of sumers of human-made goods. this would be a gain the throughput. the economic welfare enjoyed by society as a whole is Contrary to some opinions (e. Using consumption consumer durables is subtracted from weighted . Indeed. To obtain from less consumption. This amount constitutes an addition to important because it provides an approximate the stock of human-made capital. if a natural capital services as income by subtracting given level of service from consumption was from GDP the cost of natural capital depletion. It does not estimate of what Fisher described as the services constitute current income in the Fisherian sense. and life-support Such a gain. 3. its continual maintenance expenditure as the initial reference point does not is a cost not a benefit. it intact that the SNDP effectively stands as an index would lower the SNDP. The theoretical superiority of the ISEW and GPI but the distribution of income deteriorates. The cost of consumer durables 3. this would goods as the cost of keeping human-made capital lead to a rise in the ISEW and GPI. it will inaccurately reflect its true sistent with Fisher’s concept of income and capital. it makes sense to minimise not As I mentioned earlier. As Eq. the ISEW and GPI begin durables such as cars. it scarcely serves as an index of of personal consumption expenditure sustainable economic welfare. it is necessary to exploit natural because it would necessitate less production to capital which. which starts with GDP as its is the amount paid in the current year on consumer initial reference point. It constitutes a cost because imply that consumption is itself good */a theore- the maintenance of human-made capital requires tical failing of the SNDP. That is. the distribution of maximise a nation’s SNDP. would not be reflected services provided by natural capital (Perrings. it is necessary to only occur if there is an ongoing throughput of consume goods to gain the services they yield. as an index of sustainable cost. refrigerators.2. if the same level of service can be enjoyed and the output of high entropy wastes). Of matter-energy (the input of low entropy resources course. The ISEW and GPI serve as very poor. of sustainable cost. if it were made. in this particular item but would instead be 1986).

7. in some cases. roads and highways do likewise. To tious. that is. Lawn / Ecological Economics 44 (2003) 105 /118 113 personal consumption expenditure. the cost of household pollution abatement addition to the stock. . the cost of crime .8.5. Not included in personal consumption expendi. Services yielded by existing consumer durables not. It is produced to of the SNDP. in some cases. They are again overlooked in the calculation psychic income of a nation. Net capital investment reference item of personal consumption expendi- ture overlooks the services provided by The inclusion of this particular item is conten- volunteer and non-paid household work. Ideally. the cost of vehicle accidents . the cost of irksome and stock of consumer durables. P. The initial 3. To be 3. a certain percentage of private household work health expenditure assumed to constitute a form of defensive expenditure Not all benefit-yielding services are provided by market-based economic activity. psychic outgo-related aspects must also be in- tage rate chosen should reflect the estimated cluded. the ISEW and GPI include these services. Disservices generated by economic activity ture is the value of the services annually yielded by previously purchased consumer durables. The SNDP does 3. In the calculation of the ISEW and GPI. Publicly . To the SNDP. Defensive and rehabilitative expenditures consistent with the Fisherian concept of income and capital.6. the cost of underemployment Consumer durables are not the only form of . the following defensive and rehabilitative made capital. the economic process the annual value of these services is added to the involves a range of irksome activities while it running total.A. The ISEW and GPI do this by deducting depreciation rate or ‘rate of consumption’ of the following: consumer durables. museums. . income. As I mentioned earlier. As The items so far discussed make a positive Fisher argued. the cost of unemployment human-made capital that yields services. as a percentage of the total value joyed in the future. In calculating the ISEW and of the existing stock of publicly provided human. One of the key implications of the Fisherian . 3. The service value is usually calculated extend the concept of psychic income to that of as a percentage of the total value of the entire ‘net psychic income’. these services constitute current contribution to the psychic income of a nation. the cost of lost leisure time provided human-made capital such as libraries. Consistent with the Fisherian con.9. It is overlooked in the calculation of also generates many undesirable side-effects. prevent the undesirable side-effects of the eco- lated in the same way as it is for consumer nomic process reducing the psychic income en- durables.4. The service value is usually calcu. income enjoyed by a nation’s citizens. expenditures are subtracted from the running cept of income and capital. current expenditure by total: governments on human-made capital is not in- cluded because it merely constitutes a current . Services provided by volunteer and non-paid . . GPI. these services are treated as income A large portion of the human-made capital and added in the calculation of the ISEW and produced each year does not contribute to the GPI. Services yielded by publicly provided human. the cost of noise pollution 3. the percen. the cost of family breakdown 3. It is not done obtain a better indicator of the psychic so in the calculation of the SNDP. the cost of commuting made capital .

net capital investment is calcu. This makes the ISEW and fore. there is some justification for its . ciated with the ISEW and GPI that also extends to term capacity to sustain the psychic income the SNBI. human-made capital as a cost. of income and capital. All up. because of the complementar. and to keep the stock of human-made capital intact.11. The cost is even- man-made capital.114 P. calculated in this . it is necessary to deduct the stock of producer goods. sink. the additional benefits of growth are being exceeded 3. Net foreign lending/borrowing by the additional costs. of course. at the national level. the loss of wetlands and old-growth forests (lost ity between human-made and natural capital. this implies that the quantity of theoretical foundation based on Fisher’s concept producer goods per worker must not fall. Furthermore. the inclusion of this item would be services provided by natural capital. cost of ozone depletion and air and water producer goods per worker intact. provided the benefits and costs productive capacity. should the stock of producer goods be greater GPI far superior indicators of both income and than the necessary minimum requirement. life-support services of natural capital) sustainable economic welfare requires both forms of capital to be non-declining. it is equally important to know when a debts have difficulty maintaining the investment nation’s stock of natural capital has declined to levels needed to keep their stock of human-made such an extent as to render the economic welfare it capital intact. loss of farmland and the cost of resource manner. and SNBI do not directly provide this (George. cost of long-term environmental damage and inclusion. The ISEW and GPI go a long As I explained earlier. the sustainable economic welfare than GDP and the difference constitutes an increase in a nation’s SNDP. It is not. they are often forced enjoys ecologically unsustainable. There is. depletion (lost source services of natural capi- lated as the increase in the stock of producer goods tal) above the amount required to keep the quantity of . While it is impor- much on whether natural and human-made capital tant to obtain a better measure of economic is domestically or foreign owned.A. machinery. the ISEW and GPI have a sound made capital. one of the major implica- way towards ensuring this by subtracting current tions of Fisher’s concept of income and capital is expenditure on consumer durables and by not its recognition of the continual maintenance of adding current government expenditure on hu. The ISEW inconsistent with Fisher’s concept of income and and GPI do this by deducting the following: capital. as it is in the calculation cost of the lost source. and life-support of SNDP. If the calculation of this item was To be consistent with the Fisherian concept of based on an estimate of the net increase in the total income and capital. The ISEW. Evidence clearly welfare by subtracting the cost of environmental indicates that many countries with large foreign damage. Cost of sacrificed natural capital services the stock of human-made capital should not be counted as income. There. To recall. This. However. Lawn / Ecological Economics 44 (2003) 105 /118 concept of income and capital is that additions to 3. some of accuracy. In terms of human. it is reasonable to believe that the ISEW and GPI can serve as a valuable means of assessing whether. to liquidate natural capital stocks to repay debt GPI. however. 1988). . a theoretical weakness asso- This item is included because a nation’s long. is a clear of the economic process can be measured with benefit. Rather.10. however. All three indexes merely count the cost generated by the economic process depends very of lost natural capital services. the calculation of the tually borne out by way of the natural capital ISEW and GPI includes the net investment in the services lost in obtaining the throughput required stock of producer goods (plant. As contentious pollution (lost sink services of natural capital) as this item is. equipment). Moreover. information and thus require supplementation.

GPI. a comparison between a nation’s ever. it may be beneficial to replace able scale. but the Australian macroecon. avoided by ISEW and GPI advocates. I would like to advisable to undertake biophysical assessments of raise a number of aspects regarding the ISEW and a nation’s resource stocks and critical ecosystems related measures that must eventually be ad- and present the information in something akin to a dressed in order for these alternative indexes to natural capital account. reassessing the valuation methods employed and the nature and tentious valuation methods requires each to be make-up of the various items used to compile the benefit and thoroughly examined. I will leave such a task to a cost accounts. 4 long-term environmental damage. in the SNA includes a category for ‘cigarettes and defensive and rehabilitative expenditures. indexes proposed by the various contributors in some items dominate others such that it is possible Costanza et al.g. the tendency to deduct the cumulative cost of ozone depletion. it is assumed that all personal 4. and. the additional benefits of growth in forms of work and the existence values of natural Australia are not only being overtaken by the capital). it is impossible to additional costs. Lawn / Ecological Economics 44 (2003) 105 /118 115 Given the need to keep natural capital intact. 2000). As a back-up to the natural capital some of the lesser items currently included in the account. Since an assessment of the con. Neumayer. a natural capital account has been com. Quite obviously. index. and SNBI is probably greatest in ture will boost the psychic income of a nation’s relation to the valuation methods used in their citizens. . finally. One possi- Hamilton. The need for a more robust and consistent set of consumption expenditure contributes to human valuation methods well-being. 1999. Atkinson. the ISEW piled for Australia as well as the benefit and cost and GPI must be supplemented by a satellite accounts described earlier to calculate the SNBI. this issue has been largely calculation (see Maler. Over- coming this problem may require decomposition of the dominant items into a number of smaller items. tors unaccounted for (e. First. 1994. To date. have been growth forests. P. I would just like to point out that I am currently updating the SNBI for Australia and. as I have already pointed out. it is unlikely that all consumption expendi- ISEW. Since this item includes the consump- tion of junk food. GPI. 1995. ble way of dealing with this problem is to conduct The majority of criticism has been directed at the a sensitivity analysis by excluding some of the valuation of the following items listed in Table 1*/ components of personal consumption expenditure. 1991. as Neumayer (1999) has pointed out. alcohol. (1992). 1996. The of resource depletion. the list of items used to calculated indicates that the falling level of eco.g. calculate the ISEW. the cost tobacco’ and another for ‘alcoholic drinks’. personal consumption expenditure weighting of personal consumption expenditure. it is future paper. account of natural capital to determine whether The diminution of Australia’s natural capital over the changing level of economic welfare is ecologi- the same period in which the SNBI has been cally sustainable. Nevertheless. tobacco products. for a small variation in dominant items to over- whelm large variations in the remainder.. and SNBI is not nomic welfare (a consequence of the decline in the exhaustive */there are many welfare-related fac- SNBI) is also becoming increasingly unsustain. as part of the process. That is. For example. and lost old. greater welfare significance.4 Having said this. and SNBI with changing ecological footprint and biocapacity items that can be clearly identified as having could also be provided (e. Fourth. 1999) as well as a number of ecosystem health Third. and The validity of the criticism levelled at the guns. GPI. Wackernagel et al. incorporate all welfare-related factors into a single omy has probably exceeded its maximum sustain. the index of distributional inequality and the For example. the disutility of certain able. in Lawn gain broader acceptability. calculation of the ISEW. Second. (2000).A.

these alternative Clearly. the exclusion of some forms of consumption is likely to reduce the final value of the ISEW. there is little doubt that some of the sustainable economic welfare. the accompanying measure of ‘adjusted’ hypothesis. unless a useful information about the current manifesta. There might also be a justifica. robust and consistent set of valuation techniques tions and immediate effects of past and present can be established along similar lines to the way in activities. omissions of this economic welfare and. GPI. 5. for these alternative indexes. and SNBI and.A. Thus. techniques to allow for a more meaningful welfare Fifth. or SNBI to reflect the economists at a time when the world’s richest forecasted net benefits of moving toward a more nations urgently need to make the transition away just and sustainable mode of operation. the results of impact of current activities */a consequence of the the ISEW. distant approximations of their correct value. Lawn / Ecological Economics 44 (2003) 105 /118 full amount of the former could be omitted and accompanying measure of economic welfare would half of the latter. the values of some items are likely to be. reflect the failure of present policies. while the ISEW.116 P. I believe the illumination of a sound the present calculation of the ISEW. GPI. the advocates of the ISEW. they reveal much less about the future which the United Nations System of National Accounts is used to calculate GDP. if the tion for excluding a small percentage of expendi. Given the magnitude of the cies should lead to a lower measure of ‘adjusted’ consumption expenditure item. reinforce the threshold I would like to thank Herman Daly and four hypothesis. GPI. the impact of additional health costs and for a standardised set of items and valuation reduced productivity). GPI. 1996). best. and Pezzey and Wiltage (1998). In doing so. and indicators already include items to capture some of SNBI must continue to strive for more robust the costs of undesirable forms of consumption valuation methods. their own conclusions regarding its impact on Finally.g. GPI. GPI.e. Indeed. There is also a genuine need (e. to a widening of nature could lead to a small variation in the overall the gap over time between the standard and index which would then allow analysts to make adjusted indexes. GPI. This having been valuation methods employed to calculate the said. threshold hypothesis is valid. and SNBI convey comparison of different nations. This theoretical foundation and the evolution of more could be achieved by employing the forecasting robust valuation methods will strengthen the case techniques put forward by Asheim (1994. growth-based poli- ture on ‘food’. anonymous reviewers for their very constructive . etc. lead to a wider acceptance of the threshold Ideally. there- fore. better known as sustainable devel- opment. at what contributes to human well-being are com. Conclusion and SNBI with a second index that incorporates the probable future benefits and costs of current As imperfect as the ISEW.5 As it is. mon to all indicators. measured. the existence of this problem in no way ISEW. it should Pezzey (1993). I believe this to be of major impor- economic welfare would be higher than the tance and a continuing challenge to ecological standard ISEW. like indicators since subjective judgments about Hence. 5 Acknowledgements If nothing else. attributes future benefits and costs to might be. It might. and SNBI are extremely crude and undermines the legitimacy of the ISEW and other often involve the use of very heroic assumptions. This weakens the policy-guiding rele- vance of these alternative indexes. in doing so. GPI. A lower from growth to that of sustainable qualitative improvement. and SNBI will forever be open to definition of sustainable economic welfare being criticism. and SNBI actions (i. moreover. be expedient to accompany the ISEW.).

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