Wealth, Welfare and Sustainability

Wealth, Welfare and Sustainability

Advances in Measuring Sustainable Development

Kirk Hamilton and Giles Atkinson

This important book presents fresh thinking and new results on the measurement of sustainable development. Economic theory suggests that there should be a link between future wellbeing and current wealth. This book explores this linkage under a variety of headings: population growth, technological change, deforestation and natural resource trade. While the relevant theory is presented briefly, the chief emphasis is on empirical measurement of the change in real wealth: this measure of net or ‘genuine’ saving is a key indicator of sustainable development. The methodological and empirical work is bolstered by tests of the predictive power of genuine saving in explaining future consumption and economic growth. Just as importantly, the authors show that many resource-abundant countries would be considerably wealthier today had they managed to save and invest the profits from natural resource exploitation in the past.

Chapter 2: Wealth and Social Welfare

Kirk Hamilton and Giles Atkinson

Subjects: economics and finance, environmental economics, valuation, environment, environmental economics, valuation


INTRODUCTION This chapter will lay the basic theoretical foundation for much of the empirical work featured in the balance of the book. It proceeds from the consideration of measures of current utility to the problem of maximizing the present value of future utility. The properties of the constructs underlying this maximization problem provide the necessary framework for linking wealth, welfare and sustainable development. If total wealth is related to social welfare, then changes in wealth should have implications for sustainability – this is the basic intuition of Pearce and Atkinson (1993). For optimal economies – economies where a planner can enforce the maximization of social welfare (that is, the maximization of the present value of utility) – a number of results have made the link explicit. Aronsson et al. (1997, equation 6.18) show that net saving in utility units is equal to the present value of changes in utility, using a time-varying pure rate of time preference. Hamilton and Clemens (1999) show that net or ‘genuine’ saving adjusted for resource depletion, stock pollutant damages and human capital accumulation is equal to the change in social welfare measured in dollars. They also establish that negative genuine saving implies that future utility must be less than current utility over some interval of time. These results depend on the assumption that governments maximize social welfare. Dasgupta and Mäler (2000) show that net investment is equal to the change in social welfare in a non-optimizing framework where a resource allocation mechanism is used to specify the...

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