Chapter 4: The Potential Conflict Between Sustainability and Welfare Maximisation
4. The potential conﬂict between sustainability and welfare maximisation INTRODUCTION The previous chapter showed that the long-run output potential of the economic process has been overstated as a consequence of the mainstream use of aggregate production functions that violate the ﬁrst and second laws of thermodynamics. A Bergstrom production function (BPF) was subsequently put forward as an alternative means of describing production or resource-transforming possibilities. Use of the BPF revealed that natural and human-made capital are eﬀectively complementary rather than substitutable forms of capital. Unfortunately, the BPF, alone, is unable to indicate the likely pattern of natural capital depletion should a society wish to continuously increase its level of production and consumption over time. In order to fully appreciate the long-run production possibilities of an economic system, a time dimension must be incorporated into the BPF. In addition, assumptions must be made about the nature of both natural and human-made capital and the technology embodied within the latter. This is precisely what is undertaken in this chapter. Furthermore, the revised BPF is employed to conduct a range of simulation exercises. The simulation exercises reveal a number of important results and conclusions, none more so than: (a) the potential conﬂict that can arise between maximising present value welfare and the need to maintain natural capital for future generations, and (b) the critical role played in this conﬂict by the prevailing discount rate. Why might discounting conﬂict with natural capital maintenance and the ecological sustainability goal? An...
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