Advances in Measuring Sustainable Development
2. Wealth and social welfare 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...
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