Comprehensive wealth accounting: Measuring sustainable development

Abstract

The goal of development policy should be to maximize social welfare, and the measure of current progress would be the change in social welfare. A seminal paper by Samuelson (1961, p. 50) highlighted that income, or for that matter consumption, does not have a direct welfare connotation. The choice of a welfare measure has to be made ‘in the space of all present and future consumption. . . the only valid approximation to a measure of welfare comes from computing wealth-like magnitudes not income magnitudes’. Pearce et al. (1989, p. 34) argued that sustainable well-being is possible if next generations inherit ‘a stock of wealth. . . no less than the stock inherited by the previous generation’. A considerable body of theoretical work (for example, Hamilton and Clemens, 1999; Dasgupta and Maler, 2000, 2004; Asheim and Weitzman, 2001; Arrow et al., 2003) has established the link between social welfare and a nation’s total wealth - wealth defined comprehensively to include its stock of manufactured capital, natural capital and human and social capital. If wealth is decreasing, for example from depletion or degradation of natural capital, then a country will not be able to sustain its current level of income and well-being. The theory has been tested empirically by Ferreira and Vincent (2005) and Ferreira et al. (2008). More recently, the Stiglitz et al. (2009) report summarized the widely recognized criticisms of gross domestic product (GDP), the most commonly used indicator of economic progress.