almost An practical step toward sustainability
Robert Solow
Text of an invited lecture on the occasion of the fortieth anniversary of Resources for the Future, 8 October 1992
Robert Solow is Institute Professor of Economics, Massachusetts Institute of Technology, Cambridge, MA, USA; Nobel laureate for economic science. Published with the permission of Resources for the Future, 1616 P Street, NW, Washington, DC 200361400, USA.
You may be relieved to know that this talk will not be a harangue about the intrinsic incompatibility of economic growth and concern for the natural environment. Nor will it be a plea for the strict conservation of nonrenewable resources, even if that were to mean dramatic reductions in production and consumption. On the other hand, neither will you hear mindless wish fulfillment about how ingenuity and enterprise can be counted on to save us from the consequences of consuming too much and preserving too little, as they have always done in the past. Actually, the argument I want to make seems to be particularly appropriate on the occasion of the fortieth anniversary of Resources for the Future; it is precisely about resources for the future. And it is even more appropriate for a research organization: I hope to show how some fairly interesting pure economic theory can offer a hint - though only a hint - about a possible improvement in the way we talk about and think about our economy in relation to its endowment of natural resources. The theoretical insight that I will present suggests a potentially important line of empirical research and a possible guideline for long-term economic policy. Then I will make a naive leap and suggest that, if we talked about the economy in a more sensible and accurate way, we might actually be better able to conduct a rational policy in practice with respect to natural and environmental resources. That is probably foolishness, but I hope you will find it a disarming sort of foolishness.
Previewing the arguments
It will be useful if I tell you in advance where the argument is leading. It is a commonplace thought that the national income and product accounts, as currently laid out, give a misleading picture of the value of a nation's economic activity to the people concerned. The conventional totals, gross domestic product (GDP) or gross national product (GNP) or national income, are not so bad for studying fluctuations in employment or analyzing the demand for goods and services. When it comes to measuring the economy's contribution to the well-being of the country's
162
0301/4207/93/030162-11
0
1993 Resources for the Future (text) and Butterworth-Heinemann
Ltd (design and typography)
An almost practical step toward sustainability
inhabitants, however, the conventional measures are incomplete. The most obvious omission is the depreciation of fixed capital assets. If two economies produce the same real GDP but one of them does so wastefully by wearing out half of its stock of plant and equipment while the other does so thriftily and holds depreciation to 10 per cent of its stock of capital, it is pretty obvious which one is doing a better job for its citizens. Of course the national income accounts have always recognized this point, and they construct net aggregates, like net national product (NNP), to give an appropriate answer. Depreciation of fixed capital may be badly measured, and the error affects net product, but the effort is made. The same principle should hold for stocks of nonrenewable resources and for environmental assets like clean air and water. Suppose two economies produce the same real net national product, with due allowance for depreciation of fixed capital, but one of them is wasteful of natural resources and casually allows its environment to deteriorate, while the other conserve...
solow