Monday, December 6, 2010

Arrow, Dasgupta, Goulder, Mumford, and Oleson on "Sustainability and the Measurement of Wealth"

Kenneth Arrow et al. have a new paper that looks, at first glance, to be potentially very useful. It attempts to offer "a fully consistent theoretical framework that offers a clear criterion of sustainable development" and "yields an empirically implementable measure of whether a given national economy is following a sustainable path." The authors apply their model to five countries, including the US, China, Brazil, India and Venezuela. Of those five, only Venezuela is not on a sustainable path (Brazil's growth path is only barely sustainable).

This work constitutes an important contribution in the quest for the wholly grail of environmental economics, which is an agreed-upon model and measure of sustainability. There will no doubt be critics who will gripe about factors the Arrow et al. model includes and excludes. The authors themselves note the paucity of data needed to be collected and plugged into the model. However, it represents one of the first truly meaningful steps forward since Sir John Hicks first defined real economic growth more than a half-century ago as social revenues minus social costs, including losses to capital stocks (which can be defined to include stocks of natural resources).

The full paper can be read here.

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