Elsevier

Ecological Economics

Volume 176, October 2020, 106753
Ecological Economics

A Conceptual Exploration and Critical Inquiry into the Theoretical Foundation(s) of Economic Welfare Measures

https://doi.org/10.1016/j.ecolecon.2020.106753Get rights and content

Highlights

  • Fisherian and Hicksian income both provide theoretical foundations for the ISEW/GPI.

  • This double theoretical foundation leads to two distinct welfare interpretations.

  • Each interpretation comes with different time and boundary issues.

  • Recent developments toward experiences ‘here and now’ are not the only way forward.

  • Impacts of economic activities abroad and in the future better inform policy-making.

Abstract

Economic welfare measures (EWM) such as the ISEW and the GPI are often argued to lack a sound theoretical foundation. However, we observe that the initial EWM were jointly inspired by Hicksian and Fisherian income. Welfare's experiential nature is Fisherian-inspired, whereas seeing the consumption of community capital (e.g. the ecosystem) as a cost is Hicksian-inspired. As most scholars do not recognize this double theoretical foundation, two distinct welfare interpretations with different time and boundary dimensions are often conflated. EWM can be seen as either capturing the benefits and costs experienced, or as reflecting the benefits and costs of present economic activities (BCPA). The former interpretation excludes future costs, costs shifted abroad and capital changes as they are not experienced in the present, while the latter includes them. Recent developments reveal that EWM are converging toward the ex post established experiential Fisherian foundation formulated by Lawn (2003). Yet, this is not the only way forward as the BCPA-view offers an alternative to account for, for instance, the costs of present activities shifted abroad or to the future, whether they are experienced or not. To avoid inconsistencies, EWM's standardization would greatly benefit from making explicit in future studies which interpretation is taken.

Introduction

In response to misuse of the Gross Domestic Product (GDP) as a welfare indicator, Daly and Cobb (1989) developed the Index of Sustainable Economic Welfare (ISEW) to provide better information on economic welfare.1 Economic welfare measures (EWM), such as the ISEW and the Genuine Progress Indicator (GPI), offer information on “the contribution of a nation's economy to the overall level of well-being enjoyed by its citizens (Bleys, 2012). They typically do so by seeing the economy as ‘embedded’: the economy-in-society-in-the-ecosystem. EWM do not only take a broader perspective on the economy subsystem compared to GDP (that only focusses on market activities), but EWM also make explicit the links between the economic subsystem and the social and ecological domains. Over the next thirty years, EWM have been compiled for countries, regions and cities all over the globe – see Bleys and Whitby (2015) and Long and Ji (2019) for an overview. Soon after the development of the first EWM, however, critics such as Neumayer (1999) pointed out that these measures were lacking a sound theoretical foundation, whereas Hanley et al. (1999) described the ISEW as making a number of ad hoc adjustments to the national income accounts to reflect a broader welfare concept. It was not until the turn of the century that the ISEW was connected to Fisher's concepts of income and capital by Lawn and Sanders (1999) and Lawn (2003).

In his seminal paper, Lawn (2003) meticulously explained how every item included could be consistent with Fisher's concepts, thus potentially providing the ISEW and related measures with a theoretically sound foundation. However, EWM also have been defined as measures of sustainable economic welfare that are tightly linked to Hicks' (1939) maximum sustainable consumption – e.g. Harris (2007) even considers Hicksian income to be superior compared to Fisherian income. To date, Fisherian psychic income is the most commonly used theoretical foundation to underpin EWM (in e.g. Lawn, 2003; Bleys, 2008; Brennan, 2013; Lawn, 2013; Talberth and Weisdorf, 2017; O'Mahony et al., 2018; Kenny et al., 2019; Long and Ji, 2019). Fisher (1906) stressed the psychic or experiential nature of income and relates income to the subjective satisfactions consumption causes in the human psyche. By turning to psychic income to underpin welfare exercises, EWM would reveal information about the net benefits a nation's citizens are experiencing from economic activities, after deducting for instance the costs of air pollution, noise pollution and of commuting to work from the consumption benefits. EWM do more than just registering the traditional net psychic income as they also account, for instance, for the costs caused to the ecosystem. In fact, EWM are based on an extended version of Fisher's income-capital distinction (Lawn, 2008) or on the ‘entropic net psychic income’ (Brennan, 2008). This entropic extension results in registering the ecosystem services that are sacrificed in the economic process as a cost in EWM.

Despite the theoretical debate moving in the direction of Fisherian income, a clear interpretational consensus on what EWM are capturing, is missing in the field. Table 1 illustrates this by outlining a number of welfare statements of leading scholars. The emphasis we added in this overview highlights that these scholars understand, define and explain EWM differently. Sometimes, EWM are said to capture what is being enjoyed at a particular point in time or as being related to the costs and benefits experienced at a particular point in time. Here, the experiential nature of EWM is stressed, which is directly related to Fisher's psychic income. On other occasions, EWM are linked to the value added to nature, to counting the depreciation of community capital as a cost, to the impacts of economic growth or to the consequences of economic activity. In these diverse statements, two welfare interpretations can be detected. The first interpretation sees EWM as what is currently being experienced, whereas the second relates EWM to the costs and benefits caused by present economic activities. Current activities may bring (benefits and) costs abroad and in the future that are not necessarily experienced by a nation's citizens in the present.

To make things worse, many EWM studies avoid looking into the theoretical foundations of the measures, and focus exclusively on estimating an additional EMW time series. As a result, these studies make implicit and inconsistent time and boundary choices (i.e. deciding between forward-looking or present-looking perspective and between a within and beyond boundary view). This lack of standardization regarding time and boundary issues hinders the policy-impacting potential of EWM (Bleys and Whitby, 2015). Therefore, the purpose of this paper is to revisit the theory behind the EWM. Section 2 revisits the theoretical foundations of EWM and introduces with Hicksian and Fisherian income two concepts that provide EWM with a (double) theoretical underpinning. Section 3 relates this double theoretical foundation to the existence of two distinct ways to interpret EWM and connects each interpretation to a time and boundary perspective. The conclusion proposes a way forward toward a more consistent standardization in the field.

Section snippets

Revisiting Economic Welfare measures' Theoretical Foundation(s)

For terminological clarity, we want to stress the distinction between ‘income’ and ‘welfare’. In this paper, welfare is used to refer to practically compiled measures such as the ISEW and GPI, whereas income is related to the theoretical income concepts which provide EWM with a certain theoretical base. In this section we will scrutinize the theoretical foundations of EWM. First, we will introduce Hicks' and Fisher's income concepts, as they underlie the theoretical discussions on EWM.

A Conceptual Investigation of Economic Welfare Measures

The double theoretical foundation raises many questions. How can both income concepts be combined in EWM? Fisherian income is often regarded as being superior compared to Hicksian income, however, there are some difficulties with the Fisherian foundation. Should the ‘extended version of Fisherian income’, in which ecosystem services lost during the economic process (i.e. the uncancelled costs), be psychic and in line with Fisher's income-capital distinction or not? Do defensive expenditures not

Conclusion

Economic welfare measures (EWM) have been around for over thirty years. Even though voices were raised for a more robust, standardized set of the items included (Lawn, 2003) and for some convention in the valuation of environmental items (Forgie, 2007), EWM's lack of standardization is hindering their policy-making impact (Bleys and Whitby, 2015). We found that this lack of consistency is related to scholar's different understanding and operationalization of what welfare is. Nevertheless, there

Declaration of Competing Interest

The authors declare that they have no known competing financial interests or personal relationships that could have appeared to influence the work reported in this paper.

Acknowledgements

This research is supported by a doctoral fellowship from the Special Research Fund (BOF) of Ghent University. We would like to thank our colleagues Bart Defloor and Freddy Heylen for their comments on earlier drafts of this work and two anonymous referees for their valuable suggestions to improve this article. Finally, we are grateful for the insightful discussions with the participants of the Belgian Environmental Economist Day in Ghent (2018), the conferences of the European Society for

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