The Index of Sustainable Economic Welfare (ISEW) is an

economic An economy is an area of the Production (economics), production, Distribution (economics), distribution and trade, as well as Consumption (economics), consumption of Goods (economics), goods and Service (economics), services. In general, it is ...

indicator intended to replace the

gross domestic product Gross domestic product (GDP) is a monetary measure of the total market value of all the final goods and services produced and rendered in a specific time period by a country or countries. GDP is often used to measure the economic performanc ...

(GDP), which is the main macroeconomic indicator of System of National Accounts (SNA). Rather than simply adding together all expenditures like the GDP,

consumer spending Consumer spending is the total money spent on final goods and services by individuals and households. There are two components of consumer spending: induced consumption (which is affected by the level of income) and autonomous consumption (which ...

is balanced by such factors as

income distribution In economics, income distribution covers how a country's total GDP is distributed amongst its population. Economic theory and economic policy have long seen income and its distribution as a central concern. Unequal distribution of income causes e ...

and cost associated with pollution and other unsustainable costs. The calculation excludes defence expenditures and considers a wider range of harmful effects of economic growth. It is similar to the genuine progress indicator (GPI). The Index of Sustainable Economic Welfare (ISEW) is roughly defined by the following formula: ''ISEW'' = ''personal consumption''
+ ''public non-defensive expenditures''
- ''private defensive expenditures''
+ ''capital formation''
+ ''services from domestic labour''
- ''costs of

environmental degradation Environment most often refers to: __NOTOC__ * Natural environment, referring respectively to all living and non-living things occurring naturally and the physical and biological factors along with their chemical interactions that affect an organism ...

''
- ''depreciation of

natural capital Natural capital is the world's stock of natural resources, which includes geology, soils, air, water and all living organisms. Some natural capital assets provide people with free goods and services, often called ecosystem services. All of t ...

History

GDP is misleading as an indicator or even as a proxy of the welfare of a nation, let alone as a measure of people's well-being, although the makers of economic policy commonly think to the contrary. This problem already became apparent in practical economic policies in most industrialised countries in the early 1970s. The most famous examples of this development are the MEW index developed by

William Nordhaus William Dawbney Nordhaus (born May 31, 1941) is an American economist. He was a Sterling Professor of Economics at Yale University, best known for his work in economic modeling and climate change, and a co-recipient of the 2018 Nobel Memorial ...

and

James Tobin James Tobin (March 5, 1918 – March 11, 2002) was an American economist who served on the Council of Economic Advisers and consulted with the Board of Governors of the Federal Reserve System, and taught at Harvard University, Harvard and Yale Uni ...

in their Measure of Economic Welfare (MEW) in 1972, the Japanese Net National Welfare (NNW) indicator in 1973, the Economic Aspects of Welfare index (EAW) index of Zolatas in 1981, the ISEW indicator of Daly and Cobb in 1989 and the UN's human development index (HDI) in 1990. They are all based on neoclassical welfare economics and use as the starting point the System of National Accounts (SNA). The basic idea behind all these approaches is the inclusion of nonmarket commodities, positive and negative, to yield an aggregated macroindicator in monetary terms. The EAW index, applied to the United States for the period from 1950 to 1977, showed that the economic aspects of social welfare are a diminishing function of economic growth in industrially mature, affluent societies. The percentage increases in social welfare over time are smaller than the corresponding increases in the GDP, and are diminishing. When the elasticity of the EAW/GDP ratio reaches zero, economic welfare will have attained its maximum value. Beyond that point any further increase in the GDP would lead to an absolute decline in economic welfare. The ISEW was originally developed in 1989 by leading ecological economist and steady-state theorist

Herman Daly Herman Edward Daly (July 21, 1938 – October 28, 2022) was an American ecological and Georgist economist and professor at the School of Public Policy of University of Maryland, College Park in the United States, best known for his time as a ...

and theologian John B. Cobb, but later they went on to add several other "costs" to the definition of ISEW. This later work resulted in yet another macroeconomic indicator Genuine Progress Indicator (GPI): see

sustainability measurement Sustainability measurement is a set of frameworks or indicators used to measure how sustainable something is. This includes processes, products, services and businesses. Sustainability is difficult to quantify and it may even be impossible to mea ...

. The GPI is an extension of ISEW that stresses genuine and real progress of the society and seeks especially to monitor welfare and the ecological sustainability of the economy. The ISEW and GPI summarise economic welfare by means of a single figure according to the same logic by which GDP summarises economic output into a single figure. Beside economic issues, social and environmental issues in monetary terms are included in the calculation.

Trend of ISEW in the United States

The calculation of the ISEW in the United States from 1950 to 1986 was done by Cobb and Daly in 1989. The results reveal that the increase in economic welfare of an average American has stabilised after the 1970s although the economy, measured by GDP, has continued to grow. According to Cobb and Daly's calculations the external effects of production and the inequity of income distribution are the main reasons for this development in which an increase in production does not necessarily lead to an increase in welfare.

Other countries and regions to calculate ISEW

Besides the USA there have been at least seven other countries or regions which have compiled the ISEW, namely the UK (Jackson & Marks 1994), Germany (Diefenbacher 1994), The Netherlands (Rosenberg & Oegema 1995), Austria (Stockhammer et al. 1995), British Columbia (Gustavson & Lonergan 1994), Sweden (Jackson & Stymne 1996), Chile (Castaneda 1999), Finland (Hoffrén 2001), Poland (Gil & Śleszyński 2003), Belgium (Bleys, 2008), Flanders (Bleys & Van der Slycken, 2019) and China (Zhu et al., 2021).

Progress of the Finnish ISEW

The calculation of the ISEW for Finland has been done by Dr. Jukka Hoffrén at Statistics Finland in 200

. Today the time period covered is extended to years from 1945 to 2010. According to the results, sustainable economic welfare rose steadily in the 1970s and early 1980s, but has since declined and stabilised. One of the underlying reasons for this development was effective income distribution which apportioned evenly the welfare derived from increased production. In the mid-1980s income disparities started to grow again, flows of capital (investments) abroad increased and environmental hazards escalated, resulting in a decline in the weighted personal consumption. Major contributors to Finnish ISEW in 2000 (FIM billion, rp) Weighted personal consumption + 467.8 Household work + 82.8 Other positive contributions + 21.7 Long-term environmental damage - 228.0 Environmental deterioration - 192,5 ---- ISEW + 151,8

References

{{Reflist * Bleys, B. (2008). Proposed changes in the Index of Sustainable Economic Welfare: An application to Belgium. Ecological Economics, 64, 741-751. * Bleys, B., & Van der Slycken, J. (2019). De Index voor Duurzame Economische Welvaart (ISEW) voor Vlaanderen, 1990-2017. Studie uitgevoerd in opdracht van de Vlaamse Milieumaatschappij, MIRA, MIRA/2019/04, Universiteit Gent. Web: https://biblio.ugent.be/publication/8641018/file/8641020 * Daly, H. & Cobb, J. (1989), For the Common Good. Beacon Press, Boston. * Delang, C.O. and Yu, Y.H. (2015)
Measuring Welfare beyond Economics: The Genuine Progress of Hong Kong and Singapore
'' London: Routledge, 256 pages * Diefenbacher, H. (1994), "The Index of Sustainable Economic Welfare in Germany", in C. Cobb & J. Cobb (eds.), ''The Green National Product'', University of Americas Press * Gil, S. & Śleszyński J. (2003), "An Index of Sustainable Economic Welfare for Poland", ''Sustainable Development'', Vol. 11, No. 1, 2003, (47-55). * Hamilton C. (1999) "The Genuine Progress Indicator: methodological developments and results form Australia", ''Ecological Economics'', vol. 30, pp. 13–28 * Hoffrén J. (2001)
Measuring the Eco-efficiency of Welfare Generation in a National Economy. The Case of Finland
" Statistics Finland. Research Reports 233. Helsinki. pp. 107–109. * Jackson, T., Marks, N., Ralls, S., Strymne, S (1997) "An index of sustainable economic welfare for the UK 1950-1996", Centre for Environmental Strategy, University of Surrey, Guildford * Jackson, T. Marks, N. (2002) "Measuring Progress",

New Economics Foundation The New Economics Foundation (NEF) is a Great Britain, British think-tank that promotes "social, economic and environmental justice". NEF was founded in 1986 by the leaders of The Other Economic Summit (TOES) with the aim of working for a "new m ...

and

Friends of the Earth Friends of the Earth International (FoEI) is an international network of grassroots environmental organizations in 73 countries. About half of the member groups call themselves "Friends of the Earth" in their own languages; the others use other ...

, London * Jackson, T., McBride, N., Marks N., Abdallah, S. (2006-2007)"Measuring Regional Progress: Developing a Regional Index of Sustainable Economic Well-being for the English Regions",

new economics foundation The New Economics Foundation (NEF) is a Great Britain, British think-tank that promotes "social, economic and environmental justice". NEF was founded in 1986 by the leaders of The Other Economic Summit (TOES) with the aim of working for a "new m ...

, London * Nordhaus, W. and Tobin, J. (1972) Is growth obsolete?. Columbia University Press, New York * Zhu, X., Liu, Y., & Fang, X. (2021). Revisiting the Sustainable Economic Welfare Growth in China: Provincial Assessment Based on the ISEW. Social Indicators Research, 1-28. Ecological economics Economics of sustainability Sustainability metrics and indices Social science indices

History

Trend of ISEW in the United States

Other countries and regions to calculate ISEW

Progress of the Finnish ISEW

See also

Indices

Other

References