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John Hartwick

Professor at Queen's University



Video

Panel on Wealth Accounts: Concepts, Economics, and Policy

Wealth is a stock, not a flow. The country with the highest flow of GDP in a particular year is not necessarily the richest country. The richest country has the highest capital stock, whether endowed or accumulated. While this should in theory be obvious, it is often ignored. A focus on wealth, and changes in wealth, would lead to attention to investment in important assets – whether natural, produced, human, institutional or financial – and sharper attention to sustainability. In this discussion, the panelists consider wealth accounts and policy implications.

 


Academic Article

Wealth and sustainability

For economists in 1974, it was a live question whether the exhaustion of natural resources, such as oil, would necessarily lead to the decline of economic activity. Solow showed that constant levels of consumption could be sustained in the face of exhaustibility if there is sufficient substitutability between produced and natural factors of production. Hartwick then proved that underpinning this result is a saving rule—set investment in produced capital equal to the value of resource depletion at each point in time. A large literature has shown that a comprehensive measure of the change in real wealth—net saving—plays a central role in determining whether current well-being can be sustained. In particular, current declines in real wealth signal that future well-being will also decline, a result that has been confirmed empirically using data for developing countries. Changes in wealth and sustain- ability are therefore joined at the hip. The current composition of wealth serves to define the policy challenges that countries face in achieving sustainable development. If substitution possibilities are limited between natural and other factors of production, as one might expect, then technical progress is a necessary complement to policies for sustainability.

Full paper