A theoretical foundation to support the Index of Sustainable Economic Welfare (ISEW), Genuine Progress Indicator (GPI), and other related indexes

Abstract

For some time now, ecological economists have been putting forward a ‘threshold hypothesis’—the notion that when macroeconomic systems expand beyond a certain size, the additional cost of growth exceeds the flow of additional benefits. In order to support their belief, ecological economists have developed a number of similar indexes to measure and compare the benefits and costs of growth (e.g. the Index of Sustainable Economic Welfare, ISEW, and the Genuine Progress Indicator, GPI). In virtually every instance where an index of this type has been calculated for a particular country, the movement of the index appears to reinforce the existence of the threshold hypothesis. Of late, a number of observers have cast doubt over the validity of these alternative indexes. One of the concerns commonly expressed is the supposed lack of a theoretical foundation to support the ISEW, the GPI, and other related indexes. By adopting a concept of income and capital outlined by Fisher (Nature of Capital and Income. A. M. Kelly, New York, 1906), this paper demonstrates that these alternative indexes are theoretically sound but, in order to be broadly accepted, require the continuous development of more robust valuation methods.