The failure of the ISEW and GPI to fully account for changes in human-health capital — A methodological shortcoming not a theoretical weakness

Abstract

Andrew Brennan (Ecological Economics, 2013--this issue) has argued that the Index of Sustainable Economic Welfare (ISEW) and Genuine Progress Indicator (GPI) are theoretically flawed because, as indicators designed to capture the net psychic income generated by economic activity, they fail to incorporate net changes in human-health capital. To a lesser extent, Brennan is also critical of the fact that the ISEW and GPI are unable to reflect both economic welfare and sustainability. Whilst I'm happy to concede that the two indicators fail to fully account for changes in human-health capital, it is my contention that this failure represents, at most, a methodological shortcoming. It does not amount to a theoretical weakness. Despite Brennan's best efforts, the ISEW and GPI remain soundly based on Irving Fisher's distinction between income and capital. Indeed, Brennan's suggested modifications to the ISEW and GPI do nothing but conflate income and capital, which, if taken on board, would lead to misleading indicators of total economic welfare. As for not reflecting both economic welfare and sustainability, I have long argued that the ISEW and GPI merely reflect the former and need to be supplemented by biophysical indicators to determine whether the economic welfare being enjoyed by a nation is sustainable. The fact that the ISEW and GPI only reflect economic welfare is not a weakness, since no indicator can or should attempt to reflect both conditions. The use of strong sustainability approaches to calculate the environment costs incorporated in the ISEW and GPI is not an exercise designed to measure sustainability. It is an exercise in good economic accounting.