The index of sustainable economic welfare (ISEW) as an alternative to GDP in measuring economic welfare. The results of the Austrian (revised) ISEW calculation 1955–1992

Abstract

Although the inadequacy of GDP to measure economic welfare is widely accepted theoretically, it is still used as the key indicator for economic policy. This article's aim, therefore, is to give some empirical evidence to the theoretical critique. Economic welfare, or at least its change over time, is estimated by the index of sustainable economic welfare (ISEW), which takes account of GDP, unpaid household labor, social costs, environmental damage and income distribution. The concept of the ISEW, which was originally developed by Herman Daly and John Cobb, is entirely reformulated with special regard to questions of inner consistency and clarity in structure. As an illustration the methods of the calculation in the Austria case study and its results are presented. The main result is that GDP and economic welfare as measured by the ISEW differ significantly. Up until the 1970s GDP only slightly overestimated the growth of economic welfare, but since then it has been completely misleading. While GDP continues to rise, sustainable economic welfare has been stagnating since the middle of the 1980s. The main causes have been growing future welfare reductions, increasing income inequality and a stagnation in the value of unpaid household labor. As GDP neglects those aspects, it systematically misinterprets economic welfare. However, the ISEW does not intend to simply replace GDP as a unique welfare measure but should form part of a more holistic social reporting system.