Case 10.9

When Higher GDP can lead to Lower Welfare

The use of ISEW: the index of sustainable economic welfare

GDP is not a complete measure of economic welfare: nor is it meant to be. So is there any alternative that takes other factors into account and gives a more complete picture of the level of human well-being?

One measure that is growing in popularity, especially among environmental groups, is the index of sustainable economic welfare (ISEW).1 This starts with consumption, as measured in GDP, and then makes various adjustments to account for factors that GDP ignores. These include:

The table shows the calculation of ISEW for the UK for three years: 1950, 1973 and 1996. As you can see, household labour makes a substantial addition to GDP, but this is more than offset by inequality and various adverse environmental effects, especially the depletion of resources and long-term environmental damage.

The net effect is to make the UK's 1996 ISEW per capita only just over a quarter of GDP per capita (at constant prices). What is of perhaps more concern is that, while GDP per capita rose by nearly 50 per cent between 1973 and 1996, ISEW per capita actually fell (by 13.4 per cent). We may be materially richer, but if our lives are more stressful, if our environment is more polluted and if the gap between rich and poor has widened, it is easy to see how we could, in a real sense, be worse off than in the 1970s.

According to the ‘threshold hypothesis', economic growth leads to a real improvement in the quality of life up to a certain point. Beyond that, however, further growth actually reduces the quality of life. The diagram shows this effect for three countries: the UK, the USA and the Netherlands. In each case, the maximum achieved ISEW is given a value of 100. Welfare peaked for the USA in the late 1960s, and for the UK and the Netherlands in about 1980.

Not surprisingly, ISEW has come in for considerable criticism. The most important one concerns the measurement of environmental effects, especially the long-term ones. For example, there is considerable debate as to the precise amount of global warming that results from the burning of fossil fuels, and the precise damage caused by a given amount of global warming. But as the advocates of the use of ISEW point out, not to count environmental effects is to give them a precise value: namely, zero! Surely, as Herman Daly argues, it is better to be roughly right than precisely wrong.



Make out a case against using ISEW. How would an advocate of the use of ISEW reply to your points?



 1  This measure was developed in the USA by Herman Daly, John Cobb and Clifford Cobb. See J. Daly and J. Cobb, For the Common Good (Beacon Press, Boston, MA, 1989). ( See also .)