Disregarded capitals: what national accounting ignores

Abstract

In this paper, I review – and to an extent further develop – a methodology of national accounting that responds to the needs of governments when they engage in sustainability and policy analyses. Those needs would be served only if national accounts were directed at estimating the economy's wealth (which is the social worth of an economy's entire stock of capital assets), not growth in gross domestic product or improvements in the many ad hoc indicators of human development that have been proposed in recent years. Concurrently, I show that by poverty, we should mean a low level of wealth, not income, and that the distribution of human well-being ought to be judged in terms of the distribution of wealth, not income or education, or any of the several indicators that are currently in use. I show that the concept of wealth invites us to extend the notion of assets and the idea of investment well beyond conventional usage. This perspective has radical implications for the way national accounts are prepared and interpreted. I then sketch a recent publication that has put the theory to work by studying the composition of wealth accumulation in contemporary India. Private firms routinely produce balance sheets. Nations should do the same.

Keywords:

• sustainable development
• policy analysis
• GDP
• inclusive wealth
• green growth
• natural capital
• pollution
• conservation
• human capital
• value of statistical life

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

1. See, for example, Micklethwait and Wooldridge (2000), Ridley (2010), Deaton (2013), and Lomborg (2014).

2. Repetto et al. (1989), Mäler (1991), Vincent et al. (1997), and Hartwick (2000) introduced environmental natural resources into ideal national accounts. Their inclusion would not, however, have sufficed. The complete ethical basis of national accounts was developed in Dasgupta and Maler (2000), Dasgupta (2004), and Arrow et al. (2012, 2013).

3. Here, I do not distinguish between GDP and gross national product because the distinction has no bearing on the points being made.

4. What I am calling ‘wealth’ has been named ‘comprehensive wealth’ by Arrow et al. (2012, 2013) and ‘inclusive wealth’ by UNU-IHDP/UNEP (2012).

5. For ease of exposition, we drop the qualifier ‘corrected for the distribution of wealth’ in what follows.

6. The detailed proof is in Dasgupta (2004).

7. See Dasgupta (2004).

8. As example, consider that IPPC recommend a shadow price for carbon in the atmosphere in the range minus 20–60 dollars per ton, even though its market price is zero.

9. The framework for economic evaluation I am constructing here should be congenial to accountants. Speaking at last year's meeting here, Lee (2014, p. 386) said

 … valuation involves forecasting – we need to predict future cash flows, dividends, and discount rates. In fact, the essential task in valuation is forecasting. The technical differences in alternative valuation models are trivial when compared to the importance of making better forecasts of future payoffs … value is at best an educated guess given most companies are going-concerns with indefinite life-spans, the process of estimating their future payoffs will be highly subjective and imprecise.

10. The term ‘gross capital formation’ is even more restrictive. It does not reflect the depreciation of reproducible capital.

11. See Dasgupta and Maler (2000).

12. See, for example, Stiglitz et al. (2009).

13. For reflections on the controversy over the use of shadow prices in project evaluation, see Little and Mirrlees (1991).

14. Freeman (2002) is the recognised treatise on the subject.

15. Mäler (1991) and Hartwick (2000) contain outlines of SEEA in an optimising economy. Their aim was to show how net national product – not wealth – ought to be estimated.

16. In an optimally managed economy, the two would cancel each other and wealth would remain unaffected.

17. IHDP-UNU/UNEP (2012) used the same framework to measure wealth in 20 countries. In IWR 2014, the authors have extended their study to 120 countries.

18. Economists have included longevity increase in estimates of the growth of income per head to show that the economic performance of developing countries in recent decades was considerably superior to that of rich countries.