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Inclusive Wealth and Accounting Prices - I W A P
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In this research project, we attempt to test whether it would be possible to estimate accounting prices for ecological systems. The study area will be the Stockholm County. The methods developed for estimating the accounting prices can later be applied to large scale systems, in order to assess the sustainability of the joint economic - natural systems.
In the mid 90’s David Pearce and his collaborators (G. Atkinson and K. Hamilton) showed that in an optimal economy, changes in social well-being is measured by the value of the changes in all assets of importance for human well-being. Thus, if we define sustainable development as a development that sustains human well-being, the value of changes in all capital assets is the appropriate indicator. Another way of expressing this is that changes in inclusive wealth (at constant prices) reflect changes in social well-being. The adjective inclusive implies that all capital assets – real capital, natural capital, human capital, have been included in the wealth concept. The parenthesis –at constant prices- is there to remind us that capital gains from changes in the accounting prices should not be included. We are looking for the value of changes in assets and not in the changes in the value of assets.
Dasgupta and Mäler (2000) showed that this is true, even in non-optimal economies, if the changes in assets are valued with the correct accounting prices. These accounting prices will in general be different from market prices because of the differences between an optimal and an imperfect economy. In a later publication Arrow, Dasgupta, and Mäler (2003) gave examples that even small imperfections could give rise to large differences between accounting prices and market prices. Furthermore, Arrow, Dasgupta, and Mäler showed that the relevant accounting prices are also those that should be used in social cost benefit analysis. They also introduced population changes and showed that, under reasonable assumptions, change in social wellbeing is equal to the change in inclusive wealth per capita at constant prices.
The IWAP project is to apply these insights to the Stockholm County. The main objective of the study is to find out the feasibility of estimating inclusive wealth per capita. We are, of course, convinced that it will be feasible but it will be good to have empirical verification of that. But we are also interested to find out whether the development during the past ten years has shown to be sustainable, that is if per capita inclusive wealth at constant prices has increased monotonically.
So far we have collected information on the formation of real man made capital, valued with market prices. We are working on corrections of these estimates, taking into account at least some obvious imperfections such as capital taxes, environmental externalities etc. We have also collected data to assess the development of human capital in the county. Basically we are following a route rather similar but not identical to the one Jorgenson and Fraumeni (Jorgenson D. Productivity Vol 1, MIT Press 1995, chapters 6-8) took almost 20 years ago. Mäler has developed a conceptual model which differs somewhat from the model used by Jorgenson and Fraumeni, which is accessible on IWAP’s homepage (see below).
We will during the fall start making an inventory of most important ecological assets in the county and identify their production of ecological services. In particular, we are interested systems with non-convex dynamics so that resilience becomes critical. We are currently developing stochastic models for such systems in order estimate the accounting price of resilience in ecological systems.
The Beijer Institute has together with ICTP taken the initiative to create an international network for researchers working with inclusive wealth – the IWAP network. This network includes a team at CSIRO working on the Goulburn-Broken catchments in South Western Australia, teams working on estimating inclusive wealth in Namibia, Botswana, South Africa, Tanzania, and Ethiopia. We have now created a webpage at which the different teams can post their results questions etc. The webpage also includes bibliographies useful for those interested in inclusive wealth.
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