Index of Sustainable Economic Welfare (ISEW)

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What the ISEW is

The Index of Sustainable Economic Welfare (ISEW) has been elaborated by Herman Daly and John B. Cobb in 1989. The ISEW was designed to approximate the progress of a nation’s citizen more accurately than what GDP does.

Historical context

This indicator appeared in a particular historical context. Since the late 1970’s, early 1980’s,a new concept has appeared : sustainable development. This concept is officialised in 1987, in the Brundtland Report (« Our Common Future»). Sustainable Development is defined as « development that meets the needs of the present without compromising the ability of future generations to meet their own needs. It contains within it two key concepts: the concept of ‘needs’, in particular the essential needs of the world’s poor, to which overriding priority should be given; and the idea of limitations imposed by the state of technology and social organization on the environment’s ability to meet present and future needs» (U.N. World Commission on Environment and Development, Our Common Future).

It is in that singular context, in 1989, that the ISEW appears. It is enrooted in Nordhaus and Tobin works on a Measure of Economic Welfare. These works are based on the so-called “threshold hypothesis” (Max-Neef, 1995). According to this hypothesis, up from a certain threshold of economic activity, the costs of growth are higher than the additional benefits from it. Daly and Cobb aim to bring a more holistic model than the one offered by the neoclassical economic theory, by more accurately taking into account the individuals, the communities and the natural world. According to them, the contemporaneous economic theory does not tackle the issue of the changing human relations that constitute our society. They suggest redirecting the governmental and social structures towards smaller entities. More concretely, they advocate five types of actions:

  1. Significant reforms within universities;
  2. Creating local communities;
  3. Developing a relatively self-sufficient economy;
  4. Integrating the concept of scale in the social consciousness;
  5. modifying the way of measuring economic performances.

The authors interpret an increase in the score of one dimension of the ISEW as the signal of a change in directions that correspond to desirable objectives in a community approach.

Main results

The ISEW has been computed for numerous countries, among which the United States, Austria, Chile, Germany, Italy, the Netherlands, Scottland, Sweden, United Kingdom and Belgium. All these case studies show that the growth rate of the ISEW has been lower than the one of the GDP since 1945. What is more, for the 1980’s, the growth rate of the ISEW has become negative, while GDP was steadily increasing. This shed light on a significant degradation of economic welfare (as computed in the indicator).

ISEW graph 1.JPG
Source : Lawn, Philip A. (2003)

ISEW computation

The ISEW is roughly defined by the following formula.
ISEW = personal consumption
+ public non-defensive expenditures
– private defensive expenditures
+ capital formation
+ services from domestic labour
– costs of environmental degradation
– depreciation of natural capital

Controversy about the ISEW

  • Weak sustainability indicator: If this indicator includes the term « sustainable » in its title, it is though measuring weak sustainability: « …the ISEW is unique in … treating with a series of inter- and intra-generational issues directly. Examination of the index components reveals that the ISEW is grounded in a ‘weak sustainability’ paradigm such that welfare improvements, as measured by the index, could be achieved as environmental assets are used up to grow consumption» (Munday, Robert, 2007, p.353).
  • Individualist vision of collective welfare: By putting the consumption at the core of the ISEW, the authors do not really manage to settle the “community approach” that they advocate in their book “For the Common Good” (http://www.scottlondon.com/reviews/daly.html). This methodology does not allow for tackling the working collective conditions, social gratefulness, and more fundamentally, the collective processes underlying the consumption/production processes. (Ziegler, 2007).

For a more detailed overview of the critics on ISEW go on the Friends of Earth.

See also

Genuine Progress Indicator

External Links

National computations

Stewart, K. (1974), “National Income Accounting and Economic Welfare: The Concepts of GNP and MEW“, Federal Reserve Bank of St-Louis., April, pp. 18-24

 

The ISEW explained on Friend of Earth

Bibliography

Coob, J. and Daly, H. (1989), For the Common Good. Redirecting the Economy Toward Community, the Environment and a sustainable Future, Boston : Beacon Press, 492 pages.

Delang, C.O. and Yu, Y.H. (2015), “Measuring Welfare beyond Economics: The Genuine Progress of Hong Kong and Singapore” London: Routledge, 256 pages

Lawn, Ph.A. (2003), “A theoretical foundation to support the Index of Sustainable Economic Welfare (ISEW), Genuine Progress Indicator (GPI), and other related indexes“, Ecological Economics, Vol. 44, Issue 1, pp. 105-118.

Max-Neef, M. (1995),”Economic growth and quality of life: a threshold hypothesis“,Ecological Economics, Vol. 15. issue 2, pp. 115-118.

Ziegler, R. (2007), “Political Perception and Ensemble of Macro Objectives and Measures: The Paradox of the Index for Sustainable Economic Welfare, Environmental Values, Issue 16, pp. 43-60.