UK Real National Income, 1950-1998: Some Grounds for Optimism

By Crafts, Nicholas | National Institute Economic Review, July 2002 | Go to article overview

UK Real National Income, 1950-1998: Some Grounds for Optimism


Crafts, Nicholas, National Institute Economic Review


It has been claimed using the concept of the Index of Sustainable Economic Welfare (ISEW) that there has been an absolute decline in sustainable living standards in the UK since the mid-1970s. Revisions to ISEW are proposed to make it more nearly a measure of utility-based real national income. In particular, ISEW should be revised to take account of much-improved life expectancy. Implementing any of the suggested revisions reverses the finding of absolute decline while implementing all of them results in a growth rate higher than that of real GDP per head in the national accounts.

Introduction

Many of those interested in sustainable growth have taken a very pessimistic view of recent UK experience. Douthwaite (1993, P. 3) states that "economic growth has made life considerably worse for people in Britain since 1955" and a widely quoted recent estimate has claimed that for the past quarter century or so the Index of Sustainable Economic Welfare (ISEW) has been in absolute decline in the UK (Jackson et al., 1997). By contrast, economic growth as measured by the UK national income accounts has been maintained throughout the postwar period at a steady if not spectacular rate with an average growth rate of real GDP/head at 2.5 per cent per year from 1950-73 and 1.8 per cent per year from 1973 to 1998 (Maddison, 2001).

GDP is certainly not an adequate estimate of the level of sustainable economic welfare but this also applies to the ISEW adjustments to the national accounts, as critics have been quick to point out. ISEW has a number of features which make it unacceptable. In particular, the allowances that are made for environmental damage and depletion of natural capital lack a sound theoretical foundation, multiple-count the costs of climate change and exaggerate the value of reductions in energy reserves, while the adjustments made for changes to the distribution of income are not justified if the aim is to measure the economy's productive potential in terms of ability to provide future welfare (Neumayer, 1999).

The standard national accounts measure of national income is net national product (NNP). The rationale for this was set out by Hicks (1939) as the maximum amount which can be consumed while maintaining the capital stock intact. (1) Thus, investment expenditures to make good depreciation are subtracted from GNP and national income is equal to consumption plus net capital accumulation. In general, however, this is not a measure of sustainable consumption. The most obvious reason for this is that the national accounts only consider depreciation of physical capital whereas a more general measure would need to include depletion of natural resources and human capital. In a growing economy, NNP per person needs still more refinement to reflect sustainable consumption. On the one hand, more of gross product needs to be set aside to maintain capital per head in the face of growing population. On the other hand, technological progress permits consumption to be sustained with somewhat lower capital per person.

But even with these refinements we do not have a measure of real national income in terms of sustainable living standards; as Nordhaus (2000) points out, for that income must be defined in utility terms. Utility-based national income is the maximum amount that a nation can consume while ensuring that members of all future generations can have lifetime utility (be on an indifference curve) at least as high as that of the current generation. It is clearly a net income concept in the sense that the productive potential of the economy per person has to be maintained by setting aside sufficient saving to permit utility levels to be sustained in the face of capital depreciation, demographic pressure and environmental damage. But Nordhaus (2000) also emphasizes that it should also take account of life expectancy. The key point is that the same annual NNP per person with long life should be recognised as a higher living standard than that income with a short life. …

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