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Case 7.13
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:

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Inequality: the greater the inequality, the more the figure for consumption is reduced. This is
based on the assumption of a diminishing marginal utility of income, such that an additional
pound is worth less to a rich person than to a poor person.
Household production (such as child care, care for the elderly or infirm, housework and
various do-it-yourself activities). These ‘services of household labour’ add to welfare and are
thus entered as a positive figure.
Defensive expenditures. This is spending to offset the adverse environmental effects of
economic growth (e.g. asthma treatment for sufferers whose condition arises from air
pollution). Such expenditures are taken out of the calculations.
‘Bads’ (such as commuting costs). The monetary expense entailed is entered as a negative
figure (to cancel out its measurement in GDP as a positive figure) and then an additional
negative element is included for the stress incurred.
Environmental costs. Pollution is entered as a negative figure.
Resource depletion and damage. This too is given a negative figure, in just the same way that
depreciation of capital is given a negative figure when working out net national income.
Contributions to the Index of Sustainable Economic
Welfare (ISEW) (£ per capita, 1990 prices)
Year
1950
1973
1996
Consumer expenditure
Adjustment for inequality
Services of household labour
Public expenditure on health and education
Difference between expenditure on & services from goods
Defensive private expenditures on health & education
Costs of commuting
Costs of personal pollution control
Costs of car accidents
Costs of water and air pollution
Costs of noise pollution
Costs of loss of habitat and farmlands
Depletion of non-renewable resources
Long-term environmental damage
Ozone depletion costs
Net capital growth
Change in net international position
2435
–201
948
89
–206
–14
–52
–
–30
–504
–36
–35
–332
–292
–8
–
37
4067
–316
1470
192
–446
–25
–127
–8
–43
–537
–36
–28
–920
–718
–209
382
52
6402
–917
2368
365
–1160
–109
–206
–58
–36
–376
–39
–88
–1812
–1321
–621
1
–41
Per capita ISEW
1799
2713
2349
Per capita GDP
3507
6151
8890
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.
100
ISEW : maximum = 100
90
80
UK
70
Netherlands
USA
60
50
40
30
20
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
ISEW 1950-96 (maximum = 100)
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.
Question
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.)
2