Economic Theory and Sustainable Development

What Can We Preserve for Future Generations?

Vincent Martinet

• Publisher: Routledge
• Year: 2012
• eBook ISBN: 9781136326189
• Edition: 1
• Topic: Economics
• Subtopic: Economic Theory
• Index: Economics

Is development sustainable? When addressing the sustainability issue, decision-makers are faced with two challenges: taking into account conflicting issues, such as economic development and environmental preservation, while also ensuring intergenerational equity. Tackling these challenges amounts to deciding what should be bequeathed to future generations, especially in terms of natural resources.

1 General Introduction

1.1 The Economics of Sustainability

The expression “sustainable development” was made popular by the so-called Brundtland Report.¹ According to this report, sustainable development is development “meeting the needs of the present without compromising the ability of future generations to meet their own needs.” This definition has received much support: no one can argue that present development should be such that it compromises the ability of future generations to meet their needs. This definition is, however, too vague to be of practical use. What are the “needs” of a generation? What is the ability referred to? Since the report, several authors have come up with more detailed definitions and, just a decade after, Dobson (1996) was already referring to more than 300 definitions for sustainability. These definitions put more emphasis on some particular issues that are related to sustainability, in order to make the concept more operational. For example, emphasis can be put on economic elevation from poverty, protection of the environment, the demographic challenge, the sustainability of growth, or the issue of technological progress and technology adaptation.

The purpose of this book is not to analyze the definitions of sustainability, or to propose a new definition. Neither is this book a comprehensive discussion of the way these issues are addressed in economics. The analysis carried out in this book does not address all the aspects of the sustainability issue, and even disregards some very important aspects to restrict the scope of our analysis. In particular, we will not consider the population issue (Dasgupta and Mitra 1983; Dasgupta 1995). We will also avoid the intragenerational equity issue. These issues set aside, it is convenient to consider that a generation can be represented by a single “representative agent.” This also allows us to avoid the issue of coordination between several agents, either groups or countries, or coexisting generations, this latter issue being better represented by overlapping generations models (Howarth and Norgaard 1990; Gerlagh and Keyser 2001). The issue of technological change and endogenous growth is also neglected, and one can refer to the book by Bretschger (1999). The last, but not the least, of the disregarded issues is that of uncertainty (see Howarth 1991; Howarth and Norgaard 1992; Howarth 1995). Chichilnisky et al. (1998) offer good insights on this issue.

More modestly, we will focus only on some key aspects of sustainability. A first point of focus will be the environmental aspect of sustainability. The concept of sustainable development has been formulated in a general context of environmental concerns. Environmental degradations became an issue at the end of the last century, both at local scale for pollution, renewable resource depletion or ecosystem degradation, and at global scale for climate change and biodiversity erosion. This is thus an important point to consider.

The intergenerational equity issue is also unavoidable, and will be our second point of focus. Sustainability is about the potential danger of present development choices on future generations’ capacities to meet their needs. It is thus an intertemporal and dynamic issue. From my point of view, the two main challenges of sustainability are thus to deal with conflicting objectives such as environmental and economic issues, and to ensure intergenerational equity. Faced with these challenges, an important question is to determine what should be preserved for future generations, in particular in terms of natural resources and environmental assets. The whole book will focus on this conservation issue.

Given this limited focus, it is not the objective to provide a full survey of the economics of sustainability. When needed, I will refer to key results of the literature and discuss them to advance my arguments. More specifically, my aim here is to review a part of the conceptual economic literature on sustainability, and examine the results of this literature in the light of the two previously mentioned challenges: accounting for conflicting issues, and in particular the environment, and for intergenerational equity.

Two main approaches have been proposed to deal with the sustainability issue, weak sustainability and strong sustainability.

The weak sustainability approach is in line with the tradition of environmental economics. It aims at developing further the usual concepts of optimality, and associated valuation, and other concepts such as income or investment, in the context of the sustainability issue. The framework used is usually that of the dynamic evolution of an economy endowed with natural resources, and the problem is to determine a sustainable development path. The main economic criterion for intertemporal choice used in optimal growth theory is discounted utility. This criterion is, however, criticized in the context of the sustainability debate because discounting leads to the neglect of the utility of future generations. This criterion is called a dictatorship of the present by Chichilnisky (1996). Alternative criteria have thus been proposed to define the concept of optimality in the sustainability context, mainly to account for intergenerational equity (Heal 1998). Whatever the criterion chosen, it defines an optimal economic trajectory, and thus characterizes endogenously what is conserved for future generations. This may be an aggregate quantity defined in abstract terms, such a “total productive capacity.” A criterion also defines a concept of value (Cairns 2008), and the optimal solution is supported by prices that may differ from actual prices in the economy, in particular for natural assets (Heal 1998). Sustainable prices encompass the amenity values of natural assets, for example, and not only their productivity as inputs. The weak sustainability approach is then implemented in practice by modifying the actual economic prices of the economy with incentives (i.e. public policies such as taxes and subsidies) so that the resulting prices equal the sustainable prices. This approach also makes it possible to “green” the national accounts by accounting for natural resource depletion and environmental degradation (Dasgupta 2009).

Strong sustainability is based on a more quantitative approach (Neumayer 2010). It consists in defining critical natural assets that have to be preserved for future generations (Ekins et al. 2003). This is a more concrete approach, as what has to be conserved is defined in physical terms. In appearance, this may seem a much more practical approach than the use of abstract concepts of value. However, this approach is faced with the normative problem of the choice of the quantities to preserve, and has no such direct implementation tools as optimal prices.

In this book, instead of trying to define what should be preserved for future generations, I will examine what could be preserved for future generations.

The first part of the book reviews some selected economic contributions to the sustainability issue. I start by presenting the sustainability issue and the way it is addressed in economics. I examine the consequences of the standard economic approaches in the light of the sustainability challenges. In particular, I describe how sustainability concerns provide incentives to deviate from the neoclassical approach to growth, first by adding sustainability constraints to the usual discounted utility maximization program, and then by motivating the search for alternative criteria. I look at what the main economic theories of sustainability and sustainability criteria conserve for future generations.

From my point of view, the main difference between weak and strong sustainability relies on their degree of abstraction.² Defining a general criterion to address sustainability, as in the weak sustainability approach, has the advantage of providing a tool that defines what to do in any situation. What is conserved for future generations is determined by the criterion, endogenously. In such an abstract approach, the choice of a particular criterion is very controversial, as it fully characterizes sustainability. An important research question is then to determine what can be conserved for future generations with such abstract criteria. On the contrary, the approaches based on sustainability indicators and the preservation of given “quantities,” expressed as conservation constraints, are more “concrete.” The nature of the things to be preserved for future generations has to be determined in each situation, which makes the approach less general. Here, again, an important research question is to determine which sustainability constraints can be respected over the long run, and thus what can be preserved for future generations with such a quantitative approach.

The question of determining what can be preserved for future generations is addressed in the second part of the book. To answer this question, I use the mathematical concepts of invariance and viability (also called weak invariance). The concept of invariance allows one to determine the conservation laws of an intertemporal trajectory, i.e. all the quantities that are conserved along the solution of an intertemporal optimization problem. I apply this approach to optimal growth programs, in line with the weak sustainability approach. If something is kept constant along the optimal growth path, it may be interpreted as an aggregate quantity conserved for future generations, and may represent a sustainability indicator. This approach makes it possible to characterize all the things that can be preserved for future generations with an abstract approach based on optimization criteria. The concept of viability allows one to determine the conditions for a dynamic system to respect a set of constraints over time. In our sustainability framework, in line with the strong sustainability approach, sustainability objectives can be represented by (viability) constraints on sustainability indicators that have to be satisfied for all generations. Inverse viability makes it possible to characterize all the objectives, represented by constraints on indicators that have to be satisfied at all times, that can be achieved from the initial state of the economy. This represents, in quantitative terms, what can be preserved for future generations. By considering both optimal management and viable management of resources, this book is in line with both weak and strong sustainability. This allows me to compare approaches based on values (prices) and approaches based on quantities. In conclusion, the links and interconnections between these approaches are emphasized, in an attempt to bring the two approaches closer.

Even if the exercise is quite theoretical and does not address empirical issues directly, some discussions are relevant for examining the practice of sustainability.

It is usual in economics to study sustainability criteria and compare their implications using dynamic economic models with a nonrenewable resource. “Neoclassical growth models are a useful tool for gaining insights into the key factors that determine the ability of an economy to sustain itself and are not intended to be taken as literal descriptions of the economy” (Krautkraemer 1998). Focus is on this most simple formalism, and thus on the most abstract problem.

1.2 Mathematical Formalism

Throughout the book, mathematical models are used to describe the dynamics of the economy and intertemporal use of natural resources.

I will mainly consider continuous-time models over an infinite horizon, with the convention that initial time is t₀ = 0. Time, denoted by t, is a real number t ∈ [0, +∞].

A dynamic model is a model that represents the evolution of the economy, described by a set of states, with respect to decisions, described by a set of controls. State variables will be denoted by capital letters (e.g. A, B), while control variables will be denoted by small letters (e.g. a, b). For constant parameters, small Greek letters will be used (e.g. α, β).

When variables belong to a set, this latter will be denoted with “open-face” capital letters, such as ( or (. This notation will also be used when variables must belong to a set of constraints.

To describe value functions (such as the solution of an optimization problem), calligraphic capital letters will be used (e.g. A, B).

To describe the evolution of a state variable over time, the time derivative will be denoted using an over-dot, like Ȧ, Ḃ, with the convention that Ȧ ≡ d A/dt.

Other derivatives will be denoted using the ' symbol, with the derivative argument used as a lower index. For example, the derivative of a function F(X) depending on the state variable X will be denoted F'_X ≡ ∂ F(X)/∂ X. The cross-derivative of a function F(X, Y ) will be

Initial state and control variables will be marked by a subscript “zero”, as in A₀ or a₀.

In the general framework, the economy will have n state variables, represented by a vector

of capital stocks. Examples of capital stocks are man-made reproducible capital, natural resource stocks, and population.

We shall also consider m control variables to represent the decisions driving the evolution of the economic state. We represent those control variables by a vector

. It means that admissible decisions may depend on the state one considers, and may be constrained (for example, to avoid negative stock values).

The economy will be described by the dynamic system

where F is the function representing the dynamics of the system. It is, for example, a production function depending on...

Table of contents

• Cover Page
• Half Title page
• Title Page
• Copyright Page
• Contents
• List of Figures
• Preface
• Overview
• 1 General introduction
• Part I The sustainability issue in the economic literature
• Part II Invariance theories and sustainable development
• Notes
• Bibliography
• Index