The range of Herman Daly’s contributions to environmental economics has been extensive. I select here one topic upon which he pondered and successfully propagated among environmental economists. This is ‘Hicksian Income’. The estimation of national (or social) income, particularly the portion of it that derives from the exploitation of natural resources, is a subject that has occupied my thinking for some considerable time. This chapter discusses Herman’s ‘Hicksian income’, and additionally touches on the related topic of ‘steady state economics’ which I take to be Daly’s most enduring interest. Another aspect of the same topic also reviewed is Daly’s clear preference for viewing income estimates, not just as gauges of output, but as indicators of welfare. In this he has obviously been following Pigou but, surprisingly, as I hope to show below, Hicks also.
Herman Daly popularized what he called ‘Hicksian income’ among environmentalists as well as others. Generally speaking ‘Hicksian income’ is the standard concept of income as traditionally used by accountants and also by the more thoughtful economists. Income, thus defined, must not contain any element of capital. To estimate income correctly, capital must remain intact. Here, keeping capital intact is a theoretical device for the estimation of income and does not entail a normative advocacy. Quite appropriately, Herman argued for extending the category of capital that must be kept intact to natural resources since they are obviously part of society’s assets. In practice, the estimators of national income make no allowance for natural capital erosion, regularly inflating income estimates by including in them the proceeds of natural asset sales such as forest products, fish or mineral deposits, while turning a blind eye to their deteriorating stocks. This ‘standard’ practice is obviously a major estimation error of which most users of the national accounts seem to be unaware. But Daly has had a wider interest going beyond the descriptive ex post estimation of income—a description that conflates income with ‘output’. Such a conflation, in fact, is the general view held by national income statisticians who would deny vehemently that they are in the business of estimating ‘welfare’. For instance, what the domestic product measures, they would claim, is simply the domestic ‘output’ as it is transacted in the marketplace. Put simply, without knowing the size of population or how individual incomes are distributed, a rise of GDP cannot be read as a rise of welfare. However, following essentially Pigou, and also Hicks (albeit occasionally in the case of Hicks), Herman, with suitable qualifications, set out to interpret national income estimates as signifying the ‘welfare’ which the product sheds on the income recipients. Interpreting output as synonymous with welfare, however, is a complex matter and an attempt is being made here to disentangle this complexity.
The present chapter will begin with Hicks’s income as elaborated in his magnum opus, Value and Capital, (first edition 1939, second edition 1946) together with the variations or ‘approximations’ Hicks discussed around his central meaning of income.
This chapter strays out of the concept and measurement of income to dwell briefly on the not unrelated topic of ‘steady state economics’ which is one of Daly’s enduring interests. It will be shown that as there is a ‘Hicksian income’ there is also a Hicksian ’steady state’, and a Hicksian ‘stationary state’--both of them having deep roots in classical economic thought. While obviously looking upon national income as a metric of output, Hicks entertained on occasion the view that it could also indicate welfare.
What Is Income?
Income is a quantity received by an individual, a group or a nation that is usually recurrent. It ordinarily derives from wages, property rent, earned interest, or profits. It is a flow that accrues per unit of time, and it is decidedly not a stock existing at a point of time. In The Wealth of Nations, Adam Smith used ‘wealth’ synonymously with an income flow -- a usage that has misled some economists into thinking that Smith’s wealth was other than the ‘national income’ of nations. Historically, the accountants confronted the estimation of income before the economists, who came to the field much later though with a great deal of analysis that manifested a somewhat different perspective. The accountants, to their credit, had initiated the notion of ‘keeping capital intact’, not as a normative imperative, though this may not be discounted, but as a tool for a rough and ready estimation of the illusive quantity called income. In the late Middle Ages the sea-faring merchants of the Mediterranean ports (both north and south) had asked their accountants to estimate how much of their revenues could be allocated to family consumption. The accountants’ response was that enough from the receipts should be put aside for ‘maintaining capital’ before regarding any remainder as income. Needless to say the merchants could, if they wished, save part of their income, adding it to capital for expanding the business. But the accountants, qua accountants, had no say on this ‘managerial’ matter; they were simply estimating income during a period that had become past.
Adam Smith recognized that wealth could not increase without additions to capital, such additions, he held, came only from thrift. This view dominated the thinking of the classical economists down to J.S. Mill, but when the turn of neoclassical economists came, and the variety of capital categories multiplied, defining the capital that must be kept intact in practice became almost impossible. By the time of Marshall we find several capital categories: auxiliary and instrumental capital; free and floating capital; social capital, circulating capital, fixed and overhead capital--among others. The problem of obsolescence added to the problem as machinery that had not physically depreciated became outmoded (Hicks, 1942). Economists including Pigou, Hayek and Hicks battled over the concept of ‘keeping capital intact’ in the 1930s, to conclude in effect that an objective notion of the intactness of capital, let alone its empirical calibration, was not possible. This is before natural resources in their almost infinite diversity were proposed as unquestionably part of society’s capital (see below).
The correspondence between income and capital is obvious. Alfred Marshall, often recognized as the father of ‘neoclassical economics’, reminded us that Adam Smith had said that ‘a person’s capital is that part of his stock from which he expects to derive income’, adding that ‘almost every use of the term capital which is known to history has corresponded more or less closely to a parallel use of the term Income’. On the same page of his Principles of Economics Marshall wrote: ‘When capital ceases to increase, income likewise will stop growing.’ (Principles, 8th Edition, 1920, p. 78.) Hence seeking to keep capital intact should be seen as fundamental to income generation.
Relevant to both income, and the intactness of capital, is the proper valuation of end-period stocks which will be bequeathed to the next account period. For this purpose the accountants had devised a precautionary valuation rule with which the economists have not always been happy. This may be paraphrased: ‘When in doubt opt for undervaluing rather than overvaluing this stock’. In other words income should rather be underestimated than overestimated. In this respect the accountant functions as a guardian of ‘sustainability’, but it is a shorter period sustainability, namely from one accounting period to the next. If this rule were to be observed year after year, the short term survivability of the enterprise (or the nation) could be made to extend over longer periods. Economists, however, have favored a different view – a view that has seeped into national accounting--placing a greater store on valuing stocks at current prices, and this in practice has frequently undermined the accountant’s concept of sustainability .
Most commonly, overestimated income must have included elements of capital—elements that should not be there in the first place. The expression ‘sustainable income’ is usually a misnomer because the adjective ‘sustainable’ becomes redundant if income is properly estimated. Herman’s invocation of the name of Hicks in this regard was indeed proper, and probably motivated by his intention to convince doubting economists of the solid economic foundations upon which the estimation of income should rest. Economists, whether they needed convincing or not, are the principal users of the macroeconomic magnitudes produced by national accounting. And it is remarkable that, with few exceptions, they take these magnitudes at their face value, proceeding to analyze them sometimes with ostensible sophistication. Economists would arrive at dubious interpretations of economic performance, often leading them to questionable policy recommendations.
For many countries, the conventionally compiled national accounts would need correction, but such a need is acutest where serious deterioration in natural resources is taking place and not captured in the accounts. The fact that the richer countries at present tend to derive most of their national income from manufactures and increasingly from services reduces for them the importance and urgency of reforming national accounting practices in the direction of ‘Hicksian income’. Their national accounts are good enough for meeting their macroeconomic needs, both for indicating past performance and providing guidance for future policy. Having in most cases depleted the bulk of their natural capital in the process of industrialization they, with some exceptions, tend to underestimate the value of what has come to be known as ’green accounting’, and appear even to oppose it. The poorer countries, on the other hand, whose economies depend on primary activities to a much greater extent, and whose conventional accounts often cry out for drastic adjustment, understandably carry little influence in the international fora that devise national accounting procedures. Even when certain developing countries have well-founded doubts about their own national estimates that are faithfully tailored on internationally-devised standards, suspecting that the accounts falsify their performance and show them to be more prosperous than they actually are, they put up with the judgment of the national accounting ‘experts’ who, regrettably, include those employed by the United Nations. To this day, even the revenue obtained from the commercial extraction of natural resources (fish, timber, minerals inter alia) still appears in the standard accounts as ‘income’ with no allowance made in the flow accounts for the disinvestment associated with the observed decline in resource stocks. (See Commission of the European Communities et.al., System of National Accounts 1993.)
Adjusting the Conventional Estimates
Herman participated during the 1980s in the series of international workshops organized by the United Nations Environment Programme (UNEP) jointly with the World Bank. Initially, the workshop participants were searching for a periodically reckoned ‘number’, or index, capable of expressing environmental and natural resource deterioration. This, they thought, would impress citizens and politicians alike about the worsening state of the environment and thus spur remedial actions. After some hesitation the workshops settled down to considering the set of national income and product accounts as an excellent medium for meeting their purpose. The fact that income estimation depends on the principle of ‘keeping capital intact’ provided a major theme that gathered momentum during these discussions, with natural resources having to be recognized as part of society’s capital. The work accomplished at the workshops contributed in no small way to the 1993 revision of the United Nations System of National Accounts (SNA) which had remained virtually unchanged for a quarter century . Subsequently a number of meetings were held before the issuance of the new SNA, one of which was the important conference organized by the International Association of Research in Income and Wealth in Austria in 1991. It should be stressed that the process of amending the accounts was viewed from the outset as slow and gradual, and would hopefully move in time, with further research and ingenuity, from being partial and tentative in the direction of comprehensiveness and robustness.
A selection of the contributions made during the UNEP-World Bank Workshops was subsequently published, containing Herman’s paper ‘Toward a Measure of Sustainable Social Net National Product’ (Chapter 2, pp.8-9 in Ahmad et al., eds., 1989.) Herman’s piece began with Hicks’s basic concept of income (Value and Capital, Oxford, 1939; second ed., 1946) which defined ‘sustainable’ income. The rock base on which Daly’s income rested was netting out from the estimated gross product an allowance for the deterioration of natural resources—resources, here to be taken in their wider sense as ‘sink’ as well as ‘source’. How much should be netted out, however, was not easy to determine and has remained a bone of contention. The adjustment proposed by Daly included also the deduction from the conventional estimates of any ‘defensive expenditure’ undertaken to correct harmful side-effects of production and consumption. Interestingly, in that short piece Herman was looking at the national or domestic product (alias income) as output without any connotation of welfare. However, almost simultaneously in his joint book with Cobb (Daly and Cobb, For the Common Good, 1989) he was emphasizing national income as an indicator of welfare: a rise in estimated income suggested a rise of welfare and a drop suggested a decline. In that work Herman and Cobb proceeded further to adjust the official national income estimates for the United States employing a number of deductions varying from losses of source resources to deterioration of amenities. This endeavor set in motion and reinforced already begun efforts that viewed natural resource deterioration as welfare losses, with the result that both the adjusted income level and, quite often (but by no means always), its presumed growth, had to be scaled down.
In later publications, especially in tandem with his advocacy of ‘stationary state economics’ Daly convincingly explained that the pursuit of unending growth, which most economists strongly favor, was untenable since the economy is a subset of a finite biosphere that is not expanding. Daly persisted in stressing the argument that the apparent benefits of economic expansion must be balanced against its costs in a truly Pigouvian manner that centered on welfare. For Pigou had said in the 4th edition of his Economics of Welfare (1932) that ‘economic welfare….consists in the balance of satisfactions from the use of the national dividend….over the dissatisfactions involved in the making of it.’
Hicks had given a lot of thought to the concept and estimation of income and written about it in several of his publications, but his chapter on ‘Income’ in Value and Capital (second edition 1946 which is used here) contains his most detailed thoughts on the subject. He would come back to the subject intermittently, finding something fresh to add in scattered obiter dicta, but most significantly in his seminal paper, ‘The Scope and Status of Welfare Economics’, (Oxford Economic Papers, 1975). However, it would be remiss to overlook his earlier book The Social Framework, an Introduction to Economics (first published in 1942) which was totally devoted to national income in theory and practice. In the Social Framework, he systematically elaborated the relevant macroeconomic concepts and examined their interconnections, including consumption, investment, factors of production, population, capital, the social product and foreign payments. He also faced up to the formidable task of sorting out a tabulation of the social accounts of the United Kingdom for 1938 and 1949 (the latter year appearing in the 1952 Second Edition) while explaining related quantities and definitions. In the process he went back and forth in time to offer comparisons, pointing out practical estimation difficulties and how he dealt with them. This was a brave exercise that revealed to the uninitiated how difficult it was (and still is) to come up with objective estimates, with a warning to users ignorant of the practical obstacles that have to be faced by national income statisticians. It will be seen below that Hicks’s views on income, while safely anchored in Value and Capital, were to receive in 1957 an intriguing interpretation by none other than himself--an interpretation of relevance to Herman’s income work.
Income in Value and Capital
The income chapter of Value and Capital consists of two parts: the main discourse (pp. 170-181), followed by ‘Notes to Chapter XIV (pp. 181-8) -- the latter analyzing income in conjunction with saving and investment together with a discussion of the interest rates to be used for capitalizing expected future income streams. In the wider scheme of Value and Capital the income chapter came at the conclusion of Parts I-III, devoted to ‘static’ analysis, with Hicks intending the income discussion as a springboard to the dynamic analysis of the later Parts. This attention to statics versus dynamics, it will be seen, sheds light on his income definitions. In statics, he asserted, ‘the difficulty about income does not arise: a person’s income can be taken without qualification as equal to his receipts’ (p. 172). Interestingly he saw here a similarity between statics and the ‘stationary state’ of the classical economists, viewing that state as a branch of dynamic economics where everything had come to rest (ibid.) The income chapter of Value and Capital also contained a consideration of the related concepts of ‘saving, depreciation and investment’ which Hicks insisted were ‘not logical categories at all’, but merely approximations needed for ‘prudent behavior’ by the income recipient. After considering income from various angles he thought it pointless to seek a precise definition of income since that ‘would put upon it a weight of refinement it cannot bear’ (p. 171.) Something rougher, he maintained, was ‘actually better’.
Hicks’s analysis of income proceeded in steps, first offering a general definition he judged as ‘basic’ or ‘central’, namely ‘the maximum value which he [the income recipient] can consume during a week and still expects to be as well off at the end of the week as he was at the beginning.’ (p. 172). The use of the week was a Hicksian simplification so that nothing much could be expected to change during this short duration. Worthy of notice here is also the loose wording such as ‘maximum value’ , ‘still expect’, ‘as well off’ -- all rather vague but consistent with the roughness he attached to income estimation. Hicks then went on to discuss variations around this basic concept (which he named income number 1) calling them ‘approximations’ made by ‘business men and economists alike’. He then introduced ‘income number 2’, to be derived from the capitalized money value of an individual’s prospective receipts. Noting its flexibility, however, since expectations of interest rates would vary, he concluded that that second definition was more appropriate to income from property than income from wages. At this juncture he went back to elaborate ‘income number 1’, basing it explicitly on the maintenance of capital. ‘Income No. 1 is the maximum amount which can be spent during a period if there is to be an expectation of maintaining intact the capital value of prospective receipts (in money terms)’ (p. 173), adding that income number 2 was theoretically ‘a closer approximation to the central concept than Income No. 1.’ But he also considered Income No. 3 which depends explicitly on price expectations. If prices are expected to rise, the income recipient must expect to be less well off at the end of the week and thus ‘his’ current income would be lower. That is because income is the maximum that a recipient can spend and still expect to be able to spend the same amount in real terms in subsequent periods. Hence income number 3 is subject to ‘indeterminateness’ (p. 175). Income number 4 enters the discussion with the introduction of ‘durable consumption goods’. Here Hicks emphasized the distinction that should be made between ‘spending’ and ‘consuming’. Income is the maximum amount that can be consumed, not just spent, while keeping capital intact. If part of the expenditure goes into acquiring durable consumer goods then expenditure will in this case exceed consumption. Only if acquisition of durable consumption goods anew matches the use (or consumption) of ‘durables’ acquired in the past will consumption and spending match. But if the old stock is being used up and there are no new acquisitions the income recipient must be worse off.
All told, Hicks’s approximations around the central concept of income yielded little extra illumination, and thus we were forced back onto the central definition that ‘a person’s income is what he can consume during the week and still expect to be as well off at the end of the week as he was at the beginning.’ This is the definition that Daly has rightly embraced and named ‘Hicksian income’.
It is interesting that the value of stocks (or accumulations) held by the income recipient receive no mention in Hicks’s income chapter. Since his income period was short he could overlook changes in the unit value of stocks held at the beginning and end of the account period. With a longer period, however, he was of the opinion that stocks, both beginning and end, should be valued at current prices Stock valuation at current prices is the practice generally favored by economists, and this has been followed by the national income statisticians who have sometimes to go through tortuous exercises of ‘reconciliation’ to accommodate changes in stock values. The value of beginning-period stocks is unambiguously that of the previous period-end, and the stocks held at the end of the current period should be valued, according to the accountants, at their purchase prices or current market prices whichever values are less. Undervaluing end-period stocks is a precautionary measure that may underestimate income, but this brings no harm as it checks consumption and thus ‘ensures’ income sustainability. For national accounting, natural resources (as sources as well as sinks) must be viewed as part of society’s capital that must be kept intact for the estimation of income–an argument which is to be found in Herman’s paper in Ahmad et al. eds. 1989.
Income from Wasting Assets
Embedded in Hicks’s income chapter is the important notion that whichever of the ‘approximations’ to the concept of income we choose to use, the calculation of income consists in finding some sort of standard stream of values whose present capitalized value equals the discounted value of the stream of receipts which is actually in prospect. The present receipts should not be viewed as income which is what the income recipient would be receiving if he were getting a standard stream of the same present value as his expected receipts. He further stressed that any stream of values has a capitalized value which is the function of the rate of interest. In this respect he put forward the important thought to be found on page 187 viz.:
‘If a person’s receipts are derived from the exploitation of a wasting asset, liable to give out at some future date, we should say that his receipts are in excess of his income, the difference between them being reckoned as an allowance for depreciation. In this case, if he is to consume no more than his income, he must re-lend some part of his receipts; and the lower the rate of interest is, the greater the sum he will have to re-lend in order for the interest on it to make up for the expected failure of receipts from his wasting asset in the future.’
It is remarkable that Hicks’s insightful notion of income from wasting natural resources—a notion that inspired the user cost method of El Serafy (1981 and 1989) has yet to find expression in the official estimates of national income.
Later Hicksian Thoughts on Income
As previously mentioned Hicks’s view of income did not rest with Value and Capital. In at least two occasions he came back to explain or slightly modify what he had said there. This pertained in particular to the place of income in time, and the place of income in growth theory. In some sense he was qualifying what he had said about income in Value and Capital, and in another sense he wanted to justify what he thought were shortcomings of that earlier exposition.
In the Festschrift for Nicholas Georgescu-Roegen (1976) Hicks contributed a chapter on ‘Some Questions of Time in Economics’. Stressing the irreversibility of time, he referred to the valuation of stocks in social accounting, holding, rather oddly, that the value of the opening stock reflects in part the value to be expected for the end-period stock (p. 136). Further, he repudiated the notion that all options open to a consumer could form a stable scale of preferences to be hierarchically ordered, and mapped by indifference curves. Hicks’s frequent references to ‘in time’ and ‘out of time’ meant, respectively, a difference between a dynamic movement and a static snapshot, the latter to him being ‘a stationary state’ (p. 139). He accused both himself and Keynes of ‘muddling’ in that they mixed statics and dynamics, specifically where Keynes considered liquidity as a stationary state phenomenon, viz.:
‘Keynes’s theory has one leg which is in time, but another which is not. It is a hybrid. I am not blaming him for this; he was looking for a theory which would be effective, and he found it. I am quite prepared to believe that effective theories always will be hybrids—they cannot afford to bother about difficulties which are not important for the problem in hand.’ (p. 140.)
In the same vein Hicks looked back on his Income chapter in Value and Capital, identifying what he thought were weaknesses common to him and Keynes who, Hicks asserted, was merely expounding Marshall’s short period analysis. The ‘Keynes theory and Value and Capital theory were weak in corresponding ways. They both lacked, at one end, a satisfactory theory of markets; and at the other end, they lacked a satisfactory theory of growth‘. Several pages later Hicks explained that his own ‘steady state’ was a ‘growth equilibrium model’ where the balance of macroeconomic variables, technology and investment (both autonomous and induced—see Hicks, 1950) was made to produce a constant rate of economic expansion. His alleged failure to develop a theory of markets in Value and Capital is not convincing: he simply assumed (he says) that prices were determined by demand and supply. In both these cases of self-criticism a fair critic would conclude that Hicks was exaggerating his own shortcomings, and may have been attempting to sketch future paths for others to further the development of economic theory.
Steady and Stationary State Economics
The Steady State and the Stationary State have crept into the above test without adequate clarification. Daly’s steady state is obviously different from that of Hicks who disliked it intensely. It is not difficult to find out why. ‘I shall not say much about Steady State Economics; for in spite of all that it has meant for the economics of the fifties and sixties, it is my own opinion that it has been rather a curse.’ (Hicks, 1976, p. 142.) To him the ‘Stationary State’ was even worse: it was moribund with no growth at all. Unlike the stationary state, Hicks’s steady state was a dynamic process of a ‘regularly progressive economy’ with a constant rate of growth--an artifact he used for discovering the factors that could produce a constant growth rate following on from the models of ‘Harrod and Domar (or perhaps….von Neumann)’. How such steady growth might be achieved had also been Hicks’s quarry in his book on the Trade Cycle (1950).
Looking further back it is interesting see how earlier economists treated the subject. Adam Smith had described the stationary state as a state in which a country ‘had acquired that full complement of riches which the nature of its soil and climate, and its situation with respect to other countries, allowed it to acquire; which could, therefore advance no further.’ (Smith, 1776, Book I, Ch. IX, entitled, ‘Of the Profits of Stock’, Edwin Cannan’s edition, 1937, p. 94) .
Marshall picked up the theme (Principles, Book 5, Ch. V, 2-4) where he called the stationary state ‘a famous fiction’). To Marshall it was a monotonous state where all was predictable (p. 810) with population stationary and the average age constant (pp. 367-8), and the character of man himself was a constant quantity. Marshall contrasted the progressive reality around him with the stationary state world where ’every plain and single doctrine as to the relations between cost of production, demand and value is necessarily false: and the greater the appearance of lucidity which is given to it by skilful exposition, the more mischievous it is’ (p. 368).
Analytically Marshall wanted a state that would illumine economic thought, believing that a stationary state was barren and sterile. But he also briefly attempted a relaxation of some of its rigid assumptions, mainly in respect of population and capital constancy, with a view to bringing it closer to reality and therefore rendering it more useful for economic analysis.
Between Smith and Marshall came Mill, John Stuart|John Stuart Mill]] from whom Herman took his cue. It was Mill who had extolled the virtues of the Stationary State (Political Economy, Book iv, Ch. vi) hoping for a future where the progress of society would relax before the utmost physical limit had been reached. He pleaded for the enjoyment of solitude, the beauties of nature, and the pursuit of moral and social progress instead of material advance. Echoes of the same sentiment are to be found in Keynes (1930) as he also looked forward to a future when the economic problem had been largely solved, and humanity settled down to the pursuit of the higher ends of leisure and enjoyment, and when economics became a humble vocation like dentistry.
After adopting Hicks’s definition of ex post income Daly moved forward to confront the future of income change. Impelled by the dangers he saw in the unfettered expansion of economic activity advocated by most economists he used his powers of persuasion in support of ‘steady state economics’ as an alternative to growth economics. Unlike Hicks, he dismissed future growth as untenable, whether at a constant or a variable pace. He argued convincingly that the scale of world production and consumption had reached or exceeded limits which the earth can ill afford. In this he touched a sensitive nerve among economists, who not only idolized growth for its own sake, but made it the principal--if not the sole—criterion of economic success. Daly’s steady state is, however, a little vague on population. The classics had followed a Malthusian vision that expected population to be controlled by wages falling below subsistence. Daly’s 1974 paper, admittedly put forward rather tentatively, talked of imposing ‘population quotas’ to restrain population increases, an idea Daly apparently took from Boulding (Daly, op cit., p. 19). Herman is clearer on this issue in Daly, 1991, p. 17 where he advocated a physical population requiring births to offset inevitable deaths at low, rather than high levels, with increased life spans. This is of course a sensitive subject to many and if I am not mistaken it has been left out of Herman’s later writings. Steady State economics in Daly’s work is covered in greater detail in other chapters of the present book.
A Digression on Valuation by Cost or by ‘Utility’?
Writing on Pigou’s notions of welfare Hicks made a great deal of whether to value the social product by cost or by utility--a rivalry of valuation that has mostly escaped the notice of the statistical estimators-- this despite the fact that national income estimates have sometimes been expressed ‘at factor cost’ in addition to the standard valuation by market prices. According to Hicks (1975) valuing the national product at cost goes back to the classics, notably Ricardo, when the product was valued by its labor inputs. Land, the other major factor of production at the time, was left out since rent was viewed as a ‘surplus’ to be determined only after the price of the product had been established. Nevertheless, it is obvious that output is produced for a purpose, and the purpose is doubtless to satisfy a want. Since a product gives out ‘utility’ it therefore made sense to consider valuing it by the welfare it imparts—a line of argument later strenuously championed by Pigou and could be traced back at least to W. Stanley Jevons, known to environmentalists as the author of The Coal Question (1865). While Jevons’s name is usually associated with the marginalist revolution in economics in the last quarter of the 19th Century, Hicks gives him more credit for leading (along with others, mainly the Austrians) a revolution that sought to shed the classical costing by labor inputs in favor of valuation by marginal utility.
Fundamentally, whether as output or welfare, should social income be valued by the cost of making it or alternatively by the ‘utility’ it is supposed to impart to the income recipients? Valuation at market prices, which is now the standard used in national accounting does in fact combine cost and utility in Marshall’s two-blades-of-a-scissors manner. To Marshall it was futile to ask whether it is the upper or the lower blade of a pair of scissors that cuts a piece of paper: both do so simultaneously. Similarly the two sides of the market: supply (cost) and demand (utility) determine market price, and it is market prices that now dominate the valuation of national income estimates. For valuation purposes (especially the valuation of the non-transacted services of Nature (which Hicks does not specifically mention) Hicks elaborated Marshall’s views and illuminated them thus:
In a perfect market, prices are proportional to marginal utilities, and to marginal costs. Prices may therefore be regarded as reflecting either marginal utilities or marginal costs; if all goods which entered into an economic aggregate were sold upon perfect markets, the prices at which they were sold could be taken to stand for marginal utilities, or for marginal costs, indifferently. If markets are not perfect, utilities and costs may diverge; price may diverge from either, or from both. If there is no market there is no price, but valuation in terms of utility or in terms of cost may still be possible, though there is now no reason why those valuations should coincide. When we seek to set values on non-marketed commodities, it is the utility value or the cost value that we must be setting, but they will not (in general) be the same. In general…..there are two principles of valuation, a utility principle and a cost principle, answering at bottom quite different questions (pp. 190-91, Chapter 8 of Hicks, Wealth and Welfare, 1981.)
Historically speaking valuation by utility failed to gain acceptance, and cost, now clipped into shape by Marshall’s scissors and expressed in market prices, became the mainstay of the new and blossoming discipline of national accounting. This made a comeback as a tool for financing the World War II effort, particularly in Britain and the United States. Economic resources had to be husbanded and carefully devoted to support the war in competition with domestic needs. The contributions of Keynes, Hicks, Kuznets, Meade and Stone were crucial for laying down the rules of income estimation that dominate national accounting today. National accountants would deny that they are measuring ‘welfare’ or utility at all, but merely estimating the market transacted output or product. It is interesting to note that Hicks and Kuznets debated national income concepts and valuation in the pages of Economica during the 1940s. Hicks, it seems, wanted the national income to express both output and the welfare gained from it. As a clear indicator of Hicks’s thinking of income as output (not as an index of welfare) he had proposed that per capita income should be based not on total population but only the working population (Social Framework, p. 188.) In this regard (as stated above) he lamented the fact that national income could not also express welfare. For him income (ex post) was consumption plus investment, and this left behind Irving Fisher’s view that investment should be dropped from income on the pretext that it did not contribute to current welfare.
More on Welfare
Herman’s endorsement of Hicks’s definition of income went only part of the way for he was more of a Pigouvian than a Hicksian. Hicks had expressed great doubts over the state of ‘welfare economics’—a subject to which he had contributed a great deal, particularly as he urged the estimation of ‘utility’ ordinally rather than cardinally. To Hicks, economics was not ethics, though it bordered on ethics (Hicks, 1975, p. 311). On my part I believed that in trying to reform national accounting the focus should primarily be on a more correct estimation of output. Welfare was only a derivative of output, and the joy it yielded depended on many factors absent from GDP and its cohorts. Just looking at GDP will not give you income per capita, its distribution among recipients, or the effort extended in producing it. But Herman’s approach, adapted to cover such lacunae, proved popular and gave fruit to subsequent efforts that set out to show that a rise in GDP does not necessarily increase happiness. Counterbalancing what Hicks had detected as the absence of cost in Pigou’s social dividend, Herman was to stress the negative impact of growth on the economy, in fact using the eminently Pigouvian device of externalities . The cost in terms of congestion, noise, air and water pollution, depleting resources and many others had to be balanced against apparent growth in order to show that in many cases growth meant reduced welfare.
Here also Herman’s focus on scale was an overarching concern: the economic system is part of the physical ecological framework and cannot possibly grow indefinitely without causing irreparable harm. Daly’s work in this area has reinforced as well as inspired the efforts of other scholars, also dissatisfied with GDP as an indicator of sustainable welfare. These have included the index of Sustainable Economic Welfare (Daly and Cobb 1994: 443-507); the Ecological Footprint (Rees and Wackernagel (1994); the Human Development Index (UNDP 1990); the Genuine Progress Indicator (Redefining Progress, 1995) and the Happy Planet Index (New Economics Foundation, 2006). For references to these see Daly, 2008.
A Kind of Summing Up
This chapter attempted an assessment of Daly’s contribution to the propagation of the Hicksian concept of ‘sustainable income’ which has had a great impact on environmental economics and is central to ecological economics. Daly imbued Hicks’s definition with a welfare tint, supporting or inspiring the development of a number of welfare-oriented alternatives to conventional GDP. The discussion covered Daly’s selection of one from among a number of definitions of income elaborated by Hicks. A Comment was offered on Daly’s steering of Hicks’s income in the direction of Pigou: in other words from a measure of sustainable output to an indicator of sustainable welfare. This ‘twist’ was in fact in harmony with Hicks’s own leaning towards viewing national income as an indicator of both output and ‘welfare’. Since much of the environment falls outside the market and since monetizing the environment’s services defies adequate measurement, Daly’s stress on environmental losses being essentially welfare losses must be regarded as an important contribution that has found much appeal among environmentalists. Mainstream economists and conventional national accountants, however, have remained skeptical, particularly over conflating GDP with aggregate welfare. Pigou himself had reservations about conflating his social dividend with welfare, but remained fast in conflating the two. Hicks himself was clearer (1975, p. 318) stating that ‘It is unconvincing to assure us, as he [Pigou] in substance does, that increase in the Social Product is usually a good thing.’
Given Daly’s emphasis on the unfeasibility of maintaining endless economic expansion owing to the physical constraints imposed by the earth’s ecological system, it was natural that he has been a strong proponent of what he put forward as ‘steady state economics’. This Chapter touched on the concept of a steady state and its connections with output and income, comparing it to the earlier economic view of a ‘stationary state’ that can be found in Adam Smith and John Stuart Mill among others. The emergence of neoclassical economics as a ‘science’ to replace ‘political economy’ tilted economic inquiry towards pursuits that mimicked the physical sciences, permitting little discussion of ‘ends’ and allowing scant room for normative economics. Daly’s focus on policy matters has been a refreshing drive to reopen consideration of the purpose of economic activity in an attempt to move economic thought once again in the direction of normative economics.
- Ahmad, Yusuf J., El Serafy, Salah and Lutz, Ernst, Environmental Accounting for Sustainable Development, A UNEP-World Bank Symposium, The World Bank, Washington DC, 1989.
- Commission of the European Communities, International Monetary Fund, Organisation for Economic Cooperation and Development, United Nations and World Bank, System of National Accounts 1993, Brussels/Luxembourg, New York, Paris, Washington DC, 1993.
- Daly, Herman E., ‘The Economics of the Steady States’, American Economic Review, Papers and Proceedings, Volume LXIV, No. 2, pp. 15-21, 1974.
- Daly, Herman E., ‘Toward a Measure of Sustainable Social Net National Product’, pp. 8-9 in Ahmad et al. editors, Environmental Accounting for Sustainable Development, A UNEP-World Bank Symposium, The World Bank, Washington DC, 1989.
- Daly, Herman E., and Cobb, John B., Jr., For the Common Good, Redirecting the Economy toward Community, the Environment and a Sustainable Future, Beacon Press, Boston, 1989.
- Daly, Herman E., Steady-State Economics, Second Edition, Island Press, Washington DC, 1991.
- Daly, Herman E., Beyond Growth: The Economics of Sustainable Development, Beacon Press, Boston, Mass., 1996.
- Daly, Herman E., ‘Growth and Development: Critique of a Credo’, Population and Development Review, 34 (3) September, 2008.
- Dasgupta, Partha, ‘Valuing Objects and Evaluating Policies in Imperfect Economies’, Economic Journal, 111 (471), pages C1-C29, 2001.
- El Serafy, Salah, ‘Absorptive Capacity, the Demand for Revenue and the Supply of Petroleum’, Journal of Energy and Development, Volume VII, Number 1, pp. 73-88, Autumn 1981.
- El Serafy, Salah, ‘The Proper calculation of Income from Depletable Natural Resources’, pp. 10-18, Ahmad et.al. Editors, Environmental Accounting for Sustainable Development, UNEP-World Bank Symposium, Washington DC, 1989.
- El Serafy, Salah, ‘The Environment as Capital’, pp. 168-175 in Costanza, Robert, editor, Ecological Economics, The Science and Management of Sustainability, Columbia University Press, New York, 1991.
- El Serafy, Salah, ‘Sustainability, Income Measurement and Growth’, pp. 63-79 in Robert Goodland, Herman Daly and Salah El Serafy, eds., Population, Technology and Lifestyle – The Transition to Sustainability, Island Press for the International Bank for Reconstruction and Development, and UNESCO, Washington DC, 1992.
- El Serafy, Salah, ‘The Economic Rationale for Green Accounting’, pp. 55-77 in Lawn, Philip, editor, Sustainable Development Indicators in Ecological Economics, Edward Elgar, UK and Massachusetts, USA, 2006.
- El Serafy, Salah, ‘Natural Resource Accounting’, pp. 1191-1206 in Jeroen C.J.M. van den Bergh, editor, Handbook of Environmental and Resource Economics, Edward Elgar, Cheltenham, UK and Northampton, Massachusetts, USA., 1999.
- Hicks, John Richard, ‘The Valuation of the Social Income’, Economica, May 1940, Volume VII (New Series), Number 26, pp.105-124.
- Hicks, John Richard, ‘Maintaining Capital Intact: A Further Suggestion’, Economica, 1942, p. 179).
- Hicks, John Richard, A Contribution to the Theory of the Trade Cycle, Oxford, Clarendon Press, 1950.
- Hicks, John Richard, The Social Framework, An Introduction to Economics, Second Edition, Oxford at the Clarendon Press, 1952.
- Hicks in Lutz and Hague.
- Hicks, John Richard, ‘Measurement of Capital – In Theory’, first published in F.A Lutz and D.C. Hague, editors, The Theory of Capital, 1961; reprinted as Chapter 8, pp. 189-203 in John Hicks, Wealth and Welfare, Collected Essays on Economic Theory, Vol. I, Harvard University Press, Cambridge, Mass. 1981.
- Hicks, John Richard, Value and Capital, (first edition 1939), Second edition, Oxford at the Clarendon Press, 1946.
- Hicks, John Richard, ‘The Scope and Status of Welfare Economics’, Oxford Economic Papers, Volume 27, Number 3, pp. 307-320, November 1957.
- Hicks, John Richard, ‘Some questions of Time in Economics’, Chapter 6, pp. 135-152 in Anthony M. Tang, Fred W. Westfield and James S. Worley, Editors, Evolution, Welfare and Time in Economics (Essays in Honor of Nicholas Georgescu-Roegen), Lexington Books, Heath and Company, Massachusetts, 1976.
- Hicks, John Richard, ‘The Formation of an Economist’ first published in the Banca Nazionale del Lavoro Quarterly Review, September 1979, reprinted in Collected Essays on Economic Theory, Volume III titled Classics and Moderns, Harvard University Press, Cambridge, Mass., pp. 356-364, 1983.
- Hicks, John Richard, ‘IS-LM: an explanation’, Journal of Post Keynesian Economics, Volume II, No. 2, pp. 139-154, Winter 1980-81.
- Keynes, John Maynard, 1930. “Economic Possibilities for our Grand Children’, pp. 358-373 in Essays in Persuasion, W.W. Norton, New York, 1963.
- Kuznets, Simon, ‘On the Valuation of Social Income – Reflections on Professor Hicks’ Article. Part I’, Economica, February 1948, Volume XV (New Series), Number 57, pp.1-16.
- Marshall, Alfred, Principles of Economics, 8thEdition (1920) Reprinted by Macmillan and Co., London, 1947.
Meade, J.E. and Stone, Richard, National Income and Expenditure, Bowes and Bowes, Cambridge (England), Second Edition 1948. (The first edition had been published by the Oxford University Press in 1944.)
- Mehlum, H., Moene, K., and Torvik, R., ‘Institutions and the Resource Curse’, Economic Journal, Volume 116, No. 508, pp. 1-20, January 2006.
- Pigou, A. C., Essays in Economics, Macmillan and Co., London, 1952.
- Schumpeter, Joseph A., History of Economic Analysis, Oxford University Press, New York, 1954.
- Smith, Adam, 1776, An Inquiry into the Nature and Causes of the Wealth of Nations (Edwin Cannan’s edition), Modern Library, Random House, New York, 1937.
- Hicks had been the supervisor for my Oxford 1957 doctorate; we later corresponded on the topic of income.
- Unlike Daly I never use the expression ‘Hicksian income’ myself since ‘income’, properly estimated, would suffice.
- It is rather important to stress this point because Professor Sir Partha Dasgupta of Cambridge, England, had made this error in his retirement address as President of the Royal Economic Society, Economic Journal, 2001.
- Though Hicks had thought a great deal about accounting methods, he was under the impression that the ‘value that is set upon the opening stock depends in part upon the value which is expected, at the beginning of the year, for the closing stock…’ (Hicks, ‘Some Questions of Time in Economics’, p. 136, 1976.)
- Overestimating income is dangerous in that it encourages consumption that would threaten the ability of the income recipient to maintain the same level of income in future. On the other hand underestimating income is usually harmless in that it suppresses consumption and helps to build up capital to the benefit of ‘sustainability’.
- The January 2006 of the Economic Journal published an article by three Norwegian economists ‘Institutions and the Resource Curse’ (Mehlum et. al., pp. 1-20) where the authors used regression analysis to study failed ‘growth’ in so-called natural resource abundant countries using several dependent variables. They concluded that the quality of institutions was decisive for explaining the resource curse. I sent a comment to the Economic Journal and the authors explaining that the GDP numbers used in the analysis confused value added with resource sale proceeds: a decline in ‘growth’, I argued, could reflect a reduction in extraction occasioned by the country running out of the resource or a prudent act of resource management. The authors had not been aware of the weakness of the GDP estimates they used (letter dated March 13, 2006) and expressed interest in commenting on my views if they were published in the Economic Journal which turned my comment down ‘for lack of space’.
- I shall be using social accounting and national accounting interchangeably since they both have existed in the literature synonymously.
- An attempt is made in the 1993 SNA (Commission of European Communities et. al.) to construct natural ‘asset accounts’ showing new discoveries as additions and extraction as a deduction, but the asset accounts are not integrated in the income flows—fortunately, however, since adding discoveries to income makes no economic sense. There is a brief discussion In the same source (page 517) as to whether deduction for depletion should be ‘total’ or confined only to ‘the user cost’, but the matter was left to be determined outside the SNA in the so-called SEEA (later known as ‘Integrated Environmental and Economic Accounting’) which was meant as a practical guide for the compilation of environmental satellite accounts. Though another version of the guide was issued in 2003, this also proved controversial.
- Two preceding workshops had been held in Geneva and Washington before I joined this initiative at the third workshop in Paris in 1985 and was elected rapporteur. I then chaired the fourth and fifth workshops held in Washington in 1986 and in Paris in 1988. See Appendix (pp. 93-5) in Ahmad et al., editors, 1989.
- See Daly in Ahmad et al., 1989; also Daly and Cobb, 1989; and Chapter 7 in Daly 1996. See also El Serafy in Costanza, ed., 1991.
- The 1993 revision of the SNA introduced ‘satellite accounts’ for the environment which in effect left the main accounts largely unchanged, and despite much work since then the initiative for greening the national accounts (in value terms) seems to have come to a dead end, at least at the official level.
- Selected papers presented at that conference were issued two years later in a book edited by Franz, Alfred and Stahmer, Carsten: Approaches to Environmental Accounting, Physica-Verlag, Heidelberg and New York, 1993. This contained my paper, ‘Depletable Resources: Fixed Capital or Inventories?’ where I drew a distinction between depreciation and the using up of stock.
- The near-consensus among advocates of green accounting reform has been to reduce the conventional macroeconomic magnitudes by the entirety of the estimated deterioration -- a position I have objected to, recommending instead deducting only the ‘user cost’. The hankering after what in effect is an over-correction often reduced the adjusted numbers to meaninglessness, a fact that has contributed to the stymieing of the whole reform initiative. On this see El Serafy in van den Bergh, editor, 1999, and El Serafy in Lawn, editor, 2006.
- See El Serafy 1993, p. 22 and El Serafy 2006, p. 75, note 23.
- Quoted in Hicks, 1957, p. 307.
- See also Meade, J.E. and Stone, Richard, National Income and Expenditure, Bowes and Bowes, Cambridge (England), second edition 1948. The first edition had been published by the Oxford University Press in 1944.
- Emphasis added.
- Though his view—as stated in Hicks, 1976, p. 136--that the valuation of opening stocks ‘depends in part’ upon the expected end-period value seems at odds with his general position.
- The same argument had been advanced with reference to petroleum in El Serafy, 1979 and 1981 and extended to cover natural resources generally in El Serafy 1991. See also El Serafy, ‘Sustainability, Income Measurement and Growth’ in Goodland et. al., eds., 1992.
- It was this thought that guided me to formulate what became known as the ‘El Serafy method’ for estimating income from the revenue obtained in depletable resource extraction. See El Serafy 1981 and El Serafy 1989.
- Hicks’s self-criticism here may be compared to his partial repudiation of his famous IS-LM apparatus which he had put forward in 1937 to explain Keynes’s General Theory. See Hicks, 1981-82.
- Adam Smith, Wealth of Nations, Book I, Chapter IX, titled, ‘Of the Profits of Stock.’ Smith envisaged that in a stationary state profits would drop and wages decline sufficiently to quell population growth.
- Schumpeter, Joseph E., in his History of Economic Analysis, p. 966, comments wryly that though it was a fiction, ‘as a methodological fiction the stationary state was not at all ‘famous’ in 1890’. Schumpeter in fact traces the stationary state back to Plato. (Op. cit. pp. 55-6)
- In the classical economic literature writers would often use the expressions ‘steady state’ and ‘stationary state’ without clarifying the distinguishing features of each.
- Hicks strictly speaking was not a neoclassical economist but the eclectic product of different schools associated with the names of Pareto, Walras, Menger, Böhm-Bawerk and the Swedes with a fundamental grinding in the English tradition of Marshall and Pigou. In a sense he was also a Keynesian as he had similar views to what erupted as The General Theory of Keynes in 1936. See Hicks’s autobiographical essay, ‘The formation of an Economist’ Chapter 31, pp. 355-364 in Hicks’s Volume III, Classics and Moderns, Collected Essays on Economic Theory, Harvard University Press, Cambridge, Mass. 1983.
- See especially Hicks, 1940, and Kuznets, 1948.
- In the preface of The Social Framework Hicks acknowledged the help he received from Richard Stone (later Nobel laureate Sir Richard Stone) in piecing together the British national accounts (along Keynesian lines).
- The role of externalities, however, remained limited in that to discuss them usefully there must be a presumption of some existing market ‘to which they are external’. (Hicks, 1975, p. 317, note 1.)