Today’s discussion relates to this short article (only 4 pages!). So please take a look: http://www.vwl.unibe.ch/studies/3016_e/Hartwick.pdf . Note- don’t get too caught up on the complicated math formulas, focus on the written content and ideas.
One of the first attempts at providing a formula for sustainable economic development came from John M. Hartwick way back in 1977. Hartwick hypothesized that to avoid hurting future generations by over-consuming today, we must “invest all profits or rents from exhaustible resources in reproducible capital such as machines.” To clarify, ‘rents’ is essentially the same as profits, it is the difference between the selling price of the resource and the resources’ production cost. Stated simply, Hartwick is endorsing taking all profits from non-renewable resources (oil, natural gas, coal, gold etc.) and investing them in physical capital (machines, buildings, infrastructure etc.).
Does Hartwick’s idea lead to sustainability?
My opinion is that Hartwick’s formula would not successfully lead to sustainable economic growth. Unsuccessful because it does not include the negative environmental externalities that come with both the extraction and use of natural resources, and the building of physical capital. Negative externalities are the social costs that not accounted for in the market. For example, automobile pollution is a negative externality of transportation. One method of accounting for the externality would be putting a tax on gasoline. Nevertheless, here are some examples of negative externalities that would adversely affect the sustainability of Hartwick’s plan:
· --The considerable environmental damages from resource extraction:
-Ecosystem and wildlife disturbances from extraction sites
-Noise pollution, air pollution, and greenhouse gas emissions from extraction
· --The air pollution and greenhouse gas emissions from oil, coal, and natural gas combustion
· --The substantial air and noise pollution that comes with building of physical capital
Consequently, when factoring in these environmental externalities I arrive at the conclusion that Hartwick’s theory is not a sufficient condition for sustainable economic development.
Here are a couple other questions that I thought of when reading Hartwick’s article:
1. How do you account for the depreciation of physical capital? It seems to me that physical capital depreciates much faster than natural capital (further research needed here).
2. How do we account for the possibility that extraction costs increase- thereby making profits decrease- as resource reserves deplete?
All for now!
AC
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