The Lost Wealth of Nations

The phrase “sustainable development” is commonplace, but economic commentators offer no guidance on how we are to judge whether a nation’s economic development is, indeed, sustainable.

The famous Brundtland Commission Report of 1987 defined sustainable development as “... development that meets the needs of the present without compromising the ability of future generations to meet their own needs.” Sustainable development therefore requires that, relative to their populations, each generation should bequeath to its successor at least as large a productive base as it inherited. But how is a generation to judge whether it is leaving behind an adequate productive base?

Economists argue that the correct measure of an economy’s productive base is wealth, which includes not only the value of manufactured assets (buildings, machinery, roads), but also “human” capital (knowledge, skills, and health), natural capital (ecosystems, minerals, and fossil fuels), and institutions (government, civil society, the rule of law). Development is sustainable so long as an economy’s wealth relative to its population is maintained over time. In other words, economic growth should be viewed as growth in wealth, not growth in GNP.

There is a big difference between the two. There are many circumstances in which a nation’s GNP (per capita) increases even while its wealth (per capita) declines.