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"National income accounting was originally intended to provide a practical rule-of-thumb guide to the maximum amount that can be consumed by a nation without eventual impoverishment through overconsumption. Its central defining characteristic is sustainability. But the methods used for computing the national income accounts do not provide an accurate measure of sustainable income for several reasons. One reason is because the production of GNP and NNP requires supporting biophysical transformations (environmental extractions and insertions) which are not sustainable at current levels, and which are not currently counted. A second reason is that NNP overestimates Net National Product available for consumption by counting many defensive expenditures (expenditures necessary to defend ourselves from the unwanted side-effects of production) as final products rather than as intermediate costs of production. In both cases, the category "natural capital" is left out. If capital is defined as a stock that yields a flow of goods or services, then there are two categories of capital: natural and humanly created. If the principle of depreciation were extended to cover the consumption of natural capital stocks depleted as a consequence of production, the first problem would be solved. Subtracting defensive expenditures from NNP would address the second problem.
"A third problem involves the assumption by neoclassical economic theory that humanly created capital is a near-perfect substitute for natural resources, and consequently for the stock of natural capital that yields the flow of these natural resources. Thus the running down of natural capital would have to be offset by accumulation of an equivalent amount of humanly created capital if national income were to be sustained at the same level. Salah El Serafy ( 1988 ) argues that receipts from a non-renewable resource can be divided into an income and a capital component. The income component is that portion of the receipts which could be consumed annually in perpetuity on the assumption that the remainder of the receipts were invested in renewable assets. The return on the renewable assets and the amount invested each year are such that when the non-renewable resource is exhausted, the new renewable assets will be yielding an amount equal to the income component of the receipts. Herman Daly and John Cobb, assisted by Clifford Cobb, have adapted El Serafy's method to calculate their Index of Sustainable Economic Welfare.
"Other issues to be discussed include the appropriate discount rate to use in these calculations, and the question of the level of community -- national or international -- at which to seek the goal of sustainable development. In addition, there are more philosophical concerns such as whether it is possible to develop a convincing measure of the positive contribution of the economy to social welfare, and the distinction between sustainable growth and sustainable development, which becomes necessary as soon as it is recognized that sustainable growth is an oxymoron."
Quoted from: For the Common Good: Redirecting the Economy toward Community, the Environment, and a Sustainable Future, by Herman E. Daly and John B. Cobb, Jr. (Boston: Beacon Press, 1989)).
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