Well first of all, what is it?
The ISEW is an index constructed in 1989 that adds to the national expenditure other factors that better peoples' quality of life or well-being and deducts factors that do the opposite. I.e. it accounts for factors GDP ignores, e.g:
- Inequality
- Household production such as time spent gardening or other household tasks
- Expenditure on 'defensive' means i.e. masks to ride your bike because of the level of pollution.
- Economic 'bads' such as cleaning up car accidents or petrol.
- Costs to the Environment, i.e. air, noise or water pollution and damage to natural resources.
What are the components that make up the ISEW?
The ISEW is a complicated system which adds:
- public sector non defensive expenditure,
- the value of services from domestic labour,
- capital formation, e.g. equipment to be used in the future.
It then subtracts the negative factors:
- defensive expenditure,
- losses due to inequality,
- the costs of environmental degradation,
- depreciation of natural capital (goods and services related to nature,i.e. a stock of fish or a river which provides water for farming).
Each factor is weighted equally and therefore considered to be equally important in the development of a country.
Advantages of the ISEW
There are many advantages of the ISEW over GDP such as that it covers a broader variety of categories instead of just growth, thus showing the sustainability of the growth and also the development of a country. This allows governments to see how much of their growth will need to replaced due to the unsustainable means they are currently employing.
Another advantage is that it allows governments to see how they are not only meeting economic targets but also the social ones which are needed to create a fair economy. These targets can then focus on reducing the amount of inequality and costs of industry on society to improve the overall welfare and sustainability of their growth.
Limitations of the ISEW
Obviously the first limitation is how many factors there are and how many of these have no apparent monetary value, leaving these to be decided by the creator of the index. This may result in differences in the construction of these meaning that each one has differently judged values. This may lead to the index to be ineffective as a comparison of the sustainability of an economy and possibly leading to some countries believing they are more sustainable than they are.
A second limitation is that it is sometimes decided that there are not enough factors included to make a judgement on the sustainability of an economy. This may lead to some of the most important factors to be ignored.
A Comparison Between the ISEW and the Measure of Domestic Progress (MDP)
The ISEW is all well and good but as we have seen could have some major limitations, so a more modern take is the MDP which includes more factor such as the costs of crime, family breakdown and commuting, all very large costs to the economy and so can't be ignored. It could be considered then that the MDP has taken over from the ISEW all ready as it has the key factors that the ISEW needed. However, with the amount of components in the MDP people could judge it harder still to make the value judgements needed to make a valid calculation. Again though the New Economics Foundation (the creators of the MDP) seem to have thought ahead as many of the components seem to be apparently quite simple to calculate as many have actual monetary values and therefore could be more simple to calculate. Yet another victory for the MDP.
Here is a link to a tutor2u article which shows the flaws of GDP and why others may be used in the future.
