Hartwick's rule

Hartwick's rule

In resource economics, Hartwick's Rule defines the amount of investment in produced capital (buildings, roads, knowledge stocks, etc.) that is needed to exactly offset declining stocks of non-renewable resources. This investment is undertaken so that the standard of living does not fall as society moves into the indefinite future. (Solow 1974) shows that, given a degree of substitutability between produced capital and natural resources, one way to design a sustainable consumption program for an economy is to accumulate produced capital sufficiently rapidly so that the pinch from the shrinking exhaustible resource stock is precisely countered by the services from the enlarged produced capital stock. Hartwick's rule – often abbreviated as "invest resource rents" - requires that a nation invest all rent earned from exhaustible resources currently extracted, where "rent" is defined along paths that maximize returns to owners of the resource stock. The rule extends to the case of many types of capital goods, including a vector of stocks of natural capital.

The idea admits an inverse: sustainable consumption paths along which stock owners are maximizing returns implies "zero net investment" (Withagen and Asheim, 1998). For oil extraction "causing" global warming, the construction of a sustainable consumption path requires a corrective (Pigouvian) tax (Stollery, 1998). Sustainable paths of constant per capita consumption when the population is increasing have been analyzed in Asheim, Buchholtz, Hartwick, Mitra and Withagen (2007).

The difference between total investment in some kinds of capital and total disinvestment in other types of capital has been labelled "genuine savings". Genuine savings has been estimated for many countries by the World Bank and other authors (Hamilton and Atkinson, 2006, chapter 6). A positive value for a nation's genuine savings has been linked to the possibility of long-run economic sustainability.

References

*Asheim, Geir B., Wolfgang Buchholtz, John M. Hartwick, Tapan Mitra and Cees Withagen [2007] "Constant Saving Rates and Quasi-arithmetic Population Growth under Exhaustible Resource Constraints", Journal of Environmental Economics and Management, 53, 2, pp. 213-229.
*Hartwick, John M. [1977] "Intergenerational Equity and the Investment of Rents from Exhaustible Resources" American Economic Review, 67, December, pp. 972-74.
*Hamilton, Kirk and Giles Atkinson [2006] "Wealth, Welfare and Sustainability: Advances in Measuring Sustainable Development." Northampton, MA: Edward Elgar.
*Hamilton, Kirk and John M. Hartwick [2005] "Investing Exhaustible Resource Rents and the Path of Consumption" Canadian Journal of Economics, 38, 2, pp. 615-621.
*Solow, Robert M. [1974] "Intergenerational Equity and Exhaustible Resources" Review of Economic Studies, Symposium, pp. 29-46.
*Stollery, Kenneth R. [1998] "Constant Utility Paths and Irreversible Global Warming", Canadian Journal of Economics, 31, 3, August, pp. 730-42.
*Withagen, Cees and Geir B. Asheim [1998] "Characterizing Sustainability: The Converse of Hartwick's Rule", Journal of Economic Dynamics and Control, 23, 1, September, pp. 159-65.


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