NOTES

1. Bastiat uses this story to introduce a concept he calls the broken window fallacy, which is related to the law of unintended consequences, in that both involve an incomplete accounting for the consequences of an action.

2. The problem was first recognized and discussed by economists in the 1970s (Tobin and Nordhaus 1972). It has been revisited more recently by Daly, Jackson and Marks and others (Daly 1989; Jackson and Marks 1994). There exist several examples of alternative welfare measures, including the Fordham Index of Social Health (FISH), the Genuine Progress Indicator (GPI) and the United Nations Human Development Index (UNHDI), to mention just a few.

3. The absolute minimum of entropy would correspond to absolute zero temperature. It is an unreachable state.

4. The idea that economic progress is explained mostly by capital investment, while long since abandoned as regards the industrialized countries, was still taken very seriously by many development specialists until very recently. The Harrod-Domar model predicts that the rate of growth of an economy in a year is proportional to the capital investment during the previous year. Harrod intended this as a way of explaining short-run fluctuations in output of industrial countries and disavowed its use for developing countries. Yet it was widely adopted by international institutions in the early 1950s for purposes of growth accounting and to estimate the so-called 'financing gap' for developing countries. This capital investment-centered approach was supported by the 'stages of growth' model of W.W. Rostow, who asserted that 'take-off into sustained growth occurs only when the proportion of investment to national income rises from 5 to 10 percent (Rostow 1960). Several econometric studies have failed to find any evidence for this theory, however (for example, Kuznets 1963; United Nations Industrial Development Organization 2003).

5. The unrealistic neglect of materials (and energy) as factors of production in the economic system was pointed out long ago by Boulding (1966), Ayres and Kneese (1969) and Georgescu-Roegen (1971). Unfortunately, the mainstream view has not adapted.

This is extremely significant for policy, in the new century, because if resource consumption is only a consequence - and not a cause - of growth, then 'decoupling' growth from resource consumption is conceptually easy: they were never 'coupled' in the standard theory. On the other hand, if increasing resource consumption is inseparable from the 'growth engine' (as we argue), decoupling is impossible and dematerialization will be extremely difficult.

6. Virtually all models consider only man-made capital as a factor of production, although some attempts have been made to incorporate education and skills into something called 'human capital'. However, no role is generally assigned to natural capital as a factor of production, although many countries count the sale of raw materials as income, thus a contribution to GDP and hence a source of capital investment in the traditional sense. This issue is discussed briefly in Chapter 10.

7. Problems of defining and measuring capital gave rise to a well-known debate between Robert Solow et al. at MIT (Cambridge, Massachusetts) versus Joan Robinson and others at Cambridge University in the UK. The theory of capital (and the debate) was later reviewed by Harcourt (1972). A key part of the dispute was whether (or how) capital could have a value independent of its rate of return. This issue has been forgotten in recent years. Capital stock, in current models, is an accumulation based on monetary investment and depreciation, along the lines of the 'perpetual inventory' approach, which starts from a base year and adds new investments in various categories (for example, residential housing, non-residential buildings, machinery, roads and bridges, etc.) at current prices adjusted to a standard year, while simultaneously depreciating existing capital stocks based on assumed lifetimes.

8. In fairness it should be noted that Schelling is not the only important economist who has made this assumption in the context of discussions of the costs and benefits of greenhouse gas abatement policy. See Daly (2000).

9. In principle, the way a sector is defined in practice is that products within a sector are assumed to be similar enough to be mutually substitutable whereas products of different sectors are not substitutable. This is obviously a very strong assumption, since sectors are often defined in terms of a generic process (for example, agriculture or mining) or a generic use (for example, automobile parts). Yet the products of olive orchards and wheat farms are not substitutable; the products of iron mines, copper mines and gold mines are not substitutable; and the only link between engines, transmissions, headlights, brakes and axles is that they all get combined in a motor vehicle.

10. The major exceptions are the multi-sector models built by Dale Jorgenson and his colleagues (Christensen et al. 1983; Gollop and Jorgenson 1980, 1983), using the so-called 'trans-log' production function devised by Lauritz Christenson, Dale Jorgenson and Lawrence Lau (Christensen et al. 1973, 1971). Unfortunately these models are extremely data-intensive and lacking in transparency, making them hard to use and interpret.

11. Indeed, Kaldor tried to explain growth in terms of a positive feedback between demand, induced by increases in supply induced by increased demand (Kaldor 1966, 1972, 1979). He regarded the empirical 'Verdoorn Law' as evidence of this feedback (Verdoorn 1951). Our own theory can be regarded as an extension and elaboration of Kaldor's.

12. N.B. the national accounts reflect payments only to capital (as interest, dividends, rents and royalties) and to labor (as wages and salaries). The accounts therefore do not explicitly reflect payments to inputs (for example, energy, raw materials or environmental services from 'nature'). It is possible, of course, to distinguish payments to some tangible resource owners (royalties), and to natural resource extraction (labor), but these payments constitute only a very small percentage of the total.

13. Indeed, for 17 tests where the condition was not imposed as a constraint, values for alpha (the exponent for labor) ranged from 0.11 to 5.03, while values for beta (the exponent for capital) ranged from —0.74 to 1.35. Values for the sum of the two ranged from —0.09 to 4.29. Three of those tests were carried out in the original study by Paul Douglas himself, yielding values for the sum of the exponents of 1.04, 1.07 and 0.98 (Douglas 1948). In 14 other time series tests, where the sum of the two exponents was constrained to be unity, the values for alpha ranged from —0.35 to 1.12, while the values for beta ranged from -0.12 to 1.35.

14. The positive feedback cycle is essentially identical to the 'rebound effect' cited by some economists to argue that increasing energy efficiency may not result in energy conservation (for example, Khazzoom 1980, 1987; Saunders 1992).

15. This assumption has been tested empirically by Nordhaus, who found that only a very small fraction (<10 percent) of the Schumpeterian profits of most innovations are captured by the innovators (Nordhaus 2004).

16. Paul David has emphasized this point (for example, David 1991, 2003).

17. Nuclear processes (fission or fusion) are apparent exceptions to the mass-balance rule, because they convert mass into energy. However, the conservation law, as applied to mass-energy, still holds.

18. We reject Georgescu-Roegen's so-called 'fourth law' (Mayumi 1993; Ayres 1999).

19. In the case of petroleum and natural gas, there is an alternative theory, attributing some hydrocarbons to geological processes, but it is thought that anaerobic decay accounts for most deposits.

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