This year, the John Deutsch Institute and the Economics Department at Queen’s University are hosting a conference to mark the 40th anniversary of John Hartwick’s famous rule, which was published in the American Economic Review in 1977. The conference, “Investing Resource Rents: A look at resource economics after 40 years of Hartwick’s Rule,” will take place at Queen’s University, October 20 and 21, 2017. Click on the link for more information. This article provides an introduction to the rule.
By Nora Ottenhof, econ major, Queen’s University
Arguably one of the greatest accomplishments to come out of the Queen’s University Economics Department has been John M. Hartwick’s 1977 publication, “Intergenerational Equity and Investing Rents from Exhaustible Resources,” known today as the Hartwick Rule. Since its conception nearly forty years ago, the Hartwick Rule has gone on to become a pillar of sustainability economics, forever changing the way we think about the concept of sustainability. The Hartwick Rule has influenced everything from environmental sciences to public policy, and will undoubtedly continue to have a profound impact moving forward.
The essence of the Hartwick Rule is summarized in the following passage from Hartwick’s initial publication in the December 1977 issue of the American Economic Review;
“Invest all profits or rents from exhaustible resources in reproducible capital such as machines. This injunction seems to solve the ethical problem of the current generation shortchanging future generations by “over consuming” the current product, partly ascribable to current use of exhaustible resources.”
In more common language, in order for there to be intergenerational equity, for the next generation to enjoy the same, or a greater level of well-being as is experienced in the present, all profits obtained through the consumption of nonrenewable resources must be reinjected into the economy via investment in reproducible capital such as machinery or infrastructure.
Recently, Hartwick’s Rule has been associated with the weak sustainability approach, also known as the Solow approach to sustainability. The general assertion is that natural and manufactured capital are directly substitutable in terms of the well-being they generate. As such, an economy is considered to be sustainable so long as the total stock of all capital remains constant or better yet, increases over time.
Naturally, there are those who oppose this view, particularly within the ecological community. Opponents of the Solow approach claim that natural capital provides a totally unique contribution to human well-being and is not substitutable or even comparable to other forms of capital. Hartwick himself recognizes these opposing views. “There is a large ecological crowd that ridicules the Solow approach to sustainability, the approach I am associated with. I know their arguments and have no reason to try to counter them. We [who study sustainability] have heard the criticisms but do not spend time trying to shoot them down.”
Hartwick first began delving into the intricacies of sustainability economics as a postdoctoral student visiting the Massachusetts Institute of Technology in the fall of 1974. At the time a relatively new course, natural resource economics, was being taught by Professor Robert Solow, already considered an economics powerhouse for his 1956 publication of the Solow-Swan neoclassical growth model.
“I was intrigued with the material” Hartwick recalls. “Solow was a relaxed and organized lecturer and there were about 30 people in the class. Carleton University [Hartwick’s Alma Mater] had become famous for Scott Gordon’s paper on common property resources and so I was tangentially aware of some economics of natural resources”.
Nearing the completion of his time at MIT, and having demonstrated his commitment to the field, Hartwick was given page proofs of Solow’s latest article “Intergenerational Equity and Exhaustible Resources.” Upon his initial review, Hartwick admits he struggled to “penetrate the subtle links involved in the equations” adding, “growth dynamics and differential equations were not my strong suit”.
After months of mulling over Solow’s work, a breakthrough occurred upon Hartwick’s return to Queen’s University that September. “The University of British Columbia’s Anthony Scott had come through for a seminar and talked about using rental income from natural resources for special purposes. I sensed a direct connection to Solow’s piece and wrestled with it some more,” Hartwick explained. “I turned to computer examples to try to tease out the essence of the article. It dawned on me that Solow’s piece must be turning on investing resource rents in some precise way.”
After coming to this realization, Hartwick recalled things quickly falling into place. “I rushed around to various offices announcing that I had solved the world’s resource scarcity problem with a special investment strategy. One or two knowledgeable colleagues were rather dismissive, suggesting that I had rediscovered the Phelp’s golden rule (of accumulation). I mailed a note to Robert Solow, who responded without delay on how one could do things beyond the case of the Cobb-Douglas production function. I rushed a note off to the American Economic Review on Investing Exhaustible Resource Rents and Intergenerational Equity. This note appeared in the December 1977 issue and the rest is history.”
Hartwick describes himself as having “backed into the subject” of sustainability economics. “Near the end of my undergrad years, I became very interested in technical aspects of economics and developed into a reasonable quality, middle-brow theorist. Economics problems, problems of many kinds fascinated me. Sustainability theory fell into my lap. I was extremely lucky to have had a fascinating bit of new economics fall into my lap.”
A 2002 review of Hartwick’s work by Dr. John C.V. Pezzey and Dr. Michael A. Toman, respected economists and authors of The Economics of Sustainability declared the following:
“Hartwick’s rule is probably the single most powerful influence on sustainability policy that is clearly derived from an economics journal article. Many governments and multilateral institutions have invoked it, consciously or not, when declaring the importance of investing rents from natural resource depletion in building up capital in the rest of the economy”.
Despite this, it was never a goal of Hartwick’s to enact policy change.
“It is quite a commitment to become a policy person,” he affirms. “One needs to cultivate journalists and colleagues in order to get invitations to panels and requests for commentaries. Doing policy can be very distracting from other things”.
Regardless of whether or not affecting policy was part of Hartwick’s objective, his work’s influence has been undeniable. An example that has recently been gaining traction around the globe, including here in Canada is the concept of Carbon taxation, an ever growing government initiative to assign a market value to the environmental degradation caused by the consumption of fossil fuels. While it is unclear whether or not governments will use the accumulated funds to invest in reproducible capital as per the Hartwick rule instructs, the idea of depleting natural resources in exchange for a greater stock financial capital directly aligns with Hartwick’s suggestions.
The Hartwick Rule has been the basis for numerous other economic discoveries since its conception forty years ago. In the early 1990’s Giles Atkinson and David Pearce developed a sustainability index, a measure taken directly from Hartwick’s work on investing resource rents. The piece, which ranked approximately twenty nations, appeared in a 1993 issue of the Journal of Ecological Economics and was revolutionary in suggesting a formula for measuring sustainability. This formula has since been adopted by numerous governmental and multilateral institutions including the World Bank and Statistics Canada.
In August of 1998, Queen’s graduate and current University of Waterloo professor Kenneth Stollery published a piece in the Canadian Journal of Economics. His work extended the Hartwick Rule to the case of endogenous pollution or atmospheric warming to create an “equation of warming”, an incredibly useful measure that has also since been employed by numerous organizations. Hartwick himself has continued to build upon his initial findings, with later additions to his work examining sustainability under various conditions including the case of constant per capita consumption in an economy with a rising population.
When asked about how his view of sustainability has changed in the forty years since the initial publication of his work, Hartwick disclosed he “did not think about population pressure and environmental decay becoming such realistic and pressing problems as they are today. Back in the 1970’s, sustainability seemed like a long term issue. Today it is pretty well on the front burner. I would not buy land in Southern Florida these days.”
The world of sustainability, indeed the world in general, has changed dramatically over the past forty years. This truth makes it even more outstanding that Hartwick Rule has been able to not only withstand the tests of time and scrutiny, but also succeed in being a major influence across numerous sectors. Hartwick describes himself as being lucky to have happened into the field. Those who know him would argue that his success is more attributable to his incredible drive, work ethic, undying curiosity, and inability to let a problem remain unsolved.
Professor Hartwick has written himself into the history books as one of the most influential sustainability economists of our time, and we in the Queen’s community feel as though we are the lucky ones to have such a talent in our midst.
Asheim, G.B. and Withagen, C. (1998) “Characterizing Sustainability: The Converse of Hartwick’s Rule”, Journal of Economics, 23, pp. 159-165.
Atkinson, G.D. and Pearce, D. (1993), “ Capital Theory and the Measurement of Sustainable Development: An Indicator of Weak Sustainability”, Journal of Ecological Economics, 8, 2, pp. 103-108.
Ballet, J., Dedeurwaerdere, T., and Pelenc, J. (2015), “Weak Sustainability versus Strong Sustainability: Brief for Global Sustainable Development Report”, United Nations.
Geir, A.B. (2011), “Hartwick’s Rule”, University of Oslo Department of Economics
Hartwick, J.M. (1977), “Intergenerational equity and investing rents from exhaustible resources”, American Economic Review 66, pp. 972–974.
Pezzey, J.C.V. and Toman, M.A. (2002) “The Economics of Sustainability: A Review of Journal Articles”, pp. 7-9.
Stollery, Kenneth R. (1998) “Constant Utility Paths and Irreversible Global Warming”, Canadian Journal of Economics, 31, 3, August, pp. 730-42.
The author, Nora Ottenhof, is an undergraduate student at Queen’s University majoring in Economics. She will be a third-year student this fall. This summer, she is working as a research assistant for the John Deutsch Institute for the Study of Economic Policy.