Question

Define and describe the Hartwick Rule and explain how it relates to weak sustainability and strong sustainability.

Answer 1

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. When substitution among resources is possible, investing the returns from these resources into reproducible capital leads to a constant consumption. It corresponds to a zero net investment.

A commonly accepted basic definition of the concept of sustainability dates back to the Brundtland Report from 1987 in which the United Nations stated that ”sustainable development is development that meets the need of the present without comprising the ability of the future generations to meet their own needs”.

Weak Sustainability : The main difference between the concepts of weak, strong, and environmental sustainability lies in the elasticity of substitution between natural and physical capital. Weak sustainability assumes that the elasticity of substitution is 1 or above. Thus, it is theoretically possible to decrease natural capital close to zero and still be sustainable if physical capital can be increased. The maintenance of the constant aggregated level is usually achieved through investment.

Strong Sustainability: In contrast to weak sustainability the substitution of natural and physical capital is limited when discussing strong sustainability. Here, the focus lies on the preserving of the value of the natural capital stock. This is plausible since natural capital does provide some functions which physical capital cannot provide. Hence, the natural capital is often claimed to be ’critical natural capital’ which is not to be reduced in order to ensure intergenerational equity

Environmental Sustainability: Whilst strong and weak sustainability focus on sustaining aggregate values of capital stocks environmental sustainability aims at maintaining ”physical flows of individual resources”.

The implementation of weak sustainability in governance can be viewed theoretically and practically through Hartwick’s rule. Hartwick's rule, is often referred to as "invest resource rents", where ‘rent’ is payment to a factor of production (in this case capital) in excess of that needed to keep it in its present use. This requires that a nation invest all rent earned from exhaustible resources currently extracted.

A prime example of a weak sustainability is the Government Pension Fund of Norway. Statoil ASA, a state-owned Norwegian oil company invested its surplus profits from petroleum into a pension portfolio to date worth over $325 billion. The oil, a type of natural capital, was exported in vast quantities by Norway. The resultant fund allows for long-lasting income for the population in exchange for a finite resource, actually increasing the total capital available for Norway above the original levels. This example shows how weak sustainability and substitution can be cleverly applied on a national scale, although it is recognised that its applications are very restricted on a global scale. In this application, Hartwick’s rule would state that the pension fund was sufficient capital to offset the depletion of the oil resources.