Hartwick's Rule
Encyclopedia
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 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
.
Investment
Investment has different meanings in finance and economics. Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security for the principal amount, as well as security of return, within an expected period of time...
in produced capital (buildings, roads, knowledge stocks, etc.) that is needed to exactly offset declining stocks of non-renewable resources
Non-renewable resources
A non-renewable resource is a natural resource which cannot be produced, grown, generated, or used on a scale which can sustain its consumption rate, once depleted there is no more available for future needs. Also considered non-renewable are resources that are consumed much faster than nature...
. This investment is undertaken so that the standard of living does not fall as society moves into the indefinite future. Solow
Robert Solow
Robert Merton Solow is an American economist particularly known for his work on the theory of economic growth that culminated in the exogenous growth model named after him...
(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
Natural capital
Natural capital is the extension of the economic notion of capital to goods and services relating to the natural environment. Natural capital is thus the stock of natural ecosystems that yields a flow of valuable ecosystem goods or services into the future...
.
The difference between total investment in some kinds of capital and total disinvestment
Disinvestment
Disinvestment, sometimes referred to as divestment, refers to the use of a concerted economic boycott, with specific emphasis on liquidating stock, to pressure a government, industry, or company towards a change in policy, or in the case of governments, even regime change...
in other types of capital has been labelled "genuine savings". Genuine savings has been estimated for many countries by the World Bank
World Bank
The World Bank is an international financial institution that provides loans to developing countries for capital programmes.The World Bank's official goal is the reduction of poverty...
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
Sustainability
Sustainability is the capacity to endure. For humans, sustainability is the long-term maintenance of well being, which has environmental, economic, and social dimensions, and encompasses the concept of union, an interdependent relationship and mutual responsible position with all living and non...
.