Abstract
This paper tries to answer the following research question: can multidimensional concepts like well-being or sustainability be measured by using a single metric such as shadow prices? The defence of shadow prices is generally based on the pragmatic argument that different dimensions (economic, social, environmental,…) cannot be aggregated when measured by means of different metrics, thus a common measurement rod has to be found, that is shadow prices have to be used. Here the following conclusions are drawn: (1) The choice of shadow prices is not neutral, in fact implicit assumptions such as that substitutability is always desirable need to be accepted. This means that the use of shadow prices is not consistent with a simple measurement objective but with a precise weltanschauung. (2) Shadow prices are primarily meant to implement efficiency, i.e. prices reflect conditions at the margin, and thus this is their natural objective. In the framework of sustainable well-being measurement, this may give rise to counterintuitive results, such as that the loss of an important well-being component is not perceived since its physical scarcity is compensated by its increase in monetary value. (3) The pragmatic measurement argument is not well grounded, since multidimensional measurement frameworks exist, such as multi-criteria evaluation. Since incommensurability between different metrics does not imply incomparability, there is no obvious reason for not using multidimensional techniques to measure multidimensional concepts.
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Notes
One obvious problem here is that many natural resources (e.g. air, water and wilderness) do not have observable prices. Thus one would need to find implicit or shadow prices in some way. Even those prices that do exist may not be useful; they may be affected by market imperfections and taxes, and they may exclude externalities involved with the production and use of the resource. In terms of history of the economic thought, it is also worthy to remember that the issues concerning the nature, role and measurement of capital goods was the focus of the so-called Cambridge controversy (Harcourt 1972). Although the term capital was referred to artificial capital, the results can be extended to natural capital too, if money valuation is used, in particular the problem of circularity among the quantity of capital, its monetary value and the rate of interest.
In terms of history of the economic thought, it is worthy to remember that indeed shadow prices were invented as a solution to the debate on economic calculus in a socialist economy. Hayek, replying to Neurath wrote (Neurath 1973, p. 31): “Neurath was quite oblivious of the insuperable difficulties which the absence of value calculations would put in the way of any rational economic use of the resources…”. Or, as Von Mises had put it (Von Mises, 1920, in Hayek, ed. 1935, p. 111), "Where there is no free market, there is no pricing mechanism; without a pricing mechanism, there is no economic calculation". Kantorovich (1939) found a possible solution to this dilemma by inventing shadow prices (see also Karmiloff, 1963 for an overview of shadow prices use in the former Soviet Union).
Cabeza Gutés (1996) notes that the concept of weak sustainability is nothing but a by-product of growth theory with exhaustible resources when:
1. the definition of inter-generational equity is restricted to a non-declining level of consumption per capita;
2. the relationship environment-economy is restricted to the introduction of an aggregate input called natural capital into the production function.
Indeed, weak sustainability is simply a different statement of the so called Hartwick-Solow rule (Hartwick 1977, 1978; Solow Solow 1974a, b, 1986), stating that in order to have a stream of constant level of consumption per capita to infinity, society should invest all the current returns from the utilisation of the flows from the stock of exhaustible resources. These authors generally recognise that even if the production technologies of an economy can potentially yield increases in output commensurate with increases in inputs, overall output will be constrained by limited supplies of resources (growth theory with exhaustible resources). But these limits can be overcome by technological progress: if the rate of technological progress is high enough to offset the decline in the per capita quantity of natural resource services available, output per worker can rise indefinitely. A stronger statement is the claim of weak sustainability: even in the absence of any technological progress exhaustible resources do not pose a fundamental problem if reproducible artificial capital is sufficiently substitutable for natural resources.
Emphasis added to the original.
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Munda, G. On the Use of Shadow Prices for Sustainable Well-Being Measurement. Soc Indic Res 118, 911–918 (2014). https://doi.org/10.1007/s11205-013-0446-0
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DOI: https://doi.org/10.1007/s11205-013-0446-0