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increasing ecological damage, unless the use of resources and the discharge of emissions per unit of output fall as fast as the economy grows. This inescapable fact directs attention to a neglected dimension of economic productivity: productivity in the use of the environment. Conventional measures of productivity change are misleading indicators because they do not account for environmental inputs and outputs, which may be as large as other factors of production.
In this paper we explore two methods for incorporating natural resources into conventional economic performance indicators. The first, natural resource accounting (NRA), is, simply put, a methodology that extends accepted notions of income and depreciation to the stock of natural resources, treating such resources as depreciable assets. The second, multifactor productivity (MP), can be extended to bring in measures of environmental inputs and outputs. The first example provided in this paper looks at adjustments to the national accounts using NRA as a way to measure the economic value of resource depletion in Indonesia. The second example, assessing or analyzing agricultural systems, employs NRA to value soil and water depletion, and also measures off-site damages to account for environmental performance in a larger economic sense. The third example incorporates health costs into MP measures of the electric power industry to arrive at an estimate of productivity change under regulations limiting harmful emissions.
National Income and Natural Resource Accounting
The aim of national income accounting is to provide an information framework suitable for analyzing the performance of the economic system. The current system of national accounts reflects the economic concerns that were dominant when the system was developed, particularly the theories of John Maynard Keynes and his contemporaries. The great aggregates of Keynesian analysis—consumption, savings, investment, and government expenditures—are carefully defined and measured. But Keynes and his contemporaries were preoccupied with the Great Depression and the business cycle—specifically, with explaining how an economy could remain for long periods of time at less than full employment. During the Great Depression, commodity prices were at an all-time low. Thus, as Keynesian analysis largely ignored the productive role of natural resources, so does the current system of national accounts.
An earlier generation of classical economists had regarded income as the return on three kinds of assets: natural resources, human resources, and invested capital (land, labor, and capital, in their vocabulary). But natural resource scarcity played little part in nineteenth-century European economics—resources were available and prices were falling. Neoclassical economists from whose work traditional Keynesian and most contemporary economic theories are derived virtually ignored natural resources, focusing on human resources and invested capital. After World War II, when these theories were applied to problems of eco-