A Conceptual Exploration and Critical Inquiry into the Theoretical Foundation(s) of Economic Welfare Measures

Economic welfare measures (EWM) such as the ISEW and the GPI are often argued to lack a sound theoretical foundation. However, we observe that the initial EWM were jointly inspired by Hicksian and Fisherian income. Welfare's experiential nature is Fisherian-inspired, whereas seeing the consumption of community capital (e.g. the ecosystem) as a cost is Hicksian-inspired. As most scholars do not recognize this double theoretical foundation, two distinct welfare interpretations with different time and boundary dimensions are often conflated. EWM can be seen as either capturing the benefits and costs experienced, or as reflecting the benefits and costs of present economic activities (BCPA). The former interpretation excludes future costs, costs shifted abroad and capital changes as they are not experienced in the present, while the latter includes them. Recent developments reveal that EWM are converging toward the ex post established experiential Fisherian foundation formulated by Lawn (2003). Yet, this is not the only way forward as the BCPA-view offers an alternative to account for, for instance, the costs of present activities shifted abroad or to the future, whether they are experienced or not. To avoid inconsistencies, EWM's standardization would greatly benefit from making explicit in future studies which interpretation is taken.