Hartwick's Rule: Intergenerational Equity and the Investing of Rents from Exhaustible Resources

Summary

"Intergenerational Equity and the Investing of Rents from Exhaustible Resources" is a short (three-page) note by Canadian economist John M. Hartwick, then at Queen's University, published in the American Economic Review, Vol. 67, No. 5 (December 1977), pp. 972–974. Despite its brevity, it is one of the most cited papers in resource and environmental economics, generating what is now called "Hartwick's rule" — a formal result on how an economy can hold consumption constant over time while running down a finite stock of natural resources. It sits inside the theoretical lineage opened by Robert Solow's 1974 symposium paper "Intergenerational Equity and Exhaustible Resources" (Review of Economic Studies), and Solow himself later named and popularized the result as "Hartwick's rule" in his own 1986 paper "On the Intergenerational Allocation of Natural Resources" (Scandinavian Journal of Economics 88(1), pp. 141–149). The paper carries weight for the Georgist case not because it is a policy tract — it is a piece of formal growth theory with no stated Georgist affiliation — but because it supplies a rigorous, mainstream economic argument that the rent from a depletable natural resource is not simply the extractor's income to consume: it is a stock of value that, to preserve fairness across generations, should be captured and reinvested rather than spent down.

The Core Argument

Working inside a Solow-style aggregate growth model with a Cobb-Douglas production function combining reproducible (physical) capital and an exhaustible natural resource, Hartwick shows that if an economy invests all of the current rent earned on the resource being extracted — the Hotelling rent, i.e., resource price minus extraction cost — into reproducible capital, and consumes the rest of output, then consumption can be held constant indefinitely even as the resource stock declines toward exhaustion. This is the formal content of what came to be called Hartwick's rule. In Hartwick's own words (1977, pp. 973–974), "investing all net returns from exhaustible resources in reproducible capital . . . implies intergenerational equity" (quoted in Asheim, Buchholz & Withagen 2003, p. 130). The now-canonical short paraphrase in the secondary literature is "invest all profits or rents from exhaustible resources in reproducible capital such as machines." The result depends on the underlying path being efficient — Hartwick's paper builds on Solow's (1974) prior demonstration that, under a Cobb–Douglas technology with adequate substitutability between capital and the resource, a competitive/efficient extraction path exists that supports non-declining consumption; Hartwick's specific contribution is the investment rule that decentralizes and implements that outcome — an economy (or a social planner) that follows the "invest the rents" rule will trace out a constant-consumption path, without needing to solve the full dynamic optimization problem directly. Subsequent theoretical work (notably Dixit, Hammond, and Hussain (1980) and later Withagen and Asheim) showed the converse also holds under the relevant efficiency and regularity conditions: a constant-consumption efficient path implies zero net investment in the Hartwick sense, i.e., resource rents are being fully reinvested. The rule has also been connected to the Rawlsian maximin criterion for intergenerational justice: an efficient, egalitarian (maximin) consumption path satisfies Hartwick's rule, giving the investment rule a distributive-justice interpretation, not merely a growth-accounting one.

Genuine Savings and Solow's Follow-Up

Hartwick's rule became the theoretical seed of the "genuine savings" (also called adjusted net saving) literature in sustainability economics. Genuine/adjusted net saving generalizes the rule into an empirical indicator: national saving, minus depreciation of produced capital, minus depletion of natural resources (valued at their resource rent, using a Hotelling-type valuation) and pollution damages, plus investment in human capital (e.g., education spending). A country with positive genuine savings is, on this "weak sustainability" reading, reinvesting enough to hold its total capital — produced, natural, and human — non-declining; negative genuine savings signals that a nation is running down its total wealth, resource windfalls included. The World Bank has published Adjusted Net Savings estimates for roughly 160 countries using this Hartwick-derived methodology. Robert Solow's 1986 paper both named "Hartwick's rule" after the 1977 note and extended the analysis, cementing its place as one of the foundational results of what is now called weak sustainability — the view that natural and produced capital are substitutable in producing well-being, so long as the aggregate value of the combined capital stock is maintained.

Relation to the Georgist Case

The paper's Georgist relevance is conceptual and foundational rather than direct advocacy. Hartwick provides, from inside mainstream growth theory, an argument structurally identical to the Georgist claim about land rent: because a natural resource's value is not created by the extractor's effort, and because the resource is finite and shared across generations, the rent it generates is properly treated as common wealth — capital belonging collectively to present and future claimants — rather than as ordinary private income to be consumed. This underwrites the logic behind the resource rents concept on this wiki, which extends the Georgist land-rent argument to oil, minerals, spectrum, and other resources not produced by labor, and it gives a formal efficiency-and-equity rationale (beyond simple fairness intuition) for public capture of resource rent, as in severance taxes, royalty auctions, and sovereign wealth funds. It is frequently cited by name in the "genuine savings" and natural-resource-fund literatures that Georgist and ecological-economics writers draw on when arguing that resource wealth should be captured and preserved for future generations rather than left to private extractors or dissipated in current-generation public spending.

A crucial precision, honestly stated: Hartwick's rule is a rule about investment, not about cash distribution. It says resource rents should be reinvested in reproducible (or, in the genuine-savings extension, human) capital so that the productive base — and hence sustainable consumption — is not run down. It does not, by itself, argue for or model paying resource rents out as an equal per-capita cash dividend, which is the citizen's-dividend model associated with Alaska. A dividend funded by investment income on a rent-financed sovereign wealth fund (rather than by spending the rent principal itself) is compatible with Hartwick's logic — the underlying capital stock is preserved and only the return is distributed — but the 1977 paper itself makes no claim about dividends, distribution, or any particular use of the return once capital is preserved; that is a separate, later normative and policy step. This page should be read as supporting rent capture and reinvestment as a matter of intergenerational equity, and only indirectly and by extension supporting the case for resource-rent dividends specifically.

Nuances and Limits

• A three-page theoretical note, not an empirical study. The paper is a formal proof within a stylized aggregate growth model (Cobb-Douglas production, a single homogeneous exhaustible resource, perfect foresight/efficient markets). It makes no empirical claims about any actual economy, resource, or policy.
• Sufficiency, not necessity, and model-dependent. The rule's original proof shows that investing all rents is sufficient for constant consumption under the assumed technology; later literature (Dixit, Hammond & Hussain 1980; Withagen & Asheim, and others) clarified the precise conditions (efficiency, appropriate elasticity of substitution, regularity of the capital/resource aggregator) under which the rule is also necessary, and showed it can fail or require modification outside those conditions — e.g., with technical change, multiple resources, population growth, or non-Cobb-Douglas technology. Some later work (surveyed in Withagen & Asheim's "Hartwick's Rule: Myths and Facts") stresses that Hartwick's original result is better understood as a characterization of one class of efficient, constant-consumption paths than as a general practical policy prescription — several theorists caution that following the "invest the rents" rule off that specific efficient path does not guarantee sustainability.
• Weak-sustainability assumption. The rule and its "genuine savings" extension both assume produced and natural capital are substitutable — the "weak sustainability" position. This is contested by "strong sustainability" economists (particularly in ecological economics) who argue some natural capital (biodiversity, climate stability, critical ecosystem services) has no adequate produced-capital substitute, so a Hartwick-style aggregate capital rule could permit depleting essential natural capital as long as some other capital rises in compensating value.
• Practical valuation is hard. Applying the rule (or genuine savings) empirically requires valuing resource stocks and rents — a Hotelling-rent calculation sensitive to price and extraction-cost assumptions — which is at least as difficult in practice as land valuation, a limitation genuine-savings researchers and the World Bank's own methodology notes acknowledge.
• Says nothing about intra-generational distribution. The rule concerns holding aggregate consumption constant across generations; it is silent on how consumption is distributed within a generation, so it does not by itself argue for the equal per-capita distribution that gives the Georgist citizen's-dividend model its distinctive character.

Bears On

• Outcome: Resource-rent dividends are workable and durable — Hartwick's rule supplies the theoretical case for capturing and reinvesting resource rents rather than letting extractors consume them; it supports the underlying premise that resource rents are common wealth requiring careful stewardship, though it does not itself model or endorse cash dividends specifically (see "Relation to the Georgist Case" above for the precise scope of support).
• Concept: Resource Rents — provides the formal growth-theoretic rationale for treating resource rents as capturable, investable common wealth rather than ordinary private income.
• Event: Alaska Permanent Fund — the Fund's basic structure (dedicate a share of oil rent to a permanent, invested fund rather than spending it as current revenue) is a real-world institution whose logic parallels Hartwick's rule, though Alaska's 1976 constitutional fund predates the paper's December 1977 publication and its documented origin story attributes the design to Governor Jay Hammond's own political and fairness intuitions — "set aside a modest portion of the proceeds from the exploitation of our non-renewable resources for investment in our future" — rather than to Hartwick or any contemporaneous exhaustible-resource economics (the Alaska Permanent Fund Corporation's own history and Hammond's account make no reference to the academic literature). The connection is best read as a structural parallel independently arrived at, not a causal one.
• Concept: Citizen's Dividend — Hartwick's rule bears on the capture-and-preserve half of the dividend logic (don't let the resource-rent capital base be run down); it does not itself argue for the distribute-as-equal-cash half.

See Also

• Resource Rents
• Alaska Permanent Fund
• Citizen's Dividend
• Resource-rent dividends are workable and durable
• Natural Resource Rents, Local Taxes, and Government Performance: Colombia

Sources

1. John M. Hartwick (1977), "Intergenerational Equity and the Investing of Rents from Exhaustible Resources," American Economic Review, 67(5), pp. 972–974. JSTOR (paywalled). Hartwick was at Queen's University, Kingston, Ontario (confirmed via the Canadian Economics Association). Bibliographic details and the paper's core result are further corroborated by the OSTI bibliographic record and by the peer-reviewed literature; a directly verified verbatim statement of the rule (Hartwick 1977, pp. 973–974) is quoted in Asheim, Buchholz & Withagen (2003), source 5 below. (Full AER text remains paywalled; the JSTOR-hosted PDF was not retrievable in this session.)
2. Robert M. Solow (1974), "Intergenerational Equity and Exhaustible Resources," Review of Economic Studies, 41(5) (Symposium on the Economics of Exhaustible Resources), pp. 29–45 — used for the prior growth-theoretic framework (efficient constant-consumption paths under Cobb-Douglas substitutability) that Hartwick's investment rule builds on. Volume, issue, and page range confirmed via the Oxford Academic record and RePEc/IDEAS.
3. Robert M. Solow (1986), "On the Intergenerational Allocation of Natural Resources," Scandinavian Journal of Economics, 88(1), pp. 141–149 — used for the naming and popularization of "Hartwick's rule" and its connection to weak sustainability.
4. World Bank, "Adjusted Net Savings" (DataBank / methodology documentation). World Bank DataBank — used for the genuine-savings/adjusted-net-saving indicator's definition and its explicit derivation from Hartwick's rule.
5. Geir B. Asheim, Wolfgang Buchholz & Cees Withagen (2003), "The Hartwick Rule: Myths and Facts," Environmental and Resource Economics 25(2), pp. 129–150 (Kluwer) — used for the theoretical caveats on necessity/sufficiency and the characterization of the rule as descriptive of a class of efficient paths rather than an unconditional sustainability prescription, and for the verbatim quotation of Hartwick's rule in the body above. Open-access author copy: VU Research Portal PDF. (The VU portal cover sheet mislabels the venue as International Review of Environmental and Resource Economics; the paper's own printed header gives Environmental and Resource Economics 25: 129–150, 2003.)
6. Alaska Permanent Fund Corporation — history of the Fund and Dividend (established 1976 by constitutional amendment; first dividend paid 1982) — used for the Alaska Permanent Fund comparison and its chronology relative to Hartwick's paper.

Editor's note on sourcing: The original 1977 AER note remains paywalled on JSTOR and its openly hosted PDF copies (e.g. William Nordhaus's site) were not reachable from this verification session. The paper's bibliographic details, Hartwick's affiliation, and a page-cited verbatim statement of the rule ("investing all net returns from exhaustible resources in reproducible capital . . . implies intergenerational equity", Hartwick 1977, pp. 973–974) have been verified against the peer-reviewed Asheim–Buchholz–Withagen (2003) paper (source 5), the OSTI bibliographic record, and the Canadian Economics Association. The précis of the model's internal assumptions (single homogeneous resource, Cobb–Douglas aggregator, perfect foresight) reflects the standard reading in that literature rather than a line-by-line read of the three-page note; a future editor with full JSTOR/library access may wish to confirm those model details directly.