Nature and the ultimate resource: Sustainability with poor input substitution

Abstract

The paper develops an endogenous growth framework to show that poor input substitution and population growth are compatible with sustainable development, once labor and knowledge are adequately taken into account. A sustainable economy with poor input substitution relies on the combination of a favorable demand effect, providing a “safe haven" for capital and knowledge, and a supply effect that is supported by the “waterbed function" of labor. Population growth promotes sustainability through innovation, but has a negative impact if it implies increased pressure on ecosystem services. Induced innovation cannot avert an economic catastrophe when the ecology is tipping. Degrowth policies protect the environment but harm welfare level and development. Knowledge is the most important economic indicator of sustainability, but measurements at sectoral and country levels must be interpreted with great care.