Who's afraid of Natural Capital?

I know that some prefer not to use the concept of natural capital; this can be for a variety of reasons, ranging from its association with the idea of money and monetary value, and worries that they will be labelled 'neo-liberal', across to fear that influential greybeards will glare at them and cross them off their Earth Day greetings card list.  I use the idea all the time, and when Herman Daly writes about it, as he did the other week, I take notice.  His blog begins ...

Some people object to the concept of “natural capital” because they say it reduces nature to the status of a commodity to be marketed at its exchange value. This indeed is a danger, well discussed by George Monbiot. Monbiot’s criticism rightly focuses on the monetary pricing of natural capital. But it is worth clarifying that the word “capital” in its original non-monetary sense means “a stock or fund that yields a flow of useful goods or services into the future.” The word “capital” derives from “capita” meaning “heads,” referring to heads of cattle in a herd. The herd is the capital stock; the sustainable annual increase in the herd is the flow of useful goods or “income” yielded by the capital stock–all in physical, not monetary, terms. The same physical definition of natural capital applies to a forest that gives a sustainable yield of cut timber, or a fish population that yields a sustainable catch. This use of the term “natural capital” is based on the relations of physical stocks and flows, and is independent of prices and monetary valuation. Its main use has been to call attention to and oppose the unsustainable drawdown of natural capital that is falsely counted as income.

Big problems certainly arise when we consider natural capital as expressible as a sum of money (financial capital), and then take money in the bank growing at the interest rate as the standard by which to judge whether the value of natural capital is growing fast enough, and then, following the rules of present value maximization, liquidate populations growing slower than the interest rate and replace them with faster growing ones. This is not how the ecosystem works. Money is fungible, natural stocks are not; money has no physical dimension, natural populations do. Exchanges of matter and energy among parts of the ecosystem have an objective ecological basis. They are not governed by prices based on subjective human preferences in the market.

Furthermore, money in the bank is a stock that yields a flow of new money (interest) all by itself without diminishing itself, and without the aid of other flows. Can a herd of cattle yield a flow of additional cattle all by itself, and without diminishing itself? Certainly not. The existing stock of cattle transforms a resource flow of grass and water into new cattle faster than old cattle die. And the grass requires sunlight, soil, air, and more water. Like cattle, capital transforms resource flows into products and wastes, obeying the laws of thermodynamics. Capital is not a magic substance that grows by creating something out of nothing.

While the environmentalist’s objections to monetary valuation of natural capital are sound and important, it is also true that physical stock-flow (capital-income) relations are important in both ecology and economics. Parallel concepts in economics and ecology aid the understanding and proper integration of the two realities–if their similarities are not pushed too far!  The biggest mistake in integrating economics and ecology is confusion about which is the Part and which is the Whole. Consider the following official statement, also cited by Monbiot:

"As the White Paper rightly emphasized, the environment is part of the economy and needs to be properly integrated into it so that growth opportunities will not be missed." —Dieter Helm, Chairman of the Natural Capital Committee, The State of Natural Capital: Restoring our Natural Assets, Second report to the Economic Affairs Committee, UK, 2014.

If the Chairman of the UK Natural Capital Committee gets it exactly backwards, then probably others do too. The environment, the finite ecosphere, is the Whole and the economic subsystem is a Part–a completely dependent part. It is the economy that needs to be properly integrated into the ecosphere so that its limits on the growth of the subsystem will not be missed. Given this fundamental misconception, it is not hard to understand how other errors follow, and how some economists, imagining that the ecosphere is part of the economy, get confused about valuation of natural capital.

In the empty world, natural capital was a free good, correctly priced at zero. In the full world, natural capital is scarce. How do we take account of that scarcity without prices? This question is what understandably leads economists to price natural capital, and then leads to the monetary valuation problems just discussed. But is there not another way to recognize scarcity, besides pricing? Yes, one could impose quotas–quantitative limits on the resource flows at ecologically sustainable levels that do not further deplete natural capital. We could recognize scarcity by living sustainably off of natural income rather than living unsustainably from the depletion of natural capital.

In economics, “income” is by definition the maximum amount that can be consumed this year without reducing the capacity to produce the same amount next year. In other words, income is by definition sustainable, and the whole reason for income accounting is to avoid impoverishment by inadvertent consumption of capital. This prudential rule, although a big improvement over present practice, is still anthropocentric in that it considers nature in terms only of its instrumental value to humans. Without denying the obvious instrumental value of nature to humans, many of us consider nature to also have intrinsic value, based partly on the enjoyment by other species of their own sentient lives. Even if the sentient experience of other species is quite reasonably considered less intrinsically valuable than that of humans, it is not zero. Therefore we have a reason to keep the scale of human takeover even below that indicated by maximization of instrumental value to humans. On the basis of intrinsic value alone, one may argue that the more humans the better–as long as we are not all alive at the same time! Maximizing cumulative lives ever to be lived with sufficient wealth for a good (not luxurious) life is very different from, and inconsistent with, maximizing simultaneous lives.

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There's more, and it can be read here.  But this is enough to see that it is possible to be both better informed and a little bit wiser.