“Natural Capital” – Let’s Dig Deeper

Posted on September 12, 2012

I am currently attending a conference where the issue of ‘natural capital’ once again comes up. The argument goes that we currently measure wealth as GDP (a measure of income) but we fail to measure our capital – be it natural capital, human capital, etc. It is argued that our measures of wealth are therefore incomplete.

So far so good. This is all true. The problem is that this analysis does not go far enough.

Let us sidestep, for the moment, the tricky question of what constitutes ‘wealth’ and focus on the questions of capital vs income. Capital, and its accumulation, has value – but what value? The reality is that capital is only directly useful to people when it is converted to income. Capital does not feed us on a day to day basis – income does. The value of capital is that it provides a basis on which income can be generated.

A business invests in capital assets – such as factories – not so that management and workers can sit there and admire that factory. They build it as an investment so that it can generate income – the income used to pay workers, pay shareholders, pay taxes and to re-invest in other capital projects that, in turn, will generate more income – and so on.

How does this apply to “natural capital”? In exactly the same way.

Nature – and our natural capital – is one basis on which we generate income – income that is measured as GDP and translates into our ability to feed, clothe, consume, travel and so forth. Natural capital is therefore vital as a way of allowing us to generate income and therefore continue to live. If we deplete and do not replenish our natural capital we will run out of ways to generate income – and therefore to live and grow our economies. It is for this reason that natural capital is important.

This has many implications. The first is that, as environmentalists and conservationists rightly point out, we cannot keep depleting our natural capital, fail to replenish it and then expect to be able to keep generating income in perpetuity. Just like the person who spends all his capital no longer has any way of generating income, so it will be if we squander our natural capital.

However, there are other implication. The objective should not be just mindlessly to accumulate natural capital. Rather we need to invest wisely in natural capital as a way of being able to sustain our long term generation of income (‘income’ here referring not just to monetary income but to very many different outputs that are of value to us – both tangible and intangible values). We therefore need to carefully select where we place our investments by understanding which natural capital has value in generating future ‘income’ and which less so. Investing in something simply because it is ‘natural capital’ is like asking company management to invest in a factory because ‘factories are a good thing’ – irrespective of whether they can produce products that anyone wants to buy.

The reality is that we still have to learn how to evaluate our natural capital in a way that is meaningful. So far we have only fot as far as putting very large numbers on ‘nature’ in the hope that everyone will be impressed. We still need to work out the different types of value (or income) that we get from different types of natural capital (not a trivial task). Conservationists and environmentalists still have to come to terms with the fact that not all natural capital is created equal – some has more potential than the other and we need to invest in that which has value and not invest in that which has less value.

Also at today’s conference I was heartened that there was not much support for the idea that we should preserve things ‘for their own sake’.  We preserve things because we value them and we had better understand how we value them and why we value them so that we can meaningfully explain them to others.

This discussion parallels that in a previous blog posting where I argued that nobody wants ‘biodiversity’. Rather what we all want is the value and benefits that biodiversity provides. And so it is with natural capital. All these concepts bandied around in the conservation and environmental world are useful. However, I often get the impression that they are put out there half-baked. If we are to remain credible and get widespread support we need to dig deeper and explain more clearly what it is about what we are trying to build that is valuable while accepting that some of it may not be so valuable. Then we can win people’s hearts and minds.

So, yes, let’s fight for natural capital. But let’s also lay out clearly how capital is converted into income – now and in the future – and, in that context, which capital is worth building and which not so much.