Natural capital | free goods and services

Natural capital is the way nature comes together in ways that humans can readily understand in economic terms — nature that delivers flows of goods and services that either can be bought and sold on a market or would cost money to replace.

For example, the combination of sunlight, soil, water and plants provides food and fibre [goods], clean air and filtered water [services].

Goods that can be sold and services that are very hard to replace.

What’s more, nature provides these things for free.

And in economic terms at least natural capital is just there, it does not have to be created. Eons of geological and evolutionary time have provided the human race with vast environmental assets. Add human ingenuity and the opportunities to exploit natural resources seem endless. 

This capital can, however, be used up.

Economic thinking

If environmentalism is your thing then it is scary thing to call anything found in nature an asset. For it is usually the kiss of death.

Claim that there is something usable just sitting there in the environment and before long an entrepreneurial human will come along and liquidate the asset. Even the words sound like they come from a terminator movie.

Throughout history we have used our genius at innovation and commerce to convert natural capital into saleable commodities to create wealth. We begin by assigning a property right over the asset that might be worth something — think of a parcel of land, a mining lease, or a right to pan for gold on a stretch of river. Then, given the right investment, opportunity and market development, our budding entrepreneur will commercialise the asset in the blink of an eye...

  • Trees become railway sleepers, pit props, roof trusses, furniture and firewood.
  • The soil where the trees used to be now grows wheat
  • Flower filled meadows become livestock factories.
  • Ore bodies and coal seams become giant holes in the ground.

These conversions and some savvy technology have primed economies and built powerful cultures that are packed full of goods and services that many enjoy. Indeed around a quarter of us, including the majority in the west, now live like kings.

Next time you see a true to life film about gladiators or the crusades imagine how an average westerner today eats, sleeps, learns and is kept healthy compared to the wealthiest character in the movie.

There is no doubt that use of nature provides for us — our numerical success confirms it.

natural capital | wood products

Free goods and services

If we are specific about natural capital we really mean that it is free. There is no need to create the resource as nature does that for us and this is nirvana for economics.

All that has to happen when the raw materials are free is to convert them into something useful. Building a house would be easy if all the materials simply arrived on trucks and were stacked up on the plot ready to be put together. All your time and money could go into the build.

And there is more.

Nature is renewable. The basis of biology is more making, from the fundamentals of photosynthesis to the complexities of mammalian reproduction, what biology does is make more biology.

This is exactly what you want from capital.

Not so free resources

The economic premise is that capital delivers flows [goods and services] that can either be used or ploughed back to make the capital grow. In theory the best use of capital is where flows sustain economic activity without depleting the asset — ideally flows of goods and services are sustainable.

Except it is not all cotton sheets, rump steak on a Monday and air-conditioned timber-framed houses. Asset conversion has consequences.

To begin with there are now fewer assets. Once liquidated, an asset is used up and unless it is naturally renewable, it is a once only use.

Conversion to realise commercial value usually has consequences for the environment that is left behind. A logged forest is obviously denuded and is never quite the same even when the trees grow back.

Those meadows that support the cattle and sheep can degrade under hooves and teeth, loose their grass cover and have the soil erode in the wind and rain.

Extracting assets from below ground can also affect waterways and groundwater.

Environmentalism became necessary to draw attention to these externalities and to put a stop to the more damaging of them. Activists looked to governments to rule against unconstrained resource use, especially practices that damaged the environment. The legislation that followed was protective and restrictive. Laws were passed that set aside areas as parks and reserves, protected rare species and made polluters pay with numerous public servants to back it all up - it wasn't called the environmental protection agency for nothing.

Only this approach pitted environmentalism against commerce. Greens fought browns, and in many parts of the world they still do.

It also put environmentalists off the idea of naming anything as an environmental asset. The risk was that if an asset were named as such, it would not take long for an entrepreneur or two to pitch up and exploit it.

The problem was that keeping entrepreneurs away from assets eventually stifles economic activity. This tension meant that the laws were lax enough to make sure most assets remained in private hands and readily exploited.

This is the core of the local and global conflict between green and brown.

natural capital | rice paddys in Indonesia

Pragmatology

In the last decade many green groups have recognised that a stand off with commerce was either unwinnable or futile. Tentatively, some of them have begun to talk and even befriend the market mechanism. It has been a nervous relationship that is still evolving and not without opportunity itself.

It has allowed environmentalists to understand and talk about natural capital in the same terms as the entrepreneurs.

This means that they not only understand more of the mindset of commerce but can explain that there are limits to natural capital and huge long-term benefit to accounting externalities.

Equally the brown end of town will never wear green but they are becoming more aware of resource limits.

This is a big and important shift — true pragmatology.


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