A Brief Historical Perspective on Natural Capital — Part II — a guest post series by Nuno Gaspar de Oliveira

This is the sec­ond part of a guest post series by Nuno Gas­par de Oliveira who works as.consultant and advi­sor in Esporão, a por­tuguese main wine and olive oil com­pany, in the area of Strate­gic Man­age­ment for sus­tain­abil­ity using ‘Busi­ness Ecosys­tems’ models,

This guest post has pre­vi­ously been pub­lished on LinkedIn. It is the expres­sion of the author’s thoughts and expe­ri­ences and as such is acknowl­edged as a fruit­ful con­tri­bu­tion to the dis­cus­sion on bio­di­ver­sity off­sets. If you want to react or clar­ify your own posi­tion (under­pin or dis­prove), please leave a reply below!

Rousseau’s think­ing lead to a need to assess how this rel­a­tively new con­cepts of land own­er­ship was affect­ing the soci­ety and thereby, the whole west­ern eco­nomic sys­tem.

Prop­erty rights and serf­dom was on the basis for the pre-liberal think­ing on the role of nat­ural cap­i­tal and human well-being. In the XVI­I­Ith cen­tury, a cru­cial man to nowa­days finance and eco­nom­ics, Adam Smith released one of his most pro­claimed works, ‘An Inquiry into the Nature and Causes of the Wealth of Nations’ (1776), for­merly called sim­ply ‘The Wealth of Nations’. In this philo­soph­i­cal essay Smith estab­lishes some of the most pop­u­lar the­o­ries that sup­ported clas­sic lib­er­al­ism, strongly influ­enced by key philoso­phers like John Locke (e.g. ‘An Essay Con­cern­ing Human Under­stand­ing’, 1690), David Hume (e.g. ‘Essays, Moral, Polit­i­cal, and Lit­er­ary’, 1742) and Edmund Burke (e.g. ‘A Vin­di­ca­tion of Nat­ural Soci­ety: A View of the Mis­eries and Evils Aris­ing to Mankind’, 1756). Smith dwelled boldly between the deep domains of human nature that where in fact the foun­da­tions for the devel­op­ment of‘util­i­tar­i­an­ism’ and ‘free mar­ket’ the­o­ries. Accord­ing to the pro­fes­sor of eco­nom­ics V. L. Smith (1998):

“Adam Smith’s two major works are based on appar­ently con­tra­dic­tory themes in human nature: non-cooperative self-interest and other-regarding sym­pa­thy. These views are not con­tra­dic­tory if we dis­tin­guish imper­sonal mar­ket exchange and per­sonal exchange — Non­co­op­er­a­tive behav­iour in the for­mer max­i­mizes the gains from exchange, the basis of spe­cial­iza­tion and wealth cre­ation. Coop­er­a­tive behav­iour in per­sonal exchange is based on reci­procity, trad­ing gifts, favours, and assis­tance across time, which max­i­mizes the gains from social exchange. That peo­ple can be both coop­er­a­tive and non­co­op­er­a­tive is cor­rob­o­rated in lab­o­ra­tory exper­i­ments and is pos­tu­lated to stem from a self-interested propen­sity for exchange in mar­kets and friendships.”

The infa­mous argu­ment of the ‘invis­i­ble hand’ has been object of both philo­soph­i­cal (Bronk, 1998; Fleis­chacker, 2002) and eco­nom­ics analy­sis (Stiglitz, 1991; Kennedy, 2009) and rages from quite con­tro­ver­sial to absolute tru­ism. Albeit the ‘Socratic’ dis­cus­sion about the true mean­ing of Smith’s words sup­port­ing The Wealth of Nations’, there’s one par­tic­u­lar pas­sage, prob­a­bly inspired by Rousseau, that becomes quin­tes­sen­tial to the ideas of Schu­macher (1973) and The Club of Rome (e.g., Mead­ows et al., 1972), inter alia:

“As soon as the land of any coun­try has all become pri­vate prop­erty, the land­lords, like all other men, love to reap where they never sowed, anddemand a rent even for its nat­ural pro­duce.”

So, to some extent, there was an over­all agree­ment that nat­ural cap­i­tal was cru­cial to any major philo­soph­i­cal, polit­i­cal or eco­nomic change and on the other hand, the main hur­dle oppos­ing to human unlim­ited desire for end­less growth, some­how an after­shock of Thomas Malthus affir­ma­tion in ‘An Essay on The Prin­ci­ple of Pop­u­la­tion’ (1798) that pop­u­la­tion, when unchecked,increases in a geo­met­ri­cal ratio, while sub­sis­tence, increases only in an arith­meti­cal ratio.

This ‘lin­ear’ think­ing lead to a wide range of polit­i­cal and eco­nomic dis­tor­tions, many of which still endure. Nowa­days, as a result of the tur­moil evo­lu­tion of philo­soph­i­cal, polit­i­cal, eco­nomic and soci­etal mul­ti­ple dis­putes, we came to a gen­eral agree­ment that most macro­eco­nomic mod­els are built on the assump­tion that an economy’s assets com­prise man­u­fac­tured cap­i­tal, human cap­i­tal, knowl­edge, and insti­tu­tions(Forsyth, 2013).

Nature, let’s call it nat­ural cap­i­tal, seems to be often absent or ‘invis­i­ble’ from the mod­els. Account­ing for Nat­ural Cap­i­tal, is usu­ally an after­thought to the real “eco­nom­ics of busi­ness” (Jans­son, 1994). When pressed, theecon­o­mists have a ten­dency to defend them­selves by sug­gest­ing that nat­ural cap­i­tal is indeed present in macro­eco­nomic mod­els, but that it appears in a hid­den way, as a fixed, inde­struc­tible fac­tor of production.

Well, back to our his­tory time­line, there is some­thing that might help us to under­stand why the ‘invis­i­bil­ity’ of nat­ural cap­i­tal as a fac­tor of pro­duc­tion.

David Ricardo, in ‘The Prin­ci­ples of Polit­i­cal Econ­omy and Tax­a­tion’ (1821) called that fac­tor ‘land’:

“The pro­duce of the earth — all that is derived from its sur­face by the united appli­ca­tion of labour, machin­ery, and cap­i­tal, is divided among three classes of the com­mu­nity, namely, the pro­pri­etor of the land, the owner of the stock or cap­i­tal nec­es­sary for its cul­ti­va­tion, and the labour­ers by whose indus­try it is cultivated.”

For Ricardo, the prob­lem with view­ing nat­ural cap­i­tal in a strict form lead to amajor prob­lem of proper cal­cu­la­tion of both deple­tion and depre­ci­a­tion rates and stock man­age­ment option­al­ity. Although soil, forests, water­sheds, fish­eries, fresh water sources, river estu­ar­ies, and the atmos­phere (basi­cally the foun­da­tions for the ecosys­tem ser­vices the­o­ries) may be self-regenerative, or resilient to a point, but suf­fer from deple­tion or dete­ri­o­ra­tion when over-used.

Par­al­lel to Ricardo’s ideas, Alfred Mar­shall, in ‘Prin­ci­ples of Eco­nom­ics, Book VI. The Dis­tri­b­u­tion of National Income’ (1890) tried to inte­grate all costs and val­ues asso­ci­ated with the pro­duc­tion of com­modi­ties, assum­ing that:

[…] The price of any com­mod­ity is deter­mined by the oper­a­tion of sup­ply and demand. In the case of the fac­tors in pro­duc­tion, the demand is deter­mined by the entre­pre­neurs.’ esti­mate of the value of the land, labour, and cap­i­tal, in pro­duc­tion. The sup­ply is deter­mined by the costs (some­times dis­cussed as sub­jec­tive costs, some­times as real costs) of pro­duc­ing land, labour, cap­i­tal. Land, of course being irre­place­able, has only a money costfig­ured in much the same fash­ion as Ricardo’s dif­fer­en­tial pay­ment for more pro­duc­tive land; labour’s cost is essen­tially the cost of main­tain­ing a fam­ily at a cus­tom­ary stan­dard of liv­ing; capital’s cost is the cost of abstain­ing from con­sump­tion, or the esti­mate of the supe­ri­or­ity of present value over future value.

This notion of inte­grat­ing the sev­eral cap­i­tal costs within a frame­work of pri­vate prop­erty and serf­dom was later revis­ited by Karl Marx in the epic ‘Das Kap­i­tal’ when mak­ing con­sid­er­a­tions about the wealth of nature and the rea­son­ing of profit in the form of the ‘Trin­ity For­mula’, which reads as fol­lows:cap­i­tal — profit (profit of enter­prise plus inter­est), land — ground-rent, labour — wages, this is the trin­ity for­mula which com­prises all the secrets of the social pro­duc­tion process. Marx, in ‘Cap­i­tal: A Cri­tique of Polit­i­cal Econ­omy, Vol. III’(1894) stated that:

“labour as such, in its sim­ple capac­ity as a use­ful pro­duc­tive activ­ity, refers to the means of pro­duc­tion, not as con­cerns their form due to social con­di­tions, but rather as con­cerns their mate­r­ial sub­stance, […] dis­tin­guished merely as use-values, the land as an unpro­duced, the oth­ers as pro­duced means of pro­duc­tion. […] The require­ments of labour are then Nat­ural Cap­i­tal, and the land is nat­ural pri­vate property

To be continued…


Ref­er­ences (for part II)

Bronk, R. (1998). Progress and the invis­i­ble hand: the phi­los­o­phy and eco­nom­ics of human advance. Lon­don, UK: Lit­tle Brown.

Fleis­chacker, S. (2002). Adam Smith. A com­pan­ion to early mod­ern phi­los­o­phy, 505–526.

Forsyth, T. (2013). Crit­i­cal Polit­i­cal Ecol­ogy: The Pol­i­tics of Envi­ron­men­tal Sci­ence. Rout­ledge.

Jans­son, A. (1994). Invest­ing in nat­ural cap­i­tal: the eco­log­i­cal eco­nom­ics approach to sus­tain­abil­ity. Island Press.

Kennedy, G. (2009). Adam Smith and the invis­i­ble hand: From metaphor to myth. Econ Jour­nal Watch, 6(2), 239–263.

Mead­ows, D. H., Mead­ows, D., Ran­ders, J., & Behrens III, W. W. (1972). The Lim­its to Growth: A Report for the Club of Rome’s Project on the Predica­ment of Mankind (New York: Universe).

Schu­macher, E. F. (1973). Small is beau­ti­ful: Eco­nom­ics as if peo­ple really mat­tered. Aba­cus, Lon­don, 64.

Smith, V. L. (1998). Dis­tin­guished Guest Lec­ture. South­ern eco­nomic jour­nal,65(1), 1–19.

Stiglitz, J. E. (1991). The Invis­i­ble Hand and Mod­ern Wel­fare Eco­nom­ics(Work­ing Paper No. 3641). National Bureau of Eco­nomic Research.


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