This is the third 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!

In the after­shock of Malthus, Smith and Marx, inter alia, many early XXth cen­tury econ­o­mist and polit­i­cal philoso­phers felt the need to find alter­na­tive sce­nar­ios for human devel­op­ment within the lands capac­ity to fos­ter eco­nomic growth and wel­fare in an increas­ingly pop­u­lated world.

One key con­cept to the acknowl­edge­ment of the impor­tance of nat­ural cap­i­tal for the over­all econ­omy is the notion of ‘exter­nal­i­ties’. The term was coined by the British econ­o­mist Arthur Cecil Pigou in ’The Eco­nom­ics of Wel­fare’ (1920–1925), as an alter­na­tive for com­pen­sat­ing the rebound effects of the eco­nomic activ­i­ties on the social and envi­ron­men­tal sphere:

“Wealth exists only for the ben­e­fit of mankind, it can­not be mea­sured ade­quately in yards, not even as equiv­a­lent to so many ounces of gold; its true mea­sure lies only in the con­tri­bu­tion it makes to human well-being”

Under­stand­ing the con­cept of exter­nal­i­ties is under­stand­ing one huge prob­lem noted by the ‘father of mod­ern ecol­ogy’, Eugene P. Odum. In his land­mark book ‘Fun­da­men­tals of Ecol­ogy’ (1953), Odum men­tioned the enor­mous con­tri­bu­tion of nat­ural cap­i­tal, sup­plied free to human soci­eties by nat­ural ecosys­tems, as being com­monly ignored, in part because of the dif­fi­culty of eval­u­at­ing it in con­ven­tional eco­nomic terms. Accord­ing to him,money flows out of urban areas to pay for energy, goods, and human ser­vices, but nat­ural ecosys­tem ser­vices are not accounted for.

A major break­through was needed.

But before (and dur­ing) Odum’s insights, in the realm of eco­nomic and polit­i­cal think­ing, from John May­nard Keynes (e.g., ‘The Gen­eral The­ory of Employ­ment, Inter­est and Money’, 1935) to Friedrich Hayek (e.g., ‘The Road to Serf­dom’, 1944) there was a major tur­moil recall­ing a new role for pol­i­tics, phi­los­o­phy and nat­ural sci­ences con­tri­bu­tions to economics.

Fol­low­ing Pigou and the ‘Cam­bridge School’, the ‘Aus­trian School’, ratio­nal­ity and util­ity were becom­ing the new stars in heaven for pol­icy mak­ers and the ‘Neo­clas­si­cal Econ­omy’ took off, guided by authors like Paul Samuel­son(e.g., ‘Foun­da­tions of Eco­nomic Analy­sis’, 1947), Mil­ton Fried­man (e.g., ‘Cap­i­tal­ism and Free­dom’, 1962) and William Nord­haus (e.g., ‘Inven­tion, Growth and Wel­fare: A The­o­ret­i­cal Treat­ment of Tech­no­log­i­cal Change’, 1969), inter alia.

More than a cen­tury later, in a post “Malthus/Smith” world, in the out­come of the reforms con­se­quent to the indus­trial rev­o­lu­tion and the advent of theAmer­i­can con­sumerism, it became clear to some that there were some lim­i­ta­tions to the post “Marshall-Marxian-Ricardian” view on thetrans­for­ma­tion of cap­i­tals and sub­se­quent capac­ity of land to pro­vide unlim­ited rent in a world under increas­ing pres­sure.

This need to inte­grate exter­nal­i­ties, cap­i­tal­ism, wel­fare, pop­u­la­tion growth and tech­no­log­i­cal trans­for­ma­tion was very well cap­tured byRobert Sol­low. In his highly acclaimed essays ‘A Con­tri­bu­tion to the The­ory of Eco­nomic Growth’ (1956) and ‘Tech­ni­cal Change and the Aggre­gate Pro­duc­tion Func­tion’ (1957), Solow remarked that the pro­duc­tion func­tion is homo­ge­neous of first degree. This amounts to assum­ing no scarce non-augmentable resource like land. In his lat­ter 1974 com­pendium ‘The Eco­nom­ics of Resources or the Resources of Eco­nom­ics’, Solow sums it up in a key sentence:

“If it is very easy to sub­sti­tute other fac­tors for nat­ural resources, then there is, in prin­ci­ple, no prob­lem. The world can, in effect, get along with­out nat­ural resources, so exhaus­tion is just an event, not a catastrophe.”

Or is it?

In 1968, the ecol­o­gist Gar­rett Hardin explored this socioe­co­nomic ‘Gor­dian knot’ tight up since the medieval times and aggra­vated by the 1950’s/60’s ‘cap­i­tal­ist accel­er­a­tion’ in the acclaimed ‘The Tragedy of the Com­mons’, pub­lished in the jour­nal ‘Science’:

The tragedy of the com­mons devel­ops in this way. Pic­ture a pas­ture open to all. It is to be expected that each herds­man will try to keep as many cat­tle as pos­si­ble on the com­mons. Such an arrange­ment may work rea­son­ably sat­is­fac­to­rily for cen­turies because tribal wars, poach­ing, and dis­ease keep the num­bers of both man and beast well below the car­ry­ing capac­ity of the land. Finally, how­ever, comes the day of reck­on­ing, that is, the day when the long-desired goal of social sta­bil­ity becomes a real­ity. At this point, the inher­ent logic of the com­mons remorse­lessly gen­er­ates tragedy.

Hardin dis­cussed prob­lems that can­not be solved by tech­ni­cal means and focused on human pop­u­la­tion growth, the use of the Earth’s nat­ural resources – nat­ural cap­i­tal — , and the wel­fare state. Some of the major out­comes of Hardin’s work were involved in quite a con­tro­versy by his inter­pre­ta­tion on the use of pop­u­la­tion con­trol meth­ods, in a rad­i­cal approach to the ideas of both Malthus and William Forster Lloyd (e.g., ‘Lec­tures on Pop­u­la­tion, Value, Poor Laws and Rent’, 1837), inter alia. But the rev­o­lu­tions within eco­nom­ics were far from over, and both nat­ural cap­i­tal and the Earth sys­tems were about to get some major attention.

In 1970, a young Romenian-American econ­o­mist lit­er­ally increased the entropy in the cur­rent eco­nomic think­ing. Nicholas Georgescu-Roegen’s ‘The Entropy Law and the Eco­nomic Process’ (1971) was a major break­through on theinte­gra­tion of mul­ti­ple dis­ci­plines in an effort to truly under­stand the vast­ness of the eco­nomic devel­op­ment processes.

In his opus mag­num, Georgescu-Roegen made an attempt at extrap­o­la­tion of thesec­ond law of ther­mo­dy­nam­ics (the entropy of an iso­lated sys­tem never decreases, because iso­lated sys­tems spon­ta­neously evolve toward ther­mo­dy­namic equi­lib­rium) to explain man’s overuse of nat­ural resources, i.e. mate­r­ial entropy tends to a maximum.

The ideas of Georgescu-Roegen ‘entropy hour­glass’ echoed in some ‘neoclassical-born’ econ­o­mists that were now deal­ing thor­oughly with both phys­i­cal and eco­log­i­cal con­cepts, in search of bet­ter expla­na­tions for ‘the lim­its to growth’.

Fol­low­ing this new wave of ‘cross-pollination’, and inspired by sci­en­tists likeJames Love­lock (who later co-wrote ‘The Gaia Hypoth­e­sis’ with Lynn Mar­gulis, 1974) and Odum, inter alia, one par­tic­u­lar econ­o­mist emerged with a quite rev­o­lu­tion­ary idea def­i­nitely plac­ing nat­ural cap­i­tal at the very core of the economy…

To be continued…