NaturalCapital_Farley.indd Page 264 12/26/11 1:01 PM user-f494 /203/BER00002/Enc82404_disk1of1/933782404/Enc82404_pagefiles Natural Capital Natural capital is an economic construct that describes economist could suggest that “the world can, in eff ect, the natural world, its ecosystems, and their value to get along without natural resources” (Solow 1974). In the society. How people value the natural world determines 1970s, however, growing evidence of the limitations on how businesses and societies both conserve and deplete natural resources and environmental problems made it. Economists who think about natural capital as an worse by accelerating economic growth led many econo- irreplaceable resource and those who believe that it is mists to call for explicitly recognizing natural capital— like any other input into an economy have very diff erent defi ned as a stock that yields a fl ow of natural services ideas about how society should treat the natural world. and tangible natural resources—as a distinct and essen- tial factor of production. conomists use the concept of natural capital to explain Th e fi rst explicit reference to natural capital appears E the contribution that the natural world’s resources in Small Is Beautiful (Schumacher 1973). In this book, make to human economies. Diff erent schools of eco- the British economist E. F. Schumacher argued that nomic thought have a number of diff erent ways to irreplaceable natural capital stocks make up the larger approach the topic, and these approaches have diff erent part of all capital, and that modern economists errone- consequences for sustainable development. ously treat their depletion as income. Schumacher iden- tifi ed two types of natural capital. Th e fi rst was fossil fuels, which were rapidly being exhausted. Th e second Conceptual History was the ability of natural systems to regenerate them- selves, threatened by novel chemicals against which In the eighteenth and nineteenth centuries, economists nature had no defenses. Although they did not use the identifi ed the factors of production (that is, the resources specifi c phrase natural capital , other researchers, includ- that go into producing goods and services), as capital, ing Herman Daly (1973, l977) and Nicholas Georgescu- labor, and land. Capital was defi ned as an input that is Roegen (1971) were simultaneously stressing that the not consumed in the manufacture of a product (Smith goods and services provided by nature are essential, non- 1776) or, alternatively, as something human made that substitutable factors of production, and that the fi nite contributed to production (Böhm-Bawerk 1891), for supply of these resources limits continued economic example, machinery. Land, which included all natural growth. Furthermore, both Daly and Georgescu- resources, was treated as distinct from capital because it Roegen carefully distinguished between the two types was a gift of nature and because humans could not aff ect of natural capital discussed by Schumacher. Fossil fuels, its supply. In the twentieth century, economists redefi ned along with all other raw materials from nature (both capital as any asset that produces a stream of income over renewable and nonrenewable), are identifi ed as stock- time (Fisher 1906). By this defi nition, land is lumped fl ow resources, which are consumed and therefore together with other capital, and the factors of production depleted in the act of production. Humans can decide are reduced to two: capital and labor. After the redefi ni- how quickly to deplete such resources. In contrast, the tion, natural resources were increasingly ignored as a fac- ability of ecosystems to reproduce themselves, along tor of production to the point where an eminent with other services provided by ecosystems, is a 264 www.berkshirepublishing.com © 2012 Berkshire Publishing grouP, all rights reserved. NaturalCapital_Farley.indd Page 265 12/28/11 3:39 PM user-f494 /203/BER00002/Enc82404_disk1of1/933782404/Enc82404_pagefiles NATURAL CAPITAL • 265 fund-service resource. A fund is not consumed in the act regions, and businesses around the world adopted the of producing a service. For example, when a forest helps ecological footprint as a measure of sustainability. regulate water fl ow, processes waste, provides shelter for Th e book Natural Capitalism (Hawken, Lovins, and other species, or produces the seeds required for renewal, Lovins 1999) and the nonprofi t organization Th e Natural it is not consumed in the process. Nature’s fund services Step both played a critical role in popularizing the con- are generated from a particular confi guration of its cept of natural capital outside of academia, particularly in stock-fl ow components. Just as a car factory is a particu- the business world, by laying roadmaps for a society that lar confi guration of metal, glass, and concrete, a forest is obeys Herman Daly’s specifi c rules for sustaining natural a particular confi guration of plants, animals, water, and capital. Th e triple bottom line is one increasingly popular soil. Funds provide services at a given rate over time. Th e approach to business that accounts for natural capital, term natural capital generally refers both to stock fl ows human capital, and fi nancial capital (Elkington 1997). and to fund services. National and international policies designed to protect Th e concept of natural capital caught on fairly and restore natural capital including cap and trade regu- quickly, particularly in the fi eld of ecological economics, lations for pollutants and fi sheries and payments for eco- whose theoretical foundations stressed the dependence system services are now multibillion-dollar global of the economic system on the planet’s fi nite supply of markets (Farley et al. 2010). natural resources and the invaluable services they gen- erate. Th e economists David Pearce (1988) and Herman Daly (1990) argued that sustainable development Strong and Weak Sustainability required a constant natural capital stock. Daly listed specifi c rules for maintaining a constant stock: extrac- Natural capital, however, remains poorly defi ned and tion of renewable resources could not exceed regenera- subject to controversy. One ongoing debate is whether or tion rates, extraction of nonrenewable resources could not natural capital is, in fact, irreplaceable. If it is true not exceed the rate at which renewable substitutes were that some natural capital is essential and has no substi- developed, and waste emissions could not exceed the tutes, then that capital must be preserved and so cannot ecosystem’s absorption capacity. Th e concept of natural be lumped together with other forms of capital. Th is capital suited ecological economic theory so well that belief, generally shared by ecological economists and the proceedings of the second international Ecological known as strong sustainability, led to the emergence of Economics Conference were published as the book the concept of natural capital in the early 1970s. Other Investing in Natural Capital (Jansson et al. 1994). Th e economists argue that human-made capital can substi- fi rst section of this book focuses on maintaining and tute for natural capital and that as long as the value of investing in natural capital, the second focuses on meth- both types of capital together is not declining, sustain- ods and research topics, and the third on policy implica- ability is achieved. According to this model, clear- tions and applications. Th ese three topics parallel and cutting the Amazon could be viewed as sustainable as anticipate the way researchers later developed the ideas long as future generations were left with an equal value around natural capital. of roads and buildings. Th is approach is called weak sus- Much of the early research on natural capital focused tainability. David Pearce was instrumental in developing on the economic value of ecosystem services. In May the concept of weak sustainability (Pearce and Atkinson 1997, the journal Nature published a paper that inte- 1993), although he had initially stressed the irreplace- grated these studies into a single global assessment of able nature of natural capital. Many scholars now use the natural capital. Th at paper, “Th e Value of the World’s phrase critical natural capital for natural capital that is Ecosystem Services and Natural Capital” (Costanza essential to human welfare and has no substitutes (Ekins et al. 1997), has become one of the most cited in the et al. 2003). environmental sciences. A related debate concerns the labels natural capital and At the same time, various nations attempted to integrate ecosystem services , which, some argue, imply the treatment natural capital into their national accounts (Ahmad, El of nature as a commodity, or market good, and hence Serafy, and Lutz 1989), leading the United Nations to pro- weak sustainability. Many economists do believe that pose a System of Environmental and Economic Accounts natural capital should be treated as just another com- (SEEA) (United Nations 1993), eventually implemented in modity and incorporated into the market model. Others, 2003. Th e researchers William Rees (from Canada) and however, interpret natural capital as a metaphor that calls Mathis Wackernagel (from Switzerland) introduced the attention to the productive capacity of ecosystems and concept of the ecological footprint as a biophysical measure the need to invest in their protection and restoration. If of humanity’s demands on natural capital (Rees and natural capital is defi ned as an asset that produces a fl ow Wackernagel 1994). A growing number of countries, of income over time, then the term implies that we must www.berkshirepublishing.com © 2012 Berkshire Publishing grouP, all rights reserved. NaturalCapital_Farley.indd Page 266 12/26/11 1:01 PM user-f494 /203/BER00002/Enc82404_disk1of1/933782404/Enc82404_pagefiles 266 • THE BERKSHIRE ENCYCLOPEDIA OF SUSTAINABILITY: ECOSYSTEM MANAGEMENT AND SUSTAINABILITY live only off the fl ow of income without depleting the goods and cannot be forced into the market model.