I was recently pointed toward the following report on The Economics of Ecosystems and Biodiversity (TEEB). In the report I found that the authors claim that the amount of Natural Capital on the entire planet is somewhere between $2 trillion and $4 trillion. For a good description of natural capital from a good economist, see Nordhaus’s discussions of the topic. Roughly speaking you can think of natural capital as the stock of the earth’s resources (actually the services that flow from them) that can be used by human beings including obvious things like raw materials and less obvious ones like pollution sinks.
Once you put it in those terms, you should be utterly astounded by how small this stock seems to be. For example, the total net worth of households and nonprofits in the US is roughly $60 trillion.
Julian Simon famously called people the ultimate resource. Can we crudely estimate the value of this “natural capital stock” (which happily does not get depleted with additional “use”)? Sure. The US GDP is about $15 trillion right now. Based on the national income and product accounts, it appears that about two-thirds of this value is generated by labor (i.e. labor’s share of income). So, workers generate and receive about $10 trillion per year of income in the United States alone. In other words, American workers produce a flow of income that is 2.5 times the stock of the entire world’s natural ones. If you want to consider people in the US a permanently long-lived amorphous blob of an asset, and assume long term interest rates of around 3%, then the value of this human capital stock is about one-third of a quadrillion dollars. That’s for the US alone.
Is there a deeper lesson in the data? Perhaps not. It illustrates to us the point economists make regularly. A pile of dirt (which is nothing more than tightly packed chemicals) is just a pile of dirt. It takes a human mind to figure out it can turn itself into a soda can, pottery, or even the beginning of a new, truly innovative and green car engine.
Back in the 1980’s, the Wall Street Journal had an editorial that suggested the national debt ought to be compared to the United States capital account, following the way any corporation would balance equity with long-term debt. Corporations would also want to have enough current assets, cash flow and income to cover current liabilities and the current portion of any long term debt (the government does not have to worry about cash flow because it does not pay taxes!), but long term debt is not a problem as long as there is enough revenue coming in the door.
Now, the WSJ editorialists wondered back then about liquidating a portion of the United States’ assets in order to pay down the national debt. Raising taxes for that purpose would raise the possibility of deflation, the reverse of what happens when you have deficits. But selling assets that are not producing any income is certainly one way of improving one’s balance sheet. (Americans are doing that right now in their personal lives, too.)
As for the asset value of carbon-retaining “pollution sinks,” I’m not sure I’d put them on the asset side of the balance sheet. The same goes for counting natural resources that are put off-limits permanently by boneheaded regulations.
I’ve had discussions with myself on how we define natural capital and separate it from our traditional capital. Where the line gets blurry is when we improve something that is natural. So If I find a cave, it would be considered natural, but if I dug a hole in the side of a bluff to make a cellar or house, people tend to see that as man-made capital. But what about when Crusoe dug out a natural cave with a place for shelving or a better bed? Similarly, if a farmer puts chemical fertilizer into the soil? Even if we say it is now man-made, what if Crusoe number one dies and another Crusoe stumbles upon the “improved” cave? I guess another way to ask the question is at what point does our manipulation of the environment become a part of the environment? My own response was it’s somewhat arbitrary, but if I consider a resource as a part of the environment, then it is natural; even if it is the air conditioning in the place I work.
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