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That’s my name for the theory that proponents of natural capital accounting use about how economics works. In a recent paper discussing the value of natural environmental amenities and how free-markets are totally predisposed to reducing these stocks to zero over time, the following argument come up twice. It is that when market priced goods have value, such as a tractor, a price is paid for them commensurate with the stream of benefits that they generate. As a result, there is no risk that we’ll deplete the supply of tractors any time soon, among other implications.

When it comes to so called “natural capital” the same is not true. God put honeybees on this earth. One reason they are on this earth is to pollinate the billions of dollars worth of crops that are grown world-wide and that are vital for our continued existence. But those bees are part of the natural capital stock. And they get paid squat. After all, it is said, that the bees never leave an invoice with the almond growers in California! Nor do countries in South America pay the Amazon rain forest each year for the water that it generates to sustain their agriculture.

Is this right? Do such valuable natural assets not receive payment for their services (and by extension are doomed to exploitation and demise)? Well, not exactly. Imagine a simple world where there are two states. In each state the weather conditions are identical, the climate is suitable for growing the same crops, the soil and landscapes are identical and the workforces are identical. The only thing different is that in one state there are huge swarms of honeybees in existence and in the other state honeybees are afraid to enter because of an abundance of kingbirds that like to eat them. Now, you are a farmer hoping to plant 500 acres of apple trees. In which place would you be likely to purchase your land? In the place where the natural capital stock exists or in the place where it does not? All else equal, you will of course purchase the land in the place with the bees. In equilibrium in this simple world you’d see the price of the bee-infested land be higher than the other property. So while the bees themselves are not sending you a bill, someone is surely sending it to you – and it was whomever was the rightful owner of that land before it was commonly known that the bees were useful.

That the marginal cost of accessing God’s bees is zero is not changed by this account, and thus there may be reasons to suspect that the bees themselves may not be treated well, but it is certainly not the case that when we have market forces operating in a relatively open economy that natural assets are not valued or priced in some way. And as for whether the bees are destined to be doomed (or the gold or tin or clean water, etc.) I’ll leave it to your imagination for now.

One Response to “The Invisible “Land” Theorem”

  1. Harry says:

    Well, now, I am going to feed on that piece of brilliance. Thanks, Mike.

    As a fan of theunbrokenwindow.com, let me say I appreciate WC’s (tireless!) efforts beyond his tireless work for his paid students.

    Yes, Coyote does a great job, but you have to do some sifting to find good nuggets.

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