Natural capital

In his iconic economic treatise The Wealth of Nations, Adam Smith never mentions the words “natural capital.” Instead, he neatly divides the world into two kinds of capital not consumed by the economy: physical capital (machines and factories) and human capital (skills, expertise, and knowledge).

But even Smith grasped that nature, as the source of our shelter and sustenance, held the key to human prosperity. Today, 7.8 billion humans are now consuming more energy and resources than Smith may ever have imagined, leading economists to dust off the concept of natural capital and put it in terms the rest of us can understand: Natural capital—the dollar value of the services nature provides, from clean water to breathable air—is worth more than $160 trillion (pdf) every year.

Think of that like free interest from nature’s bank account, only we’re quickly depleting the principal and running a deep deficit. Now an entire field of economics and ecology has sprung up to define, map, and track the world’s declining stock of natural capital.

If they can convince us to value it more, we may just avoid bankruptcy after all.

Let’s buy in.

To help you get in the natural capital mindset while you read, we’ve put together a playlist with music inspired by—or directly made by—nature itself.

2.3 hectares: Amount of biologically productive space (arable land, pasture, forest, and ocean) available for each person on the planet in 1997

1.2 hectares: Amount left per person once the world population reaches 10.9 billion by 2100

4.2 hectares: Amount of space the average citizen occupies through their annual consumption of goods and services, mostly in developed nations

10,000 square meters (~12,000 square yards): A hectare (you’re welcome)

$5 to $23 trillion: Value of services sacrificed per year from habitat loss and environmental degradation

1.7: Number of Earths it takes to sustain today’s global level of consumption of natural capital

86%: Share of countries living beyond their natural means, thereby generating an “ecological deficit”

$5.7 billion: Annual contribution of the Great Barrier Reef to the Australian economy each year

From Karl Marx to John Maynard Keynes, economic thinkers have conceived of capital as productive stuff (factories, machines) and humans’ capacity to do something with it (skills, knowledge, and expertise). While these inputs may provide a flow of goods and services (pdf) well into the future, it largely ignores the source on which it all depends: nature itself.

In 1973, E.F. Schumacher first proposed the term “natural capital” in his book Small Is Beautiful to describe soil, air, water, animals, plants, and the ecosystem services that make human life possible, like a trust fund, where humans and wildlife are the beneficiaries.

After nearly a century living with gross domestic product as the central measure of national wealth, economists are asking whether we’re measuring “wealth” all wrong. If we buy economic growth at the expense of poisonous air and lifeless oceans, are we really richer? New measures of wealth have emerged, from the Index of Sustainable Welfare (ISW) to the UN’s Inclusive Wealth Report to genuine progress indicator. They note that while GDP has risen significantly, destruction of natural capital means we’re poorer than we imagine.

It’s hard to put a value on something as priceless as nature, critics argue. But nevertheless, economists gotta try.

Published by Nature in 2011, Robert Costanza and his co-authors estimated the value of the services natural capital provides as at least $160 trillion (adjusted for inflation), three times higher than just a few decades earlier. But losses are mounting all the time. Each year, environmental degradation and habitat loss have reduced the value of that stream by $5 to $23 trillion annually.

Beyond money, there’s another way to think about natural capital: our “ecological footprint.” By calculating how much natural capital we consume each year—and the ecosystems needed to maintain it—we see how much we’re pulling from nature’s bank account.

Humanity now needs the equivalent of 1.7 Earths to sustain today’s global level of consumption, according to the New Economics Foundation, and that number keeps getting larger. It’s derived by dividing humanity’s total demand for ecological resources by how much of those resources the planet generates each year. While not a perfect number (there’s uncertainty in the methodology for calculating ecosystem degradation), the trend is unmistakable.

Mark your calendars, but do it in pencil: The symbolic day of the year when humanity “overshoots” the Earth’s carrying capacity is creeping steadily earlier. In 1970, “Earth Overshoot Day” was in late December. This year, it’s Aug. 22.

To take into account all of 2020’s weirdness, this year’s calculation was a little different (and a little less grim). But that doesn’t mean you should celebrate—we’re on track to make up for it, and then some. Yay, humans.

1776: Adam Smith publishes The Wealth of Nations, connecting agriculture with an early concept of natural capital.

1937: Simon Kuznets, an economist at the National Bureau of Economic Research, formulates gross domestic product (GDP) for the first time. Natural capital is unmentioned.

1970: Human consumption begins to surpass Earth’s capacity to regenerate resources, according to the Global Footprint Network, which identifies the day that year when humans began to overshoot Earth’s biocapacity (Dec. 29).

1973: E.F. Schumacher proposed the term “natural capital” in his book Small Is Beautiful to show how modern economists erroneously treat the depletion of natural capital stocks as income.

1989: Ecological economist Herman Daly and theologian John Cobb develop the Index of Sustainable Economic Welfare (ISEW), a metric of welfare that includes natural capital. It forms the basis for the Genuine Progress Indicator (GPI) which assesses 26 variables related to economic, social, and environmental progress.

1995: Maryland adopts the GPI. Vermont follows suit in 2012.

2006: China creates a “green GDP” index for national economic output considering environmental factors. Accounting for environmental damage would have reduced China’s GDP by 3% in 2004.

2012: Forty-three institutions, including the International Finance Corporation—the private arm of the World Bank—urge companies to reveal their dependence on natural capital and the damage they do to it in their annual statements. Ten African countries make the Gaborone Declaration for Sustainability, pledging to “incorporate the value of natural capital” into their policies and decision-making.

2016: The Natural Capital Protocol is released for businesses to “identify, measure and value their direct and indirect impacts and dependencies on natural capital.”

“Industrial Capitalism…does not fully conform to its own accounting principles. It liquidates its capital and calls it income. It neglects to assign any value to the largest stocks of capital it employs—the natural resources and living systems, as well as the social and cultural systems that are the basis of human capital.”

—Natural Capitalism: Creating the Next Industrial Revolution, by Paul Hawken, Amory Lovins, and Hunter Lovins, published in 1999

Change has been something we’ve all had to accept lately, both with how we live and how we consume. How we work is forever altered, too, as office life adapts to our new reality.