Protecting Natural Capital: An Editorial and Introduction

Abstract

Every beginning student of economics learns that the factors of production are land, labor, and capital. Some economists now add technology to these three but technology is best understood as an ` enabler'', an element that enables each factor of production to become more ef®cient. It is common now to refer to ` human capital'', ` ®nancial capital'', and ` natural capital'' as those timeless elements of economic activity that have driven the global economy to new levels of prosperity. Human capital includes people, their ideas and intelligence, their training, motivation, and organization. Over the years, the productivity of human capital has increased greatly, due to many factors including, but not limited to, education, research and development, improved health (healthcare, lifestyle), and new and improved technology. The average revenue per employee in the service sector has increased dramatically due largely to technology. Since most businesses openly state that their employees are their greatest resource, they have invested heavily in human capital with gratifying results. Financial capital includes money, credit, factories, machinery, and all items of value that enter into economic processes but are not classi®ed as human or natural. Here also, we have seen vast improvements in productivity as ®nancial capital moves rapidly from country to country and project to project seeking the highest return. The growth and development of private pension plans and the ability of the individual investor to become a player in the ®nancial markets has provided an impetus for the sharp increase in investment in ®nancial capital. Unfortunately, natural capital has not bene®ted from investment and, in fact, there has been a disinvestment as natural systems have been overused because their true cost is not properly valued. By natural capital, we mean all natural resources and ecological systems. Instead of investing in preserving eco-systems upon which all life and all businesses depend, natural capital is being depleted at an alarming rate because of improved technology in extracting, harvesting, processing, and shipping. Why is this so? The price of natural resources is generally lower than that of human capital and ®nancial capital, so more of it is used because it is the cheapest factor of production. But why is it priced so low? Part of the answer lies in our accounting systems that do not accurately measure the cost of using natural resources. For example, the loss of topsoil from logging operations is not re ected in the income statement of the logging company. Similarly, the cost of a gallon of gasoline does not include the cost of planting trees to absorb the carbon emitted when it is used.