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  • Writer's pictureFiona Smith

Ecological economics and the roots of natural capital

The concept of natural capital owes much of its intellectual history to the field of Ecological Economics. Clifford Guest, lecturer in sustainable development at Limerick Institute of Technology (Tipperary), explores the fundamental differences between ecological and neoclassical economics.

The concept of natural capital is crucial to Ecological Economics, and some would suggest that natural capital owes much of its intellectual origins to this relatively new field of study. But what, you may ask, is Ecological Economics and what is the difference between it and the mainstream approach of neoclassical economics? Ecological Economics (EE) shares much with neoclassical economics, but its starting point is fundamentally different. While neoclassical economics sees the primary system of analysis as “the economy” and allocates nature and society secondary status, EE sees the primary system of analysis as “nature” and understands the economy and society as subsets to the physical reality of the finite planet earth.

The two disciplines do, however, share a common definition of economics, which is as follows: “economics is the allocation of scarce resources among competing desirable ends”. But the two disciplines differ as to what the desirable ends should be (economic growth versus long term sustainability) what the scarce resources are (financial capital versus natural capital) and how the scarce resources should be allocated (by means of the market exclusively, versus the market plus other non-market based mechanisms). These non-market based mechanisms includes accounting for environmental externalities which is a key focus in natural capital accounting.

"A primary objective of Ecological Economics is to ground economic thinking and practice in physical reality, especially in the laws of physics" Ecological Economics emerged from the work of figures such as Kenneth Boulding (the co-founder of general systems theory) and Herman Daly (a former economist with the World Bank) in the 1960s, but it was not until 1989 that the foundation of the International Society for Ecological Economics and publication of its journal, Ecological Economics, by Elsevier took place. A primary objective of EE is to ground economic thinking and practice in physical reality, especially in the laws of physics (particularly the laws of thermodynamics) and in knowledge of biological systems.

Herman Daly has written extensively on how neoclassical economics seems to have missed the fact that the world has changed substantially since Adam Smith first brought forward his notion of the efficiency of “the invisible hand of the market”, driven through rational self-interest and competition. Daly argues in the context of EE that we have moved from what was essentially an “empty world” (economically speaking) to what can now be considered a “full world”.

Source: 'Beyond Growth' by Herman Daly (Beacon Press, 1992)

​What does this mean then in real terms? Well consider that in 1776, when Adam Smith published his most famous work (The Wealth of Nations) the following applied:The world population was less than one billion and only one city in the world (London) had a population nearing a million people (1)It would be six years (1782) before James Watt patented a steam engine that produced continuous rotary motionTransport was largely by means of horse, stage coach and sailing ship. It would, have taken Adam Smith more than a week by stagecoach to get from Edinburgh to London in 1776 (2) Contrast that situation with today when;The world population is an estimated 7.3 billion people and there are 28 mega cities with a population of over 10 million in each city (3)There are now an estimated 1.2 billion vehicles on the world's roads (4)The airline Qantas has plans to fly non-stop from Perth to London in 19 hours in 2017 (making it the longest commercial flight in the world) (5). Smith would have been lucky to get from Edinburgh to York in the same amount of time.

"Adam Smith operated in a world where financial capital was scarce but natural capital was in great supply"

The nature of the world has changed significantly. What is scarce now is very different to what was scarce when Adam Smith laid down the fundamentals of economics 240 years ago. Smith operated in a world where financial capital was scarce but natural capital was in great supply and the world could be seen as largely empty of people and their human artefacts.  An interesting question arises in this context: why has this transformation from a world relatively empty of human beings and human-made capital to a world relatively full of these things not been noticed by the majority of economists? One answer is the deceptive acceleration of exponential growth. With a constant rate of growth the world will go from half full to totally full in one doubling period - the same amount of time that it took to go from 1% full to 2% full. The doubling-time itself has also shortened, compounding the deceptive acceleration. According to research by leading Ecological Economist Robert Costanza, the world has rapidly gone from relatively empty (10% full) to relatively full (40% full). Although 40% is less than half full, it makes sense to consider it as relative fullness because it is only one doubling-time away from 80%, a figure which represents excessive fullness (6).

This change in planetary 'fullness' has happened faster than the speed at which economic paradigms shift. Full-world economics is not yet accepted as academically legitimate in mainstream economic theory, but it is beginning to be seen as more noteworthy. New scientific paradigms rarely gain acceptance by convincing the majority of its opponents of a new position, they gain acceptance when the opponents eventually die or the macro environment changes fundamentally. As the current education system is still reinforcing the empty world analysis of neoclassical economists, it may take a major change in the macro environment before a new analysis is sought and accepted by the mainstream. Progressing the concept of natural capital is a very important contribution to remodel the deficiencies inherent in neoclassical economics.

Clifford Guest, Lecturer, Limerick Institute of Technology

Notes: Gilbert G. (2005) World Population, A Reference Handbook, 2nd edition, ABC-CLIO, Oxford.Jackman W.T. (1916) The Development of Transport in Modern England, Volume 1, Cambridge University Press, CambridgeVoelcker J. (2014) Green Car Reports, available at Nations (2014) World Urbanization Prospects, UN DESA’s Population Division, New York.Smith O. (2015) Non-stop flights from UK to Australia 'within two years', The Telegraph, London.Costanza et al. (2005) An Introduction to Ecological Economics, 2nd Edition, CRC Press, New York.

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