Natural Capital

Natural Capital and other Forms of Capital

Economists of the modern period, ranging from Adam Smith, David Ricardo, and Karl Marx, have historically identified three central elements in the production process: land, labor, and capital. Capital in these contexts refers to items such as buildings, plants, tools, and machinery that are used to produce other tradable goods. The ability of firms to produce valuable goods for trade depends on capital maintaining its value over time as an instrument of ongoing production. Capital, in this sense, refers to manufacturing capital or capital that is created by humans to engage in production. The origins of the term underscore that capital is centrally an object of human creation, as opposed to something found in nature.

Contemporary economists and management theorists have implicitly maintained that capital should be more broadly understood as those resources that can produce additional market value or competitive advantage. Financial capital is perhaps the most common form of capital discussed in contemporary settings, especially as businesses transition from a manufacturing to a service orientation. All financial capital can, in principle, be liquidated for money. Whether such capital takes the form of cash, equity stock, bond notes, or other financial instruments, financial capital enables either the direct use of money for business operation or the acquisition of money through leveraged agreements. Business leaders are also aware of the importance of new ideas and innovative practices in remaining competitive. Such intellectual capital can result in valuable patents and responsive product lines or services. Information technology firms have operated under the principle that innovative ideas and the integration of resultant technologies hold the key to developing new service platforms that make timely information available to a range of customers. Social capital refers to the advantages made available to organizations through the trust, commitment, and skill offered by its stakeholders.

Whether manufactured, financial, intellectual, or social, capital is intended to be maintained rather than depleted. Indeed, the sound growth of business traditionally takes place only under the assumption that the firm's stock of capital is enhanced rather than diminished. Natural capital has traditionally escaped a comparable analysis. A number of observers within economics and business have emphasized that an economy exists only as a part of a larger ecological system. This ecological context of commerce requires that market actors acknowledge both the natural environmental inputs in the production process as well as the ways in which their activities can adversely affect the health and viability of the ecosystem in which they operate. Natural capital, such as water, air, minerals, energy sources, and plant and animal life, are depleted by business; however, like other forms of capital, the continued depletion of these resources threatens the ability of market actors to create value in the future. Where traditional economic analyses have disregarded the natural environmental limitations to market activity, ecological economists have put forth arguments as to why natural resources are, in a fundamental sense, capital that cannot be spent without significant adverse social and economic impacts to human well-being. Global climate change, such as greenhouse gas emissions, deforestation, groundwater toxicity, and destruction of essential wetlands are but a few examples of the social and environmental problems associated with the continued depletion of natural capital.

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