Accounting for Natural Capital Ecological Limits and Sustainable Scale

Most current economic policies are largely based on the underlying assumption of continuing and unlimited material economic growth. Although this assumption is slowly beginning to change as the full implications of a commitment to sustainability sink in, it is still deeply embedded in economic thinking as evidenced by the frequent equation of 'sustainable development' with 'sustainable growth'. The growth assumption allows problems of intergenerational, intragenerational, and interspecies equity and sustainability to be ignored (or at least postponed), since they are seen to be most easily solved by additional material growth. Indeed, most conventional economists define 'health' in an economy as a stable and high 'rate of growth'. Energy and resource depletion, pollution, and other limits to growth, according to this view, will be eliminated as they arise by clever development and deployment of new technology. This line of thinking often is called 'technological optimism'.

An opposing line of thought (often called 'technological skepticism') assumes that technology will not be able to circumvent fundamental energy, resource, or pollution constraints and that eventually material economic growth will stop. It has usually been ecologists or other life scientists that take this point of view (notable exceptions among economists are Boulding and Daly), largely because they study natural systems that invariably do stop growing when they reach fundamental resource constraints. A healthy ecosystem is one that maintains a relatively stable level. Unlimited growth is cancerous, not healthy, under this view.

Technological optimists argue that human systems are fundamentally different from other natural systems because of human intelligence and that history has shown that resource constraints can be circumvented by new ideas. Technological optimists claim that Malthus' dire predictions about population pressures have not come to pass and the 'energy crisis' of the late 1970s is behind us. Technological skeptics, on the other hand, argue that many natural systems also have 'intelligence' in that they can evolve new behaviors and organisms (including humans themselves). Humans are therefore a part of nature, not apart from it. Just because we have circumvented local and artificial resource constraints in the past does not mean we can circumvent the fundamental ones that we will eventually face. Malthus' predictions have not come to pass yet for the entire world, the skeptics would argue, but many parts of the world are in a Malthusian trap now, and other parts may well fall into it. This is particularly important because many industrial nations have increased their numbers and standard of living by importing carrying capacity and exporting ecological degradation to other regions.

The debate has gone on for several decades now. It began with Barnett and Morse's Scarcity and Growth in 1963, but really got into high gear only with the publication of The Limits to Growth by Meadows et al. in 1972 and the Arab oil embargo in 1973. Several thousand studies over the last 15 years have considered aspects of our energy and resource future, and different points of view have waxed and waned. But the bottom line is that there is still considerable uncertainty about the impacts of energy and resource constraints. In the next 20-30 years, we may begin to hit real fossil fuel supply limits. Will fusion energy or solar energy or conservation or some as yet unthought of energy source step in to save the day and keep economies growing? The technological optimists say 'yes' and the technological skeptics say 'maybe' but let us not count on it. Ultimately, no one knows.

The more specific issues of concern all revolve around the question of limits: the ability of technology to circumvent them, and the long-run costs of the technological 'cures'. Do we adapt to limits with technologies that have potentially large but uncertain future environmental costs or do we limit population and per capita consumption to levels sustainable with technologies which are known to be more environmentally benign? Must we always increase supply or can we also reduce demand? Is there an optimal mix of the two?

If the 'limits' are not binding constraints on economic activity, then conventional economics' relegation of energy and environmental concerns to the side of the stage is probably appropriate, and detailed energy analyses are nothing more than interesting curiosities. But if the limits are binding constraints, then energy and environmental issues are pushed much more forcefully to center stage and the tracking of energy and resource flows through ecological and economic systems becomes much more useful and important.

Issues of sustainability are ultimately issues about limits. If material economic growth is sustainable indefinitely by technology then all environmental problems can (in theory at least) be fixed technologically. Issues of fairness, equity, and distribution (between subgroups and generations of our species and between our species and others) are also issues of limits. We do not have to worry so much about how an expanding pie is divided, but a constant or shrinking pie presents real problems. Finally, dealing with uncertainty about limits is the fundamental issue. If we are unsure about future limits the prudent course is to assume they exist. One does not run blindly through a dark landscape that may contain crevasses. One assumes they are there and goes gingerly and with eyes wide open, at least until one can see a little better.

Vitousek et al., in an oft-cited paper, calculated the percent of the Earth's Net Primary Production (NPP) which is being appropriated by humans. This was the first attempt to estimate the 'scale' or relative size of human economic activity compared to the ecological life-support system. They estimated that 25% of total NPP (including the oceans) and 40% of terrestrial NPP was currently being appropriated by humans. It left open the question of how much of NPP could be appropriated by humans without damaging the life-support functions of the biosphere, but it is clear that 100% is not sustainable and even the 40% of terrestrial NPP currently used may not be sustainable.

A related idea is that ecosystems represent a form of capital - defined as a stock yielding a flow of services -and that this stock of 'natural capital' needs to be maintained intact independently in order to assure ecological sustainability. The question of whether natural capital needs to be maintained independently ('strong sustain-ability') or whether only the total of all capital stocks need to be maintained ('weak sustainability') has been the subject of some debate. It hinges on the degree to which human-made capital can substitute for natural capital, and, indeed, on how one defines capital generally. In general, conventional economists have argued that there is almost perfect substitutability between natural and human-made capital, while ecological economists generally argue on both theoretical and empirical grounds that the possibilities for substitution are severely limited. They therefore generally favor the strong sustainability position.

Another critical set of issues revolve around the way we define economic income, economic welfare, and total human welfare. Daly and Cobb clearly distinguish these concepts, and point out that conventional GNP is a poor measure even of economic income. Yet GNP continues to be used in most policy discussions as the definitive measure of economic health and performance, and will continue to be until viable alternatives are available. According to Hicks, economic income is defined as the quantity we can consume without damaging our future consumption possibilities. This defininition of income automatically embodies the idea of sustainability. GNP is a poor measure of income on a number of grounds, including the fact that it fails to account for the depletion of natural capital and thus is not 'sustainable' income in the Hickian sense. GNP is an even poorer measure of economic welfare, since many components of welfare are not directly related to income and consumption. The Index of Sustainable Economic Welfare (ISEW) devised by Daly and Cobb is one approach to estimating economic welfare (as distinct from income) that holds significant promise. The ISEW has been calculated for several industrialized countries and shows that in all these cases, an 'economic threshold' has been passed where increasing GNP is no longer contributing to increasing welfare, and in fact in most cases is decreasing it.

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