One stability to rule them all: the economic imperative to engage sustainably with Nature
Economic and financial stability are ultimately determined by a greater stability: planetary stability. The scientific evidence, however, is increasingly clear that this vital stability is at risk. There is no escaping the fact that we are collectively damaging Nature at an alarming rate, with biodiversity declining faster than at any time in human history.
Yet the economic consequences of biodiversity loss have often been overlooked or misunderstood. That is why, back in 2019, the UK Treasury commissioned an independent, global Review on the Economics of Biodiversity. This February saw the one year anniversary of its publication.
In many ways the issue regarding the relationship nature and the economy is one that was central to early economic thinking. For the group of 18th century Enlightenment French economists “the physiocrats,” who predated the classical political economists, land was responsible for generating economic value.
Labour, Produced Capital and Land were seen as the three core factors of production originally identified by early economists such as Adam Smith, David Ricardo, and Karl Marx. But over time this focus on three forms of capital has evolved into a focus on only two.
In large part this is because, not so long ago, the economic questions requiring urgent attention could be studied by excluding Nature from formal economic reasoning. It made economic sense to focus on the accumulation of produced capital (e.g. roads, buildings, ports, machines) and human capital (e.g. health, and education).
Unfortunately, the resulting macroeconomic models of growth and development you will no doubt be familiar with have come to imagine that we can bypass Nature in our economic lives. Such a belief has been strengthened by the fact that the average person today enjoys a far higher income, is less likely to be in absolute poverty, and lives significantly longer than she did even 70 years ago.
For many decades, we have been living in the best of times.
But even while we have enjoyed the fruits of economic growth, the demand we have made of Nature’s goods and services has for some decades exceeded her ability to supply them on a sustainable basis. Such a demand overshoot has resulted in a diminution of Nature, and this gap has been increasing.
So, in another sense, we have also been living in the worst of times.
Nature’s ability to produce a flow of goods and services over time means it’s an asset. Indeed, it’s our most precious asset. It provides us with a multitude of services that we often take for granted, such as regulating our climate, cleansing our water, decomposing our waste, and fixing nitrogen. But like education or health, Nature is more than a mere economic good — it has intrinsic worth. That is, it has both use and non-use value.
Biodiversity is an essential characteristic of Nature, and is the diversity in our natural assets. Just as greater diversity within a portfolio of financial assets reduces risk and uncertainty associated with financial returns, greater biodiversity within a portfolio of natural assets increases Nature’s productivity, adaptability, and resilience, hence reduces uncertainty associated with Nature’s returns.
The Review suggests that once that extension is made, the economics of biodiversity can be seen as a study in portfolio management. Either consciously or unconsciously, the spending and investment decisions we all take influence the stock and mix of the three fundamental forms of capital: produced, human and natural. In this sense, we are all asset managers.
But we have been poor managers in recent decades. The UN’s global capital accounts have shed a light on the extent to which we are depleting our natural assets. Since the early 1990s, globally produced capital per capita has broadly doubled and human capital per capita has increased by around 20%. But the stock of natural capital per capita has declined by around 40%. Crude and approximate, nevertheless, supported by ecology and earth sciences, not just economics.
It is widely understood that we should not run down the stock of produced or human capital to the point of depletion, because doing so would reduce the economy’s productive capabilities. Yet we have been doing this with Nature, through depleting vital ecosystems like estuaries, forests and mangroves. At the global level, climate change and COVID-19 are striking expressions of Nature’s loss of resilience. They are consequences of our collective failure to manage our global portfolio of assets effectively.
We cannot contemplate further failure as we cannot bypass Nature. Ecology and earth sciences have shown and taught us how every single economic activity depends on ecosystems, and how those ecosystems are affected by every economic activity.
As the Review made clear, the global economy is embedded in Nature. Accepting that our economy is embedded within Nature forces us to recognise the limits Nature places on the economy and, in so doing, to reshape our understanding of sustainable economic development and growth. Sustainable development at its core means sustainably engaging with Nature. Reducing our current demand overshoot on Nature requires that we both reduce our demands and increase Nature’s supply.
As the Review made underscored, this will require measured, but transformative, change, for the task is to change individual incentives so that they direct the choice of our actions to align with actions that promote the common good. That is, we move from an unsustainable engagement with Nature to a sustainable engagement.
The main challenge is to encourage our economic and financial systems to take note of accounting prices of nature, that is societal worth, if only implicitly. The reason being that market prices of natural capital are far from their accounting prices, that is their true social worth. In many cases, the price we face for Nature is often negative, and consequently means it has been profitable to deplete natural assets.
This profiting from depletion has been fuelling increased risk and uncertainty. The non-linearity associated with Nature’s processes means its response to degradation is unpredictable. Ecosystems can exist in different stable states, some are less biodiverse and productive than others. A move from one stability regime to another is called a regime shift; the point at which the regime shift occurs is known as a tipping point. The existence of ecosystem tipping points and regime shifts mean that changes to ecosystem productivity can be both abrupt, long-lasting and have far-reaching consequences.
It is very much the risk and uncertainty associated with Nature that means time is not on our side to preserve the planetary stability that has defined the human era. We can continue down a path where our demands on Nature far exceed its capacity to supply, or we can take a different path where we engage sustainably with Nature, enhancing our collective wealth and well-being and that of our descendants, and maintaining the one stability that rules us all.
This was originally posted on LinkedIn on March 14 2022.