Natural resource capital

What is the value of natural resource capital to the economy? by Benjamin Warr and Robert Ayres

The value of things has been an obsession of humankind for as long as we know, in our search for satisfaction. King Midas thought that gold was the most valuable thing. This belief led him only to tragedy. As he understood only too late that the exchange he had chosen to make would not satisfy him, that all the gold in the World was of no use, and indeed would cause the destruction of everything he really held dear.

That the value that we assign to things is a function of their use and exchange value, is not a new idea either. The diamond-water paradox expounded by Adam Smith in the 1700s neatly summarises how the value of one commodity relative to that of a quantity of another depends on utility and scarcity. Water has not historically been considered a 'scarce' resource, and despite the fact that it is essential, is not considered valuable relative to rare and beautiful diamonds, whose distinguished sparkle is highly valued.Yet today, for many people, clean 'potable' water is scarce and perhaps the most useful thing they can get their hands on. The essentiality of water for life, combined with its scarcity have combined to give it almost 'infinite value', under certain circumstances, when its essentiality becomes a pressing reality.

The quest to define the value of commodities has naturally been led by economists. The neo-classical 'marginal theory' of value has provided the standard model employed by most. In it value is assumed to be determined by 'utility on the margin', and consumers are assumed to allocate money optimally across uses. This infers that the marginal utility of money is the same for an individual in all its uses and that money can be used as the standard measure of value. So far so good. The marginal theory of value provides a simple explanation of the water-diamond paradox and a measure, money. As we have already noticed; water becomes increasingly valueable as it becomes scarcer. The 'marginal' value of water is finite because the value of an aditional unit of water when we have sufficient to support basic needs is limited. But the total value of water is inderterminate, because water, like other life supporting ecosystem services, has a utility threshold. Measures of economic value are designed to reflect the difference that something makes to satisfy human preferences (Farber et al, 2002). So economic measures may tackle the questions like "What is the value of an additional tree?", but never, "What is the value of all trees?". Is this important thoug? We know that tress are important, and in general we agree there should be some. As long as we have agreed upon this we can set about deciding what is the value of an additional tree?

Ecological concepts of value have developed concurrently. Scientists use the concept of value to discuss the causal relationships between different parts of a system. For environmental scientists trees are valued for their role in the ecosystem as a hydrologic and gas exchange system and soils are valued for the buffering, transformation, degradation and plant growth roles. Analagous to this, classical economists such as Schumpeter, Ricardo and Straffa realised that value within the economic system could be determined based on production relationships, if they could identify a primary input to the production process. The barrier economists have troubled over has been identifying the correct 'primary' input.

For ecologists, the problem of identifying a 'primary' input was simple. Their starting point for the identification of causal relationships in natural systems has been to define the (eco)system of interest then measure the flows of available energy through and between the compartments of the system relative to the stocks of available energy held within the components of the system, using thermodynamic principles. Energy is ubiquitous, a property of all commodities and systems and connot be substituted for. Having identified the primary input and causal production relationships they have been capable of assessing the value of each component of the system to the productivity of the whole. The first law of thermodynamics is not particularly useful, stating simply that energy and matter are conserved, i.e. can't be 'used up'. So energy and matter as such are not productive in the true sense. The ability to do work is proportional to the degree of organisation and not the raw energy content. The degree of organisation of a system is a measure of thermodynamic distinguishability from the surroundings; the thermodynamic information content.

Lets think again about water before moving on to consider which commodities are actually primary to the economic process and may therefore fulfill the role as a measure of value. We should certainly distinguish between different types of water when we discuss their value to society. Then we can see that it is the distinguishalbility of pure water from, for example salt water, that generates its value for human life support. From an anthropocentric perspective, perhaps the most general basis for the description of value and a precursor of the measurement of value is the ability to distinguish the object, feature or phenomenon in question from its background. Once aware of a scarcity and capable of distinguishing the role of water as being essential, its value changes.

What makes something distinct? When I was at school I sat beside a boy who distinguished himself from the rest of the class. For his age he was very well organised, scarily so! Strangely enough he was also particularly productive. He was full of all sorts of useful information. This is a peculiar coincidence because theortecially;

"Information is a basic aspect of all systems, the role of the observer is to define boundaries, and to this extent information content is a subjective concept. Once boundaries are defined, the infromation content of a subsystem is a measure if its distinguishability from the surrounding system".

Continuing with my naive 'schoolboy' analogy, my colleague, easily observable at the front of the class distinguished himself from the rest of the class by his superior information content, the organisational maturity this provided him with and finally by his remarkable end-of-term results. The teacher valued him when it came to evaluating his performance related pay!

For his efforts my colleague was well rewarded by his mum, with sweets and the like. Good news too, because he worked hard. The second law of thermodynamics tells us that useful energy (organisation-information content) dissipates within a closed system unless maintained. To maintain organisation at a constant level low entropy energy capable of doing work, containing "thermodynamic information" must be imported from outside the system. To increase the level of organisation the flows of useful energy should theoretically increase. The economy works in much the same way.

The value of natural resources to the economic system starts with the consumption of available energy flows from the natural resource capital stock. The consumption of available energy from primary natural resource provides proportional flows of 'useful work' which can be directed to maintain organisation, develop new organisational structures or simply be wasted.

Available work = exergy (see exergy, power, work for an overview of the exergy concept)

Historically the largest flows of available energy through the global economy were those derived directly from the sun and converted into useful forms by plants and animals. Over the past century available energy flows from fossil fuel resources have far surpassed these inputs. We suggest that the increased flows of available energy from stocks of natural resource capital have been a main driver of economic growth. The true value of flows of available energy to perform useful work within the economic system have been systematically been ignored by the neo-classicial theory, and in this way the true contribution of natural resource capital to economic output ignored. Failure to recognise these causal relationships has meant that opportunities to improve the productivity of the economy, whilst reducing pressures on scarce natural resources have probably been missed.


Read on and discover -

How to estimate the flows of useful work through the economy?

How do flows of useful work contribute to economic growth?

How does information in its various guises contribute to economic growth?

What are the implications for sustainability in the age of information technology?


This site was created by Dr.Benjamin Warr

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