Capital Manmade And Natural

Capital is a very tricky concept. Marx wrote an important and influential book about it (Das Kapital, volume I) without fully clarifying the topic.6 He distinguished two important categories of productive capital, however, circulating (mobile) capital and fixed capital. The former is essentially financial; it consists of money and monetary instruments. Fixed capital, consisting of land, structures or machines, can be valued in monetary terms in several ways. One is to start from a base year and add new investments in various categories (for example, residential housing, non-residential buildings, machinery, roads and bridges, etc.) at current prices adjusted to a standard year, while simultaneously depreciating existing capital stocks based on assumed lifetimes. This is known as the 'perpetual inventory method' (PIM) (Maddison 1987). We have used Maddison's historical reconstructions of capital stock in our analysis.

Another approach, which is applicable only where the quantity of some form of physical capital is known, is to assess the replacement value at current costs. This might work for bridges or roads, but it is not practical for heterogeneous capital at the sectoral or national level. A third method, which is applicable at the sectoral level, would be to work backward from aggregated profits and some estimate of the rate of return to capital. In a totally monetized economy, it is tempting to argue that current income is equivalent to returns on capital. But that makes sense only for a business where all capital is invested in some sort of profit-making activity. It is clearly not true for individuals or nations. Another problem with that approach is that profits can and do vary significantly from year to year, whereas the capital stock is (presumably) much less variable and seldom decreases. The so-called 'Cambridge controversy' in the 1950s and 1960s was basically a debate about whether the term has any meaning independent of rate of return (Harcourt 1972). In recent decades, the issue seems to have been resolved in favor of the perpetual inventory method.

However, other kinds of capital need to be considered, notably human capital or knowledge, and natural capital. There are at least two fundamental difficulties, quantity measurement and valuation. As regards knowledge, including skills, 'know-how' and social organization, possible quantity measures include years of education, books, publications in scientific journals, and patents. Unfortunately, none of these measures correlates well with innovative performance by firms or nations. Other factors are obviously important, and probably crucial. Economists have also attempted valuation in terms of aggregate costs, for example, of higher education or R&D expenditures. Again, there is very weak evidence of a direct relationship between educational or R&D expenditure and contributions to useful knowledge. Most education is elementary: literacy and numeracy enable people to function in society and the economic system, but not to contribute anything new. Most non-military R&D in large firms is defensive, designed to cut costs of existing products, not to create anything new. Military R&D is focused on ways and means to destroy people and property, not to make the world better. It is no wonder that military 'spinoffs' are rare.

The fundamental problem of valuation is that the conditions for valuation of exchangeable goods in a competitive market do not apply to knowledge or natural capital. Exchange markets require exclusive ownership and control, and the ability to transfer that exclusivity. Knowledge can be sold, in principle, but it is also retained by the seller, so the exclusivity condition is violated. In the case of 'human capital', there is a market for certain kinds of expertise, embodied in people, such as lawyers, doctors, managers or entertainers. But the expertise in question is only slightly related to knowledge. Moreover, it is so distorted by institutional and other factors that the 'prices' (salaries) paid to such people are not even remotely related to the market value of specific contributions to the economy.

Inventions are no longer exclusive as soon as they are published, and they must be published to be patented. Very few inventions nowadays can stand alone. For the most part, they must be combined with many other inventions, constituting the technological assets of a firm. The firm has market value, to be sure, but there is no way to assess the value of its technology as such vis-à-vis the value of its commercial activities.

The statistical treatment of quantifiable natural resources, notably minerals and forests, is grossly inconsistent at present. Extraction of mineral or forest resources is treated as a form of national income, even though it is really a form of living off capital. Most resource-exporting countries and importing countries today are equally guilty of this form of deceptive accounting and many are actually (if unwittingly) impoverishing themselves (Repetto 1985; Repetto et al. 1989; Solorzano et al. 1991; Repetto 1992; Serageldin and Steer 1994).

In the case of unquantifiable natural capital - other than minerals, forests and fisheries - there is no market where they can be exchanged and hence no market price. This is because there is no possibility of exclusive ownership or possession. Nobody can own the sun, or the rain, or wind, or wild birds or biodiversity. Only by indirect hedonic analysis or survey techniques (for example, of 'willingness to pay') can quantitative values for the losses be assessed. The literature on these topics is large but ultimately inconclusive. However, a preliminary body of research carried out in the early 1990s by the World Bank, but never followed up, is important enough to be worth summarizing briefly below.

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