Contribution to GTI Roundtable "Monetizing Nature"

Herman Daly

I would like to add two points in light of the discussion of “natural capital” and the monetization of nature.

(1) The term “natural capital” was introduced in opposition to “financial capital,” not as an extension of it, or advocacy for “monetizing nature.” Natural capital uses the term “capital” in its original non-monetary sense of “a stock or fund that yields a flow of useful goods or services." The word “capital” derives from “capita,” meaning “heads” and referring to heads of cattle in a herd. The herd is the capital stock, the sustainable annual increase in the herd is the flow of useful goods or “income” yielded by the capital stock—all in physical, not financial, terms, and independent of prices.

Problems certainly arise when we take money in the bank growing at the interest rate as the standard by which to judge whether natural capital is growing fast enough, and then liquidate populations growing slower than the interest rate and replace them with faster growing ones. Furthermore, money in the bank is a stock that yields a flow all by itself without diminishing itself, and without the aid of other flows. Can a herd of cattle yield a flow of additional cattle all by itself, and without diminishing itself? Certainly not. The existing stock of cattle transforms a resource flow of grass and water into new cattle faster than old cattle die. Like cattle, real capital transforms resources into products and wastes, obeying the laws of thermodynamics. Capital is not a magic substance that creates something out of nothing. Thinking that real capital can behave like financial capital is a prime example of the “fallacy of misplaced concreteness,” i.e., mistaking the abstract symbol for the concrete reality. A good symbol should not be allowed to do things that the reality it symbolizes cannot do. If you object to the term “natural capital,” just substitute “natural stocks or funds that yield a useful flow of goods or services into the future,” and note that this is very similar to the economic concept of real capital, but very different from financial capital.

(2) There is certainly an important trade-off between how much of the world should be transformed by human beings into goods, and how much should be left in the natural ecosphere. This is fundamentally an ethical and ecological decision, but has economic consequences. It is a macro-level, price-determining decision, not a micro-level, price-determined decision. Imagining pseudo-market prices for nature does not help to make this macro decision. But once physical limits to resource throughput and economic takeover of the ecosphere have been set on ethical and ecological criteria, we still have the problem of allocating the scarce resources to different uses. This is the rationing function of prices and is necessary when ecological footprint (demand) greatly exceeds carrying capacity (supply).

The difficulty here is not with pricing access to nature, but with an excessive scale of the human economy. If you don’t want to put some rationing prices on nature, if you want it to be free, then cut the scale of the human economy drastically. If some people have too many ration tickets and others too few, then redistribute them. But while doing that it would help to keep clear the difference between price-determining and price-determined decisions. Showing how high the rationing prices for natural services would be if we actually had to account for them, and how impossible it would be to pay them, is a useful way of illustrating to people who have difficulty in seeing beyond money that the physical scale of the economy is far beyond any optimal or even sustainable level.

Herman Daly
Herman Daly was Emeritus Professor at the University of Maryland, a former Senior Economist in the Environment Department of the World Bank, and co-founder of the journal Ecological Economics.

Cite as Herman Daly, contribution to GTI Roundtable "Monetizing Nature," Great Transition Initiative (August 2014),

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