Three dimensional capitalism

As an investment banker with another life built over fifteen years around my passion for the economics of nature and, more recently, by leading TEEB, a study on the economics of ecosystems and biodiversity, I am often asked how I reconcile my capitalist background with my commitments to nature and the environment.

I give my stock reply "I don't reconcile them – I am a total capitalist". And usually, the conversation ends there. Sometimes however, the answer leads to another question: "You mean … you see nature as a form of capital?" Now, that does deserve an answer.

Several years ago at an environmental conference in Aspen, Colorado, I heard Professor Richard Norgaard speak about a deep, underlying, but unstated belief system in economics. He said that unlike environmental sciences (and their underlying ideology "environmentalism") or social sciences ("socialism") there was no "ism" or ideology for economics – at least not openly. But there was definitely an unstated ideology in economics – perhaps we should call it "economism" - which can be summed up as "money matters most".

Money does matter, but must we necessarily confuse money with capital that we fixate solely on one dimension of capital (ie physical or man-made capital) which can of course be paid for with, or sold and converted into, financial capital (ie money). Why must we ignore human capital and natural capital?

And why must we look to markets to solve what ails humanity, including commons tragedies such as climate-changing emissions and the collapse of ocean fisheries? Well-designed free markets are undoubtedly the most efficient way of allocating private capital, and of trading private claims. But why do we assume that the best solutions to social problems must be market solutions - assume, in other words, that everything can be privatised?

It takes monumental effort (not always successful) to marketise public goods or bads. It may require the painstaking creation of derivatives or synthetic claims (eg: corporation-wise limits to their generation of "public bads", in the form of specific emissions caps for corporations in the EU-ETS) in order to use markets to try and contain the common problem of the loss of climate stability and safety, an important public good.

Markets help us to value goods and services that are traded, such as advertising space, club memberships, cars, and houses. We value these things, we conserve them, and we would not voluntarily destroy them – whether they belong to us, or to someone else. They are all private goods.

But what about public goods and services? Where are the markets to buy and sell clean air, fresh water, law and order, communal harmony, species diversity? And are we not collectively guilty of assuming "no price = no value = no need to conserve" public wealth?

Why do we use the term market failure to describe anything that is a commons problem? Does it not project an underlying belief that there must be a market success awaiting us around the corner, if only we could find it? Is this not another example of the almost religious ideology of economism at work, through its unstated belief system?

For capitalism to work, it must be recognised in all its dimensions – physical capital (financial assets and other man-made assets), human capital (education, health, relationships, law and order, communal harmony, etc) and natural capital (freshwater, forests, biodiversity, etc).

This actually is not a new thought. It goes right back to Adam Smith's concepts of "land, labour and capital". But in his days, land and labour were plentiful, and if not, then colonisation expanded supply. Energy was not even a major factor of production. The scarce resource in those days was financial capital, and the entrepreneur-businessman was feted by society because he created financial capital, and not pilloried for being the cause of the worst shocks and crises in economic history. How times have changed!

This article was also published in the Guardian online