In January 2007, my wife Isobel and I spent a wonderfully peaceful month in the small town of Puerto Morelos, on Mexico’s Yucatan Peninsula. Apart from enjoying the beach and the local culture (and learning to mix a mean Margarita based on grapefruits from the Mayan supermarket), there was time to think and study. I was in the early stages of a long-term socioeconomic study of the Florida Keys with its threatened coral reefs, for the US Government, and the 700-page Stern Review on the Economics of Climate Change had just been published in the UK (October 2006).
The initial Eureka moment related to the environment, but please be patient. Cultural activities may be “smaller” in the public mind than environmental degradation, but the parallels are strong.
Nicholas Stern himself has defined “the nature of the economics” of climate change. It became an eye-opener for me. Click  for his definition of external effects or “externalities” — you don’t have to be an economist to get the message. The quotation begins as shown in this box (italics added):
In 2007 I began developing the Music in Australia Knowledge Base. At the same time that I studied the economics of climate change I also explored the economics of culture and the arts. The first time I explored types of economic capital was in Four kinds of economic capital, a lecture to students at the University of Trinidad and Tobago in February 2007. I was struck by the similarities. Economies are built on capital assets not just in the monetary sense but covering physical (sometimes known as manufactured), human, ecological and cultural assets which influence everybody’s well-being. The two former kinds dominate, while the relative newcomers, ecological and cultural assets, are given lower priorities by most politicians.
Historically, the classical economic model concentrated on physical or manufactured capital, with standardised inputs from “labour” and “land” (“factors of production”). The entrepreneurial skills needed to start projects were either assumed or made explicit as an additional factor of production.
The first to break out of the neoclassical mould was “labour”, morphing into human capital in the 1960s. Nobel Prize-winning economist Gary Becker showed that there was far more to “labour” than could be expressed as a standardised input — education, technology and innovation all served to transform the input into a far more high-level and diversified resource. Human capital is largely shaped by education that includes the ability to (a) innovate and develop and (b) use technology. These days one of the many aspects of human capital would be the entrepreneurial skills which received generally scant attention from neoclassical economists. We can only wonder today why it took so long for the profession to recognise the transformation of “labour” into the contribution that human capital makes to the knowledge economy that is so important today.
It took even longer before the shorthand term “land” was transformed into natural capital — the natural environment that in all its huge diversity includes our continents and islands, our oceans and seas, our atmosphere, our increasingly vulnerable ecosystems wherever we look on this planet. In short, the natural assets encompass all non-renewable and renewable resources on, below and above the surfaces of land and sea, and what Professor Throsby has called ‘the vast genetic library referred to as biodiversity.’
Natural capital became recognised as an independent economic force in the 1980s. In 1983, Gro Harlem Brundtland was appointed chair of the Commission on Environment and Development (WCED) by then United Nations Secretary-General Javier Pérez de Cuéllar. The Brundtland Commission published its report, Our Common Future in April 1987. Brundtland played a key role in the development of the broad concept of sustainability which provided the momentum for the first Earth Summit in Rio de Janeiro in 1992.
Cultural capital took even longer to become widely accepted. David Throsby notes that the first attempt to extend the idea of sustainability to culture was in the World Commission for Culture and Development (WCCD) report, Our Creative Diversity (1995), under the chairmanship of Javier Pérez de Cuéllar following his term as UN Secretary-General. So it’s the latest kid on the block by any measure. For further comment see Cultural Capital as an Independent Economic Force.
The key attributes of capital assets (physical, human, natural and cultural) are substitution and sustainability. Sometimes one kind of capital can replace (substitute for) another, the most important being the ability of increasingly highly qualified human capital to replace, or reduce the need for, large factories and machinery, and perhaps also reduce the need for some shipping and air transport as globalisation proceeds. To the extent that this happens (against many opposing trends in our complex growing world), this substitution reduces the strain on the environment associated with construction of buildings, machines, ships and aircraft.
But not all capital can be replaced by other kinds. Natural capital resources may be renewable (though often at the expense of environmental degradation, including pollution and loss of rural land quality) — but a great many are not. Minerals, oil and gas taken out of the ground won’t come back. To the extent that renewables can replace non-renewable resources, like solar power replacing coal, there are opportunities for investing in environmentally more benign types of natural capital. But the present world seems more inclined to substitute one non-renewable resource for another (such as natural gas replacing oil through ever more large-scale technologies currently dominated by hydraulic fracturing or “fracking”). This has some benefits for yet another vulnerable non-renewable resource — the atmosphere — because natural gas emits less CO2 than coal. But is it enough?
How environmental policy is conducted, and economic policy generally, is highly relevant in the context of short-term versus long-term impacts. Can we afford to continue concentrating almost exclusively on the short term? Read Stern’s definition of the impact of externalities again, in note . Slowly!
There are an awful lot of policy measures to tackle. And this complexity, and the fact that the impact of environmental damage is basically long-term, reaching into times when our descendants inhabit uncertain futures, means that exact numerical measurement of externalities is virtually impossible.
Indeed, what is called non-tradeable goods (including the atmosphere) in principle cannot be assigned a commercial value.
Which takes us to cultural capital — the kind that has only been recognised in a resource policy context within the past 20 years.
To get at the hard facts, David Throsby in his 2005 article on the sustainability of cultural capital exposed the difficulty of actually measuring cultural value. He concluded:
“Given the parallels between natural and cultural capital, it is intuitively plausible to extend the analysis of sustainability in ecological terms to embrace the phenomenon of cultural sustainability, a concept that to date has tended to have rather more rhetorical than analytical substance. Nevertheless, while the theoretical concept of a culturally sustainable development path defined according to explicit criteria may be an appealing one, it remains operationally constrained until robust value-assessment methods can be devised. It is suggested that a step in this direction might be to seek aggregate cultural indicators providing a first approximation to levels and changes in the cultural capital stock, along the same lines as [has been done] for natural capital. Of course this is more easily said than done; efforts to construct cultural indicators … have some particular problems of their own, and quantification is especially difficult because of the unavailability of suitable data on cultural resources for any country, let alone on an internationally comparable basis between countries.”
Throsby’s framework is formal econometric analysis which exposes the difficulty of producing “robust value-assessment methods”. This problem is shared by natural capital and it is very hard to see how the problem of measurement can be convincingly overcome in the foreseeable future. Formal economics runs into a wall when it can’t put a money value on something. We can agree that the benefits are intuitively attractive but the economic model sets up a barrier which is a disincentive to political action because the numbers are missing.
This analytical approach is eminently legitimate, and it is important because it sets up criteria for how far formal economics can take us in these new relatively new policy areas, which need to go deeply into the possible long-term impacts. The formal analysis, however, must necessarily exclude the impact of the whole bundle of “intuitively attractive” new policies which might be introduced but for now lack numerical foundation themselves — emerging economic, social, cultural and ecological policies. Including new initiatives in education, research, technology and innovation, the arts and culture.
What plausible future scenarios can be devised based on alternative policy mixes, given that we cannot put a money value on the future? Policies that have direct impact on the future status of our four kinds of economic capital. What would be the range between a plausible best case and an equally plausible worst case if we were allowed to postulate changes in the basic game plan?
The parallel between cultural and natural capital assets remains. What has been said about either applies to both. Whether the action is physical pollution or inadvertent destruction of existing cultural assets, the impact extends into an uncertain long-term future and the monetary effects cannot be measured. This doesn’t mean that these effects should be ignored, but we must find try other ways to identify and analyse them.
We haven’t arrived at a satisfactory conclusion yet, but there is good reason to listen to one of the foremost exponents of global economic policy, Managing Director Christine Lagarde of the International Monetary Fund who attended the G20 meeting hosted by Australia in February 2014. While she points out that the IMF way is to “crunch the numbers” and look at situations “country by country”, her economic paradigm takes us beyond where we are today to where we might be if certain recommended policies are — or are not — carried out.
This resumé of Madame Lagarde’s responses has been as faithfully reproduced as possible:
Maybe the message could be even more focused, into the following three points:
Philippa Barr, a PhD candidate in Architecture at the University of Sydney, near the end of the session asked whether the IMF would ever abandon the use of the GDP in favour of “natural capital accounting” (assigning financial values to natural resources including air quality) to measure the long-term viability of the national economy.
This question is much the same that has been bothering people concerned with the long term impact associated with our ecological and cultural capital (including myself), and Christine Lagarde said the question was close to her own sympathies:
The issue remains, as David Throsby and others have shown, that formal long-term valuation is currently impossible to put into numbers. But at least the leader of one of the most influential economic institutions in the world is on record with her belief that there is a strong need to make progress in that direction.
This encourages the Music Trust and its Knowledge Base to explore what we can do to put more realistic values on our cultural assets and activities (with more than a glance towards the natural environment with which there are so many common features). Hence the launch of this project focusing on the Australian music sector.
Hans Hoegh-Guldberg, 27 March 2014.
Nicholas Stern, 'What is the Economics of Climate Change?' World Economics, Vol. 7, No. 2, April-June 2006, p 4. The article of 10 small pages is recommended reading in its entirety.