The Fallacy of the Presumption of Symmetrical
Depreciation in the Substitutionality of Natural and Human-Made Capital
by Alastair McIntosh
This first appeared as Appendix 6 to my 1994 Harris Superquarry public inquiry submission with Warrior Chief Sulian Stone Eagle Herney and the Rev. Prof. Donald MacLeod. It subsequently appeared as an appendix to my paper on the superquarry in The Journal of Law & Religion, Hamline Univesity School of Law, St Paul, Mn, (www.hamline.edu/law/jlr), XI:2, 1994-95, pp. 789-791. The purpose of the appendix was to preemptively head-off any attack on our theological presentation at the public inquiry by Redland Aggregate's advocate. Had he tried to make a simple argument that the destruction of nature is justified on the grounds that turning mountains into motorways increases human capital, I would then have had a basis to draw him into cross-examination on the company's assumptions about contingent valuation of the mountain. As it happened, the advocate asked no questions!
A technical version of this paper, published jointly with Professor Gareth Edwards-Jones in Geophilos (with a decently drawn graph!), is now available on this website - click here.
In the debate about "sustainable development" it is often proposed that natural and human-made capital are substitutable in present value terms. This justifies the continued conversion of non-renewable aspects of nature into objects of consumption, within a rubric of "sustainable development". The argument is central to the view that it is acceptable to convert mountains into motorways, and other relatively short-lived uses of aggregate.
Implicit to such a proposition of
substitutionality is, normally, what might be called, the presumption of
symmetrical depreciation. That is to say, the explicit or, more usually,
implicit discount rate used in depreciation of both types of capital is presumed
to be of the same sign (normally positive) and to be sufficient in magnitude to
have an appreciable discounting effect over human timescales. The implicit
effect over intergenerational timespans is, however, that the future value of
any type of capital thereby tends to zero. Were this not the case, the
proposition of substitutionality would be logically incohesive.
Market distortions of apparent
capital value appraised monetarily must not be permitted to cloud this point.
Fortunately, in recent years the accountancy profession, at least in the United
Kingdom, has become quite clear about the issue through Statements of Standard
Accounting Practice associated with the respective national institutes of
chartered accountancy. These recognise that capital (or, fixed) assets should be
subject to depreciation, even if their market value appreciates.
Distinction is made between the diminishing utility of an asset as it ages and
experiences wear and tear over time, and its possible appreciation in book value
due to property market dynamics, inflation, etc.. Any such monetary or
"paper" capital appreciation is normally treated as a "below the
line" "extraordinary" item. This avoids compromising the extent
to which the revenue statement, indicating an organisation's operating
profitability, is "true and fair".
Presumably, it is wise to apply
similar concerns for truth and fairness in resource accounting for
sustainability. The principle that depreciation of human-made capital is real,
positive and significant is important and must not be overlooked. It means that,
over the fullness of time, the value of such capital will tend towards zero, no
matter how finitely great the initial valuation, or how low the positive
depreciation rate.
Such is arguably not
symmetrically the case with natural capital. A mountain, for instance, does not
depreciate. Inasmuch as it erodes over geological time, such
"depreciation" is arguably compensated for by related geomorphological
processes such as soil formation, sedimentary rock formation, and fresh tectonic
uplift. The oldest coherent rocks in the Earth's crust are less than four
billion years in age. Since something like the same period of time again can be
expect to unfold before the sun goes into supernova, the uplift and natural
denudation of mountains can be viewed, from the perspective of geological time,
as little more than the self-compensating ups and downs of planetary middle-age.
If the human and other enterprises of evolution, teleological or not, are to be
viewed in accordance with normal accountancy practice, this should be on "a
going-concern basis". Our ultimate timespan in considering issues of
sustainability ought therefore be nothing short of geological.
Furthermore, a mountain is a
context in which biodiversity can continue to be and unfold. If this is
something which we recognise as having intrinsic or imputed value, then the
implication would follow that natural capital embodies an inherent propensity to
appreciate, not depreciate. Accordingly, at the very least, the natural
depreciation rate of a mountain tends towards zero, if positive. More likely,
however, it is actually negative.
Other examples of natural capital
dynamics abound. In the 1960's fresh natural capital was created when the
volcanic island of Surtsey emerged from the sea near Iceland. The rise in
biodiversity and processes of soil formation was carefully monitored. Over less
than a decade, it could be seen to "appreciate" in "worth",
if we take the capacity to support life as our predicating value. Similarly, a
natural forest usually appreciates at it reaches climax succession and then at
least holds its value.
Natural systems are based upon
simple interest from capital; not compound interest, on which discounting
procedures are predicated. In nature, if you leave the apples on your tree, you
do not harvest the same again plus ten percent next year. The worms get them,
and their nutrients follow a different route in nature's cyclical processes than
would have been the case had small boys pinched them. If the small boys defecate
in the compost heap or field, as they did traditionally in the Scottish
Highlands and Islands for instance, these nutrients are not lost.
Concepts derived from compound
interest such as discounting, and even simple depreciation which is not
compounded, are relevant to the time value of money or time-utility, related to
the wear-and-tear of non-self-repairing or replacing forms of capital. As such,
they must be recognised as generally inappropriate to nature. Their attraction
is only that they spuriously justify short-cutting natural processes in a manner
which makes a false translation from the world of finance. Financial tools are
concepts rooted in the psychological construct of money and presumed utility;
nature, by contrast, is not psychological. Nature was established outwith an
anthropogenic mythopoesis, but anthropogenic constructs must ultimately stand
the test of nature, within which they are held.
In conclusion, because depreciation cannot be symmetrically (that is to say, "in the same way") applied to both natural and human-made capital, I contend that the proposition of capital substitutionality is fallacious. It should be dropped from "true and fair" discussion about long term sustainability.
(The following figure illustrates the above argument)
Trends in the utility derived from hypothetical items of human-made and natural capital over time. For simplicity, a linear rate of decline is utility is assumed for human-made capital, AB, while for natural capital, CD, a zero rate of decline is assumed. In reality many functional forms are possible for both of these rates, but regardless of form, the rate of decline for human-made capital will usually be negative, while in the long run, that for natural capital will tend towards zero. Accordingly, the total utility for natural capital is the finite area under the triangle OAB, whilst for natural capital it is the rectangular area under OCDE, which tends towards infinity. This graph and legend did not appear in the original superquarry submission but was carried in the Journal of Law & Religion to clarify the argument. Presentation in this form was originally proposed by Gareth Edwards-Jones, then ecological economist at the Scottish Agricultural College, Edinburgh, and subsequently professor of ecological economics at Bangor.
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02/04/21