41 Capital
41.1 Produced Capital
41.1.1 Cambridge Controversy
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Produced capital.
What is it?
Produced capital is defined as ‘capital goods embodied in human-made goods or structures, such as roads, buildings, machines, and equipment’ (Dasgupta, 2021, p. 507). These are physical assets, generated by human transformation of natural capital, that are used to provide a flow of goods or services, e.g. a sewing machine, factory or computer. A private house counts as produced capital because it provides services (e.g. shelter) repeatedly over time. Intangible assets, such as company patents, are also included. Produced capital is then a diverse stock measured as a value in national wealth accounts, and an increase of which contributes to economic growth (GDP). Thus, ‘inclusive wealth increases if and only if aggregate consumption is less than net domestic product (NDP), that is, GDP less the depreciation of all capital assets’ (Dasgupta, 2021, p. 138, emphasis original). Measuring the value of capital is then essential to the whole approach.
How is it valued?
Different forms of capital cannot be aggregated physically (i.e. hammers and tractors do not add together). So what is the aggregate or total amount of capital? The stock can be measured either as: (i) the monetary cost of production or (ii) the monetary returns attributed to specific capital on future output produced (i.e. future profits). The former, (i) involves capital itself in the pro- duction of capital and so ends in circularity with the value of capital determining the value of capi- tal, ad infinitum. One work around is to adopt a labour theory of value, so that all produced capital s valued by the labour required for its production. Today this classical economic theory is generally rejected outside of classical Marxist economics. As a neoclassical economist, Dasgupta opts for (ii), claiming that: ‘[a]ssets acquire their value from the services they provide over their remaining life’ (Dasgupta, 2021, p. 138). This leads to an asset man- agement approach whereby different types of assets, or forms of capital, are required to produce the same rate of return in order to achieve an optimally managed investment portfolio (i.e. that maximizes returns by equating returns on every investment at the margin). More simply, this means whether investing in produced capital, education or blue whales the economic agent (‘citizen investor’) seeks the same return. What is ignored by Dasgupta is a long history, that involved his own University and Economics Department, concerning problems with measuring capital.
What is problematic about it?
The failings of both approaches, (i) and (ii) above, were the subject of the ‘Cambridge Capital Con- troversy’, involving combat between economists in Cambridge England and USA. Starting in the 1950s this continued for two decades, or more, and was never resolved (see Cohen & Harcourt, 2003). In case (i) there is the need to take into account a flow of costs over time (period of pro- duction) which, in economics, requires knowing the rate of interest as a basis for equating values in different time periods. In case (ii) knowing the value of (profit from) a stream of future output (over a period of production) means calculating the net present value and so discounting it at a rate of interest. Knowing the rate of interest is required in both cases. However, the rate of interest is the return on capital investment, which requires knowing the quantity of capital. So, the value of capital cannot be determined without knowing the stock of capital, that, for multiple forms of capital, becomes a value which cannot be known without the rate of interest, which is defined by already knowing the stock of capital, and so on …
Neoclassical economists (aka Cambridge USA) then opted for naïve empiricism and claimed they could collect data and observe the rates of return in actual markets without explanation as to how, or from where, it is produced. Thus, in this tradition Dasgupta claims that: ‘[t]he yield on investment in produced capital is its marginal product’. Solow, whom Dasgupta cites as a major influence on his economics, has sought to justify this approach. Yet, the basic problem remains, the value of capital and, indeed, its definition, are left indeterminate and the empirical approach lacks validity. The alternative is to admit that neoclassical theory bears no relationship to reality, and capital investment is not about simplistic production functions specifying the rate of return to different factors (i.e. land, labour, capital) measured by disaggregated marginal products, but, rather, con- cerns institutional arrangements to capture surplus. Indeed, outside of economic textbooks, the contributions of the separate factors to output cannot be determined, let alone a marginal product attributed to each (i.e. what is due to labour vs. capital, say the farmer versus the tractor, let alone the land!). Rather than marginal productivity theory we might instead consider that profit is derived from the social power of those able to appropriate the technological achievements of society as a whole. They may be capitalists in market dominated economies or functionaries of the State in centrally planned economies. Under capitalism the key to power lies in gaining private property rights over resources, and this then lies at the heart of the debate over biodiversity. What is at stake is the legal right and economic authority to capture the surplus created by the production process. This is why classical political economy (as opposed to neoclassical economics) connected individuals’ dependence on the market for their livelihoods with social class, as the fundamental unit of analysis.
Rather than marginal productivity theory we might instead consider that profit is derived from the social power of those able to appropriate the technological achievements of society as a whole. They may be capitalists in market dominated economies or functionaries of the State in centrally planned economies. Under capitalism the key to power lies in gaining private property rights over resources, and this then lies at the heart of the debate over biodiversity. What is at stake is the legal right and economic authority to capture the surplus created by the production process. This is why classical political economy (as opposed to neoclassical economics) connected individuals’ dependence on the market for their livelihoods with social class, as the fundamental unit of analysis.
41.2 Natural Capital
(se renv on Spash/Dasgupta) Spash (2021) The Dasgupta Review deconstructed: an exposé of biodiversity economics (pdf)
41.3 Human Capital
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The concept of human capital is heavily related to productivity in a wage labour economy.
People who can be more productive have more value and those who live longer (i.e. the young) can be productive for longer, and so have more value, than others. The two main elements, health and education, must be converted into monetary values to oper- ationalize the human capital approach.
Dasgupta (2021, p. 256) notes that: ‘The value of a statistical life (VSL), [is] a concept central to the meaning and measurement of human capital’. The idea is that monetary values can be placed on human life without specifying the people who will actually lose their lives as a result of a public policy decision. There are two main methods for assessing the risk of death or VSL. First, an indi- vidual may be directly asked their willingness-to-pay to avoid a risk or their willingness-to-accept compensation for incurring a risk. CVM surveys have been commonly applied but also been severely criticized.
The other main alternative is to use measures related to earnings, a revealed preference method, technically termed a hedonic wage approach. This might, for example, use actual wage differentials in jobs with a range of risks.
The definition of human capital as productive wealth could be understood as framing a govern- ment’s relations with its citizens primarily through the lens of their economic contribution, as if a human resources department, ensuring good health and education to the extent that it contrib- utes to productivity. This implies allocating resources according to the expected payback, e.g. prior- itizing young healthy adults. This productivist logic led some economists to justify eugenics. There are also long standing racist associations with references to lazy indigenous peoples by colonizing Europeans, and classist associations as in the history of removing common rights to force the poor into wage labour relations so they could become productive.
The apparently simple case of investment in education also quickly runs into trouble. Financial returns neither require being educated nor does education bring financial returns per se. Under capitalism it is business, banking and finance that ‘makes money’ not just being educated.
Health (mortality/morbidity) as a capital investment is even worse. Producing money numbers here requires the conjuring trick of talking about abstracted non-real people who are represented as ‘statistical lives’, under the VSL. For example, the results are used in transportation assessment to decide upon road building programmes and the installation of safety equipment. However, the public rejection of this approach is exposed when there is a train crash, people are killed and the public discover the lack of safety equipment is due to the calculation that it cost more than the expected fatalities times the VSL. Politicians rarely defend the numbers in such circumstances, although their transport departments may continue to use them on a daily basis.
Spash (2021) The Dasgupta Review deconstructed: an exposé of biodiversity economics (pdf)
41.4 Social Capital
Spash
Social capital is defined as mutual trust and associated norms of reciprocity that enable people to engage with one another.
While mainstream economics commonly views society as comprising three classes of institutions (households, firms, government), ‘the idea of social capital illuminates a fourth class, comprising communities and civil society’ Dasgupta’s understanding here, and his capitalist reductionism, appear quite limiting.
Social capital must be optimized for several reasons. First, he believes trust and economic growth are positively related so that more cooperation improves efficient allocation of resources and so increases wealth. Second, civic engagement and membership in associations discipline governments and improve governance. Third, communities and civil society are regarded as essential for controlling Nature conservation and restoration programmes initiated by government or national/international NGOs.
Bringing together a range of actors – governments, NGOs and ‘increasingly’ private firms – is advocated to build local institutions to engage people in collective action and set rules. This is necessary because ‘beliefs do not appear out of nowhere’. Accordingly, this will be an institutional process: ‘That helps to align beliefs’
The danger of blanket calls to ‘align beliefs’,
Diversity of opinions, different stake- holders perspective, ‘misaligned beliefs’ and public debates are what democracy is about. Aligning beliefs is more inline with totalitarianism. Absolute trust in government by all is also neither likely nor something to be ‘optimised’ via investment. Promoting such ‘social capital’ might easily be instru- mentalised to silence critical voices, blame civil society for being uncooperative, depoliticize issues and dismiss genuine concerns – class struggle, power relations, value conflicts. Civil society is also divided. The concept and promotion of social capital by The Review appears fuzzy, double-edged and dangerous for democracy.
Spash (2021) The Dasgupta Review deconstructed: an exposé of biodiversity economics (pdf)