THE CONCEPT OF RESOURCES

1.2 THE CONCEPT OF RESOURCES

In broad terms, a resource can be defined as anything that is directly or indirectly capable of satisfying human wants. Traditionally, economists classify resources into three broad categories: labor, capital and natural resources. Labor encompasses the productive capacity of human physical and/or mental efforts measured in terms of ability to do work or produce goods and services. Examples are a worker on an auto assembly line, a high-school teacher and a commercial truck driver. Capital refers to a class of resources that is produced for the purpose of creating a more efficient production process. In other words, it is the stock of produced items available not for direct consumption, but for further production purposes. Examples include machines, buildings, computers and education (acquired skill). Natural resources are the stock of living and nonliving materials found in the physical environment, and which have an identifiable potential use to human beings (Randall 1987). Agricultural land, deposits of ferrous and nonferrous minerals, water, fisheries, and wilderness and its multiple products are examples of natural resources.

At this point, four key issues need to be clarified regarding this economic notion of resources. First, it is rare that basic resources (labor, capital and natural resources) are used for direct consumption without some modification. Resources are often used as factors of production or as means to produce final goods and services that are capable of directly satisfying human needs. In other words, basic resources are often viewed as a means to an end, rather than ends in themselves. The second and somewhat related issue is that, as the quotation at the beginning of the chapter clearly indicates, the economic notion of resources is strictly anthropocentric. That is, the economic value of any resource is defined by human needs and nothing else— which implies that resources have no intrinsic value (value which depends solely on the nature of the thing in question) (Attfield 1998). Case Study 1.1 illustrates the anthropocentric view of resources. The worthiness of a watershed service (water purification process by root systems and soil microorganisms) is identified solely by its commercial value. The fact that the watershed under consideration may have other, noneconomic value is not considered.

The third issue that needs to be understood is that each of the above resource categories is of economic concern to the extent that they are scarce found in limited quantities and/or qualities. The fourth issue deals with the fact that as factors of production, resources are used in combinations. Furthermore, resources are generally considered to be fungible (Solow 1993). That is, one kind of resource (such as a machine) can be freely replaced by another (such as labor) in the production process; or one type of energy resource (such as petroleum) can be replaced by another form of energy (such as natural gas). This is also evident in Case Study 1.1 where it is suggested that water purification for the city of New York can be undertaken either by investing in the preservation of “natural capital” (a forest watershed) or by building a filtration plant— physical capital. Fungibility implies that no particular resource is considered to be absolutely essential for

production of goods and services (more on this in Chapters 3 and 7 ). However, as will be evident from the discussion in the next section, fungibility does not in any way suggest an escape from the general problem of resource scarcity.

4 THE “PREANALYTIC” VISION

CASE STUDY 1.1 ECONOMIC RETURNS FROM THE BIOSPHERE

Garciela Chichilnisky and Geoffrey Heal

…The environment’s services are, without a doubt, valuable. The air we breathe, the water we drink and the food we eat are all available only because of services provided by the environment. How can we transform these values into income while conserving resources?

We have to “securitize” (sell shares in the return from) “natural capital” and environmental goods and services, and enroll market forces in their conservation. This means assigning to corporations—possibly by public-private corporate partnerships—the obligation to manage and conserve natural capital in exchange for the right to the benefits from selling the services provided.

In 1996, New York City invested between $1 billion and $1.5 billion in natural capital, in the expectation of producing cost savings of $6 billion-$8 billion over ten years, giving an internal rate of return of 90–170 percent in a payback period of four to seven years. This return is an order of magnitude higher than is usually available, particularly on relative risk-free investments. How did this come about?

New York’s water comes from a watershed in the Catskill Mountains. Until recently, water purification processes by root systems and soil microorganisms, together with filtration and sedimentation during its flow through the soil, were sufficient to cleanse the water to the standards required by the US Environmental Protection Agency (EPA). But sewage fertilizer and pesticides in the soil reduced the efficacy of this process to the point where New York’s water no longer met EPA standards. The city was faced with the choice of restoring the integrity of the Catskill ecosystems or of

building a filtration plant at a capital cost of $6 billion-$8 billion, plus running costs of the order of $300 million annually. In other words, New York had to invest in natural capital or in physical capital. Which was more attractive?

Investing in natural capital in this case meant buying land in and around the watershed so that its use could

be restricted, and subsidizing the construction of better sewage treatment plants. The total cost of restoring the watershed is expected to be $1 billion–$1.5billion…

To address its water problem New York City has floated an “environmental bond issue,” and will use the proceeds to restore the functioning of the watershed ecosystems responsible for water purification. The cost of the bond issue will be met by the savings produced: avoidance of a capital investment of $6 billion–$8 billion, plus the $300 million annual running costs of the plant. The money that would otherwise have paid for these costs will pay the interest on the bonds. New York City could have “securitized” these savings by opening a “watershed saving account” into which it paid a fraction of the costs avoided by not having to build and run a filtration plant. This account would then pay investors for the use of their capital.

Source: Nature Vol. 391, February 12,1998, pp. 629–630. Reprinted by permission.