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Missing capitals: how should we think about the modern wealth of nations?

Conceptions of wealth tend to focus on financial assets. But prosperity also depends on natural capital, human capital, social capital and intangible capital.

For many of us, the word wealth tends to be associated only with financial assets. But this is an overly narrow view of prosperity. For much of history, land was the foundation of wealth: the Domesday Book, for example, was a record of landholding compiled at the order of William the Conqueror in 1085.

Property remained the key asset into the times of Adam Smith, widely thought of as the father of economics. Along with financial assets like pensions and savings, property is still an important component of wealth in the UK, as are physical assets such as factories and warehouses, or machines and lorries.

But even this perspective needs to be broadened. The wealth of nations depends on a wide range of assets, all able to be accumulated (or depleted) over time. These assets also deliver economically valuable services year by year. Those that are often overlooked, partly because they are harder to measure, are sometimes called missing capitals.

Natural capital is one. This refers to the resources provided by nature, such as a liveable climate, water, ecosystems and minerals. While some are part of the monetary economy, many others are only just starting to be more carefully measured, given the new recognition that economic activity has been using nature for free in an unsustainable way. The threat of climate change and biodiversity loss heighten the importance of natural capital in our national accounting.

Another component of wealth is human capital: the skills and know-how everybody invests in acquiring, primarily through education and training. Increasingly, economists are including health in measures of human capital, as healthy people are more productive.

Less tangible are two other missing capitals. One is intangible capital, which consists of accumulated value in intellectual property, designs or organisational know-how.

The other is social capital – the ways in which people in local communities or wider societies connect with each other to share resources and activities. An economy with high social capital – typically measured by the levels of trust in others that people express – is likely to be richer than one with low social capital.

Returning to a more holistic view of wealth is essential for sustainable growth. A focus on wealth embeds concerns for the future because the value of any asset today depends on the services that it is expected to provide in future. Specifically, if an asset is depleted too much or not maintained well, it loses value.

Including the whole range of assets ensures that decisions can take account of the links and trade-offs between them. For example, cleaner air will improve human capital as well as natural capital; and investing in upstream tree planting will reduce what needs to be spent on concrete flood defences downstream.

Finances and more conventional economic measures certainly matter – but the long-term prosperity of a nation requires a more comprehensive view of wealth.

Where can I find out more?

Who are experts on this question?

  • Matthew Agarwala
  • Diane Coyle
  • Partha Dasgupta
Author: Diane Coyle
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