Capitalism’s Missing Links

If capitalism requires three factors of production — land, labor and capital — then why do we obsess over one (capital) and virtually ignore the other two?

 The foundation of capitalism rests on three factors of production: Land, labor, and capital. Capital is the money and the physical assets used in production. We have a wide range of incredibly sophisticated ways to measure what happens to capital: depreciation formulas that vary based on the type of asset, ROI, ROE, IRR, net present value, etc. etc. etc.

So why don’t we have ways to measure changes in the productive capacity of the land and “resources” used in production? When an oil reserve is pumped (or a forest cut down, or a fishing ground overfished), GDP goes up. Woo-hoo! Nowhere is it acknowleged that once these materials are gone, it will be a long, long time (if ever) that they will be replaced. If I went to my financial planner and said I planned to increase my income this year by $50,000 by selling off my IRA, with no thought of building it up again, he’d think I was nuts. But this is what our current economic system does and somehow on a national scale it is OK.

Economists like Sir Partha Dasgupta and “Greenies” like Amory Lovins and Paul Hawken have written compelling arguments for measuring these forms of “natural capital” and incorporating changes in their values into measures of national wealth.

Since this calculation often lowers a nation’s wealth, mainstream economists aren’t very interested in propagating it. (Read more about this here: ) But without it, economics is a “dismal science” indeed. In fact, it is hard to call it any kind of science when on the one had it touts three essential factors of production, yet only measure one.

And, yes, this leads to the fact that we should also measure the growth or decline in “human capital”. Education shouldn’t be accounted for as a current expenditure, but as an investment. But that’s for a different blog….

Until economists (and society) take a more complete view of capitalism, business will report the numbers that look best on their balance sheet or P&L and continue to ignore these negative effects. Look no further than this to understand why environmental and social ills seem so intractable….


One Response to “Capitalism’s Missing Links”

  1. GM: A Morality tale of the dangers of Incomplete Capitalism « The Incomplete Capitalist Says:

    […] The Incomplete Capitalist Exploring What Adam Smith Didn't Tell Us « Capitalism’s Missing Links […]

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