The Wealth of Nature

Last week’s Archdruid Report pointed out that modern economic thought, through its lasting difficulties in coming to terms with the dependence of human economic activity on the world of nature, has played a very large role in backing industrial civilization into its present difficulties. It probably would have been wise, though, to point out that the word “modern” here is being used in a historical sense, for these difficulties date straight back to the beginning of economics as a distinct field of study.

Adam Smith, who set the whole ball rolling with his The Wealth of Nations, started that book with the following sentence: “The annual labor of every nation is the fund which originally supplies it with all the necessities and conveniences of life.” It does not seem to have occurred to Smith that the annual labor of a nation would be utterly useless without the natural raw materials, goods, and services – in the language suggested in last week’s post, the primary goods – that enable labor to be done at all, by making human life possible in the first place and by providing all that labor with something to labor on. Certainly it has occurred to very few of his successors.

The classic example is David Ricardo, who remains an influential figure in economics, not least because his theories – he was a vocal proponent of free trade, and provided what are still the standard arguments in its favor – proved to be highly useful to the British Empire in its time, and of course to the American empire in ours. Ricardo is famous for, among other things, building a significant part of his economic theories on the claim that land retains its “original and indestructible” economic value no matter what economic use is made of it.

This is an odd claim. Even in the early 19th century, when Ricardo originally made it, plenty of people could have set him straight. Bad farming practices that led to soil sterility were known in Ricardo’s time, and so was the impact of industrial pollution – though of course we have gotten much better at both since then. It may be relevant that Ricardo was born and raised in London, as far from the realities of agricultural life as you could get in his time; it is at least as relevant that his theories show the habit of dodging inconvenient facts for what look uncomfortably like ideological reasons – his arguments in favor of free trade, for example, only work if you grant the unstated assumption that international trade and its supporting infrastructure cost nothing in terms of labor, materials, or money, and also dodge the extent to which control of the transport routes and exchange processes determine who profits from the trade.

What is far more interesting, though, is that his definition of land prefigured the way that natural resources have been treated by most economists ever since. This is as true of radical economists as of their capitalist rivals; recent proponents of “green socialism,” for example, might want to reread Marx, who explicitly rejected the idea that the “free gifts of nature” could have any value at all. (The disastrous mistreatment of the environment common under Marxist regimes in the 20th century was not accidental, but a natural outgrowth of Marxist theory.) Nearly the only concession made to the ecological dimensions of economics in the mainstream, and it’s a fairly recent one, is the concept of “externalities” – the recognition that if somebody does something that fouls the environment, other people may suffer a loss of economic value as a result, and might deserve compensation for that.

Now of course this is true, and Garrett Hardin’s famous essay “The Tragedy of the Commons” built on that insight to remind us that a society that permits the advantages of ecological abuse to go to individuals, while the costs are shared by the whole society, is effectively subsidizing the destruction of its environment. Still, both the “externalities” argument and the structure Hardin built on it miss the central issues raised by the interface between environment and economics. Both tacitly accept Ricardo’s fantasy of invulnerable land as the normal state of affairs, apply it to the entire environment, and then focus attention on the exceptional situation when somebody does manage to make land (or some other environmental resource) less valuable.

Let’s take a closer look at the land whose value Ricardo considered “indestructible.” He was talking primarily about land as an economic factor in agriculture, and so shall we. What he apparently did not realize, but ecologists have shown in exact detail since his time, is that fertile land suitable for growing crops does not simply happen. Like anything else of value, it must be made, and once made, it must be maintained; the only difference is that the laborers that make and maintain it do not happen to be human beings.

Soil suitable for crops, after all, is not simply rock dust. A large part of it – sometimes more than half – is organic matter, some living, some dead but not yet wholly decayed, some dissolved into organic colloids complex enough to give analytical chemists sleepless nights, and all of it is put there by the activity of living things over long periods of time. Energy and raw materials flow through soil, uniting bacteria, fungi, algae, worms, insects, and many other living things into one of the most intricate ecosystems on Earth. Plants participate in and depend on this bewilderingly complex world; they draw water and mineral nutrients from it, and cycle leaves and a wide range of chemical compounds back into it.

The farmer who wants to grow crops is attempting to extract wealth from the underground ecosystem of the soil. She can ignore that, and simply plant and harvest with no attention to the needs of the soil, but the soil will be depleted of nutrients in a few years and her crops will fail. Alternatively, she can replace nutrients with chemical fertilizers, predators with pesticides, and so on; if she does this she will have to use steadily larger doses of chemicals to get the same yields, and when the chemical feedstocks run out – as they eventually will – she will be left with soil too sterile and pest-ridden to grow much of anything. If she wants to fulfill Ricardo’s promise and hand the land on to her grandchildren in the same condition that it came from her grandparents, she will have to provide the things the soil needs for its long-term health. Put another way, she will have to barter with the soil, giving it the things it will accept in exchange for crops.

This is the premise of organic agriculture, of course. It’s a premise that has proven itself over millennia, in the Asian farming regions that inspired the organic pioneers of the early 20th century to devise a more general way of doing the same thing, and over decades, in the farms now using organic methods to get yields roughly comparable to those of chemical agriculture. The organic approach has many dimensions, but one may not have received the importance it deserves. To an organic farmer, land is not a commodity that can be owned but a community with which she interacts, and that community has its own economy on which the farmer’s own economy depends.

Imagine, to develop this concept into a metaphor, that our farmer got crops, not from the fields, but from a village of some indigenous tribe near her home. The inhabitants of the village are deeply conservative, and their own economy follows traditional patterns not subject to change. If the farmer wants crops, she must find out what the villagers are willing to take in exchange for them, and that will be determined by the internal dynamics of the village economy: what is already produced in surplus amounts, what is scarce, what is desired and what is detested by the villagers. Her relations with the village, in other words, would be exactly the same in outline as those of an organic farmer with her land.

The same thing is true of every other form of economic activity, though the dependence on nature may be less obvious in some cases than in others. Behind the human activities that produce secondary goods lie nonhuman activities that produce primary goods – the biological cycles that yield soil fertility, crop pollination, and countless other things; the hydrological cycles that put fresh water into reservoirs and taps; the tectonic processes in the crust that put economically useful metals and minerals into veins in the rocks; and, of central importance just now, the extraordinarily complex interplay of biological and geological processes that stored away countless billions of tons of carbon under the earth’s surface in the form of fossil fuels.

Conventional economics assumes that these things get there by some materialist equivalent of divine fiat. This misstates the situation disastrously. Primary goods are produced by an exact analogue of the way that secondary goods are produced: raw materials are transformed, through labor, using existing capital and energy, to produce goods and services of value. The difference is simply that all this takes place in the nonhuman world. Human beings do not manage the production of primary goods, and the disastrous results of trying to do so suggest that we probably never will; on the other hand, in at least some cases – maltreated farmland is a good example – we can interfere with the production of primary goods, and suffer the consequences.

E.F. Schumacher’s insight, that goods produced by nature are the primary goods in any economy, and those produced by human labor are secondary goods, thus needs to be extended further. There is also a primary and secondary economy. The cycles of nature that produce goods needed by human beings constitute the primary economy, while the process by which human beings produce goods is the secondary economy. The secondary economy depends utterly on the primary in at least two ways. First, as discussed last week, something like three-quarters of all economic value in today’s world is produced by nature – that is, by the primary economy – and only around a quarter is produced by human labor. Second, even that quarter is made directly or indirectly from primary goods, and cannot be made at all if the necessary primary goods aren’t there. This is why the attempt to replace a depleted natural resource with something else always involves substitution costs: human labor must be brought in to replace some part of the work previously done by nature, and the costs of that part of the work thus end up having to be paid out of the secondary economy.

We have become so used to thinking of economics as a matter of human labor that it’s probably best to point out that what are sometimes called “primary industries” – farming, mining, and the like – belong to the secondary economy, not the primary one. The primary economy consists wholly of those nonhuman processes that yield economic goods to human beings. Thus a farm and the crops grown on it are part of the secondary economy, while the soil, water, sun, and genetic potential in the seed stock that make the farm and its crops possible are part of the primary economy. In the same way, a mine is part of the secondary economy, while the slow geological processes that put ore in the ground where it can be mined are part of the primary economy. If you examine any human economic activity, you’ll find behind it natural processes that make that activity possible; those processes are the inputs from the primary economy that make the secondary economy possible.

Thus Adam Smith’s dictum cited earlier badly needs reformulation. The product of the natural environment of every nation is the fund which originally supplies it with all the necessities and conveniences of life; the annual human labor is simply the energy input required to turn some of that product into forms useful for human beings. The wealth of nations, it turns out, is ultimately the wealth of nature, and the sooner the value of natural cycles and primary goods is taken into account, the better chance our descendants will have of avoiding the self-defeating habits that are pushing modern industrial system down the long road to collapse. To do so, however, will require a clear sense of the difference between value and price, or to put matters another way, between wealth and money – the theme of next week’s post.