What is Capital? (Guide to Chapter 1)

Few people will be easily convinced that the challenge to man’s future cannot be met by making marginal adjustments here or there, or, possibly, by changing the political system…

— E. F. Schumacher, Small is Beautiful, Chapter 1.

There is a fundamental difference between production in the economy and production in nature. Because they are essentially self-producing, and use only dispersed (high entropy) substances for their growth and maintenance, green plants are called primary producers. By contrast, humans are strictly secondary producers. We use enormous inputs of high-grade energy and material resources extracted from the rest of the ecosphere to produce and maintain our bodies and all the products of our factories. In short, all production by the human enterprise involves the consumption of a much larger quantity of energy and material first produced by nature. From this material perspective, economic activity is more an inefficient conversion process than it is a productive process.”   

— William Rees, ecologist and co-author, Our Ecological Footprint, 25th anniversary edition (1989)

The first chapter came from a talk Schumacher gave in Zurich in February 1972. He launches straight in without any kind of introduction, so perhaps we should do the same…

What the chapter says…

This chapter is about the idea of ‘capital’. Traditionally, this meant just land, labour and manufactured capital – the three bases for creating wealth according to traditional economics. We have become used since 1973 to authors and business writers trying out new forms of capital, whether that is ‘social capital’ (like Robert Putnam), ‘intellectual capital’ (like Annie Brooking or Thomas Stewart), ‘natural capital’ (Paul Hawken), or even ‘spiritual capital’ (perhaps Danah Zohar). 

This is what Paul Hawken said 25 years ago: “The term natural capital, introduced to a broad audience by Schumacher in Small is Beautiful, was not immediately taken up by economists or academics. The term seemed to lay dormant until the past decade. Today, it is being used commonly, certainly in environmental circles and writings. Schumacher defined natural capital both narrowly and amorphously: fossil fuels and the tolerance margins of nature and human subsistence. Today we understand natural capital as the sum total of renewable and non-renewable resources, including the ecological systems and services that support life. It is different from conventionally defined capital in that natural capital cannot be produced by human activity. What was unimaginable 25 years ago was the speed with which the loss of natural capital would affect humankind.” (25th anniversary edition, Hartley & Marks, 1999).

So, yes, Schumacher looked at natural capital, and first of all he looks at fossil fuel consumption – bear in mind that the Greenhouse Effect had yet to be identified when he was writing. What he wants to discuss is: why the effort to use this capital as if it was ordinary income?

He includes some figures looking ahead, explaining that by the 1970s, human beings were using about 7,000 million tons of coal equivalent. By the year 2000 – about half way back to 1973 – our energy consumption would triple, he said – and it had already tripled since the end of World War II.

What about the year 2028, when little children running about today will be planning for their retirement, he asks? Will it have trebled again?

In the event, it hasn’t been as bad as that – mainly because so many of us have partly managed to wean ourselves off fossil fuels. the Greenhouse Effect was actually identified back in 1824, but it wasn’t a popularized concept until the late 1980s and early 1990s.

In fact, fossil fuel consumption has increased significantly over the past half-century, around eight-fold since 1950, and roughly doubling since 1980.

Even so, Schumacher’s point still stands: that, first, you can’t just carry on exponentially increasing fossil fuel consumption – which you can understand only when you grasp that humanity has been using up its natural capital as if it was a renewable resource:

“All these questions and answers are seen to be absurd the moment we realize that we are dealing with capital and not with income: fossil fuels are not made by men; they cannot be recycled. Once they are gone they are gone for ever.”

And second, don’t forget the pollution this all causes (“And this has come so suddenly that we hardly noticed the fact that we were very rapidly using up a certain kind of irreplaceable capital asset, namely the tolerance margins which benign nature always provides.”)

Meanwhile, we are blithely shooting towards a nuclear energy future as an alternative – when we haven’t even solved the problem of what to do with all that high-level radioactive waste that needs to be stored until it is safe – in about 25,000 years’ time (more on this in Chapter 9).

“I am sure that I shall be confronted with another, even more daring proposition: namely, that future scientists and technologists will be able to devise safety rules and precautions of such perfection that the using, transporting, processing and storing of radioactive materials in ever-increasing quantities will be made entirely safe; also that it will be the task of politicians and social scientists to create a world society in which wars or civil disturbances can never happen…”

Are we not far better off than we were a generation ago? Schumacher asks rhetorically. To which he answers: “Of course we are: most, but by no means all, of us…”

The ‘substance of man’ is his third form of natural capital (after fossil fuels and energy and nature’s tolerance margins). But he barely defines it – he just says what it isn’t. “It cannot be measured by Gross National Product,” he says: “Perhaps it cannot be measured at all, except for certain symptoms of loss. However, this is not the place to go into the statistics of these symptoms, such as crime, drug addiction, vandalism, mental breakdown, rebellion, and so forth. Statistics never prove anything.”

Which is quite right. Or so I believe.

Then the chapter ends with a call to arms: “What is my case? Simply that our most important task is to get off our present collision course. And who is there to tackle such a task? I think every one of us, whether old or young, powerful or powerless, rich or poor, influential or uninfluential. To talk about the future is useful only if it leads to action now. And what can we do now, while we are still in the position of ‘never having had it so good’? To say the least – which is already very much -we must thoroughly understand the problem and begin to see the possibility of evolving a new life-style, with new methods of production and new patterns of consumption: a life-style designed for permanence…”

What happened next?

So how is wealth created if we throw out the traditional trio of capitals – land, labour and manufactured capital?

One of the problems is that, in the traditional model, you are allowed to substitute one capital for another, which means that it is OK to trash the planet – as long as one of the other types of capital takes its place.

That doesn’t work, said the late David Pearce, the doyen of the environmental economists and the author of Blueprint for a Small Planet: “There are many types of environmental assets for which there are no substitutes.” 

Paul Ekins, the first director of the New Economics Foundation, wrote a book called Wealth Beyond Measure: An atlas of new economics. It was published by Gaia Books in London in 1992 – to coincide with the Earth Summit that year in Rio de Janeiro.

He proposed a different system that had four capitals, rather than the traditional three – ecological or natural capital, human capital (people and ideas), social and organizational capital, and manufactured capital (tools, machines and infrastructure).

Thirty years on, we might make that five by dividing the social from the organizational capital, because we know so much more about social capital (communities) and organizational capital (institutions and laws).

Since then, all these different capitals have gone their own sweet ways, with the socioeconomists primarily interested in social capital, the institutional economists in organizational capital, the environmental economists in natural capital – and the patent lawyers in intellectual capital.

In this way, the insights that began with Schumacher have become scattered to the winds.

Questions for Discussion…

1. Alvin Toffler, a contemporary of Schumacher’s who wrote Future Shock, used to ask business managers what it would cost them – in real cash terms – if none of their executives had ever been toilet-trained. What aspects of life do you think are vital for creating wealth?
2. Could Schumacher’s ‘problem of production’ ever be solved?
3. Can you define Schumacher’s phrase ‘substance of man’ which industrial production “eats into”?
4. “Few people will be easily convinced that the challenge to man’s future cannot be met by making marginal adjustments here or there, or, possibly, by changing the political system,” says Schumacher at the end of Chapter 1. Are you one of them? What adjustments need to be made?

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