Today vs. Tomorrow – Time and Capital
by Gabriel Cross
A dollar today is worth more than a dollar tomorrow, so the thinking goes. Money in hand can be invested to make more money, and a simple calculation can show that with compounding returns, it takes quite a large sum of promised money in the future to outweigh a much smaller sum of cash in hand today. This simple fact, however, leads to a mentality which frequently causes much more economic damage in the future than the value of the money gained today, even when compounding returns are taken into account, because it leads us to extract too much value from limited resources in the short term. The simple reason is that nobody is doing the math in the moment, we are just working off of the maxim that the “today money” is worth more.
People have a tendency to conflate money and capital, but they are not the same thing. Anything which has the capacity to create money can be thought of as capital. A tractor, a machine, a truck, or a real estate property all have the capacity to generate a steady stream of income for the owner, which equates to some money today, some money tomorrow, some money next year, etc. You can sell the capital and get a lot more money up front, but then you lose the steady stream of money over time. Furthermore, if you keep the land or the truck you collect a much smaller sum of rent or income and still have the full value of the capital. A capital resource is not like money, it is exactly as valuable tomorrow as it is today (not considering depreciation). Money today is only more valuable than money tomorrow because it is assumed you will invest the money today in capital to make more money. If you keep the money today as cash, it is actually worth less every single day.
A natural resource can be viewed economically in the same way as real estate, or any other capital. Take the example of cod fishing in Canada. Canada once had a booming cod fishing business. As early as the 1500s, cod fishing was a business so lucrative that European nations fought naval battles over access to Newfoundland fisheries. In the late 1960s, the cod catch peaked at 810,000 metric tons. This is more than 5 times the catch from 1940. After the 1960s, the catch steadily declined until a total ban on cod fishing was put into effect, but this ban may have come too late. Today, even though the species is still considered endangered and may never fully re-establish, the ban has been partially lifted to allow some economic activity in the old fishing towns. (The Rise and Fall of Atlantic Cod – Canadian Geographic)
In the example above, the fishery provided a steady stream of money over time for centuries. The amount of money being returned increased steadily until the point of over fishing, when it suddenly dropped exponentially. From that point, the fishery was exhausted in a manner of decades, and now returns little or no money. In economic terms, the capital was depleted and became worthless due to poor management.
Overfishing is similar to a land owner who cannot decide between selling and holding, and ends up selling stock or parcels of land one at a time. With each transaction the owner gets a little more than just collecting rent or selling his harvest, but diminishes future returns and owns less and less of the capital. Economically, this is the worst way to manage a capital investment. Another analogy might be trying to save money on servicing a vehicle or other piece of equipment: in the short term it helps balance the books, but the capital degrades and becomes useless much faster.
This slow attrition of capital is how small scale farmers across America lost their land over the past several decades. When the crop yield didn’t quite cover the bills, they had to sell another quarter acre. In hind sight, they would have been better off selling the whole farm at once and entering another business, but most people can’t let go of their way of life quickly enough to make that kind of decision.
Every time that we catch more fish than the stock can regenerate, we are removing potential value for all of the future; we are trying to squeeze a few more bucks out today at the expense of the entire future productivity of the capital resource. Farmers have the highest suicide rate of any profession in America. This is because the small farmers who are forced to sell a bit of land at a time to cover their bills reach a point at which they no longer have enough land to produce a crop which will pay for their lives even in the best year. Then the only option left is to say goodbye to their way of life. The American farmer has been forced into this economic corner, however, and has lost his capital because changing agribusiness climates have encouraged farmers to “get big or get out.” The over fisher, on the other hand, has chosen to damage his capital for extra dollars today because he is short sighted, or perhaps does not believe or understand what he is doing.
Fish stocks are perhaps one of the more obvious examples of natural capital resources, but there are many more which do not have an easily identified or quantified economic output. A forested area, for example, provides flood protection, biodiversity, oxygen, carbon sequestration, local climate and weather tempering, and many other valuable services. Of all those, only flood protection is readily quantifiable. Because the other services are not valued economically, the forest is not treated like a capital resource for anything other than timber. Yet, the services that are destroyed when the trees are cut down are almost certainly more valuable than the lumber; they are simply excluded from an economic analysis because they are difficult to calculate.
Because natural capital resources are undervalued, or indeed often not valued at all, they are managed atrociously. When viewed as capital resources, the maintenance of these natural service providers becomes an obvious goal. Just as a farmer wants to conserve his soil and maintain his tractors, the holder or user of a natural resource should want to preserve the utility and capacity of that resource to provide services over time, and not just extract some money or immediate use out of it today. Drawing against natural capital, in other words, is inevitably going to lead to losing the whole farm.
For more, see the book Natural Capitalism by Paul Hawken, Amory Lovins & L. Hunter Lovins