Keywords: natural capital, human-made capital, substitutability, laws of thermodynamics, production functions
How important is natural capital in terms of sustaining real output? Revisiting the natural capital/human-made capital substitutability debate
This paper revisits the natural capital/human-made capital substitutability debate by putting forward a production function incorporating the first and second laws of thermodynamics. Use of this alternative production function shows that, where relevant, the elasticity of substitution between natural capital and human-made capital is less than one. Moreover, as attempts are made to increase the stock of human-made capital to offset the depletion of natural capital, the elasticity of substitution moves closer to zero. This suggests three things. First, even if one focuses entirely on resource availability and ignores the need for waste assimilative and life-support services, human-made capital cannot serve as a substitute for natural capital. Second, since a given quantity of real output requires an irreducible quantity of resource input, there is a need to maintain a minimum stock of resource-providing natural capital. Third, natural resource policy and national income measurements should be based on a strong rather than weak sustainability stance.