Q: Why Does It Matter?
A: A Sustainable Canada
What is wealth, and what does it have to do with sustainability? While we typically think of wealth in reference to a person (he/she is very wealthy), wealth is also a specific economic term that refers to the total value of a nation’s assets.
Currently, Statistics Canada includes only produced capital like buildings and machinery and some natural capital in its official wealth measure. Comprehensive wealth looks at the bigger picture, valuing all of the country’s assets—produced, natural, human and social capital—the complete basis of the nation’s success and well-being.
Comprehensive wealth is can be used as the basis for tracking sustainability. Monitoring Comprehensive wealth and the factors that drive it will help identify economic, environmental and social issues before they can undermine our sustainability.
What Is Comprehensive Wealth?
Comprehensive wealth is made up of four parts: human, natural, produced and social capital.
Human capital refers to the collective knowledge, skills and capabilities of the labour force. Formal education, on-the-job training and lifelong learning are important drivers of human capital. Normally the largest source of capital in developed countries.
Natural capital refers to extractable resources such as timber, minerals, oil and gas. It also includes ecosystems such as carbon-storing forests and wetlands that generate clean drinking water. Natural capital is particularly important in Canada, with the country having the most natural capital per person in the world.
Produced capital refers to the nation’s infrastructure, transportation networks, factories, homes and other manufactured assets.
Social capital refers to social ties and networks, social and cultural institutions, laws and governance. Social capital is a supporting factor that contributes to other forms of capital.
Made To Measure:
Assessing Comprehensive Wealth
There are two ways of measuring comprehensive wealth. For assets that are tangible, physical units of measure can be used. A forest, for example, can be measured in terms of its area, species composition and age.
Other assets aren’t as well suited to physical measurement. Social capital, in particular, is not easily captured in physical terms; neither is human capital. An alternative is to use monetary measures to assess the Comprehensive Wealth portfolio.
In principle, all assets can be measured in monetary terms. A benefit of this is the ability to “add up” the value of various assets. For instance, the value of a forest can be added to the value of pulp mills and sawmills to come up with an overall value of both natural and produced capital in the forestry industry.
However, not all assets can or should—be expressed in monetary terms. Some environmental assets, in particular, are critical to supporting human life. Their deterioration imposes direct and irreplaceable costs on well-being: they are, effectively, priceless.
For assets that can be meaningfully valued, estimates of their full social value are needed. The social value of an asset takes into account all costs and benefits of its use, not just for its owner but society as a whole. Education, for example, provides benefits to the individual in the form of higher wages or the enjoyment of learning. It also provides benefits to society as a whole, as educated individuals are better equipped to engage in economic and social life.
In some cases, market prices can be used to approximate the social value of assets. However, markets often do not function perfectly and, as a result, do not always reflect the full value an asset holds for society. For instance, the price of education might not reflect the broad benefits of better-educated citizens. The market value of assets that have negative consequences when used — such as creating pollution — might be too high if the costs of those consequences, for example — medical care, aren’t reflected in their prices. This is true for fossil fuel assets, for example, since climate change impacts are not fully reflected in their prices.
There are other assets for which market price simply don’t exist. For example, the market typically doesn’t price wetlands and their benefits. The social value of wetlands is, of course, considerably higher than the zero value ascribed to them by the market. For these kinds of assets, indirect methods of estimating value are available and increasingly capable of yielding useful results.
Most approaches to valuing human capital focus on the benefits of formal education. The Organisation for Economic Co-operation and Development (OECD) has been a leader in developing human capital estimates. Several OECD member countries have begun to develop estimates of their own. The most common approach uses wages to estimate the value of different education levels. Though Statistics Canada (StatsCan) hasn’t published official estimates of human capital, it has produced research studies with experimental estimates.
Measuring natural capital — water, forests, fisheries, fossil fuels, minerals, land and ecosystems — focuses on the benefits of these assets in terms of the goods and services they provide. These benefits enhance well-being in many ways, many of which are related to “free” enjoyment of nature. Since the 1990s, StatsCan has published official estimates of the value of fossil fuels, minerals, timber and land. Its estimates of other natural capital assets are at the experimental stage.
Valuing produced capital is fairly straight forward as market prices are readily available and meaningful. Monetary measures of produced capital are, for this reason, already well developed and have long been reported by StatsCan.
The valuation of social capital is less well developed. Its value is sometimes calculated residually by subtracting “bottom-up” estimates of produced, human and natural capital from a “top-down” estimate of comprehensive wealth, leaving social capital as a residual. Improving on this crude approach is an area of active research.
It’s time to measure what matters —
for a sustainable and prosperous future.