Real Capital – an explainer – Stephen Hinton Consulting

Real capital defined

Real capital is defined as:

Something that is used in the production of
goods and services to society, but not used up.

Note that capital is necessary but not sufficient to provide services. The capital is utilised in the production system. There are several categorisation methods, but I prefer the following as described in the table below:

Natural Capital: The living layer we all rely on as well as the layer beneath our feet with the minerals and other substances from the lithosphere, natural systems like the climate and water cycle.	Built Capital: All man-made things that are used to provide our basic needs: houses, roads, factories, equipment, tools etc. This includes systems like telecoms, payments, etc.
Social Capital: Our organisations and institutions including the knowledge and capability that is in these organisations.	Human Capital: What we as humans command in terms of strength, knowledge, insights, attitude, capabilities etc.

The four real capitals

Real Capital Maturity

Maturity is what happens after growth. If we are to entertain the idea of economic growth, surely we should entertain the motion of economic maturity – i.e. what does something look like when it is fully grown.

If capital is something used but not used up, then mature real capital is when it is developed to a stage that it can provide the services needed by the population it is intended to serve. For natural capital, especially ecosystems, this may sound anthropocentric. However, as we shall see as the discussion develops, humans are in the unique position of being able to be ecosystem stewards. This means stewarding natural capital for its own sake, as well as stewarding parts of that capital for the services needed to survive.

Real Capital Maturity: three ways of arriving at a maturity level
1) The level at which the capital can provide the services needed by the human population.
2) The ecological maturity of biological real capital defined by Odum et al.
3) The level of maturity aimed for by policy arrived at democratically – which may or may not correspond to ecological maturity or that which is sufficient to provide services.

It is necessary, therefore, to identify which parts of the ecosystem are needed to be utilised for services to human populations, and which are left to develop more naturally. Note that we split natural capital into two categories: that which is the living layer of the Earth, part of the biosphere, and the material available from the lithosphere, metals and minerals etc.

The table below gives a vision of what characterises the real capitals at maturity.

Natural Capital Fully functioning Natural cycles Productive and biodiverse forests Healthy soils Functioning eco-systems Minerals, Metals from earth available to all	Built Capital Infrastructure providing for all, safe, efficient and comfortable: Housing Transport Energy Food production and distribution Health and education
Social Capital Organisations offering: Gainful, productive employment Good standard social goods and services Repositories of know-how and technology Resilience Democratic governance Healthy inclusion	Human Capital Healthy, productive, skilled, strong, happy generous, peace-loving & balanced people

Already here, policy decision bases can start to emerge if a measure of maturity can be constructed. The chart below illustrates how an overall state of the maturity of capital (say of a country) can inform policy. It can also lead to enquiry as to how the state of the various capitals affect each other, and the desired maturity levels, and the investment required. Remember that 100 could be the score defined as sufficient to provide social needs as well as a reflection on responsible stewardship capabilities.

The chart above, which could be for a municipality, region or nation indicates that mineral capital is lacking, and the condition of ecosystems in the country are in a poor state (remember that 100% is the figure that represents sufficient maturity). This would indicate that policy needs to focus on how minerals and metals can be provided for production, (possibly focussing on recycling to avoid import dependence). Human capital is just above 50% which could indicate poor health, education, lifespan, etc. Best is built capital which might suggest an ability to house everyone, or suggest that the environmental and efficiency performance of infrastructure is 20% under standard.

For each figure, there will be figures feeding into them like the 17 SDG – Sustainable Development Goals, which are broken down to many indicators under them. For an example of one possible methodology see the website of Cerise, a French nonprofit created in 1998 and the Social Performance Task Force, or SPTF https://cerise-spm.org/en/metodd-sdg/.

A commons approach

Corporate operations, and indeed public sector-owned operations use resources and services that come from a finite amount of real capital that is common to the community. For example, all burning of fossil fuel uses oxygen which is in the community. Other examples include industries which take water from rivers, or which use the water to cool their installations, and use the water as a recipient of heat. A huge stress on biological real capital is the release of phosphorus into surface water.

These finite common-pool resources within a community are called commons.(Ostrom, 1990)

The commons
Real capital that is common-pool and used as a resource within a community. Biological real capital is used to harvest resources or as a recipient.

The common-pool resource in this example is the atmosphere. The incorporation of O2 in burning fossil fuel involves corporations or other organisational forms which are either directly involved, using the combustion in their production processes (for example, an airline burning jet fuel) or by selling fuel for a consumer to burn – for example petrol or diesel for private cars.

Questions and answers

Is it possible for the status of Real Capital to be over 100%

Absolutely – for example if you have more houses than you need, or if you have more agricultural land than is needed to produce the food of the community.

Can you call agricultural land a commons?

Agricultural land uses the services of real capital – the sun, the atmosphere, the surface water, the rain etc. So even if farmland is privately owned, its impact is very much in interaction with the commons.

I don’t feel happy with the ideal of mineral capital, like metals. You cannot create metals or regenerate them.

This is true, but remember, real capital is something that is used and not used up in production and use. What needs to be regenerated is the performance of industry (built capital, social capital) to constantly recycle metal after use into a pool of metal ready to be used again. Here again we see metal as being a common pool of a limited resource.

I don’t understand the maturity status graphs. Is any value judgement associated with the values (i.e. is 100% mature good or bad or neutral)

There is a value judgement with all percentage values of maturity. 100% percent means that those charged with making the indices judge the status of the real capital to be sufficient to provide that which is needed by the organisations using its output. In the case of ecological maturity, the figure is based on Odum’s work and subsequent developments of his work. The value is arrived at normatively, i.e. IF we want the (real capital) to sustainably provide (resources/services needed) THEN the status of that capital should be Y. It is today at X so the status is X times 100 divided by Y.

Is money not real capital – it is after all used (to buy stuff) but not used up?

The answer is in the question. When money (financial capital) is spent it is no longer financial but real capital. So the monetary system contains tokens that are used to convert one form of capital to another. In itself the system is a form of social capital (firm) and infrastructure (banks and payment systems). The system facilitates the transfer of one capital to another. For example work> wages > savings > car. That is human capital > social capital>infrastructure. Should the monetary system disappear, it would be replaced by another and the transfer of capitals would still continue.