Flaws in Conventional System -  Inconsistent Treatment

There is inconsistent treatment of man-made and natural assets. As mentioned earlier, while computing sustainable income measures like net national product or net domestic product, the man-made machinery is depreciated so as to allow for replacement of losses in the capital stock. Man-made assets such as buildings and equipment are valued as productive capital, and are written off against the value of production as they depreciate. The inherent assumption behind this is that a consumption level maintained by drawing down the stock of capital exceeds the sustainable level of income. However, natural resource assets are not so valued and the losses in the natural resources are not similarly depreciated. Their loss entails no debit charge against current income that would account for the decrease in potential future production. For example, when forests are transferred for non-forest purposes, the national accounts record only the expenditure incurred in clearing the forests, and do not account for the loss to society as a result of this transfer. Moreover, the reduction in the forest area is shown in other volume changes, which do not have any effect on GDP.

Another misunderstanding underlies the contention that natural resources are "free gifts of nature," so that there are no investment costs to be "written off." The value of an asset is not its investment cost, but the present value of its income potential. Common formulas for calculating depreciation (e.g., straight line depreciation) by 'writing off investment costs are just convenient rules of thumb. The true measure of depreciation, which statisticians have tried to adopt for fixed capital in the national accounts, is the capitalized value of the decline in the future income stream because of an asset's decay or obsolescence. Thus, in the same sense that a machine depreciates, soils depreciate as their fertility is diminished.

A country could exhaust its mineral resources, cut down its forests, erode its soils, pollute its aquifers, and hunt its wildlife and fisheries to extinction, but measured income would not be affected as these assets disappeared. Ironically, low-income countries, which are m9ly most dependent on natural resources for employment, revenues, and foreign exchange earnings, use a system for national accounting and macroeconomic analysis that almost completely ignores their principal assets (i.e., natural assets). Underlying this anomaly is the implicit and inappropriate assumption that natural resources are so abundant that they have no marginal value. This is a misconception. Whether they enter the marketplace directly or not, natural resources make important contributions to long-term economic productivity and so are, strictly speaking, economic assets. Many are under increasing pressure from human activities and are deteriorating in quantity or quality.