Interesting query and discussion at Martin Wolf’s blog about how economics came to conflate natural resources and capital, and whether it should continue to do so. You’ll want to read the comments too!
The idea that land and capital are the same thing is evidently ludicrous. It requires us to believe that the economic machine is self-sustaining — a sort of perpetual motion machine. Capital is the product of savings and investment. It is the result of human frugality and the invention required to imagine and create new capital goods. Labour is also — and in today’s circumstances, increasingly — a form of capital. Parents, governments and individual people invest in their own skills, so making themselves more productive. Yet there would be no economy — indeed no humanity — without a constant inflow of natural resources into the system: what lies above our heads (the sun and the atmosphere), what lies close to us (the soil, the seas and location itself) and what lies beneath us (fossil fuels, metals and minerals and heat). Humanity does not make these things; it exploits them. Some of these resources are also appropriable and so a source of unearned personal wealth.
Why did this compelling distinction disappear from economics? After all, no economist can believe that the economic system will move without a constant infusion of external resources.
One reason was that the classical world view implies diminishing returns. Since the supply of land was fixed, it would become ever scarcer. Rents — the price of resource scarcity — would rise, profits would fall and growth slow. But the economy did not show signs of diminishing returns. Technical progress seemed to offset any tendency towards diminishing returns. So assuming that land, like capital, could be effectively expanded, without limit, via land-augmenting technical progress, seemed to be the right thing to do.
Another reason may have been political. Henry George argued that resource rents are not a reward for the efforts of the owners, but the fruit of the efforts of others. It would be both just and efficient to socialise rents, he argued, and then use the proceeds to finance the infrastructure that makes resources valuable. But the powerful owners of natural resources wished to protect their unearned gains. In practice, therefore, the tax burden fell on labour and capital. Economics, one might argue, was pushed into supporting this way of organising economic life.
Yet it would seem to me that this way of thinking by economists is no longer sensible, if it ever was. Land must again be treated as separate from labour and capital.