The Dog That Didn't Bark: The Role of Natural Capital in Explaining the Rise and Fall of Global Productivity Growth

This report examines the role of natural capital in economic and productivity growth. It proposes that natural capital should be considered a pivotal explanatory variable in the rise and subsequent decline of global productivity growth over the past five centuries, and presents extensive supporting evidence. Labour productivity and multifactor productivity (MFP) growth rates have been declining in advanced economies for several decades, with significant implications for living standards; the decline in labour productivity growth has extended to emerging economies over the past fifteen years. Global MFP growth has flatlined since 2007 in both advanced and emerging economies. While many explanations for these trends have been advanced, no clear consensus has yet emerged. However, the pervasive and persistent nature of the declines signals that factors of global scope and extended duration are likely implicated. This report presents an alternative explanation for the secular decline in global productivity growth: that erosion of natural capital has been occurring on a sufficiently large scale as to exert significant and growing downward pressure on productivity growth. Accordingly, a fundamental transformation in the economic role of natural capital has taken place, from productivity accelerator from the 16th century through the mid-20th century, to productivity decelerator subsequently. This role has been obscured due to the absence of natural capital from conventional economic frameworks and production functions.