We are all asset managers. Whether as farmers or fishermen, hunters or gatherers, foresters or miners, households or companies, governments or communities, we manage the assets we have access to in line with our motivations, as best as we can. This Review pays close attention to a class of assets we call Nature and studies it in relation to the many other assets in our portfolios.

It is commonly accepted that growing urbanisation accompanying economic growth has created a distance between people and the natural world. There is evidence of that (Chapter 11). Rural communities in low income countries are a lot closer to Nature than are urban households in high income countries.

Chapters 7 and 8 studied externalities that travel in the material world. In fact, externalities are embedded in a larger space. The social world can be as powerful a carrier of externalities as the material environment. A common form in which they appear in the social world is in the way our relationships influence our preferences and wants.

In Chapter 6, aspects of human relationships were studied in terms of the underpinnings of laws and social norms. Here we further probe the factors that are at the heart of human relationships. The features of personhood we examine here will be found to be of special significance for policy, for they tell us about the human motivations that drive population numbers (N) and the standard of living (y), both of which appeared in the Impact Inequality (Chapter 4).

World population in 1950 was around 2.5 billion and global output of final goods and services, at 2011 prices, a little over 9.2 trillion international dollars (dollars at purchasing price parity, PPP) (Figures 4.1 and 4.2). As noted in Chapter 0, the average person’s annual income was about 3,300 dollars PPP, a high figure by historical standards (Maddison, 2018) (Figure 4.3). Since then the world has prospered beyond recognition. Life expectancy at birth in 1950 was 46; today it is above 72. The proportion of the world’s population living in absolute poverty (currently 1.90 dollars PPP a day) has fallen from nearly 60% in 1950 to less than 10% today (World Bank, 2020a). In 2019, the global population had grown to over 7.7 billion even while global income per capita had risen to 15,000 dollars PPP (at 2011 prices).

The Oxford English Dictionary defines institution to be “an established law, custom, usage, practice, organization, or other element in the political or social life of a people”. The present chapter unravels their lead, but recasts the concept so as to stress the role of institutions in economic life.202

By institutions we mean, very loosely, the arrangements that govern collective undertakings. Those arrangements include not only legal entities like the modern firm, but also insurance institutions within village networks, such as the iddir in Ethiopia and variants elsewhere in sub-Saharan Africa (Box 6.4). They include bazaars in the Middle East, village networks for saving and credit in Asia and Latin America, the nuclear household in the West, the extended kinship system of claims and obligations in Africa, and elaborate authority structures such as the Mafia. And they include that overarching entity called government that exists everywhere in the modern world.

In Chapter 10 it was shown that despite wide differences in their foundations, three prominent styles of ethical theory interpret well-being across the generations to be the discounted sum of individual well-beings. We interpreted personal well-being to be the extent to which one’s informed desires are realised, and assumed it is a function of the individual’s standard of living. Realisation of informed desires applies to the cognitive component of happiness (some call it ‘contentment’), but not to the affective component (which can be called the ‘hedonic level of affect’) although it could have a bearing on affect. So, we now dig deeper into the content of well-being.367

In the formal models that were developed in previous chapters, the living standard was represented by the quantity of an all-purpose commodity to which the average person in society has access. We called the all-purpose commodity a consumption good. But the presumption that the sole factor in well-being is consumption may seem otiose.

Mathematical models of economic growth and development could appear esoteric, unreal or even self-indulgent; but they shape, and are in turn shaped by, our conception of humanity’s place in the biosphere. Economists, in planning commissions, ministries of economics and finance, international organisations and private corporations, use the models to analyse data, forecast economic trajectories, evaluate options, and design policy. The economic models that government decision-makers routinely use can be traced directly to academic journals. In turn, economic models in academic journals reflect evolving societal beliefs about what is achievable. The influence is mutual.

Perhaps without conscious design, the macroeconomics of growth and development has been built on the view that human society is external to Nature. In contrast, when constructing the economics of biodiversity, we will keep in mind that we are embedded in it. The difference has profound implications for what we can legitimately expect of the human enterprise.

Restoration seeks to assist Nature recover from a degraded, damaged – even dilapidated – state. Potential benefits from restoring our ecosystems have been discussed earlier in the Review (see in particular Chapter 2). Restored ecosystems are more effective at providing regulating services, which have been lost in many places due to overharvesting of provisioning goods (Chapters 2 and 16). Restoration can make a significant contribution to the mitigation of, and adaptation to, climate change. Successful restoration requires a wider understanding of the relationship between people, Nature and livelihoods, and effective institutions. It relies on sound science, clear objectives, community engagement, monitoring and evaluation (Wortley, Hero, and Howes, 2013; Perring et al. 2015; Gann et al. 2019).

It is not uncommon to hear people referring to tipping points, positive feedback, path dependence, irreversibility, and even catastrophic risks when talking or writing about climate change and biodiversity loss. As the expressions point to features of the processes governing the biosphere, it is important to understand what they amount to. Otherwise the terms will remain in wide use even when their significance for economic policy remains unclear.

The source of those features is the non-linearity of the processes that govern the biosphere. Non-linearity is a ubiquitous feature of Earth System processes, so ubiquitous that it would not be an exaggeration to say that the economics of biodiversity is the study of non-linear processes.91 The meaning of non-linearity is simple enough: if, to take an example, you were to replicate an ecosystem M times, the functions of the enlarged ecosystem would not be an M-fold replica of the original ecosystem.

The framework we have constructed so far for building the economics of biodiversity has had but the briefest of looks into risk and uncertainty. Our account could almost be read as though the socio-ecological world is deterministic. But we know it is not of course. Even in everyday conversation it is customary to take as understood that when someone says, for example, that the next train to London is scheduled to arrive at the station in 50 minutes time, uncertainty is acknowledged, that the speaker says the train is expected to arrive in 50 minutes time.

The term ‘expectation’ has something like ‘average’ built into it.