The natural interest rate of the forest: Macroeconomic requirements for sustainable development

A profit-maximizing owner will let a forest continue to grow, or regenerate after harvesting, if that choice yields a greater net present value than immediate harvesting without regeneration. The choice depends in part on the relationship between the forest’s growth rate and the owner’s discount rate. For each forest, there is a threshold interest rate above which the owner will prefer harvesting without regeneration.

The interest rate thus is not only the market price of capital; it must also stay below a critical level if the market is to allow forest conversation. This reflects the dual nature of forests, as both marketable assets and as parts of natural ecosystems. Such cases of dualism are important in the development of ecological economics, and can be seen as parallel to the dual nature of labour and wages in Marxian theory.

For long-run sustainability, interest rates must be low enough to allow forest conservation. This might threaten disequilibrium in capital markets, and cause inflationary pressure. The solution is to lower the marginal rate of profit on new investments, bringing markets back to equilibrium at a lower interest rate – with the likely long-term consequence of slower economic growth due to slower capital formation.