The Discovery of the Faustmann Formula in Natural Resource Economics

This article examines the discovery and early development of the most fundamental of forest and natural resource economic principles, the “Faustmann formula” and the “Faustmann condition,” and links their emergence more closely to the general development of economic thought than has been done previously. In particular, it is shown that a London-based editor and book reviewer, John Houghton, should be given credit for being perhaps the first who explicitly recognized the opportunity cost of forest capital. In his writings, published in 1683 and 1701, Houghton compared forestry with other forms of land use, employing calculations that are in line with modern capital and investment theory. The emergence of this type of natural resource economic reasoning was stimulated by the extensive institutional and political changes in England in the latter part of the seventeenth century. Only much later did the capital valuation and intertemporal resource allocation approach in line with the Faustmann formula begin to gain ground in economics generally.