The Circular Economy is necessary, but not sufficient

It is no great secret that the global economy is not currently sustainable. It uses more resources and creates more pollution than the planet can handle. In response to this conundrum, there has been growing support for the circular economy. At first glance, this seems like the solution to an unsustainable economy. If the material throughput of the economy is killing off ecosystems and driving climate change, then increasing the circularity of economic activity must be the answer.

The concept is also quite simple and straightforward: using the waste of one production chain as the input for another product or service can cut down on the amounts of raw materials needed to produce goods and services, as well as decrease the waste that comes from the economy. It seems like a win-win solution. The economy can go on creating the same amounts of products and services using fewer resources and generating less pollution. Perhaps the most appealing aspect of the circular economy solution is that it does not require any radical changes to the economy. It focuses on increasing efficiency, which is something that is profitable and (supposedly) happens quite naturally in the market anyways. Yet, if it is such an effective and simple solution, why has it not taken off despite over a decade of growing attention to—and investment in—circular economy efforts? More importantly, why are global environmental crises continuing to worsen despite more circularity and impressive efficiency gains in the economy?

“Why are global environmental crises continuing to worsen despite more circularity and impressive efficiency gains in the economy?”

My journey with the circular economy started in 2007, when I decided to write my master’s thesis on China’s newly unveiled circular economy strategy. If you had asked me back then to guess what the global economy would be like in 2021, I would have predicted it would be based mostly on reusing, repurposing, refurbishing, and recycling. The market would be reoriented to sell access to products rather than ownership of products. Companies would be responsibly retrieving their used products and packaging, to feed them back into the production process. A wide array of systems would exist that keep new resource use and waste to a minimum.

Yet, it was in looking more deeply at this solution for my thesis that I bumped into some of the unresolved tensions and contradictions that have kept the global economy from becoming truly circular and sustainable. These tensions led me to question the deeper ways in which the global economy is currently organized – in particular, I began to question the pursuit of economic growth and profit. For the past thirteen years, since completing my master’s thesis, I have focused my efforts on understanding how societies can reorganize the economy to meet everyone’s needs without driving or depending on economic growth; how we can have sustainable post-growth economies.

Sometimes when I talk about transitioning to a post-growth economy, I am misunderstood as saying that we don’t need a circular economy, as if the two are mutually exclusive. To the contrary, I am still very convinced of the importance of a circular economy. Material circularity is necessary. But it is not sufficient. This is because the pursuit of GDP growth and returns on investment drives the growth of the material economy and the corresponding environmental impacts. Furthermore, the kind of circularity needed is not likely to happen in the current economic system, which is focused on profitability.

“The kind of circularity needed is not likely to happen in the current economic system, which is focused on profitability”

A For-Profit Circular Economy is unsustainable

The circular economy is often framed as having great potential to contribute to economic growth and profitability. This framing is highly problematic because it puts circularity (and indeed sustainability) in the position of a means that can be used to achieve the end of financial gain. In reality, profit is negotiable, while the Earth’s life support systems are non-negotiable. As such, sustainability has to be prioritized as an end, not as a means. Then, the question arises of whether sustainability and financial gain can both be ends, which is often assumed to be the case – as expressed in the popular catch-phrase ‘people, planet, profit’. As I will explain, tradeoffs between money and social-ecological sustainability are everywhere, so it is dangerous to assume that what is sustainable is profitable and vice versa.

“Tradeoffs between money and social-ecological sustainability are everywhere, so it is dangerous to assume that what is sustainable is profitable and vice versa”

In my work, I explain how the for-profit economy is incompatible with sustainability. For-profit business structures are organized for the purpose of delivering financial gain to private owners via private financial rights (i.e., the rights that entitle owners to the profit of a company). The expectation for business managers to deliver financial gain to owners leads them to try to increase revenues and cut costs any way they can – often at the expense of people and planet. This profit-orientation incentivizes managers to use strategies like planned obsolescence and manipulative advertising to increase sales. And of course, all of those sales have environmental impacts. An economy that is compelled to constantly grow is not sustainable, regardless of whether it has material circularity, because growth requires new inputs. This is especially true when one acknowledges the limitations of recycling.

“An economy that is compelled to constantly grow is not sustainable, regardless of whether it has material circularity, because growth requires new inputs”

In addition to the growth-driven nature of the for-profit economy, there is also a disincentive for profit-seeking companies to take on environmental responsibility measures (such as product take-back systems). Used resources will inevitably be more expensive than new resources, because it takes so much more effort to retrieve, sort, and process used materials so that they can be fed back into production processes. Not only is there a disincentive for businesses to go circular, but there is an incentive for them to cut environmental corners in order to keep costs low. Installing filters or safety valves that would decrease or prevent pollution, for instance, costs money – money that profit-seeking companies would rather not spend.

The circular economy literature often points to the need to implement taxes and regulations that would incentivize, or even force, companies to act in a more circular way. Yet, the drive for profit also incentivizes businesses and their owners to influence policy-making in ways that keep such regulations and taxes from being implemented. In this way, they protect their ability to profit from pollution and exploitation. This is why, despite decades of effort to get companies to take responsibility for the environmental impacts of their products, very little has been done by way of formal policies. When policies do manage to be strengthened somewhere, companies can always move their operations to another part of the world, where they are not as constrained. In a system in which profit is treated as an end and as the main indicator of success, this is rational behavior. It is a systemic problem, not a matter of managers making bad decisions.

The underlying point here is that keeping existing materials in use is not a profitable endeavor. It is not nearly as profitable as letting the environment, local communities, and society at large deal with the environmental problems caused by a linear economic system. These “externalities” are not a coincidence or an accident, but rather an inherent feature of the for-profit economy. What would be best for the environment is to minimize material consumption as much as possible. Yet, this would entail shrinking the economy in many places and reducing revenue for many companies. In this way, the for-profit economic system is at odds with sustainability.

If we hope to address the urgent crises of ecological breakdown and climate change, businesses and markets can no longer be organized in this way. Luckily, the for-profit way of organizing the economy is not the only way, and the for-profit economy is indeed a strange outlier in the larger scope of human history.

“The for-profit economy is indeed a strange outlier in the larger scope of human history”

A Sustainable Economy is Circular and Not-for-Profit

An economy predominantly composed of not-for-profit (NFP) businesses would behave very differently from the for-profit economy. Not-for-profit businesses differ from for-profit businesses in terms of purpose and financial rights. While for-profit businesses have private financial rights that serve the purpose of financial gain for owners, NFP businesses are set up to deliver social benefit and are not allowed to distribute profit to private owners. Crucially, NFP businesses also differ from traditional nonprofit organizations in that they generate most or all of their revenue through the sale of goods and services, rather than through donations and grants. Not-for-profit businesses exist all around the world and in every sector of the economy. There are not-for-profit banks, insurance companies, farms, grocery stores, gyms, energy providers, cinemas, and even real estate agencies and law firms.

An NFP economy would not systemically drive the growth of production and consumption for profit, as the for-profit economy does. The social benefit purpose of NFPs does not inherently incentivize business strategies like planned obsolescence, cutting environmental corners, and lobbying against circular economy regulations, as the financial gain purpose of for-profit businesses does. Furthermore, an NFP economy would have higher levels of economic equality, as these kinds of businesses channel all of their surplus into socially beneficial activities rather than distributing it to private owners (which is a key driver of inequality in the for-profit economy). Thus, an NFP economy is distributive by design, leading to less of a need for redistribution and growth. Furthermore, the social benefit purpose of NFP business is inherently more compatible with efforts to make economic activity more eco-friendly and to reduce overall consumption and production to sustainable levels.

“An NFP economy is distributive by design, leading to less of a need for redistribution and growth”

Thus, material circularity and not-for-profit business are both necessary conditions for a sustainable economy. But of course, even these two organizing principles together are not sufficient. Sustainability also requires shifts in values and norms, such as a shift away from a culture of consumerism, which equates more consumption with a higher quality of life. Fortunately, the foundations for a more sustainable future already exist and seem to be growing stronger. As the current economic system continues to generate worsening ecological catastrophes, inequality, and financial crises, there also seems to be an increasing openness to re-orienting the economy to serve people and planet, rather than deliver profit to a handful of owners.

By Dr. Jennifer Hinton

April 2021