Applying Real Capital to the Circular Firm

Several thinkers (including, for example, Boyd 2020 and Hazel Henderson) have suggested that the concept of real capital – or multi-capital – be introduced into the political economy to aid decision-making at policy level as well at corporate level. This may overcome one of the failings of standard economics: Policy makers often rely on economists to provide their decision bases. However, one of the failings of standard economics when preparing decision bases for policy makers, is that anything that cannot be valued in money is seen to have no value or little value. The Earth does not send a bill for the use of its atoms so the stewardship of the material world is left out. Without a comprehensive valuation framework, policy makers and strategists are likely to miss the full picture by just relying on monetary values and make decisions that could be detrimental to society, counter to the intentions of the policy.

This article gives a general explanation of the category of real capital that is built capital, and how to use its valuation in preparing decision bases. The Real Capital approach gives a more robust decision basis, helping identify long term investment needs and policy that steers investment and activities to avoid capital degeneration and promote capital regeneration.

Real Capital is something that is used in the production of
goods and services, but not used up.

Note that capital is necessary but not sufficient to provide services. The capital is utilised in the production system. There are several categorisation methods, but I prefer the following to describe built capital:

Built Capital: All man-made things that are used to provide our basic and other needs: houses, roads, factories, equipment, tools etc. This includes systems like telecoms, payments, etc.

The performance of the firm in terms of its environmental impact is very much determined by the capability and capacity of the firm to operate in a circular economic manner. That is to say, that the firm uses renewable energy and recycled and natural materials as inputs. Its waste should be recyclable. Its products should last as long as possible. This capability is provided by the built capital. This is illustrated in the diagram below.

In other words, our built capital, embedded in the production apparatus needs to perform to circular standards.

Built Capital is infrastructure providing for all, in a sustainable way, safe, efficient and comfortable:
– Housing
– Transport
– Energy
– Food production and distribution
– Health and education

If a society is to function in a circular manner, then firms need to invest in infrastructure, built capital, that affords this. For policy makers it is vital to know both the capability and performance of current infrastructure, and the capability of the Best Available Technology (BAT).

We need our built capital to be developed to maturity

If capital is something used but not used up, then mature real capital is when it is developed to a stage that it can provide the services needed by the population it is intended to serve in the way that conforms to norms of sustainability.

Having set the maturity level at 100%, a decision basis could illustrate the performance of a particular industry or cluster of industries according to the diagram below, provided for illustrative purposes for a fictitious industry.

Stylistic representation of Built Capital performance in a company or industry

In the diagram above, 100% represents the desired capital maturity level, BAT represents the performance achieved with the best technology available. The blue are represents actual performance and the red is the capability minus the actual, i.e. the amount of capacity that is not being used.

The infrastructure of the firm needs to run on fossil-free energy, use recyclable inputs, create recyclable wast and produce products that last (i.e. are reparable, upgradeable and long lasting).

According to this stylistic, the challenge for policy is to accelerate use of current capacity for fossil-free energy whilst stimulating development of replacement technology.

For inputs, the capability is there but not the practice, which needs to be stimulated to change. For the recyclability of waste, there is technological development needed as a priority as well as a switch to BAT. For the extension of product lifetime, the data shows that the lifetime could be doubled with existing technology and that BAT is insufficient for needs.

For more focus on infrastructure capability, concerted efforts are needed from both the scientific and political communities. Scientists must engage more actively in public discourse on the way our infrastructure is performing, effectively communicating their findings to policymakers and the general public in accessible language. Additionally, interdisciplinary collaborations between scientists, policymakers, and other stakeholders can facilitate the integration of data on our infrastructure capability and performance into policy development processes.