Have you ever pondered over the role played by the neighbourhood- cobbler, electrician and tailor in recovering resources and reducing waste? Most of us have never even noticed them. If I say that they like wastepickers and recyclers are going to be the pillars of ‘Circular Economy’ envisioned by economically advanced countries, will you believe me?
I am assured that your first question will be ‘What is circular economy?’
According to the authors- Peter Lacy & Jakob Rutqvist of the book ‘Waste to Wealth- The Circular Economy Advantage’, ‘
Shifting to a circular model means changing our linear economy’s supply logic. We will need more renewable energy, more biomaterials and biochemical that can degrade safely, and more technical materials like metals that are designed to use recovered secondary material and for low cost end of life recycling, effectively closing the manufacturing loop. We need components designed for reuse and products…
This presentation comes from the “Future day” seminar arranged by waste handler Ragnsells.
It covers why phosphorus requires to be treated as a special case in the circular economy, indeed in a circular economy culture. And gives a few ideas how to do that – mentioning the acute need to do something about the Baltic Sea.
Launched just a few days ago, with Stephen Hinton as one of the main course developers, this new site will be offering both free and paid courses in the circle economy.
The site offers courses appealing to a wide range of audiences, from entrepreneurs, activists, policy makers, macro-economists and even those working with the peace economy.
Currently the site offers two free courses, one for entrepreneurs and the other connecting macro-economics and the circular economy.
Be sure to sign up to get notifications of coming courses!
Extractive economy is business-as-usual and the mental model taught in business schools. It is not called that of course, but examining any business textbook will reveal that the mental model – or paradigm – of extraction is underlying most teaching. This article aims to explain in clear terms what extractive models are, point out some of the shortcomings and hopefully opens up to the possibility of other, more functional, models.
Summary:
Seldom do business textbooks describe the paradigm of modern business as extractive – that is to say based on extracting resources from the earth without replenishing or recycling them. This is possibly because the practice is so ingrained in our way of life that it is taken as the only way. Extractive business practices deplete resources and downgrade capital. It is rather surprising that the dominant business paradigm is capitalism and yet it runs on degrading capital. On a finite planet, this is surely not good business let alone good for the planet. A dialogue around extractive approaches can be helped by naming what is going on and describing the paradigm. Several patterns associated with extractive approaches are described including the bell-curve of oil field extraction and the accumulated capital investment curves precluding break-even. Extractive approaches have many social downsides including externalization of negative effects like pollution and noise, but the main challenge is that they are actually not even good business, especially as investments for fiduciary investors.
The basic idea of extractive business
The basic idea of extractive business is that there is a resource to exploit to produce goods and services which are sold at a profit.
By exploiting the resource:
it gets used up (resources) or degraded (capital asset)
money gets made by the people putting up money in the beginning
money is made by the extractor
it creates livelihoods for employees along the whole supply chain
the extractor typically moves on, using knowledge and technology gained to the next pool of resource
Both resources and capital can be extracted
We should explore the distinctions between resources and capital – both essential components of business approaches. Extractive approaches use up resources, but even risk depleting capital. One of the definitions of capital is that which is used in production of services for payment but not used up. Obviously natural capital is one of the things that firms can use, but capital also includes built capital; buildings, machines, human capital, workers and so on, and social capital; organisations.
Capital can be drawn down, or reduced. For example, natural capital can be eroded if it is treated in such a way that more is extracted than can be regenerated. In this way capital can be treated by firms as a resource. Another example might be railroads. A firm can own railroads and rent them to railroad companies. The firm can maximize profits by reducing investment in maintenance. After a while, the capital asset – the railroad system – is worth less as the functionality of the system is degraded.
In this other example above, tractors may be effective, but they do not reproduce themselves (or self-repair). In terms of investment, are tractors really a better long-term?
Resources use
Typical examples of resources firms use up to earn money include:
coal deposits
oil deposits
Indeed, extractive business like energy companies and food distributers are among the largest corporations on Earth, so it is understandable that the extractive mindset is still dominant in the way business is taught.
TABLE: Largest corporations globally by revenues and their extractive approach Source: Wikipedia
Typical examples of resources being used up include:
Soil farmed and not regenerated
Forests clear felled and their ability to regenerate compromised.
Workers losing their working ability through accidents or industrial illnesses.
This diagram illustrates the results of extractive approaches to food production on soil fertility. SOURCE: United Nations
Patterns of extractive business approaches
Extraction of resources typically follows a bell-shaped curve, illustrated below.
The amount of resource extracted (vertical axis) over time (horizontal axis) typically follows this pattern.
Initially, infrastructure needs to be set up to start extracting the resource, and as this is added production ramps up to about half of the resources are extracted. Typically, the other half of the resource is harder to get at, and production tails off from its peak.
This pattern is seen in oil field exploitation as shown below.
Another way to see this pattern is the “S” curve of accumulated extraction. This pattern is the corollary of the bell curve. Starting fairly slowly, the total amount of extracted resources accelerates and then tapers off towards the end.
Total accumulated resources extracted over time.
The next pattern to consider is how business can be set up around this resource.
Typically, an investment needs to be made before anything can be extracted. This investment – money put up before any earnings can come in – typically comes from the owners of the business who are shareholders/stockholders or from outside investors who offer loans.
This investment follows the pattern below which shows money accumulated as investment.
Accumulated investment through the life of the resource extraction
As you see, the need for money invested rises rapidly in the beginning until a desired rate of extraction is reached. The slight rise after that represents the investment in replacing worn-out equipment.
The diagram below illustrates some key points in the business cycle.
Time to production – from the first dollar invested to when production starts
Time to break even – where the money earned from the operation is equal to the total amount invested.
The final result – in this case the accrued profit is about 30% higher than the investment over the total lifetime of the business.
The costs – these are not shown on the pattern. Costs include maintenance, inputs like fuel and labour.
Throughout the lifetime of the business it generates jobs and livelihoods for both direct employees and employees in suppliers. It also generates livelihoods for customers using the products.
So what are the downsides with extractive business approaches?
Frontier mentality is unsustainable – cannot go on forever
The amount of extractable resources is finite, so with each completed extraction there is less to find. The model only works when there is a relatively large amount of potential resources to be had. The model drives itself as the investment in one extraction in terms of knowledge and technology can be transferred to the next, so there is a incentive to continue to the next resource. This mentality is something that may have developed in conjunction with the discovery of the North American Continent, as the frontier to the Wild West pushed forwards, successful businesses sought to repeat themselves further across the frontier.
It externalizes a lot of its true costs
Some of the costs of this type of business are actually moved across to society as a whole to to bear, and are not born by the producer or customer. For the oil and coal business these include:
injured and disabled workers
the consequences of climate change
dealing with workers laid off after the industry declines
changing infrastructure to use alternative sources of product (includes closing down townships near the facility, investment in new railways, etc)
It creates dependency on the extracted resource
The availability of an extracted, finite resource creates dependencies that require whole system changes after the resource depletes. One example we are dealing with today is the need for investment in renewable energy as oil and gas reserves are drawn down.
One way dependency is dealt with is through globalisation. When oil reserves deplete in one country the corporations move to another. So dependency drives globalisation and the risks of exploitation that follow it.
Unavailable for future generations
The whole problem with extracting finite resources in ways that do not let them be re-used is selfish in a way. Firstly, they are made unavailable for future generations, and they are used just by those who happen to find them. There is no thought of just distribution in the extractive approach.
Together with the need to make money to pay investors back, the model pressures wages into a negative spiral towards austerity
It follows from the discourse above that one way to get more money out of an investment is to reduce costs. Labour costs are one obvious target. Once an investment in infrastructure is made, with owners and borrowed money, the race is on to not only cover costs but to find a way to repay the investment with a profit. So there will always be a downward pressure on wages. That in turn creates an affordability problem for the workers’ essentials like fibre, fuel and food. If workers have less money, they have less to spend on goods produced. In order to sell goods produced from extractive practices at prices affordable to workers, there is more pressure to extract, even more cheaply, from land and from the earth. This creates a downward spiral leading to austerity, and ultimately conflicts.
The extractive economy and its relationship to property rights
Extractive business approaches tend to, where property is involved, draw down the ecological functionality of the property if it is land, and if it is machinery, emit pollution and exert other externalized pressures onto society around it.
Examples include:
Mining – which affects the water quality of the surrounding area
Industrial agriculture which imposes a nutrient burden on the eco-system around it.
Vehicle ownership – which emits noise to surroundings
Extractive practices are actually supported in many cases by lax laws that do not protect the rights of surrounding eco-systems or society. For an extractive approach to be acceptable in the modern society, strict environmental, waste and pollution laws should apply.
A doubtful target for fiduciary investing
Through any project’s business cycle, institutional investors, like pension funds, will be looking to place their money to get dividends so they can pay their members’ pensions. These investors are expected to invest with prudence – to provide pensions whilst not degrading living standards for their pension-takers. Extractive businesses, whilst offering shorter-term possibilities of returns, always – by definition – reach an end-point. These businesses are only able to offer the kind of constant returns pension fund seek by having an ongoing portfolio of young, mature and ending extractive projects. As we saw earlier, this means that ordinary workers are being required to invest in extractive business approaches with externalized costs being placed onto society and bearing the risk that the available resources get depleted.
We cannot run all businesses with an extractive approach
We have to find ways to prosper in our present reality where we understand there is no Planet B. In that reality, an extractive economy is quickly seen as truly unsustainable when you start to analyze it. We can’t keep taking more from a place where there is only so much. There ARE alternative non-extractive but harvestable resources. Examples include well-managed soils that continue to be fertile for generations, well-managed forests that can provide fibre and fuel indefinitely, and the sun and wind and tides that can provide energy. There are, too, ways of recycling extracted minerals like copper indefinitely.
If extractive is the dominant business paradigm, the alternative is regenerative. This approach harvests resources whilst ensuring that the underlying capital – soil, forest, energy installation, minerals, etc remain functional and preferably function even better. This is the subject of future explainers.
If business as a discipline is to develop away from extractive practices we need to develop a mathematical language to help economists and policy makers model alternative approaches. Modelling – using both standard business calculations and simulation tools like those developed by Steve Keen – can help decision making at the level of the individual firm and policy level. We propose that adaptations of the Cobb-Douglas Equation can be used to help those doing macro-economic modelling of the sustainable economy. We hope this article contributes to knowledge.Continue reading “Towards a mathematical model of the economy that moves away from extractive business approaches”
Just as budgets steer every household and every corporation, so should every nation signed up to the Paris Agreement be steered by a carbon budget. This carbon budget should be treated like a monetary budget, the actions of the Swedish Government (even with the Green Party in power) up to now can only be described as fraudulent. This message comes from Climate Scientist Kevin Anderson, most recently in his presentation to the Swedish Climate Folk Parliament on the 5th May 2018 as it passed a motion to adopt such a budget.Continue reading “Swedish Climate Parliament passes motion for true carbon budget”
Most of us would like to think that people taking important decisions – ones that affect our lives deeply – would be basing their judgement on deep criteria. We hope that they are being reasonable and rational, balancing long-term and short term, what is fair and what is equitable etc. What many might suspect, however, is that decision-maker’s logic is more ruled by the economics of the situation and the budget covering just the domain of their decision. Indeed, many social experiments like the Stanford Prison Experiment show how authority and social pressure alter decision making. Of course economics are important but should they be the trump card that overrules compassion, equity, decency and plain common sense? The initiative Invest in Peace proposes a safe house for humanity. Continue reading “Envisioning a Safe House for Humanity”
As world population expands, and the demand for a better standard of living drives the world economy, it is becoming clearer to many that using up the world’s resources will actually put us at risk of ending up with a lower standard of living. It could even drive conflicts. Insecurity and lack of the capability to produce the basics are likely to fan the flames of conflict and undermine peace in the world. We urgently need a new mindset – one that focusses on bringing security of the basics to everyone whilst preserving and indeed increasing the capability of society to provide.
Part of this new mindset requires us to rethink capital. This article breaks down the importance of capital to society, and how the economy should manage capital if we are to transition to a sustainable and peaceful future.Continue reading “EXPLAINER: capital, sustainable development and peace”
What we call “technology” is actually a narrow description of a practice including mechanics, electronics and computer science. This confusion is hampering human development, especially when the expectation is on not developing financial and social technology but demanding mechanical solutions when simple agreements could suffice. Modern technology is failing, we are not addressing the challenges in front of us. Our very use of language in this case is holding us back and preventing us from thinking clearly.
Understanding the circular economy needs you to have a grounding in physics, biology, economics supply chain and several other disciplines.
To help you apply circular economy thinking in your work we have developed a series of guides, presentations, videos and workshops that gives you the essentials without having to study these disciplines.
For example:
A GUIDE TO THE ESSENTIALS OF THE CIRCULAR ECONOMY
First presented at the Caux Foundation conference on Trust and Integrity in the Global Economy (TIGE), a 40-minute overview of the absolute essentials explains:
Two main cycles – and the absolutely essential crossover points that should always be monitored.
Three elements of the circular economy, their cycles, their essential differences and why understanding them will help you grasp circularity.
Four spheres, their interaction points essential to pinpoint in all supply chain and economic activity.
