What Is a Circular Economy?

what is a circular economy sustainable economics

In the 1920s, a group of the largest lightbulb companies from around the world came together and made a plan to sell more lightbulbs: make them worse. 

The group, called the Phoebus Cartel, decided that their bulbs would last 1,000 hours, much lower than the 2,500 hours the bulbs had lasted before. Customers would then have to buy more bulbs. 

It was a foolproof plan, except for being unethical and shortsighted. The Phoebus Cartel shows the problems with a traditional linear economy that a circular economy solves. In a circular economy, the point is to look past sheer profit or growth and consider a sustainable future with wider social benefits. 

Marx and the Relationship Between Production and Consumption 

Karl Marx was one of the first historical thinkers to explore the problems with an unregulated capitalist economy. One of those problems was the tension between production and consumption. Along with an unchecked desire for profit, that tension helps produce the waste of a linear economy. 

Manufacturers want to sell as much of their product as possible, because that is how they make more profit. In other words, production is elastic: manufacturers can (and want to) expand the amount they make indefinitely. 

But everything that producers make also needs to find a consumer, and people can only consume a certain amount. So, consumption is inelastic: there are definite limits to how much of a product people can use. 

To make more money, manufacturers need to get people to consume more, even if that isn't good for society at large (which it usually isn't). Two techniques have been key: psychological obsolescence and disposables. 

Psychological Obsolescence: Buying Style 

In Made to Break: Technology and Obsolescence in America, Giles Slade talks about the history of psychological obsolescence. It is a marketing technique in which companies change the styling of their product to convince people to buy more. 

The first person to really see the power of psychological obsolescence was Alfred Sloan, who served as the head of GM in the 1920s. Sloan saw that style changes could make a car out-of-date far more quickly and reliably than technological changes, which required years of R&D. 

For example, if you added tailfins to the latest model from GM, then everyone would need to go out and buy a new car if they wanted to be in style. Then, a few years later, you can take the fins off again, and the whole cycle starts over. 

This strategy helps sell cars, clothes, appliances, and any number of other consumer goods. People buy a new product they might not need. Last year's model ends up in the landfill. 

Disposables: The Future Is in the Trash 

A related innovation was the move to disposable goods and one-time-use products. The sooner people throw a product away, the quicker they will need to buy a replacement for it. 

Like psychological obsolescence, this trend was coming either way, but again there was a visionary who embraced it. For disposables, that was Lloyd Stouffer, the editor of Modern Packaging Magazine. 

In 1963, Stouffer spoke at the National Plastics Conference and declared, "The future of plastics is in the trash can." 

Stouffer had figured it out. To sell more products, you convince customers they need to buy more, and the best way to do that is to convince customers to get rid of what they already have. Manufacturers actually taught Americans how to throw things away. 

In a Linear Economy, Waste Is a Feature, Not a Bug 

The point of both of these examples is that in the linear model, it does not matter how a person consumes a product, just that someone consumes it. A consumer can use a product or just throw it away. The result (at least as the company is concerned) is the same: they have to buy another one. 

In other words, the old approach considered products in a straight line. Once a product reaches a customer, we don't have to think about it anymore, since you cannot sell the same thing twice. 

In fact, efficiency is actually the enemy. The more efficiently a customer uses a product, the less frequently they need to buy replacements. 

How a Circular Economy Is Different 

A circular economy considers the total lifespan of a product and any raw materials, including after a customer consumes them. The point is to reduce waste and pollution by recycling products and bringing them back into use. 

This shift, from the linear approach to the new, circular one, represents a complete change in approach. It prioritizes strategies like reusing, repairing, and recycling to reduce consumption rather than things like psychological obsolescence. 

A Change in Scale 

Perhaps the most important part of this new mindset is shifting to a wider frame of reference for how we think about the economy. It requires a change in scale from thinking about individual companies or consumers to thinking about society as a whole. 

Under an ethical circular economy, every actor connects with every other actor. That means every person, company, and country interconnects. The only way an economic decision is ethical is if it benefits everyone. 

You can apply this new scale to the example of disposable goods above. A company that makes paper plates benefits if their customers use the plate once and throw it away because the company can sell more plates. 

But, at a higher level, society at large suffers. Making all these disposable plates costs time, natural resources, and money for no social benefit. So, expanding our view beyond a single company shows the wastefulness of the old, linear approach. 

In that way, the circular economy shows the benefits of ethical supply chain management in an economy. 

Now Is the Time for Change 

Shifting our thinking from the old approach to a circular economy is the first step to dealing with our present overconsumption. It can help all of us to act more ethically and focus on reusing and recycling as much as possible. 

For more information on other pressing economic issues in the U.S. and the world right now, and tips on how you can change your lifestyle, check out some of our other blog posts. We publish a wide variety of helpful articles on economics and thriving financially even during economic recessions.

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