Ever Increasing Circles

Stuart Crainer reports on Davos

It is great news that one of the big ideas at this year’s Davos is the circular economy. The concept won the Breakthrough Idea Award at Thinkers50 2013 and champions a virtuous circle in which, according to one of its champions Walter Stahel, “the goods of today are used as the resources of tomorrow at yesterday’s prices”. It is a system in which restoring and regenerating resources is designed as part of the system rather than as a neat but optional extra. The circular economy challenges corporations to think in circular rather than linear terms about their supply chains, manufacturing processes, material flows, business models and the lives of their products.

Crucially, the circular economy does not talk about consumers but users. The argument behind the circular economy is that the linear, consumer-led economy is intrinsically a destroyer of value – whether it is through its use of energy, other raw materials or lack of reusability – at all stages. The traditional value chain leaks value at every link.

The circular economy aims to decouple economic growth from resource constraints — by design. Materials flows are classified in two ways: biological materials, designed to reenter the biosphere safely, and technical materials, which are designed to circulate at high quality without entering the biosphere. Effectively, waste is designed out of the system and materials or components no longer required in their place of origin are “metabolised” elsewhere in the economy.

A compelling voice in the circular economy comes from the Ellen MacArthur Foundation. Based in Cowes on the Isle of Wight, the Foundation is the creation of Dame Ellen MacArthur.

MacArthur remains best known for her remarkable sailing exploits. Aged 18-19 she sailed around the UK singlehandedly. She came second in the 2001 Vendée Globe solo round-the-world race and went on to break the world record for the fastest solo circumnavigation in 2005.

In the years following her world record, MacArthur remained involved in sailing. But, through her sailing experiences, visiting the remote island of South Georgia and a powerful thirst for knowledge, MacArthur became fascinated by the economic and resource challenges facing the global economy. She announced her retirement from racing in 2009 and in 2010 launched the Foundation.

Sailing around the world, every item on-board has to justify its inclusion. The lighter the yacht, the faster. Each mouthful of food, each piece of kitchen roll has to be consumed with the overall resources in mind. “On a boat you have finite resources and you really realise what finite means. Translate that to the global economy and you realise there are some pretty big challenges — 3.5 billion new middle class consumers coming online, the population increasing, more and more demand on resources. We’ve seen a century of price declines erased in ten years. Economists don’t seem to think that’s going to change because there’s more and more demand for commodities. And for me the question was, so what works?” says MacArthur.

With this question burning in her mind, MacArthur sought out answers. She visited a power station and saw the vast supplies of raw materials required to keep them running. She traveled, but with a new agenda. Her eyes were opened to the concept of the circular economy when she saw a diagram in a book by Ken Webster (later the Head of Innovation at the Foundation). “Suddenly there was this idea of a cycle. For me it made sense. It was a different way of looking at things,” she says. “I thought this could work. This is an economy that could run in the long-term. At that stage we had absolutely no idea of the economics. It made sense from a materials flow perspective and it made sense from an energy perspective but we had no idea whether it cost three times more than a current linear product.”

Curiously, the actual term, the circular economy, came from a most unlikely source: China’s eleventh five-year plan says that China is working towards a circular economy.

“The concept of the circular economy is radically different from the current global economic model. Yet its principles make sense and fit in with what we now understand about sustainability and the overuse of our natural resources,” says Ioannis Ioannou, Assistant Professor of Strategy and Entrepreneurship at London Business School. “Our existing economic models assume that there are inputs and then outputs. Limited inputs imply rising prices. But what about when there are simply no inputs? We have not previously explored non-linear models of economic production where the outputs of today can also become the inputs of tomorrow.”

The circular economy has ignited a debate at Davos and beyond. The big question is whether good intentions and lively discussions can be transformed into action.