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The Circular Economy: Where Does Money Fit In?

Real economics is the study of how people transform nature to meet their needs…Neoclassical economics is inconsistent with the laws of thermodynamics.

Charles Hall, SUNY, an ecologist by training.

It’s not news of course. Frederick Soddy, another outsider (an escapee from physics and chemistry and a Nobel Prize winner) spent half his life on what he saw were two big flaws in the economy: the lack of connection to real world ‘thermodynamics’ for which let’s read ‘resources’ (energy and materials stocks and flows) and the money system. He first wrote extensively about this in 1926! The intellectual preference of our times has been to have much more to say about the resources ‘flaw’ than about money. This is a curious and really quite obvious gap in understanding the economy as a whole, as Prof Steve Keen remarked this year:

“…If you look at mainstream economics there are three things you will not find in a mainstream economic model – Banks, Debt and Money. How anyone can think they can analyse capital while leaving out Banks, Debt and Money is a bit like an ornithologist trying to work out how a bird flies whilst ignoring that the bird has wings…”

Real world systems are complex and adaptive. Image: NASA
Real world systems are complex and adaptive. Image: NASA

But there you are; mainstream economics thinks that the real economy is barter with the oil in the market machine supplied by money. If the amount of money increases it doesn’t change anything much except prices, so it doesn’t really affect the economy. Steve Keen and others see money, created as credit more like rocket fuel, very much as important to what happens as are physical energy and materials flows. So money, they say, is a part of the dynamics of the real economy as well as the financial economy.

This kind of economy, a big picture one shall we say, is therefore assumed to have a biophysical basis and one where money, banks and debt are ‘in’ the model. Since we know the economy is dynamic, never at rest, and full of feedback it can be seen as a complex adaptive system: embedded for our purposes in flows of energy, material and information. That’s already quite novel for some people, but obvious to most, given a moment or two’s reflection. So what next?

These flows are connected to variable stocks or ‘capitals’ of numerous kinds e.g. energy and materials, products, forests, fisheries, networks, human, social and financial instruments (including money). These feedback-rich systems are often non-linear as a result and exhibit a dynamic stability at best. For example they can reach a tipping point where they transform rapidly into another set of patterns. There is no general equilibrium, there is no normal, everything is just a phase and in transition.

Human actors might want to believe our leaders can stand outside the economy pulling levers and creating predictable changes but in reality it is more nuanced. In a dynamic system like an economy we are assumed to beparticipant and within limits can propose — and explore — changing the economic system conditions, and then observe the iterations which follow and consider what next. If we are not pulling machinery levers with predictable results then what is the aim of our participation? Logically, from a systems perspective that is, it is in optimising the system as best we can through establishing a positive cycle(s) of development and as a consequence, restoring and regenerating capitals. This will offer both more and more effective flows (assuming capitals are degraded in today’s model) and it is this “effective flows and rebuilding capitals” which provides a basis for a new prosperity.

However, this will mean that banks, debt and money are to be part of that optimisation. They are endogenous; credit leads the productive cycle so how credit is created.how it is allocated and on what terms makes a lot of difference to the outcomes. The existing arrangements funnel wealth upwards in a linear fashion based on the creation of money as debt by banksex nihilo (97% of the total) The allocation of this credit primarily to existing asset classes (real estate, insurance, commodities, stocks and bonds — under 10%) is to finance new or additional production. The interest paid on the issuance further inhibits the cycle of income and expenditure (it reduces consumption of debtors and many creditors don’t spend all that they receive). Wealth is, furthermore, concentrated through the boom and bust cycle in asset classes over time and by an emphasis on taxation on labour and consumption. What is required is easy to see: more ‘circularity,’ the feedback essential to all complex adaptive systems which endure. As Nick Hanauer notes “we are all better off when we are all better off.”

EMF_AWealthofflows_Diagram_2a

Just as it was useful for Braungart (for example) to distinguish between ‘biological’ and ‘technical’ materials flows in a circular economy, it is useful to distinguish between two of the main functions of money: money as a medium of exchange and money as a store of value. The essentials of most economic activity require money as a medium of exchange. It has to be available at the periphery every bit as in the mainstream. As a store of value it can work in the opposite direction. If the desire to hold money inhibits some of its availability as a medium of exchange perhaps because the money is not spent or invested at all, or not in productive activity, then it means less exchange or it must circulate faster.

One argument around the creation of a supply of money as a medium of exchange and source of economic expansion is that since money as a medium of exchange acts across the board it behaves like a public utility. Perhaps it ought to be managed as such, and the existing private supply of money at interest is an expensive distortion. (see the (1933) Chicago Plan Revisited by Michael Kumhoff)¹. At the same time, reducing the private sector debt overhang gives a big stimulus to growth. See Kumhoff for details of these and other benefits to the productive economy from rearranging the basic system conditions. Paradoxically, changing the system conditions around money should be easier than around using fossil fuels or rare earth metals since money is a human invention and exists immaterially for the most part. In practice it isn’t.

 

Lordlocky/Flickr CC by 2.0
Lordlocky/Flickr CC by 2.0

Much damage has been done by associating and then ‘framing’ the government in the public’s mind with a household or a business which has a budget. A sovereign money issuing authority cannot run out of money. It is surprising how often it is the ‘framing’ of an idea which prevent change. This is as true for governments (framed as a household) and money (framed as a commodity) as for the idea that work is fundamentally exchanged for wages. Yet most things we do for each other, most work is not paid for at all but is in many ways an exchange of gifts. In all these contexts the reality is that stocks need maintenance (a healthy human is an example) and flows need to be effective. If there are surpluses these need circulating back into the system for it to function well and discussion of how best to do this could be more practical than concerns about whether someone ‘unemployed’deserves an income or whether a government ought to balance a budget.

Although moral or value laded decisions are dominant, here are some examples of how to support the effective circulation of income; to bring some more ‘circularity’ and with it more prosperity.

Firstly, by encouraging a diversity of money supply — complementary currencies — to ‘energise’ exchange in contexts the monocultural $ or € cannot easily reach.

Secondly, a tax shift away from labour onto non-renewable resources and including e.g. a financial transactions tax or, as the supporters of Henry George propose, a tax on the rising value of land.

Thirdly, consideration of one of the following options designed to bring an increase in income to the poorer segments in society so that they can also spend, but avoiding the extensive bureaucracies of the present day or moralising over the meaning of ‘real work’. These options are also pre-emptive of the structural employment losses but huge gains in productivity which will follow from the ‘second age of machines’- the ongoing ICT revolution. The three choices commonly offered (in declining preference): a citizens’ income, a negative income tax or a minimum ‘living wage’.

A useful summary about the ‘affordability’ of such schemes can be found here from Periera (Univ of Birmingham)².

Here are the takeaways:

A circular economy includes questions around the supply of money because every modern economy faces these questions, although it is often obscured at present. Money as a medium of exchange could be seen as a public utility rather than an output of a private fiefdom.

Circulating spending power is crucial to the effective use of resources and building an economy that works long term. It can be seen as a systems question, an adjustment of flows for the well being of citizens. A basic income is an example and follows from separating work from wages to rescue the greatest and most valuable waste streams in our world — the unemployed, underemployed or unwell members of humanity.

Notes

[1] Benes and Kumhoff: ArticleVideoPresentation

[2] Richard Pereira, University of Birmingham: Article

Update: this article was revised by the author on 7th September.

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Ken Webster

Ken Webster

Ken Webster is Head of Innovation at the Ellen MacArthur Foundation and he is a major contributor to the development and communication of ideas in this field.