Ep 158: Shaping the future with the performance economy | The origins of the circular economy

Colin Webster 00:04

Welcome to the Circular Economy Show from the Ellen MacArthur Foundation. My name is Colin Webster and I'm here with my colleague, Pippa Shawley.

Pippa Shawley 00:11

Hi, Colin. So in this series, we've been looking at the schools of thought which have inspired the circular economy and how they fit in today. So, you want to remind people of what we've talked about over the last four episodes

Colin Webster 00:22

Yes, we've talked about biomimicry, regenerative design, cradle to cradle and industrial symbiosis.

Walter Stahel 00:24

And today, we're going to be talking about the performance economy.

Colin Webster 00:25

That's right. It's the final episode of this series. And not only will we look at the performance economy, but we'll ask what it brought to the circular economy and how it helped. The Ellen MacArthur Foundation shaped the idea. And

Pippa Shawley 00:46

he'd been bringing some really great guests along to help us understand these schools of thoughts. Who are we going to hear from today?

Colin Webster 00:51

In this episode, we're going to hear from Walter Stahel, who is of course, the author of the performance economy. They don't actually interview Walter here. Instead, we're going to hear clips from an older interview that he gave.

Pippa Shawley 01:03

So you're gonna keep the content circulating at its highest value. Sounds familiar.

Colin Webster 01:08

Yes, indeed, it does. But Walter did send me a copy of his book yesterday. And ever since I've been trying to read through all 300 pages of it.

Pippa Shawley 01:16

That explains why you're looking a little tired.

Colin Webster 01:19

It looks like you've saved the cheesy jokes for the last episode, Pippa.

Pippa Shawley 01:23

I've been sitting down for a very long time. So let's get into the content. Now a key part of the performance economy is retaining the value of goods and materials. Because of the cost involved in extracting more. Let's go over to Walter where he explains.

Walter Stahel 01:39

The first point is the coming resource price paradigm shift will change priorities, in the sense that for the last 100 years, resource prices for energy and materials have constantly decreased. It is expected that resource prices in 21st century will constantly increase. This means that resource security could therefore become a major political bone of contention. Managing existing physical stocks will provide resource security for enterprises and nations, under conditions that we consider the goods of today, as the resources of tomorrow, at the resource prices of yesterday. And the business model to do that is selling goods or services, enables economic actors to retain the ownership of their goods and embodied resources, and thus contribute to their own future resource supply, as well as give the nation's resource security for the future.

Colin Webster 02:50

So that, Pippa, is the famous quote by Walter Stahel: The goods of today are the resources of tomorrow, the resource prices of yesterday. Very nicely put, right?

Pippa Shawley 03:00

It is very nicely put. And I think something that comes out of that is a reason that people might want to engage in this that often don't think talk in this sector economy or sustainability space. It's that national security element.

Colin Webster 03:14

Yeah, I would say he's really big on talking about the national security. And also, of course, the profit motive for avoiding extracting more materials at higher prices. And if you look at the commodity prices, actually because that's where he started. And that Melissa interview, let's be fair, is actually 10 years old, right? The commodity price index, which tracks the cost of all sorts of commodities, over the years, shows a bit of a roller coaster. And if you go back to the start, say the year 2000 to year 2010, there was an enormous spike in the costs. And that wiped out a century's worth of price declines. Wow. And just 10 years, so a crazy change. So that was a huge peak in 2008, which, of course was a time of financial crisis. And then there was another one and 2022. Even higher spike, actually. And the lows on this rollercoaster ride on the committee on the commodity price index, are never as low as they were in the in the 2000s. But there are reasons for as I understand that for this high spike recently, and of course, COVID, geopolitical tensions been two of the key reasons why. And

Pippa Shawley 04:30

And then the UN Global Resource outlook for 2024 has found that our use of resources has tripled over the last 50 years. And that if we carry on as we are at the moment with business as usual, there'll be a 60% rise in resource use from 2020 to 2060. That surely means that primary resource extraction is still too cheap. There aren't enough barriers there. So one suggestion is raising taxes on non renewables.

Colin Webster 05:00

Yeah, exactly. That's what this is what it says. And of course, one would imagine, with so much more resource extraction, that you'll see even higher resource prices as a result. So I switched to what Walter was talking about in essence, right? That what's at the heart of the circular economy, of using resources more intelligently. Therefore, businesses saving money as a result would be a smart thing to do. And we'll get back to that that idea of selling performance, ie the performance economy, instead of selling goods. But you picked up that point about taxing non renewables. And it's a big part of the argument that water style makes, let's hit to make that argument just now.

Walter Stahel 05:42

Sustainable taxation simply means do not tax what is desired. Therefore, do not tax renewable resources, including labour, human work, wages, instead, tax non renewable materials and energies. What does that mean? Not taxing labor as renewable resource creates virtuous loops, it boosts job creation, employment, occupation, in all forms, and in all labour intensive economic sectors, it increases the competitiveness of labour intensive activities in the circular economy, compared to industrial manufacturing. And of course, also in carrying jobs that are outside manufacturing, such as hospitals, long term care for disabled people, etc.

Pippa Shawley 06:43

So as some of what Walter's talking about there, there's this idea of getting rid of the idea that it's not worth investing in, say, repairing something that's broken, it's actually just cheaper to buy something new.

Colin Webster 06:55

Yes, so you have an example of what you might call linear lock. And if there are no barriers to operate in a linear economy, and no incentives for a circular economy, then why would you see a change at the scale that we need to see the change, which of course, that's why we work with policymakers as much as we do with businesses, because you need to see these things operating hand in hand.

Pippa Shawley 07:22

And so are there some examples of where this is happening already?

Colin Webster 07:25

Well, the European Commission in 2019, was still talking about the idea of sustainable taxation. And the way the Walter Stahel was talking about it there as part of the European Green Deal. And there are examples. For example, in Sweden and 2016, they reduces their VAT rate, from 25% to 12%, on repair, repair of bikes, clothing and shoes, and then they cut it again and 2022. And that was obviously done to stimulate more work being done in those areas. And I think that's great to see these examples taking off.

Pippa Shawley 08:02

Definitely. And I think Walter also talked there about the not taxing labour. Can you tell us a bit more about that?

Colin Webster 08:10

Well, if you didn't tax labor, or move, take that Swedish approach that by by I guess reducing some costs, then you incentivise more people to be in work. Of course, not only does that mean, that they can be repairing goods or operating in reverse cycles. And we know, and Walter will go on to talk about this, we know that the repair, for example, is much more labour intensive than extraction of materials. So we need more people to be working in those positions. And of course, we need more people in work and in general. So not only do you get that benefit, where a labour intensive, circular economy becomes more achievable, but you get those spin off benefits, and you talked about the killing services. So if you have a blanket removal of tax on labor, then that benefits not just circular economy work, but everywhere else. He said carings are hospitals, but across the board.

Pippa Shawley 09:07

So it sounds like a really good societal win. Let's bring it back to the circular economy, we are after all talking about how the performance economy fits in and inspires the circular economy, so what are we going to learn next?

Colin Webster 09:19

We're going to go and talk about the loops and the size of those loops, which will be familiar territory to many people listening to this.

Walter Stahel 09:27

Now let's come to the circular economy. Circular Economy is about economics and profit maximization. There is an axiom and unwritten law, which says that the smaller the loop, the more profitable and resource efficient it is. In other words, don't repair what is not broken. Down remanufactured what can be repaired, don't recycle what can be remanufactured. This is the most beneficial one financially and resourcewise debate the small loops reuse repair are best done locally or regionally to avoid doubles transport costs, whereas recycling is a global business based on employing cheapest labour, such as sending electronic waste to Africa, for recycling. The second factor to consider is that a loop has no beginning and no end. You, you need to optimise the loop, which is stock management, maintaining value maintaining quality and performance of goods and materials. So, this is one of the big differences to the linear economy, a loop has no beginning and no end. And the third point, which is important, the speed of the circular flow is crucial. A lake economy operates at a very low speed. The other extreme is material recycling of short lived goods, such as beverage cans, this leads to fast circular flows, and the rapid loss of the material, what I call reverse resource compound interest.

Pippa Shawley 11:27

So, we're already talking about performance economy, circular economy, we've just had a third term Lake economy. What does that mean, Colin?

Colin Webster 11:38

Yes, he in the book, he does talk a lot about the lake and loop economy sometimes calls it and it's probably best understood if you understand the also talks about a river economy as an opposition. And in essence, the river economy is fast flowing. That's the linear economy as far as we're concerned. So lots of fast flowing goods that are going in one direction, whereas the lake economy, of course, is a pooling of off the resources. So it's much slower, and the water in this case would stay in there for longer. So he's just simply use a metaphor to help us understand the performance economy.

Pippa Shawley 12:17

Yeah. And that ties into what he was saying about inner loops being more profitable. So not having these complicated reef manufacturing ways or some sort of reuse of material, but actually repairing things so that they don't get very far away from you don't have any leakages or, or losses, which sounds like quite an integral part of the performance economy.

Colin Webster 12:40

Yeah, and, of course, an integral part of the circular economy, we look at a butterfly diagram, those inner loops, the one that are close, the closer to the user, those we know are much more profitable to share, or to repair is much more profitable than to re manufacture or recycle. Because you're using fewer materials to repair, you're using less energy is passing through fewer hands, maybe things that even stay more local after going through those inner loops. So that I mean, that's where that's where we get the idea from. And one, one can see actually, recent report, showing that it was from the World Economic Forum, seeing that product as a service and product life extension can improve supply chain profitability, when it comes to motor vehicles by about 1.5 times. That's an enormous, that's an enormous difference. Yeah, that must be so attractive to vehicle manufacturers to start looking at models like this. And in our most recent report, building prosperity, which I think by the time people are listening to this, it's now out. It's currently being written as and as we speak, and that demonstrates the profitability and shared fashion and these models are really begin to take off now.

Pippa Shawley 13:56

Yeah, I think it's something that I've noticed, my friends are talking about more, it's escaping the niche of the circular economy circles.

Colin Webster 14:04

And that's interesting. When people outside your work world, start talking about some of these ideas to you, you realise that they're really beginning to resonate. And why are these things taking off now? Things that we've talked about for a long time, and Walters talked about, I think, for an even longer time, some of the technologies like AI and the our ability to track components to track products to use and the mobile internet more effectively, and with much more trust than we've ever had before. And it's I think those those technologies like those are blockchain as well, are part of the reason why we're starting to see these sharing models, these performance models beginning to take off. And another really interesting one is predictive maintenance.

Pippa Shawley 14:53

What's that?

Colin Webster 14:54

That's the idea that if, if you have a shared car, and it It never works its way back into the hands of the whoever is most responsible for it. But they can monitor it from a distance because it has all sorts of sensors on it. So they know the owners of the vehicle know when it's going to need a service. And if they can catch it before something goes wrong with it, then they can keep it running for much longer. And you see that model working. The most famous example is the Rolls Royce power by the hour. So these are jet engines that are used by lots of different airliners, but Rolls Royce monitor them from afar, and they know when they need to be repaired. And they can keep the life of these machines working for much, much longer as a result.

Pippa Shawley 15:40

And keeping those loops small.

Colin Webster 15:42

And keeping those loops small, which is crucial. Yes. Right. So we're going to go back to Walter Stahel to hear now what he has to say more about job creation.

Walter Stahel 15:51

This circular economy, the first point was is about the economics the second point, it's about regional job creation. Three quarters of the energy to manufacture products are used in the raw material production, only one quarter in manufacturing goods. The reverse is true for labor, three quarters are employed in goods manufacturing, only one quarter in raw material production, repair and re manufacture in a circular economy. Therefore, because they are like manufacturing, they reinforce the low energy, high labor input part of the economy. But they are more labor intensive than manufacturing. So compared to manufacturing, the circular economy means a substitution of manpower for energy. Now the third point about circular economy is that it prevents co2 emissions and greenhouse gas emissions. Reuse remarketing and service life extension activities in the circular economy preserve the water and energy inputs and related greenhouse gas emissions embodied in the existing goods. Water and Energy Saving as well as rates prevention now become profitable activities that positively impact corporations financial bottom line.

Pippa Shawley 17:25

This is quite a hot topic at the moment called endless employment conversation. So what are those benefits that Walter's talking about within the sector economy and the performance economy?

Colin Webster 17:35

Well, we do have some numbers on them now. So there was our reuse report from a couple of years ago, that was proposed, there'll be about 11,000 jobs in France, if they're only looked at France. Every years principles were applied. And there was an OECD report, which says that a circular economy should bring about a net positive jobs affect somewhere between zero to 7%. Boost. And then there is an EU estimate, which says that our transition to a circular economy could create 700,000 jobs by 2030 in the EU alone. And this is largely due to the fact that activities linked to that transition such as we've just heard from Walter, product life extension strategies, reuse repair remanufacture, we've said this already, they're more labor intensive than primary production there which can often be automated. So there is a big advantage, it seems to switching to a performance model a circular economy model when it comes to employment.

Pippa Shawley 18:43

And the other thing he talks about there is the way it helps reduce greenhouse gas emissions. Because we know that switching to green energy is only going to solve 55% of our emissions. We need a circular economy and the kinds of things that we're just talking about to fix the other 45%.

Colin Webster 19:01

Exactly. Yeah, Echo echoing exactly what we say. We're going to jump back to Walter for him to give us a conclusion. And then we'll talk a little bit more about how the performance economy is impacted on the circular economy.

Walter Stahel 19:16

A circular economy increases the future resource security creates regional jobs of all skill levels, and reduces greenhouse gas emissions. Especially the small loops, reuse remarket, repair, re manufacture a sustainable tax policy. In other words, not taxing labor as a renewable resource is a powerful lever to accelerate the development of a circular economy with positive impacts on the three pillars of sustainability, the economy, the environment, and social well Fail jobs.

20:02

Alright, so that was Walter summarizing, the key arguments are for performance economy. You know, one catch phrase of Walters I like and he does like a catch phrase. We've heard a couple of them in his boots here just now. But one that really stood out for me is this that he doesn't want to focus doesn't want us to focus on doing things, right. But instead, doing the right things, which I think echoes well with, say Cradle to Cradle is famous, lean, less bad is not the same as good. And

Pippa Shawley 20:31

definitely echo some things that we talk about in the circular economy as well, like, you know, when people are like, Oh, that's like sustainability. And we say, No, it's so much more. So that's some things that are in common, what is missing from the performance economy that we see in the sector economy?

Colin Webster 20:46

I think it'd be fair to say there's not much focus on nature. On regeneration. I don't think that's in the work of the performance economist. So there's obviously references to the environmental benefit. And we've heard a few of them here. And those are, those are very clear benefits. But I think of all of the schools of thought, maybe the performance economy looks at nature less than than the others.

Pippa Shawley 21:13

So to summarise, we've talked about five schools of thought that influence the sector economy. Can you just give us a quick recap on what those are?

Colin Webster 21:23

Yeah, but but let me just say this first, I think the impact of the performance economy on the circular economy, the way that we talk about it, is enormous. And I think it's really clear from everything that we've heard there, the the fact that Walter stylohyoid looked at the profitability of these different loops, and the different actions within them. And that's so clear in everything that we've done. So his fingerprints are, are all over that butterfly diagram and and a lot of the work that we've done, but that's not answering your question, you said, What were those five skills, you got Cradle to Cradle. And I think their impact, again, is very obvious, especially from if we just pick one aspect, the two material cycles the technosphere and the biosphere. Again, that is our butterfly diagram, and that would that came from cradle to cradle? Then we had biomimicry, which for me is that overall big picture of mimicking natural systems, and operating like living systems do. Then you have regenerative design, where very clearly we've taken that third principle, the circular economy where we have to be regenerating the biosphere, regenerating nature, through our actions. And if you look at our most recent work on the built environment, you'll see clear inspiration from regenerative design, in terms of how we're suggesting the built environment should operate now. Then you've got industrial symbiosis, which is maybe again, like a bigger picture, look at the flows and the collaborations right across the board. So I'd say five very clear, schools of thought inspiring how we talk about the circular economy.

Pippa Shawley 23:10

Definitely. And thank you for finding people to talk about these in such an engaging way, Colin and for guiding me and our listeners through it. If people want to find out more about the schools of thought, where can they go to our website?

Colin Webster 23:24

Yes, on our website, you can find information about each of them. But of course, they are all disciplines, that all work on a standalone basis. So you can Google them quite comfortably and find all the leading thinkers, writers and instigators of all of these different ideas, they're all out there.

Pippa Shawley 23:44

And if you found this series useful or entertaining, then please do share with your colleagues, your friends, your fellow students who might also enjoy it. And of course, make sure you subscribe so you never miss a future series. Until then, thank you for listening.