Subsidies are contrary to circular economy principles

Value chains within organizations should be metaphorically understood as micro power plants that produce energy (added value) from consumed inputs (capitals). Value chains are constructed so, that by producing marginally larger output value as is the sum of all input values, they create added value that provides nourishment for the regeneration and replication of the brand (powered by such value chains), to owners of particular parts of value chain and to overall owners.

Comparing power plants to added value machines inside organizations makes sense but for one very important difference. While power plants always lose energy due to all kinds of frictions (due to second law of thermodynamics), value chain machinery within organizations adds value due to “intangible” effects of human action. Human action not only secures that the value of all resources that enter the process increases at the output, but also that the value of the cause for this action, the value of human capital, increases. It is thus not that its activity to produce added value exhausts human capital, but it is itself enlarged by such actions. If it were not so we would not be a part of growing civilization, of something that increases its value, its temperature, but a part of something that loses energy and vitality.

Let’s put down the simplest value chain:

Agent A uses resource a to produce product b, that is used by agent B as a resource to produce product c that is then used by agent C as his resource.

Such micro value chain can be established only if b is evaluated by B as having marginally higher value as was a total input of values for A. For this marginal utility to happen, we only need one incident to happen: A and B have to agree on the price.

We have to be very precise in definition what they have to agree upon. They do not agree on marginal utility or added value. B does not now and there is also no need for him to know what added value is produced by agreeing for the price with A. No one has to know it (except tax revenue office). And insomuch also there is no need for A to know what added value is going to be produced by B when C is going to agree about the price of what comes out for his resource. Each one calculates his marginal utility for himself by agreeing on one factor only: the price. This short description of praxeology should be taken only as humble attempt to insert Ludwig von Mises treatises into value chain explanation.

What I really want to point out here are two lessons that are by definition put aside in everyday practice of contemporary intellectualistic interpretations of reality:

  1. the importance of the owner of each individual value chain element; the one that profits from the added value created in the moment of exchange with another owner;
  2. that the value in the flow from elements a to b and then to c is enlarged intrinsically.

This intrinsic nature of added value creation among various capital owners lies in the core of circular economy. It always goes from particular A to particular B and then to particular C. So simple. For the reason that there are zillions of such A’s and B’s and C’s and also zillions of a’s and b’s and c’s interchanging values in all possible directions, a complex human civilization emerges.

It is valid to compare emergence of circular economy phenomena with the emergence of human body. Both are based on very few and very basic entities and principles. The complexity of human body emerges from four bases of DNA: Adenine Thymine, Cytosine and Guanine. Four only. On the way up from ATCG there emerge zillions of levels of interactions from DNA, genome, chromosome, cell, organ and body to name only few of them.

What is important for biological organisms, namely that value exchange that produces energy is performed intrinsically, is or should count also for organizations. If A ads value due to received subvention, then the exchange principle is spoiled for the reason that the agent that provides input in the form of a subsidy (agent G, government) is not really part of circularity, part of value chain that is calculated on the basis of marginal utility. G inserts value, but is not a part of such circular economy. The value of subsidy “s” is not calculated on the same principles as values of a, b, and c. S, subventions are extrinsic to circular economy principles and thus spoil natural metabolism of organizations.

To conclude with real life example: subventions to renewable energy producers destroy the circularity of that part of economy since agents on the market cannot and do not calculate their added value in exchange on the bases of marginal utility principles but on the basis of extrinsic subvention principles. The argument that such subventions are necessary to foster development of new energy sources is false for it is a part of calculations of each actor about resources allocated to development as much as about natural capital resources, intellectual capital resources or human resources. Development in complex systems is emergent property (necessary property) of intrinsic added value creation and market exchange. Civilization that by definition rests on non subsidized development is a final proof of such claim.

It is thus a sorrow paradox that those same governmental and supra governmental bodies that promote circular economy also subsidize development of renewable sources and many other kinds of development. They have circularity on their mouths but not in their hearts; or better: circular economy fake trend prophets have it it their pockets.


Andrej Drapal