Our economic system revolves around consumption. For our wealth to grow, we have to consume and thus produce more. It is a model that created massive wealth for a huge amount of people, but also a model that stands at the basis of a coming environmental disaster. Our planet is polluted, our resources depleted and our climate severely disturbed.

However, a solution is proposed that could make markets solve part of the mess they have created. Namely, by changing a simple but impactful market mechanism; we should stop owning stuff and start renting their application instead. This may not seem revolutionary, people rent goods all the time. However, this idea goes further. It would mean you would practically rent everything. No longer would you buy cars, freezers, computers or light bulbs. These products would all remain the property of its producers. This simple change is said to have revolutionary impacts, but could have unintended consequences.

 

The model

In an episode of Tegenlicht (Dutch), architect Thomas Rau explains this new economic model. In our current model of consumption, companies are not incentivized to make products that last as long as possible, since this will shrink their sales of new products. Although most producers already know how to make their product significantly more sustainable, they are reluctant to do so. And as long as the other companies do not introduce more sustainable competing products, no one does. This is tacit collusion on a product level.

However, in this new model companies retain ownership of the products they produce, and also gain the full responsibility of it properly functioning. This has large implications for the way products are designed. First of all, products will be made as energy-efficient as possible, since companies have to bear energy costs themselves now. Secondly, products will be made to be long-lasting and easily repairable, since it is no longer profitable to produce a brand-new product every couple of years. This also implies that products will be designed to be more easily upgraded with new features.

Lastly, products will be designed to be easily recycled, since the valuables in the machines will remain property of the company and can be used in new products. Right now, the edges of African cities are littered with heaps of western technological waste. Oftentimes this technological waste still contains loads of valuable material. However, because the products were not designed to be reused, it is often too costly to salvage these materials in the developed nations that used them. This leaves the people in developing countries to extract the valuables, which has a serious impact on their health and the environment.

This model envisions that the path to a truly circular economy could be in sight. The extremely pollutive resource-extracting industry could be shrunk considerably. This industry will obviously not be completely eradicated. However, in an era where hundreds of millions of people are entering the global middle class, with its consequences for consumption, it could mean a huge difference.

Apart from obvious consequences for the environment, there may also be considerable social consequences. For instance, poor people may be able to rent appliances that they otherwise could not have bought. In the Tegenlicht episode, Rau shows a man in a lower-income Amsterdam neighborhood who now rents a high-end refrigerator for a monthly fee. The participants of this program would probably couldn’t have bought such a refrigerator themselves, but through this program do have access to it.

Ghanean man collects scrap phones, PHOTO SOURCE: Fairphone

 

Unintended consequences

The model sounds very appealing, but may also have negative concequences. First of all, do we know for sure that it will be more profitable to recycle products in the developed countries? Maybe dumping used products in Africa remains more profitable. Even if part of the product is recycled, if the rest is dumped, the environmental gains may be a lot smaller than suggested. Considering the decrease of resource prices due to lower demand, this gets more plausible. Also, if the model functions properly, it could have dire consequences for developing countries, considering their dependency on the exports of raw materials. This would mean the costs of transition to sustainable production would be borne disproportionately by the poorest on the world.

The consequences for industrialized countries, from a welfare point of view, are also ambiguous. Although the ‘new’ production sector may shrink, the producing companies will grow largely in other sectors like repairs and recycling. These services may be conducted by external parties which are hired by the producing company. This may lead to the double marginalization problem, which means that because a larger amount of companies adds its profit margin atop the price of the good, it may in the end be more expensive and thus welfare-decreasing.

It is also possible that the producing companies deem it more profitable to conduct these new tasks themselves. The producing firms need to increase the activities they perform (add recycling, upkeep, energy-negotiations etc), which basically means they have to build up conglomerates in sectors they have no experience in. The companies that succeed will compete in a much more concentrated market. This is because the barriers to entry to build and maintain these high-end appliances will be high, it requires a much larger operational apparatus than the status quo does. This increases the producers’ market power and thus their ability to increase prices.

This is one of the main weaknesses of the model, it requires the producing company to remain owner of the products. If any other company owns the product, the incentive to maximize the product’s sustainability vanishes. So, you can’t have a large amount of smaller companies that lease products. In order to maintain the model, you require the producing oligopolies to expand their activities and thus become much more powerful.

This increase in market power can also be felt on a personal level. Not owning the appliances you use may increase their accessibility, but it also increases your dependency on the producing companies. Consider that, instead of a one-time investment, people will have to deal with higher monthly fixed costs for their appliances. This could lead to serious problems, since most people are simply not good at planning ahead financially, and underestimate the chance of a coming financial setback. It raises the question what the producing companies are permitted to do when a customer lags behind one or multiple payments. Should they provide a payment arrangement like many utility companies already do? Are these companies prepared and able to take on this increased financial liability? Could they take away the product if payments are not made? Bailiffs are often restricted as to which goods they may take to satisfy debt owed to the creditors. Goods like refrigerators and washing machines are to be left untouched. What happens if these goods are the ones being rented out? In short, do we want a bunch of large corporations to have such an influence in our lives?

The possible consequences described above are the result of trying to reach the goal of sustainability by using the conflicting interests of the market. Relying on big business to solve a problem for which they were never designed to solve is risky. The theoretical model may look promising, but its consequences are very hard to predict accurately in the complex system that is today’s global economy. We simply don’t know whether this model is enough to make companies change up their entire business model, because it requires a very thorough inquiry into financial organization. We don’t know what will be the welfare consequences, nor the consequences for the financially vulnerable.

The desire for a model that fixes our environmental problems and also allows us to keep on mass-consuming is understandable. However, these two desires are simply incompatible. Even if this model can help us reduce waste and pollution, it is unlikely that it will be near enough. If we take the potential social consequences in consideration, maybe we should examine the alternatives more closely, although they may be less convenient. There is no costless quick-fix for preventing the coming environmental catastrophe, nor is there much time left.