The Functional Economy: Cultural and Organizational Change


First published 1986 in s ‘Hidden innovation’ in: Science & Public Policy, London, vol 13 no 4, August 1986
(Special issue on "The hidden wealth" edited by Orio Giarini and Walter R.Stahel).

A functional economy, as defined in this paper, is one that optimizes the use (or function) of goods and services and thus the management of existing wealth (goods. knowledge, and nature). The economic objective of the functional economy is to create the highest possible use value for the longest possible time while consuming as few material resources and energy as possible. This func­tional economy is therefore considerably more sustainable, or dematerialized, than the present economy, which is focused on production and related material flows as its principal means to create wealth.

One aim of this paper is to sketch out a functional economy. The other is to show the social, cultural, and organizational change that may arise in shifting from a production-oriented economy toward a functional or service-oriented economy.


Sustainability depends on several interrelated systems. Each is essential for the survival of humans on Earth. This means that priorities cannot be argued over nor can there be speculation about which of these systems humankind can afford to lose first. In fact, humans cannot risk losing ground in any of these areas:

  • The eco-support system for life on the planet (e.g. biodiversity), a factor of the regional carrying capacity of nature with regard to human popula­tions and human life styles,
  • The toxicology system (qualitative, sometimes accumulative), a direct danger to man and increasingly the result of humankind’s own economic activities,
  • The flows-of-matter system (quantitative), a factor of planetary change (toward a re-acidification) and thus a danger to human life on Earth, and
  • The system of societal and economic structures, factors contributing to our quality of life.
The last item carries the idea of a sustainable economy (Coomer, 1981). It encompasses the broader objective that includes, besides the natural resource prob­lem, the question of the longevity and sustainability of our societal and economic structures.

This insight was at the basis of the movement that coined the English term “sustainability” in the early 1970s. The emergence of the “green” movement and its use of the term sustainability missed the wider perspective of a sustainable society. The broader perspective includes considerations such as full and mean­ingful employment and quality of life. That perspective is necessary for under­standing the importance of the social, cultural, and organizational changes needed for a more sustainable economy.


Current economic systems are the result of linear thinking. For example, the terms “added value,” relating exclusively to production, and “waste” at the end of the first (and often only) use phase of goods, are notions of a linear industrial economy. Manufacturers’ liability for quality and waste stops shortly after the point of sale (warranty). The buyer becomes responsible for the utilization and disposal of goods without knowing what resources are incorporated in the goods.

In contrast, cycles and loops have no beginning or end. In a true economy of loops, there is thus no waste in the linear sense. An economy in loops is similar to natural systems, such as the water cycle, but in contrast to nature has to search for the highest conservation of economic value.

Present national accounting systems and the use of the gross national product (GNP) as a measure of success is again an inheritance of the linear industrial economy. Adding income and expenses together is an indication of activity, not of wealth and well-being: waste management, car accidents, pollution control, and remediation costs all constitute positive contributions to the GNP at the same level as the manu­facturing of goods. This shows a basic deficiency of national accounts. In this old frame of reference, waste prevention corresponds to a loss of income (i.e. it is economically undesirable). From a sustainability view, waste (and accident) prevention is a reduction of costs that contributes to substantial national savings. For example, waste management in Germany costs the economy (i.e. and contributes to GNP) in excess of US$ 545 billion per year. Waste prevention could reduce the need for this management cost and contribute to national savings.

When discussing the benefits of moving toward a more sustainable society and searching for metrics to gauge such change, it is important to keep the context of the non-sustainable national accounting systems in mind.


The choice of the best waste-management strategy is often a self-fulfilling prophecy. The promotion of recycling strategies - closing the material loops - conserves the existing economic structures and is thus easy to implement. Unfor­tunately, an increase in the amount of secondary resources can cause an oversupply of materials and depress the prices of virgin and recycled resources alike. The result is a problem of oversupply and sinking resource prices that jeopardise the economics of recycling. Future technical innovation in recycling will include improvements in design for the recyclability of goods and new recycling technologies, both of which cannot overcome the basic price squeeze mentioned (Jackson. 1993). In­creased recycling does not reduce the flow of material and energy through the economy but it does reduce resource depletion and waste volumes.

In contrast to recycling, strategies for higher resource efficiency reduce the volume and speed of resource flow through the economy. One of the keys to resource efficiency is the take-back strategy: closing the (product and material) responsibility loops. However, strategies of higher resource efficiency often counter the validity of the present calculus of economic optimization that ends at the point of sale. At first sight, closed responsibility loops even seem to violate traditional task definition in the economy: Industry produces efficiently, con­sumers use quickly, and the state disposes efficiently.

Strategies to close the product responsibility loops, such as the voluntary or mandatory take-back of consumer goods, impose structural changes and are thus more difficult to imple­ment than the recycling of materials. Because these strategies are based on inno­vative corporate approaches, such as Xerox’s asset management programme, they are highly competitive as well as sustainable. These strategies will become even more competitive as the functional economy develops and energy and resource prices rise (Stahel, 1994). Future technical innovations that can be expected in this field are those that enable the use of remanufactured and upgraded components and goods and commercial innovations to keep goods in use as long as possible.

A higher resource efficiency through an optimization of the use of goods are measured as “resource input per unit of use” over long periods of time and will cause substantial structural change within the economy. The change will be helped by the fact that these strategies increase competitiveness. An early adoption may thus give a consider­able long-term advantage to companies that dare to change first. Among the strategies for higher resource efficiency are those for a longer and more inten­sive use of goods, those for dematerialized goods and those for innovative sys­tem solutions (Table 1). Among the innovations to emerge from a promotion of higher resource efficiency are new technical and commercial strategies to im­prove use. There have also been innovations in redesigning components, goods, and systems that reduce material use in manufacturing and in reducing the costs of operating and maintaining the goods in use.

Table 1. Resource Efficiency and Business Strategies in the Service Economy


The economies of industrialized countries are characterized by several key factors (Giarini and Stahel 1989/1993):

  • Their populations account for only 20 percent of the world population but for 80 percent of world resource consumption.

  • Their markets for goods are saturated and the stocks of goods represent a huge storage of resources. For built infrastructures, there is also an in­creasing financial burden with regard to operation and maintenance costs.

  • Their economies suffer from oversupply, which indicates that the old rem­edy of a higher economy of scale (centralization of production to reduce manufacturing costs) can no longer solve the economic problems or the sustainability issue. The reason for this is that the costs of the services that are instrumental for production are a multiple of the pure manufacturing costs; a further optimization of production therefore does not make eco­nomic sense.

  • Incremental technical progress is faster than product development: substi­tuting new products for existing ones will increasingly restrain techno­logical progress compared with the alternative of a fast technological upgrading of existing goods.
The situation in many developing countries, however, is radically different. These countries will continue to experience a strong demand for basic materials for the construction of their infrastructures and will continuously suffer from a shortage of affordable resources and goods, including food, shelter, and infra­structure and services for health and education. Resource efficiency in industrialised countries will ease market pressure on the resource consumption necessary for other countries to develop.


Several changes in how we think about economics are necessary for under­standing a “life after waste” industrialized society. A critical change is to shift to a service (cycle) economy (Figure 1) (Giarini and Stahel, 1989/1993). Cycles have no beginning and no end. Economically, the most interesting part of the cycle and new focal point is the stock of existing goods in the market. Economic well-being is then no longer measured by exchange value and GNP but by the use value of a product and the wealth presented by the stock of existing goods.

Long-term ownership of goods becomes the key to the long-term (rental) income of successful companies, and with that ownership comes unlimited prod­uct responsibility. Strategies of selling the use of goods instead of the goods themselves (e.g. Xerox selling customer satisfaction) and providing incentives to customers to return goods to manufacturers become keys to long-term corporate success. The adaptability of existing and future goods to changes in users’ needs and to technological progress (to keep them current with technological progress) becomes the new challenge for designers and engineers. The economic structure must maximize the return from these new resources: a fleet of existing goods in a dispersed market. An adaptation of today’s eco­nomic, legal, and tax structures to these new requirements may be a precondition for countries to attract and breed successful economic players for a sustainable functional society.

Several multinational companies such as Schindler and Xerox have already started to successfully implement these new strategies. Schindler sells “carefree vertical transport” instead of elevators, a strategy that provides all the services needed by customers (i.e. maintenance, remanufacturing, and technological up­dating of elevators). In addition, there is a telephone connection linking every elevator 24 hours a day to a centralized emergency service centre. In col­laboration with the decentralized maintenance crews of the manufacturer, this system ensures that no person ever gets stuck for more than a few minutes in a elevator that has stopped functioning.

Xerox’s asset management program is focused on selling photocopying ser­vices instead of photocopiers. Asset recovery is now part of a new business process that includes an asset re-use management organization. Xerox has decoupled manufacturing volume from turnover and profits, regionalised ac­tivities, and changed its skill pool and employee responsibilities accordingly.

A reduction in the flows of matter through the economy can be achieved by decreasing the volume of flow (through innovative multifunctional products and a more intensive use of products and system solutions) or by slowing the speed of flow (e.g., through the remanufacturing and remarketing of goods to extend their service life) (Figure 1).


In contrast to the manufacturing economy, economic success in the sustain­able service economy does not arise from mass production but from good hus­bandry, caring attitudes and stewardship. Economic rewards come from minimizing tasks needed to transfer a product from one user to the next. Local reuse after a quality check or repair by the manager’s representative is the smallest possible cycle in Figure 1 and the most profitable strategy. A product that can no longer be commercial­ized (i.e. rented or used) will be remanufactured and upgraded or, in the worst case, be dismantled with the aim of reusing its components for new products. If there is no re-use possibility, the materials can be recycled and used to manufacture new components.

To achieve the smallest cycles, a different economic and organizational mindset is necessary in several areas:

  • The industrial structure for manufacturing and remanufacturing activities will have to be regionalized in order to be closer to the market assets. This proximity demands the capability to handle smaller (re-)manufacturing volumes more efficiently. Appropriate methods for such pur­poses will have to be developed and skilled labour trained. The cost for such a change is offset by dramatic reductions in the purchase of materials and the virtual elimination of disposal costs.

  • Products will have to be designed as technical systems that are part of pre-designed modular master plans. Such plans will facilitate ease of main­tenance and ease of out-of-sequence disassembly by workers or robots.

  • Components will have to be designed for remanufacturing and techno­logical upgrading according to the commonality principle. This principle was first used by Brown Boveri Company in the 1920s to design its revo­lutionary turbo compressors. It has been perfected by Xerox in the 1990s in the design of its copiers. The commonality principle promotes stan­dardized multi-product function-specific components that are interchangeable among different product lines. These standardized components are often maintenance free, self-protecting and fault tolerant, which greatly reduces operating costs (such as service interventions, repairman training and spare-parts management).

  • New technologies aimed at optimizing the resource efficiency and safety of products and components over long periods of time will have to be developed. These include spare less repair methods, in situ qual­ity of function monitoring systems, and memory chips to register life cycle data.

  • New professions and job qualifications will emerge, such as operation and maintenance engineers. The salesperson of the past will have to become customer advisor able to optimize generic products for the needs of specific users, and to upgrade existing products according to the wishes of the user as technology advances.

  • Users (ex-consumers) will have to learn to take care of the rented or leased products as if they owned them, to enjoy the new flexibility in product-use offered by a use-focused service economy. Whereas in the industrial economy, misuse and abuse of products lead to a financial punishment in the form of increased maintenance cost for the owner-user, in the service economy they may lead to the exclusion of a user from the use-focused system.
FIGURE 1 Strategies for higher resource efficiency.

adapted from Stahel. 1992, 1993, and 1994.


I. Strategies for slowing down the flow of matter through the economy

A. Long-life goods: Philips induction lamp, Ecosys printer

B. Product-life extension of goods:

B1. Reuse: re-useable glass bottles

B2. Repair: car windscreen, flat tire

B3. Remanufacture: re-treaded tires, renovated buildings

B4. Technology upgrading: Xerox copier ‘5088, mainframe computers

C. Product-life extension of components:

C1. Reuse: refill printer cartridges, roof tiles

C2. Repair: welding of broken machine parts, re-vacuum insulating windows

C3. Remanufacture: remanufacturing engines and automotive parts

C4. Technology upgrading: upgrading of (jet) engines to new noise and emission standards

D. Remarketing new products from waste (product-life extension into new fields)

II. Strategies for reducing the volume of matter through the economy

M. Multifunctional goods: fax-scanner-printer-copier all-in-one, Swiss Army knife, adaptable spanner

S. System solutions: micro cogeneration of cold or heat and power, road railers


III Strategies for a cradle-to-cradle product responsibility

V. Commercial or marketing strategies

V1. Selling use instead of goods: operational leasing of cars, aircraft, trucks, construction equipment, medical equipment, photocopiers, rental apartments

V2. Selling shared-use services: Laundromat, hotels (beds),

V3. Selling services instead of products: lubrication quality instead of engine oil

V4. Selling results instead of products: pest- and weed-free fields instead of agro chemicals, individual transport instead of cars

V5. Monetary bring-back rewards: 10-year cash-back guarantee


Many obstacles will need to be overcome on the way to an economy optimiz­ing multiple service-lives or use-cycles. Most of these obstacles are embodied in the logic of the present linear industrial economy. A supply definition of quality, for example, is based on warranties limited to 6 or 12 months for manufacturing defects only and on the newness of components in new goods. The logic framework of a functional economy requires a demand-side definition of quality based on unlimited customer satisfaction and the guarantee of a system functioning over longer periods of time.

The signs on the horizon clearly point to a use-focused economy:

  • The European Community-directives on product liability and more re­cently on product safety and the draft directive on service liability all stipulate a 10-year liability period, or impose a manufacturers disposal liability (end of life vehicles, WEEE)

  • Some car manufacturers offer a total cost guarantee over 3 or 5 years, which includes all costs except tire wear and fuel.

  • Industry shows an increasing willingness to accept unlimited product re­sponsibility and to use it aggressively in advertising, through money-back guarantees, exchange offers, and other forms of voluntary product take-back and is learning to make product retake and remarketing a viable business division.

  • Out-sourcing has rapidly become a generally accepted form of selling results instead of (capital) goods or services.
Companies and regions that initiate the change toward a sustainable society rather than suffering the consequences of it through the actions of their competit­ors will have a head start and be able to position themselves strategically. An old, but in the age of market research somewhat forgotten, truth of economies will play its heavy hand again: Real innovation is always supply driven - the role of demand is one of selection (Giarini and Stahel. 1989/1993).


The shift in the economy towards a more sustainable society and functional economy began some time ago. However, most experts are unaware of the fun­damental change, probably because they interpret the signs on the horizon in terms of the old industrial economic thinking.

A functional society will not solve all the problems of this world, and especially not the inherited problems from the past (e.g., pollution cleanup and unemploy­ment of overspecialized production workers); nor will it make the manufacturing sector disappear. The manufacturing sector could well be transformed into a high-volume producer of global standardized components and regional­ized assemblers (e.g. computer components and DELL) and remanufacturer or remarketer of products.

A sustainable economy needs an appropriate structure. The characteristics include a regionalization of jobs and skills, such as mini-mills for material recy­cling, remanufacturing workshops for products, decentralized production of ser­vices (e.g. rental outlets), local upgrading and take-back, supplemented by centralized design, research, and management centres. Such an economy will consume fewer resources and have a higher resource effi­ciency, and its production will be characterized by smaller regionalized units with a higher and more skilled labour input. Transport volumes of material goods will diminish and be replaced by transports of immaterial goods such as recipes instead of food products, software instead of spare parts.

Quality will be redefined as a long-term optimisation of system functioning.

For the first time since the beginning of the Industrial Revolution, the economy will offer workplace mobility rather than rely on worker mobility. The more immaterial goods that are transported, the greater the feasibility of telecommuting. Flexible work periods and part-time work are compatible with and even a necessity for, providing services and results around the clock.

Because services cannot be produced in advance and stored but have to be delivered at the location of the client when needed, the economic disadvantages of peripheral suburban zones will partly disappear, as will most of the environ­mental burden caused by transportation flows to centralized zones.

Waste management could increasingly become a subject for historians rather than economists as large companies reach their goals of zero waste by 2000.


Coomer. J. C.. ed. (1981) Quest for a Sustainable Society. Elmsford. N.Y.: Pergamon Policy Studies.

Giarini, Orio and Stahel, Walter R. (1989/1993). The Limits to Certainty - Facing Risks in the New Service Economy. Boston. Mass.: Kluwer Academic.

Jackson, Tim (ed.) (1993) Clean Production Strategies. Developing Preventive Environmental Manage­ment in the Industrial Economy. Boca Raton. Fla.: Lewis.

Stahel, Walter R. "The Product-Life Factor" (1984); in Susan Grinton Or (ed.) "An Inquiry into the Nature of Sustainable Societies, the Role of the Private Sector", The Mitchell Prizes 1982, HARC Houston, TX.

Additional references that were published after the initial publication 1986:

Stahel. W. R. (1992) Product design and waste minimization. Pp. 91-98 in Waste Minimization and Clean Technology: Waste Management Strategies for the Future. W. A. Forester, and J. H. Skinner, eds. New York: Academic Press Harcourt Brace Jovanovich.

Stahel. W. R. (1994) The utilization-focused service economy: Resource efficiency and product-life extension. Pp. 178 - 190 in: B. R. Allenby. and D. J. Richards (eds.) The Greening of Industrial Ecosystems. Washington. D.C.: National Academy Press.

Stahel, Walter R. (1997) The functional economy: cultural and organizational change; in: Richards, Deanna J., The industrial green game, 1997, National Aca­de­my Press, Washington DC. p. 91-100. ISBN 0-309-05294-7.

Stahel, Walter R. (1997) Business/Design Strategies for a sustainable society; in: ECP (Environmentally Conscious Products) Network Newsletter, JEMAI Japan (Japan Environmental Management Association for Industry), issues 97-4 to 97-7.

Stahel, Walter R. (1999) Life-cycle cost analysis of three road vehicles (over a period of 17 / 30 years). Study on the impacts of an extended product-life of vehicles on the relative importance of labour, spare parts and purchase costs.

Stahel, Walter R. (2001) From ‘Design for Environment’ to ‘Designing Sustainable Solutions’; in: Tolba, M.K. (ed.) Our Fragile World: Challenges and opportunities for sustainable development. Forerunner to the Encyclopedia of Life Support Systems. UNESCO and EOLSS Editors, Cambridge UK. P. 1553-1568.

Stahel, Walter R (2003) “The Functional Society: the Service Economy”; in: Bourg, Dominique and Erkman, Suren (eds.) Perspectives on Industrial Ecology, Greenleaf Publications, March 2003, 384pp, ISBN 1 874719 46 2.

Geneva, June 10, 2005