Abstract

This paper develops a dynamic ecological-macroeconomic model of the circular economy that integrates the core strategies of reducing, reusing, and recycling within a unified intertemporal framework. The model treats produced capital, available material stocks, waste liabilities, and dissipated residuals as physically interconnected stocks subject to material-balance constraints. Its central contribution is to show how capital depreciation, when interpreted as deferred residual generation rather than only as a loss of productive services, changes the optimal growth problem. Two macroeconomic mechanisms emerge from the analysis: a circular capital discount, reflecting the shadow cost of future residuals embodied in current investment, and a waste-liability drag, through which depreciation-related and production-related residuals lower the effective intertemporal return to capital and reduce sustainable consumption relative to a linear benchmark. We show analytically that these mechanisms imply a liability-adjusted golden rule of capital accumulation and a lower socially optimal steady-state capital stock than in the standard neoclassical model. The paper also maps the planner's allocation into a decentralized system of circular Pigouvian incentives, derives a circularly adjusted accounting identity for comprehensive wealth, and provides calibrated transition exercises showing how Reduce, Reuse, and Recycle operate through distinct macroeconomic channels. The results suggest that circular strategies reshape growth not by eliminating intertemporal trade-offs, but by changing the shadow valuation of capital accumulation, residual generation, and material recovery.