A frequent criticism of markets is that private owners have every incentive to dump the waste byproducts of their production processes into the air, water, or land without concern about the harmful effects. More sophisticated critics understand the idea of negative externalities and love to jump up and down about how they demonstrate the need for government intervention. There are a number of responses to these sorts of arguments, as Art Carden and I pointed out in a recent EconLib article. One can note that better defined and enforced property rights, especially privatizing the commons, would turn pollution into a tort and reduce it substantially. One can also point out that the imperfection of markets is not ipso facto a case for government intervention, because the latter is prone to serious imperfections as well.
There’s another counterargument, which I think isn’t made often enough. The criticism treats the byproducts of industrial production as unambiguous “bads” that have no possibility of being used to satisfy other kinds of wants. That is, it treats the byproducts as being completely without economic value. That’s an assumption worth challenging. After all, the byproducts of production are physical objects of potential value. One of the great things about the market is that it provides incentives and signals to producers not to waste anything of potential value. Why dump something if you, or someone else, can imagine a valuable use for it?
As Pierre Desrochers’s work has shown, many products that we today regard as useful originated in clever ways to turn waste (and potential negative externalities) into valuable goods. This process of “industrial recycling” has been recognized for centuries, as Pierre has documented. He writes,
In his classic On the Economy of Machinery and Manufactures, the polymath Charles Babbage (1835, 217) wrote that cheap production of any article was possible partly because of the care taken to prevent raw material waste: “Attention to this circumstance sometimes causes the union of two trades in one factory, which otherwise might have been separated.”
Babbage described how horns from livestock were used by many other industries early in the nineteenth century. Some were made into combs and a substitute for lantern glass; others were carved into knife handles and the tops of whips. The processing provided fat for soapmakers, glue to stiffen clothes, and fertilizer for farmers — even toys for children. As Frederick Talbot (1920, 11) wrote in the early twentieth century, waste was “merely raw material in the wrong place.”
This process continues today.
My local paper recently had this story about how the Greek-yogurt craze has become a source of electrical power. Yogurt production, especially the Greek version, produces whey, a watery milk substance, as a byproduct. It’s often shipped to farms for feed and fertilizers, but as the AP story shows, there’s a new use for it:
At the Gloversville-Johnstown wastewater plant west of Albany, it’s pipelined from the nearby Fage yogurt plant, where it goes into a 1.5 million-gallon tank filled with anaerobic bacteria, called an anaerobic digester. The resulting methane gas becomes combustible fuel that generates nearly enough electricity to power the plant.
And the local dairy farmers get it:
Finger Lakes dairy farmer Neil Rejman, who keeps 3,300 cows, regularly accepts whey from Chobani. Though whey usually makes up less than 5 percent of what goes in his digester, it helps Rejman keep running his digester at maximum 1,000-kilowatt-hour capacity.
“Everyone’s talking about whey and yogurt as if it’s a new problem or a phenomenon. It’s an old story,” he said. “It’s really not a problem for the industry. It might be a little bit of a cost for yogurt manufacturers. But the processors, they’re getting a home for it on the farms, so that’s a good thing. For farmers, it’s a good thing because they’re using it for feed, electricity and fertilizer. And the consumers are getting renewable power.”
This is what markets do: they create incentives not to casually dump byproducts, because what looks at first like useless waste may well have a use not previously known. Economic value is subjective in that goods get value when people perceive that they are able to satisfy a want. Those who don’t perceive those possibilities will treat byproducts as “bads” to be disposed of, while those who do will want to rescue them from being wasted. Many benefits of competition and entrepreneurship in a freed market lie in entrepreneurs’ alertness to profitable opportunities for value creation, “waste rescue,” and recycling — that is, by imagining uses for byproducts that others overlook.
Better defining and enforcing property rights is an excellent way to internalize the costs associated with waste disposal, but at least as important is recognizing how freed markets create the incentives and signals that entrepreneurs can use to turn waste into want-satisfaction. It’s said that one man’s trash is another man’s treasure. In the market, one man’s negative externality is another man’s valuable input.