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People often claim that 'the market' is wasteful and that government intervention is necessary in order to reduce waste and increase efficiency. Such claims are based on a false conception of how a true market system functions.
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The best way to minimise waste is to allow the conventional institutions of the market system - private contracts and civil liability - to define the boundaries of human action. The current socialised system of residuals-management undermines this system and is excessively wasteful. If we wish to move towards a more sustainable, less wasteful society, we must reconsider the objectives of policies that are currently directed towards dealing with residuals.
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Markets
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In a pure market system, the production and consumption of goods occur within a legal framework which protects the rights of individuals to own, use and exchange property, enables individuals to enforce contracts, and limits the amount of harm that can be inflicted on persons and property.
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The ability to own property enables people to reap the benefits of their investments. A farmer who owns his land has a greater incentive to invest in improvements to that land, than does a farmer whose land belongs to the state. The ability to protect property from outside interference through civil liability further enhances the incentives to invest in the improvement of that property. The law of trespass, for example, provides owners with legal protection against the dumping of waste on their property.
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In pre-market societies, production is limited to those goods that can be manufactured locally. Such societies suffer from periodic shortages and high levels of bacterial contamination, resulting in famine, disease and death. Life is nasty, brutish and short. As markets develop, people specialise, adapting their productive systems to the environment and developing technologies that increase efficiency, such as ploughs, tractors, fertilisers, pesticides, and new varieties of crops. Food consumption increases and sanitation improves, resulting in longer, happier lives.
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Waste
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The production of goods in this kind of extensive market system is clearly beneficial for the participants. However, it also causes a change in the way that the residuals of production and consumption are managed.
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In primitive societies, residuals, such as manure from horses and oxen, and chaff from wheat, are used as fertiliser or fuel within the village, while unwanted residuals are dumped nearby (hence the bacterial contamination). This type of residuals-management might be called 'closed-loop'.
In the extended market order, residuals that are produced in one place are often transformed or disposed of in another. This type of residuals-management might be called 'open-loop'. Some people seem to think that closed-loop residuals management is preferable to open-loop residuals-management. This seems to be because they ask themselves the wrong questions. The question should not be, 'how can I minimise the transportation of residuals?' or even, 'how can I ensure that the maximum amount of a particular type of residual is recycled?' Rather, it should be, 'how can I ensure that the residuals-management system results in the least waste of resources?'
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Markets minimise waste
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The fundamental objective of any business enterprise is to create added value - to sell goods at a price greater than the costs of production. So the entrepreneur is always vigilant for ways of improving product performance and reducing costs. Cost reductions can be made in numerous ways, including by reducing the use of raw materials and from using residuals more efficiently.
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If it is possible to save money by utilising the residuals of manufacture rather than paying to have them disposed, then entrepreneurs will generally discover those uses and, over time, adjust their manufacturing processes to enable such utilisation. So important is it that these efficiency gains be realised that in the 1970s, management consultants such as Arthur D Little developed procedures for carrying out internal 'life cycle analyses' (LCAs), in which all the most important inputs to and outputs from any production process are assessed in order to discover potential efficiency gains. Of course, carrying out an LCA and transforming manufacturing processes in light of the findings are costly - they consume resources - and so some apparent improvements will not take place (at least in the short term). But that in itself is not a criticism of the current system; it is merely a consequence of a world of imperfect knowledge.
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The notion that this system can be improved upon by government intervention - as many argue - is implausible. The government's (or regulator's) knowledge of what use of resources is most efficient is likely in most cases to be less complete than that of the individual manufacturers, who must day after day assess the costs of inputs and prices of outputs.
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With regard to material use per unit of manufacture, the situation is equally clear. Consider the example of packaging, which serves both to improve the quality of products and to reduce costs. Packaging enhances the shelf life of food products and means that less food will be wasted on the journey from the producer to the consumer. This means that the products can be sold at a lower price, satisfying more consumers and increasing the profits of the manufacturer and retailer. In addition, consumers benefit from being able to store their products at home for longer - saving them trips to the supermarket, which might have involved the use of some fossil fuel-based transport system.
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Nevertheless, packaging itself uses resources, so over time entrepreneurs have developed packaging systems that use less material. Compare the heavy glass bottles that were the predominant means of packaging milk and other soft drinks 20 years ago with the lightweight plastic bottles and laminated cartons used today. These modern alternatives are not only cheaper to produce, but their lighter weight and more rectangular shape also reduce transport costs. Moreover, in the case of fruit juices, the use of aseptic laminated containers (the brick-like packs made of layers of plastic, paper and aluminium) has dramatically reduced the quantity of resources consumed during storage, since it is no longer necessary to refrigerate them.
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Similar advances have been made in other areas. Cables carrying information long distances are now typically made of glass-fibre rather than copper: a cable made from 60 pounds of silica can carry 1000 times as much information as a cable made from a tonne of copper.  Computers offer perhaps the most startling example of this 'dematerialisation'. In the 1950s computers were the size of a two-bedroom flat and could process only about a thousand instructions per second. Today, computers the size and weight of a book can process more than a billion instructions per second. These advances in computer technology have also led to more efficient use of resources in other areas. For example, all the world's telephone numbers can now be stored on a few easily searchable compact discs, rather than in hundreds of cumbersome and poorly cross-referenced books. Letters and manuscripts can now be sent electronically from England to New Zealand in a few seconds, whereas before they went by fossil fuel-guzzling aeroplane or boat and took days or weeks.
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Governments create waste
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It is clear, then, that entrepreneurs have strong incentives to manage their residuals efficiently and gradually to reduce their consumption of resources for any given output. However, these incentives are often distorted by interventions in the market. For example, where municipalities operate a monopolistic solid waste management system, companies and individuals are unable to decide which type of residuals-management system would be most appropriate. This situation is made worse if the municipality charges a flat fee, since this erodes even the marginal incentives to limit the generation of solid waste that is created by unit pricing, and distorts the companies' residuals-management systems towards the over-production of solid waste.
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Similar distortions are created by the existence of statutory licenses to emit substances into the atmosphere or watercourse. These licenses typically override civil liability, so that companies need no longer pay affected parties for the costs that they impose on them. As a result, the residuals-management system might be distorted in favour of excessive use of the atmosphere and watercourses.
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Reform
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The problem with such a socialised system of residuals management is that we do not know how individuals value their environment and so we cannot know whether the implicit prices charged for use of that environment are correct. Sadly, attempts to correct these distortions through legislation typically result in more waste. This is especially true of recent residuals management policies.
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While recovery and recycling may in many cases be appropriate ways of dealing with residuals, policies that specifically promote these solutions are likely wasteful. The European Union's 'waste hierarchy', for example, lacks empirical validity and is probably even more costly and more harmful to the environment than allowing local authorities to decide the appropriate way of dealing with residuals. Systems of mandated 'extended producer responsibility', in particular, undermine market institutions and create waste.
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A true market solution to these distortions would entail moving back to a system of civil liability for protection of private property and to private contracting for waste services. If all individuals and companies were responsible for disposing of their own waste, within the context of the aforementioned system of civil liability for damage to property, then they would gradually discover more cost effective - that is to say, less wasteful - ways of managing their residuals.
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Julian Morris is director of International Policy Network and a research fellow at the Institute of Economic Affairs.
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Related resources:
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Packaging, recycling and solid waste, by Lynn Scarlett et al., Reason Public Policy Institute
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Recycling is Garbage by John Tierney [originally published in the New York Times]
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Government and Recycling: Are we promoting waste?, Cato Institute [.pdf, 4.7MB]
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Law, Markets and Waste, by Julian Morris, International Policy Network [.pdf, 16KB]
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