Mises Wire

Capitalism Means Less Waste — Because More Waste Means Less Profit

In “How Capitalists Created a “War on Waste”,” Chris Calton did an excellent job of laying out how the “profit motive encourages the natural reduction of waste,” without requiring government coercion. Selling part of the output of a productive process that would otherwise be thrown away or require costly disposal is as much a source of profit as any other way of increasing revenue or decreasing costs. Further, he illustrated the power of those positive environmental incentives with multiple striking examples. In other words, he taught readers something important.

However, Mr. Calton’s article raises a question — why aren’t students who have taken economics courses already intimately familiar with this topic? It appears to be a natural application of market entrepreneurship and the analysis of production processes that produce multiple outputs — joint products, or productive complements.

I believe the core reason is that the topic of productive complements is too-seldom taught in principles of microeconomics or intermediate microeconomics texts.

Every economics student is shown how “both-and” relationships exist on the demand side (e.g., coffee and donuts), and how an increase in the price of the “other” goods in such bundles will decrease the demand for their complements. However, students are much less often shown how “both-and” relationships exist on the production or supply side (e.g., beef and hides as joint outputs from raising cattle) and how an increase in the price of the “other” goods in such bundles will increase the supply of their productive complements.

For an article titled “Productive Complements: Too Often Neglected in the Principles Course?”, my co-authors and I surveyed a set of economics principles texts to see how many introduced productive complements. We found four major texts that incorporated the subject, but eighteen that did not. We even went back to the first edition of Paul Samuelson’s Principles of Economics book and found that he did not discuss it either. We also extended our survey to a smaller set of intermediate microeconomics texts, none of which discussed the topic.

Without being taught that productive complements are important supply shifters in supply and demand analysis, students do not learn to look in that analytical direction. And not knowing to look often means not recognizing even obvious and important application of the analysis--such as the inherent market incentive to reduce waste. And this not only blinds students to important applications, it represents a substantial dumbing-down of what economics students must learn.

Almost a century ago, in his 1920 text, Alfred Marshall not only talked about “the case of joint products: i.e., of things which cannot easily produced separately; but are joined in a common origin, and may therefore be said to have a joint supply,” he provided several examples. He analyzed applications involving not just beef and hides, but wheat and wheat straw, wool and mutton, and cotton and cotton-seed oil. He even derived a rule for the supply price of a productive complement in competitive markets.

Even earlier, William Stanley Jevons argued in 1871 that “these cases of joint production, far from being ‘some peculiar cases,’ form the general rule, to which it is difficult to point out any clear of important exceptions.” And it is hard to disagree when we ask how many production processes have only one potentially valuable output and generate nothing that needs to be disposed of or generates negative externalities, such as pollution of one form or another.

We live in a world where claims of “market failure” are seemingly ubiquitous (though not developed to the point of showing that mechanisms relying on government coercive power would in fact do better). However, people seem far less aware of how profit incentives push producers to reduce costs and damage, even if we might caricature them as “not caring about others,” because they do care about their bottom lines. However, students who have been exposed to economics should know this. And for that, they need to learn more about productive complements. That would not only remove their blinders about a cornucopia of interesting and useful entrepreneurial applications, it would also expand their horizons to free market environmentalism and deflate one of the more common defamations that can keep people from fairly considering the advantages of voluntary arrangements over government coercion.

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