In their bestseller Natural Capitalism, a book so heartily praised by environmentalists and business executives that its American edition sold out before its publication date, authors Paul Hawken, Amory Lovins, and L. Hunter Lovins indict traditional capitalism as a “financially profitable” but “nonsustainable aberration in human development” that is rapidly depleting our unrecoverable natural capital(1). To escape this predicament, the authors recommend, among other things, massive taxation and complex regulation of everything they dislike, from nonrenewably generated electricity and fossil fuels to chlorine and pesticides. Despite being described in their book dust-jacket blurbs as “three of the world’s best brains,” Hawken and the Lovinses fail to notice that some of their evidence actually warns against their politically driven prescription.
For example, they identify a number of American policy failures that have resulted from over “two hundred years of policies in taxes, labor, industry, and trade meant to encourage extraction, depletion and disposal.” As they point out: “Hundreds of billions of dollars of taxpayers’ money are annually diverted to promote inefficient and unproductive material and energy use.” These range from “perverse subsidies” to the primary sector in mining, oil, coal, fishing, forest industries, and agriculture that degrade soil fertility, use wasteful amounts of water and chemicals, and discourage the use of recycled material. Meanwhile, modern American agriculture features various input subsidies, price supports, production quotas, and use-it-or-lose-it western water laws that result in a Soviet-style system which rewards participants for how much they manufacture or consume rather than how efficiently they produce.
So could it be that our modern economies would have been more “sustainable” if politicians had not been busy distorting markets for several decades? Much evidence suggests that this might indeed have been the case.
The authors suggest that reducing the wasteful throughput of materials can be accomplished by “redesigning industrial systems on biological lines that change the nature of industrial processes and materials, enabling the constant reuse of materials in continuous closed cycle.” In other words, one company would feed on the waste of another.
Much historical evidence, however, suggests that market economies were behaving that way long before Hawken and the Lovinses were born. Actually, many books and monographs were written on loop-closing several decades ago.(2) In virtually all instances, people familiar with the inner workings of factories saw the creation of wealth out of industrial waste, whether within the confines of a firm or through trade in the market, as an important way of gaining a competitive advantage.
For example, the American authors of the Illustrative and Descriptive Catalog of Whitin Cotton Waste Machinery and of Various Systems of working Cotton Waste marketed their machine by making this argument in 1914: “The economical and profitable disposal of the waste products of a cotton manufacturing plant has become a problem of the greatest importance…. The reclamation of the waste products of a mill affords simple means for the manufacturer to reduce his manufacturing expense to a minimum.”(3)
The German engineer Ernest Hubbard similarly wrote in the preface of his book The Utilisation or Wood-Waste, first published in 1902: “The rational utilisation of waste products is at all times important, but as our industries become more and more developed the working up of the waste or bye-products [sic] which may be produced in any process becomes absolutely essential from an economical standpoint.”(4) Looking to the recent past, the journalist Frederick Ambrose Talbot wrote in 1920: “To relate all the fortunes which have been amassed from the commercialization of what was once rejected and valueless would require a volume. Yet it is a story of fascinating romance and one difficult to parallel in the whole realm of human activity.”(5)
Much evidence suggests that market incentives rewarded firms that found ways to turn their waste into valuable commodities. Meanwhile, the vast majority of people benefited from these practices, as finding commercial uses for byproducts typically led not only to improved surroundings but also to lower prices. However, as will now be discussed, less-innovative firms were severely hurt by this new competition, and they quickly tried, often successfully, to secure special privileges through the political process. A case in point is American antitrust law, which Hawken and the Lovinses deem to have been important in curbing “flagrant… abuses of market power in the early part of the [twentieth] century.”
Politics against Creativity
While many commentators today hold what could be called the “public interest” interpretation of antitrust, Hawken and the Lovinses might be surprised to learn that some historians and economists who are more familiar with its origins do not share this belief.(6) One of the first economic sectors targeted by self-proclaimed “trust busters,” meat packing, illustrates how the political process has often been used to penalize creative firms for the benefit of their less innovative competitors.
While this is now long forgotten, American meat packing was a widely decentralized industry until the second half of the nineteenth century, owing mostly to the lack of adequate conservation and transport technologies. The advent of a national railway network and refrigeration, however, eventually paved the way for the rise of the Chicago packers whose strength lay not only in their ability to cut costs by integrating forward in marketing and backward in purchasing, and by obtaining their own materials directly. To a large extent, it lay also in their unparalleled capacity to turn byproducts into valuable commodities.
As one contemporary observer put it: “In the great beef slaughtering and packing establishments at Chicago… economies are effected which are not possible when this industry is carried on, as usual, upon a very small scale…. Every part of the animal – hide, horns, hoofs, bones, blood, and hair – which in the hands, of the ordinary butcher are of little value or a deal loss, are turned to a profit by Chicago packers in the manufacture of glue, bone-dust, fertilizers, etc.; and accordingly the great packers can afford to and do pay more for cattle than would otherwise be possible.”(7)
Actually, Chicago’s meat packing district came very close to Hawken and the Lovinses’ ideal of “industrial parks whose tenants will constitute an industrial eco-system in which one company will feed upon the nontoxic and useful wastes of another.” As the American economist Rudolf Clemen observed in 1927, there grew around mammoth cattle-killing plants a number of separate satellite industries, which bought the unfinished byproducts of the plants and transformed them into many different products:
This process of integration in the packing industry and its by-products differs from what is normally understood as integration by the professional economists. While many of the products … are manufactured by certain of the national packers themselves, or through subsidiary corporations such as leather and tanning companies and fertilizer company, in many instances by-products processed to a certain degree within the packing industry proper are transferred to other subsidiary industries over which individual packers have no control, for further elaborate and expensive processing into final, highly finished articles.(8)
Among other linkages, large refineries took the non-uniform steam-rendered lard of packers, refined and bleached it, and sold it on the open market. Soap factories bought various grades of tallow. Glue works made their products from bones, sinews, and various other materials. Manufacturers used neutral lard and oleo oil from packing plants to make oleomargarine. Fertilizer plants carted off the pressed tankage and raw or pressed blood, dried and sold it as such, or manufactured mixed fertilizer.
According to all credible sources, the Chicago packers received less from the sale of dressed-beef carcass than the amount they paid for the live animal. However, this loss was more than covered, and a reasonable profit reaped, by the sale of hides and other waste materials that were turned into valuable byproducts on an unprecedented scale.
The revenue derived from these byproducts, in turn, led to a significant decline in the retail price of meat, which hurt local butchers and retailers unable to compete with their more-efficient competitors.
In response, the butchers engaged boycotts. The protest movement took a more organized form in 1886 with the formation of the Butchers’ National Protective Association (BNPA) in St. Louis. As the environmental historian William Cronon points out, while the stated goal of the association was to “secure the highest sanitary condition” for consumers, public health was in fact “a convenient way of putting the best face on a deeper and more self-interested economic issue.”(9) Indeed, as economists Donald Boudreaux and Thomas DiLorenzo have put it, the most plausible explanation for the adoption of the first antitrust legislation in Missouri in 1889 is an attempt by politically powerful local producer groups, mostly independent retail butchers, to shield themselves from the intense competitive pressure exerted by the Chicago packers.(10)
The story of America meat packing was hardly unique. The case of saccharin provides another illustration.(11) Saccharin was discovered in 1879 by Constatin Fahlberg, a German-educated postdoctoral fellow, while conducting research at Johns Hopkins University. Fahlberg’s discovery came as he was working with Hopkins’s first appointee in chemistry, Ira Remsen, on the reaction of a class of coal tar byproducts (toluene sulfamides). Fahlberg noticed one day an unaccountable sweetness to his food, which he traced back to a compound that accidentally got on his fingers. The two researchers jointly published their discovery in the American Chemical Journal in 1879 and 1880, and in a German journal in 1879.
Remsen quickly moved on to other things, but Fahlberg saw the potential of a low-cost sweetener whose production would be much more reliable than sugar cane. He soon changed the name of the compound from benzoid sulphinide to saccharin, which is derived from the Latin word saccharum (sugar). Fahlberg later moved back to Germany where he obtained financial backing, went into business with his uncle Adolph List – who had previous connections in the sugar industry – and eventually put his products on the market in 1900.
Saccharin was initially marketed as a sweetener for diabetics, but because of its low cost it was quickly used by other consumers and industries as well. Soon after its introduction, saccharin had 9 percent of the German sweetener market. It experienced a precipitous decline, however, when beginning in 1902, a powerful central and east European lobby of beet-sugar producers persuaded the authorities to restrict the use of saccharin to the use of saccharin to the pharmaceutical industry. This prohibition led to a booming black market, increasingly supplied from Switzerland, one of the few European countries, in which saccharin manufacturing and consumption remained legal. Saccharin has ever since been plagued by similar lobbying efforts by the sugar industry in many countries including the United States and Canada, despite the absence of any conclusive evidence as to its harmful effect. This ensures that more land than necessary is cultivated and that more energy is used for transporting and refining raw sugar than would otherwise be the case.
Politics and the Status Quo
While sustainable-development theorists typically indict market processes for their alleged failure to create wealth out of industrial waste, much evidence indicates that most of today’s “unsustainable practices” were actually brought about through the political process by well-established producers against more innovative new competitors. Because innovative business behavior subverted the status quo, defenders of the status quo soon subverted elected officials, which often led to the adoption of counterproductive measures and environmental harm.
While Hawken and the Lovinses correctly identify a number of political barriers to more sustainable practices, they do not pause to wonder how failure on such a grand scale occurred and is still perpetuated.
They nonetheless hint at the right answer when they point out that Washington, D.C., is host to “thousands of trade organizations, 60,000 lawyers and 90,000 lobbyists who spend $100 million a month in direct lobbying expenses” and that some corporations “benefit from subsidies, externalizing their costs, avoiding transparency, and monopolizing markets.”
Perhaps it will eventually dawn on them that most of the money spent in lobbying for the benefit of special-interest groups typically leads to a less-efficient use of resources. When that happens, they will have gone a long way toward realizing that free markets have always been the best road toward sustainable development ant that political interventions have typically turned out to be roadblocks.
1. Paul Hawken, Amory Lovins, and L. Hunter Lovins, Natural Capitalism: Creating the Next Industrial Revolution (Boston: Little, Brown and Company, 1999), p. 5. See their Website at www.natcap.org.
2. For more detail on this issue, see Pierre Desrochers, “Is ‘Greed’ Green?” Ideas on Liberty, April 2003, and “Saving the Environment for a Profit, Victorian-Style,” Ideas on Liberty, May 2003.
3. Within Machine Works, Illustrated and Descriptive Catalog of Within Cotton Waste Machinery and of Various Systems of Working Cotton Waste (Whitinsville, Mass.: Whitin Machine Works, 1914, p.i.
4. Ernest Hubbard, The Utilisation of Wood-Waste, 3d ed. (London: Scott, Greenwood & Son, 1920), p.v.
5. Frederick Ambrose Talbot, Millions from Waste (Philadelphia: J. B. Lippincott Company, 1920), pp. 17-18.
6. For an introduction to the topic an d summary of further readings, see Donald Boudreaux and Thomas DiLorenzo, “The Protectionist Roots of Antitrust,” Review of Austrian Economics, vol. 6, no. 2, 1993, pp. 81-96, Alfred D. Chandler, “Government Versus Business: An American Phenomenon,” in J.T. Dunlop. Ed., Business and Public Policy ( Boston: Harvard University Graduate School of Business Administration, 1980) pp. 1-11; William Cronon, Nature’s Metropolis: Chicago and the Great West (New York: W. W Norton & Company, 1991); and Gary Libecap, “The Rise of the Chicago Packers and the Origins of Meat Inspections and Antitrust,” Economic Inquiry, April 1992, pp. 242-62.
7. David A. Wells, Recent Economic Changes and Their Effect on the Production and Distribution of Wealth and the Well-Being of Society (New York: D. Appleton and Company, 1889), pp. 98-99.
8. Rudolf A. Clemen, By-Products in the Packing Industry (Chicago: University of Chicago Press, 1927), p. 27. 9. Cronon, p. 242.
10. Boudreaux and DiLorenzo.
11. The information on saccharin is mostly taken from Tamas Szmrecsanyi, “Review of Christopher Maria Merki, Zucker gegen Saccharine: zur Geschichte der Küslichen Süssstoff,” (Sugar versus Saccharine: On the History of Artificial Sweeteners), World Sugar History Newsletter, June 1997.
Pierre Desrochers is Associate Researcher at the Montreal Economic Institute.