The government tells us we must recycle all kinds of stuff: bottles, cans, paper, plastics etc. They say that recycling reduces the number of products made from natural resources, which means more resources are conserved and our energy costs are lower. Superficially, this seems plausible. Surely it is more wasteful to manufacture products by digging resources out of the ground than to use discarded resources which already exist above ground – right? Not necessarily.
Resource Allocation through Market Prices Our objective is to minimize the use of resources (including energy) in the manufacturing process for all products. In order to achieve our objective, we must be guided by market prices, without exception. As long as prices are allowed to freely adjust to changes in supply and demand, resources will be allocated to their most highly valued uses, and resource conservation will be maximized. The capitalistic process of profits and losses ensures these outcomes.
Profits tell us that a firm has taken various factors of production (labor, raw materials, land, buildings, machines etc.) and combined them in such a manner that they are now valued by consumers of those products – which means these resources have not been wasted. Furthermore, profits are a signal that consumers approve of the manner in which a firm is utilizing resources.
In contrast, losses tell us that a firm has taken various factors of production and combined them in such a manner that they are now worth less than the sum of their parts – which means these resources have been wasted! Losses are a signal that consumers disapprove of the manner in which a firm is utilizing resources. If the firm does not improve, it will be forced out of business, thereby conserving these resources for others who can utilize them more efficiently.
This post was published at Ludwig von Mises Institute on Nov 11, 2017.
Follow on Twitter
Recent Comments