How Markets Make Economic Growth Sustainable

Market-driven dematerialization is the unsung environmental success story of the 21st century.

Fifty years ago, researchers at MIT produced The Limits to Growth, a report on how existing economic trends foretold environmental ruin. Left unchecked, the authors predicted, expanding populations and economic growth would exhaust global resources. and ultimately prompt civilizational collapse. The models upon which Limits was based suggested that global reserves of copper, silver, lead, tin, zinc, and petroleum would have all run out by now, and the world would be struggling to find enough arable land to feed a population of over 7 billion people. Without governmental efforts to change global trends, "[t]he most probable result will be a rather sudden and uncontrollable decline in both population and industrial capacity," the authors warned.

As should be obvious, the predictions offered in The Limits to Growth (and other contemporary doomsayers) were wildly off the mark. Among other things, they failed to account for how markets respond to scarcity, producing incentives for efficiency and innovation, so that we may do more with less. In short, the authors failed to understand why markets encourage sustainability.

Those predicting imminent depletion of global resources and exhaustion of the earth's carrying capacity also failed to predict what is arguably the most important—and under-appreciated—positive environmental trend of the 21st century: Dematerialization of modern economies. The same economic incentives which forestalled resource exhaustion have actually enabled people to do more with less throughout the developed world.

This dramatic development is chronicled in Andrew McAfee's book, More from Less: The Surprising Story of How We Learned to Prosper Using Fewer Resources — and What Happens Next, which I reviewed for Regulation. Here is an excerpt from my review:

Dematerialization may be the most important, yet unsung, example of environmental progress in the 21st century. It is commonplace to observe that the relentless drive to do more with less has led to more efficient resource use, so that a soda can today is made with a fraction of the metal required 50 years ago. But dematerialization is not merely a story about increased efficiency or per‐​capita reductions.

What is now being observed represents a fundamental decoupling of resource consumption from economic growth, such that as mature economies grow, they not only use fewer resources per unit of output, but they also consume fewer resources overall. In short, economic growth in the most developed nations increasingly coincides with a net reduction in resource consumption.

Let that sink in. It is not merely that we are using resources more efficiently in countries like the United States. It's also that we are actually using fewer total resources year-over-year.

The United States uses less gold, steel, aluminum, copper, stone, cement, and even paper than it did at the start of this century, despite the continued increase in gross domestic product. Annual consumption of all but six of the 72 resources tracked by the U.S. Geological Service are "post peak." We also use less fertilizer and water while growing more crops. Plastic consumption is up, as is energy use, but these two appear to have been decoupled from population and economic growth as well.

How does this dematerialization occur? Some examples may be useful. The dematerialization of soda cans is relatively easy to grasp, particularly for those of us who can remember the heavier cans of the 20th century. Aluminum cans weighed 85 grams when introduced in the 1950s. By 2011, the average can was under 13 grams. Cans today are not only thinner and lighter, they are produced more efficiently, with fewer separate sheets of metal.

Substitution can be an even more powerful source of dematerialization. Consider telecommunications. A single fiber optic cable made from less than 150 pounds of silica can carry the same volume of information as multiple 1‑ton copper cables. And were that not enough, satellite and wireless technologies enable us to bypass the use of physical cables altogether. We can communicate more and yet use vastly less material to do so. This not only saves copper, but other resources too. Think of all the paper saved by e‑mail, e‑banking, and e‑readers.

Not only did neo-Malthusians not predict these developments, they failed to recognize that such trends would be driven by private markets, and not governmental regulation.

We do more with less not because of government regulation or administrative direction, but because of capitalism and technology. These are the dominant forces driving dematerialization in the most developed countries and they could unleash similar gains in the rest of the world. We "want more all the time, but not more resources," McAfee notes. We want more of what resources can provide, and one way to get more is to do more with less. Market capitalism both facilitates and enhances the underlying incentives that drive efficiency gains and technological advance. This not only leads to dematerialization but also promotes "critical aspects of well‐​being," including health and prosperity.

Unfortunately, these trends are not universal. While we consume fewer resources in developed nations, these trends have not (yet) taken hold in many developing countries, which often lack well-functioning market economies. We have also not observed equivalent trends in many forms of pollution, largely because emissions are not priced the way consumption is. An entrepreneur who figures out how to produce widgets while using less copper gains an economic advantage, as the copper must be paid for. An entrepreneur who figures out how to emit fewer particulates or nitrogen oxides does not, as emitting such pollutants is not meaningfully priced and contemporary regulations rarely create meaningful incentives for emission reductions on the margin.

Understanding what has encouraged and allowed for dematerialization at the same time that populations have expanded and economies have grown is essential if these trends are to be replicated in developing countries and if we are to meet contemporary environmental challenges, including climate change. A suite of policies designed to replicate the same market dynamics that have led dematerialization could spur meaningful decarbonization. Ill-conceived policies, on the other hand, could actually do more harm than good. This is but one more reason policymakers should be more interested in fiscal instruments than regulatory mandates to reduce greenhouse gas emissions.

Another article in the same issue of Regulation as my More from Less review notes that greenhouse gas emissions in the United States may have peaked in 2005, and that GHG emissions appear to initially increase, but then decline, with economic growth. Such trends are not observed, however, in less-developed and less-market-oriented economies, such as China. The authors, Bruce Yandle and Jody Lipford, think this indicates that domestic GHGs could continue to decline going forward, even without new government policies. This may be so, but the reductions are nowhere near what would be achieved if carbon emissions were priced and there were more powerful market incentives for market decarbonization. Greater market incentives for decarbonization could also lead to the development and deployment of low-carbon technologies that could facilitate emission reductions in other countries as well, and given that climate change is a global concern, such measures will be necessary if atmospheric stabilization is to be achieved.

The bottom line is that competitive markets create powerful incentives for efficient and sustainable resource use. Market-driven innovation has made it possible to provide for more people using fewer resources. Such environmental successes are often ignored because there is no policymaker or program than can take credit for them. They are the result of market processes, not governmental direction or design.

Replicating the incentives that spur dematerialization may be difficult, particularly because some obvious measures (such as taxing carbon emissions) are politically fraught. Yet pursuing such policies is the surest way to replicating market-driven environmental successes. Dematerialization is not a reason to ignore environmental problems, as many such problems are quite real. It does, however, provide a lesson for how to address many of the environmental problems that remain.