Some Economics of Sawdust

Cambridge University Press has published a 35th anniversary edition of The Economist’s View of the World and the Quest for Well-Being by Steven E. Rhoads.

The book offers a sympathetic verbal (that is, no graphs or math) explanation of basic concepts in microeconomics: for example, the opening chapters are “Opportunity Costs,” “Marginalism,” and “Economic Incentives.”

Rhoads is an economically-minded political scientist. This book is not at all an attack on economics: indeed, I think it has sometimes been used as a textbook for a nonmathematical introduction to economics, both at the undergraduate and with master’s degree programs in areas like public administration. I suspect that the book does a good job of building bridges with those who are skeptical or hostile to what they perceive as the field of economics, because Rhoads is quick to emphasize that economic efficiency and growth are not the only ingredients of human well-being, and that fairness and equality should also play a role. My only real quibble with the book, and it's a small one, is that Rhoads seems in some places to think this insight will be news to economists, while my own experience is that economists have been emphasizing for decades how equality and fairness may in some contexts have tradeoffs with efficiency and growth, while in other cases they may complement each other.

The discussion throughout is based on solid explanations and a wealth of interesting examples. To provide a flavor, here’s one example from the introduction of an economic story about sawdust. The story works on several levels: as a basic story about supply and demand, a story about the intricacies of economic interconnectedness, and a parable about the perils of economic central planning. Rhoads writes (footnotes omitted):

In 2008 the price of milk was much higher than usual. An economist asked a dairy farmer, how come? The farmer said his inputs were much more expensive. (Within two years it had gone up by a factor of four for some uses.) He used sawdust to bed his cows more comfortably. They produced more milk when they were more often off their feet. The reason for the increase in the price of sawdust was the sharp downturn in the production of new housing. Since construction of new houses was down, there was less sawdust.

So, imagine you are a politician or a planner trying to satisfy citizens complaining about the high price of milk. … But another problem citizens were complaining about was homelessness and the price of affordable housing. Would you realize that using more sawdust to produce milk would increase the price of housing? Probably not. But it would increase housing costs, because sawdust is also the principal component in particleboard, which is used widely in the building industry. It is cheaper than substitutes such as lumber and plywood. You probably wouldn’t know that.

Many of your constituents also love gardening, and they would not be happy if the sawdust they use to make their mulch became more expensive because some of it was being siphoned off to help “higher-priority” users. Sawdust is also used in the production of charcoal briquettes and as part of a mix to make a lightweight material for dashboards. It would take a planner a lot of time to decide on the fair and efficient allocation of sawdust. …

Of course, no politician or planner would have time to worry about sawdust. If there were no entrepreneurs or markets, sawdust would probably be thrown away or sued only for mulch; no one would know that the waste product had these other uses. Even if they eventually figured it out, how would they decide which usage was the most important and how much should go into it and how much for the second most important usage?

The lowly sawdust example shows that there is a “dense interconnection” of different kinds of scarce resources. No planner could sort out everything efficiently. This is an important reason why we need markets.

The Agricultural Marketing Research Center (a group of universities operating under a grant from the US Department of Agriculture) wrote a few years ago about the many industrial uses of sawdust, as well as the rising importance of sawdust, and wood waste in general, as a source of renewable biomass energy. Here is the AgMRC on uses of sawdust:

Shavings and sawdust may be reground into wood flours, or the wood flour may be recovered as sized “dust” materials that have been screened and separated. Wood flour has major industrial markets in industrial fillers, binders and extenders in industrial products like epoxy resins, fertilizers, adhesives, absorbent materials, felt roofing, inert explosive components, ceramics, floor tiles, cleaning products, wood fillers, caulks and putties, soil extenders and a vast array of plastics. Some wood flours like mesquite may be used in edible flavorings for human or pet consumption.
 
Shavings and sawdust can be marketed for use in molded or laminated composite wood products (e.g., toilet seats, countertops) in automotive materials and in oil and water isolation and solidification products for the environmental control industry. Other uses include fillers, bulk shavings, sawdust, hog fuel (dried bark shavings), meat-smoking chips, barbeque cooking fuels and composite fireplace logs. Landscaping applications include playground “footing,” equestrian arena and other “wood edge footing” (safety margin and walkway material) and some exhibit and tradeshow applications. A few manufacturers are using post-consumer plastic waste mixed with a sawdust extender to make high-value extruded composite decking lumber and similar products for the home improvement market. Currently, a primary use of baled dry shavings is for equine and livestock bedding or small pet bedding applications.

However, the AgMRC emphasizes a future role for sawdust and wood waste products in biomass energy production. I once had a conversation with a professor of forestry who pointed out that the “carbon cycle” in burning fossil fuels and eventually having that carbon return to the form of oil or coal or natural gas was measured in millions of years, while the carbon-cycle in burning wood products and then having that carbon reabsorbed into trees was a matter of years and decades. The AgMRC writes:

At this time and in the near future, wood wastes are and probably will be the most commonly used biomass fuel for heat and power. The most economic sources of wood fuels are usually wood residues from manufacturers (mill residues), discarded wood products or woody yard trimmings diverted from landfills, and non-hazardous wood debris from construction and demolition activities. A significant environmental benefit of using these materials for generating electricity is that their energy value is utilized while landfill disposal is avoided. As long as clean-burning combustion technologies are employed, carbon emissions to the atmosphere can be minimized. 

Recent studies indicate that quantities of available (presently unused) mill and urban wood residues exceed 39 million dry tons per year in the United States. This is enough material to supply more than 7,500 MW, doubling the existing U.S. bio-power capacity in the United States. To illustrate this point, this amount of power could supply the yearly electricity demand of the residential customers in all six New England states.

Moreover, there is agricultural innovation in the growth of “wood grass” species that will probably affect the sawdust industry as well.

The use of crop residues, livestock manures and short-rotation-intensive-culture (SRIC) plantings of fast-growing “wood grass” tree species as fuel resources can improve the economics of farming while solving some of the most intractable environmental problems in agriculture today. In SRIC systems, “wood grass” species are cultivated and then chipped on-site for use in energy production (by combustion) or wood-product manufacturing (composites). The advent of energy crops for power production is a new agricultural market. However, these crops provide soil conservation and nutrient management benefits for the land and may be compatible with government conservation set-aside incentive programs. Increased woody-biomass utilization will impact other groups including architectural and engineering firms, consultants, and processing and handling equipment vendors.

Centralized government decision-making can be a useful method of production when it is focused on a specific goal: create a specific new vaccine or fighter jet, or provide electricity. But the production and use of sawdust are multifarious. Detailed and granular knowledge of people who are deeply involved at every stage of the process, and who have personal incentives to make it work smoothly, is needed to know what is possible now and what innovations might be made. In these settings of what Rhoads calls “dense interconnection,” the decentralized decision-making of markets coordinated by individual incentives and a price mechanism can be remarkably effective.