Markets for a circular economy
Accelerating circularity with institutional technologies
The circular economy has been an elusive goal for governments and consultants for decades. The Australian Productivity Commission’s latest inquiry points toward familiar solutions: more labelling for sustainability-conscious consumers, streamlining waste processes, pilots and schemes, commercialisation of research, and making businesses more responsible for what they produce.
But as Chris Berg and I argued in our submission, achieving a circular economy is really an economic challenge requiring markets, not planning. In an increasingly complex economy, people need new market infrastructure to coordinate and trade resources. Thankfully, today we have new institutional technologies that can make the economy more circular – not through appeals to altruism, sustainability values, or government mandates, but through better markets.
Lost information
What we call ‘waste’ often exists not because materials are useless, but because information about their composition, history, and potential uses is lost. This information entropy makes finding new applications too costly, hindering trade and reuse – a fundamental coordination failure.
But centrally planned systems struggle greatly with this. As Friedrich Hayek argued, the knowledge necessary for coordination is dispersed among countless individuals and never exists in a complete, concentrated form accessible to a central planner. So, planners simply cannot know the highest value use for every byproduct.
Compared to planning, markets excel at turning byproducts into inputs because they use dispersed local knowledge through competition. Once again, in Hayek’s words, competition is a discovery procedure for “such facts as, without resort to it, would not be known to anyone”.
The information for a more circular economy to happen simply does not exist without the market processes to reveal it. While government trials and pilots might yield isolated insights they cannot replicate this dynamic, decentralised discovery process.
Free market environmentalism
The circular economy idea connects directly to free market environmentalism, which has long recognised that environmental outcomes can emerge from market processes rather than central planning. Historically, we have seen private firms find value in ‘waste’ through ‘inter-firm recycling initiatives’ where circularity emerged naturally, driven by profit incentives rather than sustainability mandates.
Rather than treating environmental challenges as public goods problems requiring intervention, free market environmentalism frames them as coordination problems that better institutions — specifically markets and property rights — can solve more effectively than central planning. But these markets only emerge when entrepreneurs discover ways to create value despite constraints.
Technology accelerates circularity
Market solutions are constrained by transaction costs and information decay. When the costs of finding, verifying, and exchanging materials exceed their potential value, markets fail to emerge – regardless of whether or not they work in theory. When environmental externalities remain unpriced due to high measurement costs or poorly defined property rights, markets struggle to internalise these costs.
But today’s frontier technologies are dramatically reducing these barriers, making market-based environmental solutions more viable than ever.
Blockchains can establish persistent, trustworthy records of a product’s entire lifecycle, creating digital property rights and provenance tracking that combat information decay (if we can overcome some of the coordination problems).
Meanwhile, artificial intelligence reduces search and matching costs, helping to connect secondary resources with their optimal uses at scale previously impossible. As AI agents become more advanced, and we make them more aligned with our economic preferences, they may identify and execute profitable trades of resources. A longer-term vision of this is hyper-barter (an economy beyond markets and prices where AI agents trade liquid digital assets at high frequency).
But what should governments do?
Even if governments understand this information problem, centralised top-down solutions will not keep pace with how fast our private institutions are shifting. The convergence of AI and blockchains in particular will create a rapid institutional evolution in how resources are tracked, valued, and exchanged.
Instead, effective policy requires both: (1) broad-based economic reforms that reduce barriers to exchange and innovation, and (2) regulatory clarity for the frontier technologies supporting new markets.
In their report, the Productivity Commission rightly identifies the need to harmonise inconsistent regulations, citing examples like battery disposal rules or waste classifications. This is welcome. But the focus on specific waste streams or activities already labelled 'circular' doesn’t go nearly far enough.
The reforms needed aren’t just tweaks to waste rules or new sustainability programs. We need deep, economy-wide changes that make it easier to do business, invest, trade freely, and innovate.
In addition governments should address barriers to the frontier technologies that provide the necessary infrastructure for these new markets. Providing clear, predictable frameworks for technologies like AI and blockchain – without prescribing their specific use – is key to building the market infrastructure needed to solve the deep information problem at the heart of circularity.
The circular economy will not be achieved by treating it like an isolated planning problem – we must unleash the markets and technologies that allow entrepreneurial discovery to thrive.