July 24, 2014

The zero marginal cost society by Jeremy Rifkin

The zero marginal cost society by Jeremy Rifkin

The internet of things, the collaborative commons, and the eclipse of capitalism

[Even though there is a more socialistic inclination, it is nice to read about paradigm shift]

The capitalist era is passing... not quickly, but inevitably. A new economic paradigm - the collaborative commons - is rising in its wake that will transform our way of life. We are witnessing the emergence of a hybrid economy, part capitalist market and part collaborative commons.

The French Enlightenment philosopher, Jean-Baptist Say argued that “a product is no sooner created then it, from that instant, affords a market for other products to the full extent of its own value... The creation of one product immediately opens a vent for other products”. A later generation of neoclassical economists refined Say’s Law by asserting that new technologies increase productivity, allowing the seller to produce more goods at a cheaper cost per unit. The increased supply of cheaper goods then creates its own demand and in the process, forces competitors to invent their own technologies to increase productivity in order to sell their goods even more cheaply and win back or draw in new customers (or both). The entire process operates like a perpetual-motion machine. Cheaper prices, resulting from new technology and increased productivity, mean more money for consumers to spend elsewhere, which spurs a fresh round of competition among sellers.

What happens if the marginal cost of producing and distributing a book plummeted to near zero? a growing number of authors are writing books and making them available at a very small price or even for free on the internet - bypassing publishers, printers, wholesalers, distributors and retailers. The only cost of marketing and distributing each copy is nearly free. The near zero marginal cost phenomenon has already wreaked havoc on the publishing, communications, and entertainment industries as more and more information is being made available nearly free to billions of people.

There are already millions of prosumers - consumers who have become their own producers- generating their own green electricity at near zero marginal cost around the world.

Oskar Lange, a University of Chicago professor of the early 20th century noted that when an entrepreneur introduces technological innovations that allow him to lower the price of goods and services, he gains a temporary advantage over competitors with antiquated means of production, resulting in the devaluation of the older investments they are locked into. This forces them to respond by introducing their own technological innovations, again increasing productivity and cheapening prices and so on.

Lawrence Summers, U.S> secretary of the treasury during President Bill Clinton’s administration and former president of Harvard University and J. Bradford DeLong, a professor of economics at the university of California, Berkeley argued that:

“If information goods are to be distributed at their marginal cost of production - zero - they cannot be created and produced by entrepreneurial firms that use revenues obtained from sales to consumers to cover their fixed setup costs. If the information goods are to be created and produced... companies must be able to anticipate selling their products at a profit to someone”.

All economic activity comes from harnessing available energy in nature - in material, liquid, or gaseous form - and converting it into goods and services. At every step in production, storage and distribution process, energy is used to transform nature’s resources into finished goods and services.

The coming together of the Communications Internet with the fledgling Energy Internet and Logistics Internet in a seamless 21st century intelligent infrastructure - the internet of things (IoT) - is giving rise to a Third Industrial Revolution. The IoT is already boosting productivity to the point where the marginal cost of producing many goods and services is nearly zero, making them practically free. The result is corporate profits are beginning to dry up, property rights are weakening and an economy based on scarcity is slowly giving way to an economy of abundance.

Infrastructure requires three elements, each of which interacts with the other to enable the system to operate as a whole: a communication medium, a power source and a logistics mechanism.

Gunpowder, the compass and the printing press were the three great inventions which ushered in bourgeois society. Gunpowder blew up the knightly class, the compass discovered the world market and founded the colonies and the printing press was the instrument of Protestantism and the regeneration of science in general; the most powerful lever for creating the intellectual prerequisites

Neither Karl Marx nor Adam Smith seemed to understand, however, that the print revolution and water and wind power were indispensable to each other and that together they created a general-purpose technology platform for an economic paradigm shift that changed the European social and political landscape.

While capitalism operates through the free market, free market does not require capitalism.

Three of the four largest shareholding companies in the world today are oil companies = Royal Dutch Shell, ExxonMobil and BP. Underneath the oil giants are ten banks - JPMorgan, Chase, Goldman Sachs, BOA / Merrill Lynch, Morgan Stanley, Citigroup, Deutsche bank , Credit Suisse, Barclays Capital, UBS and Wells Fargo Securities - that control nearly 60% of the worldwide investment banking market. And, beneath the financial investors are 500 globally traded companies - with combined revenue of $22.5 trillion, which is equal to one-third of the world’s $62 trillion GDP - that are inextricably connected to and dependent on fossil energy, global communication and the world’s electricity grid for their existence.

Robert Hoyt of the University of Minnesota summed up mirror relationship between the organization of feudal society and the Great Chain of Being. “The basic idea that the created universe was a hierarchy, in which all created beings were assigned a proper rank and station, was congenial with the feudal notion of status within the feudal hierarchy, where every member had his proper rank with its attendant rights and duties”.

Martin Luther launched a frontal attack on the church’s hierarchical rule of the pope and the papal administration over the lives of the faithful (Protestant Reformation). Luther accused the pope of being the Antichrist and warned that the Catholic Church was neither God’s chosen emissary on Earth nor the anointed intermediary by which the faithful could communicate with the Lord. Nor could church leaders legitimately claim the power to intercede with God on behalf of their parishioners and assure salvation in the next world.

In the case of first and second industrial revolution, the nature of the communication/energy matrices favored vertical integration of economic activity to reduce marginal cost and create sufficient economies of scale to recoup investments and make a profit. The new economy will optimize the general welfare by way of laterally integrated networks on the Collaborative Commons, rather than vertically integrated business in the capitalist market. The giant monopolies that presided over the music industry, the publishing industry, the print and electronic media, and large parts of the entertainment industry, have already experienced, firsthand, the shock and awe of peer production in laterally integrated economies of scale networks that push marginal costs to near zero.

Robert Solow - who won Nobel Prize in economics in 1987 for his growth theory - tracked the industrial age, he found that machine capital and labor performance only accounted for approximately 14% of all of the economic growth, raising the question of what was responsible for the other 86%. This mystery led economist Moses Abramovitz to admit that the other 86% is a ‘measure of our ignorance’. Economists researched and found that it is the increasing thermodynamic efficiency with which energy and raw materials are converted into useful work that accounts for the most of the rest of the giants in productivity and growth in industrial economies. In other words, ‘energy’ is the missing factor.

Despite a significant increase in efficiency, nearly 87% of the energy we used in the second industrial revolution was wasted during transmission. The third industrial revolution infrastructure, it is conceivable to increase aggregate energy efficiency to 40% or more in the next 40 years, amounting to a dramatic increase in productivity beyond what the economy experienced in the 20th century.

Free Energy

Many of the key players have come over from the information technology and internet sectors to apply experience they garnered there to the new energy paradigm. They correctly sense tow uncanny parallels. First, the harvesting power of renewable energy technology is experiencing its own exponential growth curve in solar and wind, with geothermal, biomass, and hydro expected to follow. Second, like the Communications internet where the up-front costs of all establishing the infrastructure were considerable, but the marginal cost of producing and distributing information is negligible, the up-front costs of establishing an energy internet are likewise significant, but the marginal cost of producing each unit of solar and wind power is nearly zero. Renewable energy, like information, is nearly free after accounting for the fixed costs of research, development and deployment.

The impact of society is all the more pronounced when we consider the vast potential of solar as a future energy source. The sun beams 470 exajoules of energy to Earth every 88 minutes - equaling the amount of energy human beings use in a year. If we could grab hold of one tenth of 1 % of the sun’s energy that reaches earth, it would give us six times the energy we now use across the global economy.

Richard Swanson, the founder of Sunpower Corporation, observed that the same doubling phenomenon in solar that Moore did in computer chips, Swanson’s law holds that the price of solar photovoltaic (PV) cells trends to drop by 20% for every doubling of industry capacity.

Knowledge Revolution

Knowledge revolution began when a Stanford University professor, Sebastian Thrun, offered a ‘free’ course on artificial intelligence (AI) online in 2011, one similar to the course he taught at the university. By the time it commenced, 160,000 students from every country in the world (except N. Korea) were sitting at their computers in the biggest classroom ever convened for a single course in all of history. Thrun went on to launch an online university called Udacity with the goal of providing a top-quality education for every young person in the world, esp. the poor in developing countries who otherwise would never have the opportunity to be exposed to learning at his level.  

Two of Thrun’s computer science colleagues, Andrew Ng and Daphne Koller, who participated with him in the online course experiment, set up a competing for-profit online university website called Coursera. Coursera was followed by edX, a nonprofit consortium put together by Harvard and MIT.  Coursera now has 97 participating universities as of this writing. EdX has also expanded to more than 30 universities. The new education phenomenon is called MOOCs (massive Open Online Coursera).
We are in the midst of an epic change in the nature of work. The first Industrial Revolution ended slave and serf labor. The second industrial revolution dramatically shrank agricultural and craft labor. The third industrial revolution is sunsetting mass wage labor in the manufacturing and service industries and salaried professional labor in large parts of the knowledge sector.

The tragedy of commons by Garrett Hardin’s essay (published in 1968) says freedom in a commons brings ruin to all. (In Hardin’s parable, a single group of herders shares a common pasture. The common is large enough to support many animals, but not infinitely many. From time to time, each herder must decide whether to add another animal to her flock. What’s a rational herder do? By adding an animal to her herd, she receives a substantial benefit when she sells the animal at market. However, the cost of supporting that animal is shared by all who use the commons. Thus herder gains a lot, but pays only a little, by adding an additional animal to indefinitely, so long as the commons remains available. Of course, every other herder has the same set of incentives. If each here acts according to her self-interest, the commons will be completely eroded and there will be nothing left for anyone”).

In 1986 - 18 years after Hardin’s essay seemed to put the last proverbial nail in the coffin of Commons theory - Carole Rose pried open the casket, breathing new life into what many had already concluded was a dead idea. The Northwestern University law professor entitled her salvo “the comedy of the commons” a scathing rejoinder to Hardin’s earlier thesis. Rose began by reminding her readers that not everything is amenable to private ownership.

Rose pointed out that “there lies outside purely private property and government-controlled ‘public property’ a distant class of inherently public property’ which is fully controlled by neither government nor private agents. This is property collectively ‘owned’ and managed by society at large, with claims independent of and indeed superior to the claims of any purported governmental manager” (e.g. oceans, air we breathe are all in the nature of public goods).

Rose cities the customary right to participate in the public square, noting that it has long been regarded as indispensable to social life. The public square - at least before the internet - is where we communicate, socialize, revel in each others company, establish communal bonds, and create social capital and trust, the indispensable elements for nurturing community. The right to be included to have access to one another which is the basic right to participate ‘in commons’ is the fundamental property right, while private property, the right to enclose, own, exclude is merely a qualifies deviation from the norm - although in modern times the qualification has all but subsumed the norm.

In regard to festivals, dances, sporting events and other social activities in the public square, the more individuals that participate says Rose, “the higher its value to each participant. Rose says that this is the reverse of the tragedy of the commons. it is a comedy of commons as is so felicitously expressed in the phrase ‘the more the merrier’.

What makes Rose’s insight so uncanny is she wrote it in 1986, before the emergence of the WWW. Rose’s blistering attack on Hardin’s tragedy of commons thesis and her equally spirited defense of the comedy of the commons was followed, just four years later by publication of Elinor Ostrom’s ‘The Governing of the Commons’. Her work dazzled the intellectual community and even the economic academy. Ostrom;s insightful analysis won her the coveted Nobel prize in economics in 2009 - making her the first woman ever to receive the honor.

After years of field investigations and research on what makes commons work, Ostrom and her colleagues came up with seven ‘design principles’ that seem to be integral to every effective commons surveyed.

1. Effective management of a commons requires ‘clearly defined boundaries on who is allowed to appropriate from the commons and who is not.

2. It is necessary to establish appropriation rules restricting the time, place, technologies and quantity of the resources that can be used as well as setting up the rules on the amount of labor, materials and money that can be allotted to the appropriation.

3. A commons association needs to guarantee that those affected by the appropriation rules jointly and democratically determine those rules and their modifications over time.

4. The commons association should ensure that those monitoring the activity on the commons are the appropriators or are accountable to them.

5. Appropriators who violate the rules should, in principle, be subject to graduated sanctions by the other appropriators or officials accountable to the appropriators to guard against overly punitive punishments that sours their future participation and creates ill will in the community.

6. The commons association ought to build in procedures for rapid access to low-cost private mediation to quickly resolve conflict among appropriators or between appropriators and public officials.
7. It is vital that government jurisdictions recognize and condone the legitimacy of the rules established by the commons association. If government authorities do not provide a minimum recognition of the authority of the commons association to self-manage and in effect treat it as illegitimate, the self-rule of the commons is not likely to be able to sustain itself over time.

These seven design principles appear over and over again in Commons arrangements all over the world.

Most of the major sectors on the internet today are controlled by one dominant company or an oligopoly. Google owns search, Facebook social networking, eBay rules auctions, Apple dominates online content delivery, Amazon, retail; and so on.

Review websites abound on the internet. yelp, Angie’s List, Citysearch, Tripadvisor, Travelocity, Judy’s Book and Local are among the hundreds of review sites where consumers check in to track other consumers experience with goods and services. It is estimated that Craigslist single-handedly wiped out $10 billion in classified ad revenues in print publications annually, replacing it with $100 million in online revenues, with operating costs representing a fraction of the cost incurred by newspapers and magazines, which long relied on classified to stay afloat. Craigslist's global online bulletin board is managed by a staff of just 30 people in its office in San Francisco.

Online banking platforms like Zopa, Lending Club, and Prosper lend money directly to individuals and projects.

In his masterful book ‘The Philosophy of Money’ the 19th century sociologist Georg Simmel reminds us of the critical role that money has played throughout history in extending and deepening human social interaction. Simmel pointed out that coins are promissory notes, backed by an unstated collective trust among strangers that guarantees that at some future date the token passed on in an earlier exchange will be honored by a third party in a subsequent exchange.

Peter Senge of the MIT Sloan School of Management points out that the average life of a Fortune 500 company is only around 30 years. Today many second industrial revolution companies are faced with a comparable opportunity and a choice, Some are already making the leap into the Third Industrial Revolution, incorporating the new business models and services into their existing portfolios and developing transitional strategies to keep pace with the paradigm shift into a hybrid economy made up of both Collaborative Commons and conventional capitalist marketplace.

The powerful social forces unleashed by the coming zero marginal cost society are both disruptive and liberating. They are unlikely curtailed or reversed. The transition from the capitalist era to the collaborative Age is gaining momentum in every region in the world 0 hopefully in time to heal the biosphere and create a more just, humane, sustainable global economy for every human being on earth in the first half of 21st century.

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