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.
