Let’s step back for a moment and consider how the great economic transformations in history occur. There have been a number of them in world history, and they all have a common denominator. At a single historic moment, the same three defining technologies emerge and converge to create a new general-purpose technology infrastructure. They fundamentally change the way society manages, powers, and moves economic activity. The three technologies are new communication systems that manage economic activity more effectively; new sources of energy that power the activity more efficiently; and new modes of mobility that move the economic activity more rapidly. This changes society’s spatial temporal orientation, its business models, its forms of governance, and even people’s cognition and consciousness.
We saw that the productivity potential of the second industrial revolution technology infrastructure had run its course. Meanwhile, a dramatic reduction in fixed and marginal costs had already occurred in computers and communications, and would probably occur elsewhere as well. And as this happened, it would change the economy so that neoclassical economic theory would no longer suffice to describe it.
The world was entering a third industrial revolution — a digital revolution. [Note: Although the numbers differ, what Rifkin calls the third industrial revolution and the broad technological shift known as “Industry 4.0” are roughly the same movement.] In a digitally connected society, the marginal costs of an increasing number of goods and services would fall to near zero. This would force a fundamental change in prevailing business models: from markets to networks, from ownership to access, from workers to “prosumers” [individuals who produce as well as consume goods and services distributed on the Web], from sellers and buyers to providers and users, and from consumerism to sustainability — and the second industrial revolution’s economies of scale would no longer apply. The communications part of it had already happened: Inexpensive computers and the Internet existed, and the smartphone had just been invented. It took a while to see that the same phenomenon could occur in the world of atoms, and dramatically reduce the cost of energy, mobility, and other goods and services.
[…]Aggregate efficiency is the ratio of potential work to the actual useful work that gets embedded into a product or service. The higher the aggregate efficiency of a good or service, the less waste is produced in every single conversion in its journey across the value chain.
[…]Traditional economics says you increase productivity by investing more capital in better machines and by providing better-performing workers, all of which reduces the fixed and marginal cost of production. But these factors account for only about 14 percent of productivity. Much of the rest of productivity is accounted for by the improvement in aggregate efficiency in the managing, powering, and moving of economic activity.
Aggregate efficiency works the same way in economic production as it does in nature. When a lion chases down an antelope and kills it, only about 10 to 20 percent of the entire energy in the antelope gets embedded into the lion; the rest is heat lost in the transition. So the lion’s aggregate efficiency is only 10 to 20 percent. If it could consume more of its prey’s energy, or use less of its own in the hunt, the lion would gain productivity as a predator.
Economists are now learning that aggregate efficiency is a critical determiner in productivity growth. In the past, economists have missed this because they have not been trained in thermodynamics; chemists, engineers, biologists, and architects get it.
When the second industrial revolution began around 1905, there was about 3 percent aggregate efficiency in the U.S. production of goods and services. Mass production methods dramatically improved this level, and productivity rose as a result. But there were limits to the efficiency of 20th-century telecommunications, fossil fuel–based energy systems, and internal combustion–driven transportation. By the beginning of the 21st century, the U.S. was up to around 13 percent aggregate efficiency; Germany had reached 18.5 percent; and Japan led the world at 20 percent aggregate efficiency. That was the ceiling, and productivity growth stagnated. Businesses that plug into the second industrial revolution infrastructure can no longer significantly increase their aggregate efficiency and productivity in managing, powering, and moving their goods and services through their value chains.
Now, with the digital third industrial revolution more fully under way, aggregate efficiency is about to rise again — perhaps exponentially this time. Two factors are the vastly reduced costs of communication, energy, and transport that we talked about. Another is the Internet of Things. The cost of sensors and identification chips is, for the first time, dropping low enough to allow us to embed them in trillions of devices: thermostats, assembly lines, appliances, warehouse equipment, and more, all gathering data. With the IPv6 protocol, those devices can be interconnected through the Internet. When intelligent technology is embedded in homes, offices, factories, and infrastructure, everyone will have a transparent picture of all the economic activity flowing through the economy, with the ability to mine it and use predictive analytics to improve thermodynamic efficiency and productivity while reducing the ecological footprint of economic activity.
[…]We’re witnessing the birth of a new economic system: a hybrid of the existing capitalist structure and the sharing economy. Most of the goods and services that [make up our] quality of life will be much less expensive. It will be easier to broaden prosperity, without having to fight over scarce resources, in part because it will be much easier to make the most of the resources we have.
[…]Investor capitalism won’t disappear; it will live side by side with the sharing economy. In the emerging era, the cooperative form of business is being reinvigorated because of the lateral scaling advantages made possible by a digitally interconnected global economy with near-zero marginal cost. There were already successful cooperatives around the world, many of them dating back to the early 20th century. A billion and a half people work in them, in industries like agriculture, food production, housing, banking, and energy. They have new life now that there are IT-based tools, such as blockchain, that make it easier to collaborate, and because of the scaling advantages made possible by the digitally interconnected global economy.
[…]In the end, the economy may no longer be controlled by a small group of centralized, global, vertically integrated companies. The first and second industrial revolution infrastructures were centralized, proprietary, and vertically scaled because the communication, energy, and transport technologies worked best that way. By contrast, the coming infrastructure of 5G communication, renewable energy, and automated mobility works best if it’s distributed, open, transparent, crowd-sourced, and laterally scaled. The more users on the network, the more everyone benefits. With any attempt to monopolize, control, or centralize it, the infrastructure loses aggregate efficiency and productivity.
[…]We’ll see a similar kind of change in education. The public school system was a great leap forward in the 19th century, but it was introduced to prepare a generation for the first industrial revolution of factory and office employment, and then was only slightly upgraded for the second industrial revolution. A school designed for that time is a microcosm of a factory. The teacher instructs, and the students are supposed to memorize the knowledge and recite it back. Every 50 minutes a bell rings and they move to the next spot on the line. They’re being trained to be efficient automatons operating machines. If the students share information, and help each other, it’s called cheating.
[…]Although the digital third industrial revolution could bring about a more democratic and ecological era, it is by no means guaranteed. I’m not a utopian in regard to technology. Indeed, I’ve been critical of some technologies over the years. There are going to be many political struggles along the way. For example: How do we ensure data privacy when everyone’s connected? How do we prevent cybercrime and cyberterrorism? And how do we prevent Internet companies, the big ones, from monopolizing the platform for commercial purposes and exploiting the information they gather?
[…]…the biggest shadow in the room is climate change. Most scientists had thought that we had another 100 years before facing a significant crisis, but we didn’t fully anticipate the feedback loops brought on by global warming emissions — the more the Earth warms, the more the process of climate change accelerates. We probably have less than 30 years to effectively exit a carbon-based civilization.
The most recent indicators of change have scared the living daylights out of me. For every one degree rise in the temperature of the planet brought on by global warming emissions, the atmosphere is absorbing 7 percent more precipitation from the ground and the oceans, leading to more concentrated precipitation in the clouds and more extreme and unpredictable water events — blockbuster winter storms, dramatic spring flooding, prolonged summer droughts and wildfires, and category three, four, and five hurricanes. Our ecosystems cannot catch up to a runaway exponential curve in the water cycles and are collapsing in real time, taking us into the sixth extinction event of life on Earth over the course of the next half century. Even in a world of abundance, climate change is the dark shadow that could foreclose opportunities for present and future generations and for life itself on Earth.
Fortunately, the third industrial revolution is based on post-carbon technology. Moreover, it’s inclined toward a highly diverse and distributed infrastructure. The more diverse, redundant, and distributed the networks and systems are, the more resilient the infrastructure is, and the less vulnerable it is to cybercrime, cyberterrorism, or natural disasters from climate change.
Source: strategy+business (Winter2017)
Subjects: Articles & Links, Economics | Economy, Environment | Sustainability, Excerpts, History, Life & Society, Politics & Public Policy
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