The Zero Marginal Cost Society: The Internet of Things, the Collaborative Commons, and the Eclipse of Capitalism (10 page)

Determined to avoid the break between classical economic theory and a budding capitalism, the economists chose to abandon Locke’s natural rights theory of private property to the socialists and scurried to find a new theory to fill the void. They found their answer in David Hume and Jeremy Bentham’s theory of utilitarian value. Hume argued that property is a human convention born out of common interest that leads each man “in concurrence with others, into a general plan or system of actions, which tends to public utility.”
10
In other words, the laws of property are codes that human beings agree to follow because it is in their common interest.

Hume made it plain that he was sympathetic to the notion that what a man makes out of nature is his own. He argued, however, that private property rights should be encouraged not because they were based in natural rights but because they were “
useful
habits” and that property should be freely exchanged in the marketplace because it was “so
beneficial
to human society.”
11

By contending that the general welfare of society, defined as the pursuit of pleasure over pain, was the basis of all property arrangements, the utilitarians could justify championing both the private property of the laborer and the property rights embedded in capital, arguing that both forms of property advanced the general welfare and are therefore useful. In both instances, it is utility alone that justifies the practice.

Bentham was a bit more willing to take on the natural rights theory of property head on, arguing that there is no such thing as natural property. Bentham explained that

rights are, then, the fruits of the law, and of the law alone. There are no rights without law—no rights contrary to the law—no rights anterior to law . . . property and law are born and must die together.
12

Utilitarian doctrine gave capitalists the lifeline they needed to justify their growing role as the dominant force in the new industrial economy. Still, the natural rights theory of property continued to hold sway, especially among the throngs of workers streaming into the factories and front offices of the industrial economy and the small craftsmen and business owners who would continue to play a critical, if not diminished, role in the era of big capital.

The utility doctrine, although ostensibly grounded in social convention rather than natural law, got an unintentional boost from Charles Darwin. In his second book,
The Descent of Man
, Darwin argued that human beings’ evolved mental faculties spawned the development of conscience, which predisposed them to increasingly adhere to the utilitarian principle of championing the greatest good for the greatest number. Darwin’s musings armed the economists with some reassuring “natural support” for their utilitarianism.

However, Darwin wasn’t happy with the purloining of his theory of evolution. After all, he had argued that our species’ utilitarian nature was of a higher order—one that promoted empathic extension and cooperation among people—and was understandably upset to see his insights reduced to a more strictly economic agenda of legitimizing a collective material self-interest. In his last writings, Darwin challenged John Stuart Mill and other popular utilitarian economists, arguing that “impulses do not by any means always arise from . . . anticipated pleasure.”
13
To make his point, he used the example of a person rushing to save a stranger in a fire despite the personal risk and without any expectation of a reward. Darwin argued that the motivation to come to another’s rescue derived from a deeper human impulse than pleasure—what he called the social instinct.
14

The misuse of Darwin’s theory to jack up the utility theory of property had some measurable effect. However, far more egregious and impactful was the wholesale expropriation of Darwin’s theory of natural selection by the sociologist and philosopher Herbert Spencer to advance what would later be called Social Darwinism—an ideologically inspired movement designed to justify the worst excesses of a rampant capitalism in the latter part of the nineteenth century. Spencer seized on Darwin’s description of natural selection to justify his own theory of economic evolution. Spencer wrote that “this survival of the fittest, which I have here sought to express in mechanical terms, is that which Mr. Darwin has called ‘natural selection, or the preservation of favored races in the struggle for life.’”
15
While Darwin is widely credited with coining the term
survival of the fittest
, it was actually conceived by Spencer after reading Darwin’s work. However, Darwin unfortunately inserted Spencer’s narrative into the fifth edition
of
The Origin of Species
, which was published in 1869. Darwin wrote, “this preservation, during the battle for life, of varieties which possess any advantage in structure, constitution, or instinct, I have called Natural Selection; and Mr. Herbert Spencer has well expressed the same idea by the Survival of the Fittest.”
16
Darwin meant the term as a metaphor for “better designed for immediate, local environment.”
17
Spencer, however, used the term to mean in the best physical shape.

In Spencer’s hands,
survival of the fittest
came to mean that only the fittest organisms will survive. Spencer hammered the term into the public discourse, unabashedly aligning himself with Darwin, despite the fact that his own views of evolution were far more Lamarckian.

Darwin later went to great lengths to distance himself from the term
survival of the fittest
, even apologizing for using it, but to no avail.
18
The term stuck in the public consciousness and came to define Darwin’s theory in the minds of successive generations.

Spencer argued that all the structures in the universe develop from a simple, undifferentiated state to an ever more complex and differentiated state, characterized by greater integration of the various parts. This process applied equally to the stars in the galaxies and the biological evolution here on earth, as well as to human social organization.

Spencer viewed competition among firms in the marketplace as the expression of society’s natural evolutionary development and believed that competition should be allowed to play out without government interference—assuring that only the most complex and vertically integrated companies would survive and flourish.

Spencer’s views helped legitimize the business interests of the day. By finding a rationale in nature for companies’ pursuing ever larger, vertically integrated enterprises, controlled by even more rationalized, centralized management, Spencer and the free-market economists who followed him successfully tempered any serious public opposition to the existing economic arrangements.

Where Spencer and his compatriots
erred was in believing that the increasing complexity of society invariably required vertically integrated businesses and more centralized command and control in the hands of fewer institutions and individuals. Complexity is not always synonymous with vertical integration and centralization. In the case of the First and Second Industrial Revolutions, 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. This proved to be equally true, I might add, under both capitalist and socialist regimes, as we saw in both the Soviet Union and China and even in the mixed social market economies in Europe. We shouldn’t confuse ownership of the means of production with the organization of the mode of production. Both capitalist and socialist regimes
organize production in integrated, vertically scaled enterprises because of the increased efficiencies, despite their different patterns of ownership and distribution of earnings.

But how do we go about organizing an economy where the entry costs in establishing a communication/energy matrix are substantially lower and paid for in large part by hundreds of millions of individuals in peer-to-peer networks, and where the marginal costs of generating, storing, and sharing communications, energy, and a growing number of products and services are heading to nearly zero?

A new communication/energy matrix is emerging, and with it a new “smart” public infrastructure. The Internet of Things (IoT) will connect everyone and everything in a new economic paradigm that is far more complex than the First and Second Industrial Revolutions, but one whose architecture is distributed rather than centralized. Even more important, the new economy will optimize the general welfare by way of laterally integrated networks on the Collaborative Commons, rather than vertically integrated businesses in the capitalist market.

The effect of all this is that the corporate monopolies of the twentieth century are now coming up against a disruptive threat of incalculable proportions brought on by the emerging IoT infrastructure. New types of social enterprises can plug and play into the IoT and take advantage of its open, distributed, and collaborative architecture to create peer-to-peer lateral economies of scale that eliminate virtually all of the remaining middlemen. The compression dramatically increases efficiencies and productivity while reducing marginal costs to near zero, enabling the production and distribution of nearly free goods and services.

Although the vertically integrated monopolies that ruled over the Second Industrial Revolution of the twentieth century are struggling to hold off the assault, their efforts are proving futile. 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. As the IoT infrastructure matures, we can expect a routing of many of the corporate giants in fields ranging from energy and power generation to communications, manufacturing, and services.

These far reaching economic changes are beginning to affect an even more profound change in human consciousness itself. The new economic paradigm is being accompanied by a sweeping rethink of human nature that is fundamentally altering the way we perceive our relationship to the Earth. Thomas Paine, the great American revolutionary, once remarked that “every age and generation must be as free to act for itself.”
19
A new generation is nurturing an embryonic near zero marginal cost society, changing its worldview, and bringing new meaning to the human journey.

Part II

The Near Zero Marginal Cost Society

Chapter Five

Extreme Productivity, the Internet of Things, and Free Energy

I
f I had told you 25 years ago that, in a quarter century’s time, one-third of the human race would be communicating with one another in huge global networks of hundreds of millions of people—exchanging audio, video, and text—and that the combined knowledge of the world would be accessible from a cellphone, that any single individual could post a new idea, introduce a product, or pass a thought to a billion people simultaneously, and that the cost of doing so would be nearly free, you would have shaken your head in disbelief. All are now reality.

But what if I were to say to you that 25 years from now, the bulk of the energy you use to heat your home and run your appliances, power your business, drive your vehicle, and operate every part of the global economy will likewise be nearly free? That’s already the case for several million early adopters who have transformed their homes and businesses into micropower plants to harvest renewable energy on site. Even before any of the fixed costs for installation of solar and wind are paid back—often in as little as two to eight years—the marginal cost of the harvested energy is nearly free.
1
Unlike fossil fuels and uranium for nuclear power, in which the commodity itself always costs something, the sun collected on your rooftop, the wind traveling up the side of your building, the heat coming up from the ground under your office, and the garbage anaerobically decomposing into biomass energy in your kitchen are all nearly free.

And what if nearly free information were to begin managing nearly free green energy, creating an intelligent communication/energy matrix and infrastructure that would allow any business in the world to connect, share energy across a continental Energy Internet, and produce and sell goods at a fraction of the price charged by today’s global manufacturing giants? That too is beginning to evolve on a small scale as hundreds of start-up businesses establish 3D printing operations, infofacturing products at near zero marginal cost, powering their Fab Labs with their own green energy, marketing their goods for nearly free on hundreds of global websites, and delivering their products in electric and fuel-cell vehicles powered by their own green energy. (We will discuss the up-front fixed capital costs of establishing the collaborative infrastructure shortly.)

And what if millions of students around the world who had never before had access to a college education were suddenly able to take courses taught by the most distinguished scholars on the planet and receive credit for their work, all for free? That’s now happening.

And finally, what if the marginal cost of human labor in the production and distribution of goods and services were to plummet to near zero as intelligent technology substitutes for workers across every industry and professional and technical field, allowing businesses to conduct much of the commercial activity of civilization more intelligently, efficiently, and cheaply than with conventional workforces? That too is occuring as tens of millions of workers have already been replaced by intelligent technology in industries and professional bodies around the world. What would the human race do, and more importantly, how would it define its future on Earth, if mass and professional labor were to disappear from economic life over the course of the next two generations? That question is now being seriously raised for the first time in intellectual circles and public policy debates.

Extreme Productivity

Getting to near zero marginal cost and nearly free goods and services is a function of advances in productivity. Productivity is “a measure of productive efficiency calculated as the ratio of what is produced to what is required to produce it.”
2
If the cost of producing an additional good or service is nearly zero, that would be the optimum level of productivity.

Here again, we come face-to-face with the ultimate contradiction at the heart of capitalism. The driving force of the system is greater productivity, brought on by increasing thermodynamic efficiencies. The process is unsparing as competitors race to introduce new, more productive technologies that will lower their production costs and the price of their products and services to lure in buyers. The race continues to pick up momentum until it approaches the finish line, where the optimum efficiency is reached and productivity peaks. That finish line is where the marginal
cost of producing each additional unit is nearly zero. When that finish line is crossed, goods and services become nearly free, profits dry up, the exchange of property in markets shuts down, and the capitalist system dies.

Until very recently, economists were content to measure productivity by two factors: machine capital and labor performance. But when Robert Solow—who won the 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 percent of all of the economic growth, raising the question of what was responsible for the other 86 percent. This mystery led economist Moses Abramovitz, former president of the American Economic Association, to admit what other economists were afraid to acknowledge—that the other 86 percent is a “measure of our ignorance.”
3

Over the past 25 years, a number of analysts, including physicist Reiner Kümmel of the University of Würzburg, Germany, and economist Robert Ayres at INSEAD business school in Fontainebleau, France, have gone back and retraced the economic growth of the industrial period using a three-factor analysis of machine capital, labor performance, and thermodynamic efficiency of energy use. They found that it is “the increasing thermodynamic efficiency with which energy and raw materials are converted into useful work” that accounts for most of the rest of the gains in productivity and growth in industrial economies. In other words, “energy” is the missing factor.
4

A deeper look into the First and Second Industrial Revolutions reveals that the leaps in productivity and growth were made possible by the communication/energy matrix and accompanying infrastructure that comprised the general-purpose technology platform that firms connected to. For example, Henry Ford could not have enjoyed the dramatic advances in efficiency and productivity brought on by electrical power tools on the factory floor without an electricity grid. Nor could businesses reap the efficiencies and productivity gains of large, vertically integrated operations without the telegraph and, later, the telephone providing them with instant communication, both upstream to suppliers and downstream to distributors, as well as instant access to chains of command in their internal and external operations. Nor could businesses significantly reduce their logistics costs without a fully built-out road system across national markets. Likewise, the electricity grid, telecommunications networks, and cars and trucks running on a national road system were all powered by fossil fuel energy, which required a vertically integrated energy infrastructure to move the resource from the wellhead to the refineries and gasoline stations.

This is what President Barack Obama was trying to get at in his now-famous utterance during the 2012 presidential election campaign: “You didn’t build that.” While the Republican Party opportunistically took the quote out of context, what Obama meant was that successful businesses
require infrastructure—electricity transmission lines, oil and gas pipelines, communication networks, roads, schools, etc.—if they are to be productive.
5
No business in an integrated market economy can succeed without an infrastructure. Infrastructures are public goods and require government enablement as well as market facilitation. Common sense, yes, but it was lost in the fury that followed President Obama’s remarks, in a country where the prevailing myth is that all economic success is a result of entrepreneurial acumen alone and that government involvement is always a deterrent to growth.

Public infrastructure is, for the most part, paid for or subsidized by taxes and overseen and regulated by the government, be it on the local, state, or national level. The general-purpose technology infrastructure of the Second Industrial Revolution provided the productive potential for a dramatic increase in growth in the twentieth century. Between 1900 and 1929, the United States built out an incipient Second Industrial Revolution infrastructure—the electricity grid, telecommunications network, road system, oil and gas pipelines, water and sewer systems, and public school systems. The Depression and World War II slowed the effort, but after the war the laying down of the interstate highway system and the completion of a nationwide electricity grid and telecommunications network provided a mature, fully integrated infrastructure. The Second Industrial Revolution infrastructure advanced productivity across every industry, from automobile production to suburban commercial and residential building developments along the interstate highway exits.

During the period from 1900 to 1980 in the United States, aggregate energy efficiency—the ratio of useful to potential physical work that can be extracted from materials—steadily rose along with the development of the nation’s infrastructure, from 2.48 percent to 12.3 percent. The aggregate energy efficiency leveled off in the late 1990s at around 13 percent with the completion of the Second Industrial Revolution infrastructure.
6
Despite a significant increase in efficiency, which gave the United States extraordinary productivity and growth, nearly 87 percent of the energy we used in the Second Industrial Revolution was wasted during transmission.
7

Even if we were to upgrade the Second Industrial Revolution infrastructure, it’s unlikely to have any measurable effect on efficiency, productivity, and growth. Fossil fuel energies have matured and are becoming more expensive to bring to market. And the technologies designed and engineered to run on these energies, like the internal-combustion engine and the centralized electricity grid, have exhausted their productivity, with little potential left to exploit.

Needless to say, 100 percent thermodynamic efficiency is impossible. New studies, however, including one conducted by my global consulting group, show that with the shift to a Third Industrial Revolution infrastructure, it is conceivable to increase aggregate energy efficiency to 40
percent or more in the next 40 years, amounting to a dramatic increase in productivity beyond what the economy experienced in the twentieth century.
8

The Internet of Things

The enormous leap in productivity is possible because the emerging Internet of Things is the first smart-infrastructure revolution in history: one that will connect every machine, business, residence, and vehicle in an intelligent network comprised of a Communications Internet, Energy Internet, and Logistics Internet, all embedded in a single operating system. In the United States alone, 37 million digital smart meters are now providing real-time information on electricity use.
9
Within ten years, every building in America and Europe, as well as other countries around the world, will be equipped with smart meters. And every device—thermostats, assembly lines, warehouse equipment, TVs, washing machines, and computers—will have sensors connected to the smart meter and the Internet of Things platform. In 2007, there were 10 million sensors connecting every type of human contrivance to the Internet of Things. In 2013, that number was set to exceed 3.5 billion, and even more impressive, by 2030 it is projected that 100 trillion sensors will connect to the IoT.
10
Other sensing devices, including aerial sensory technologies, software logs, radio frequency identification readers, and wireless sensor networks, will assist in collecting Big Data on a wide range of subjects from the changing price of electricity on the grid, to logistics traffic across supply chains, production flows on the assembly line, services in the back and front office, as well as up-to-the-moment tracking of consumer activities.
11
As mentioned in chapter 1, the intelligent infrastructure, in turn, will feed a continuous stream of Big Data to every business connected to the network, which they can then process with advanced analytics to create predictive algorithms and automated systems to improve their thermodynamic efficiency, dramatically increase their productivity, and reduce their marginal costs across the value chain to near zero.

Cisco systems forecasts that by 2022, the Internet of Everything will generate $14.4 trillion in cost savings and revenue.
12
A General Electric study published in November 2012 concludes that the efficiency gains and productivity advances made possible by a smart industrial Internet could resound across virtually every economic sector by 2025, impacting “approximately one half of the global economy.” It’s when we look at each industry, however, that we begin to understand the productive potential of establishing the first intelligent infrastructure in history. For example, in just the aviation industry alone, a mere 1 percent improvement in fuel efficiency, brought about by using Big Data analytics to more successfully route traffic, monitor equipment, and make repairs, would generate savings of $30 billion over 15 years.
13

The health-care field is still another poignant example of the productive potential that comes with being embedded in an Internet of Things. Health care accounted for 10 percent of global GDP, or $7.1 trillion in 2011, and 10 percent of the expenditures in the sector “are wasted from inefficiencies in the system,” amounting to at least $731 billion per year. Moreover, according to the GE study, 59 percent of the health-care inefficiencies, or $429 billion, could be directly impacted by the deployment of an industrial Internet. Big Data feedback, advanced analytics, predictive algorithms, and automation systems could cut the cost in the global health-care sector by 25 percent according to the GE study, for a savings of $100 billion per year. Just a 1 percent reduction in cost would result in a savings of $4.2 billion per year, or $63 billion over a 15-year period.
14
Push these gains in efficiency from 1 percent, to 2 percent, to 5 percent, to 10 percent, in the aviation and health-care sectors and across every other sector, and the magnitude of the economic change becomes readily apparent.