The Zero Marginal Cost Society: The Internet of Things, the Collaborative Commons, and the Eclipse of Capitalism (2 page)

Powerful industry leaders often strive to restrict entry of new enterprises and innovations. But slowing down or stopping new, more productive technologies to protect prior capital investments creates a positive-feedback loop by preventing capital from investing in profitable new opportunities. If capital can’t migrate to new profitable investments, the economy goes into a protracted stall.

Lange described the struggle that pits capitalist against capitalist in stark terms. He writes:

The stability of the capitalist system is shaken by the alternation of attempts to stop economic progress in order to protect old investments and tremendous collapses when those attempts fail.
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Attempts to block economic progress invariably fail because new entrepreneurs are continually roaming the edges of the system in search of innovations that increase productivity and reduce costs, allowing them to win over consumers with cheaper prices than those of their competitors. The race Lange outlines is relentless over the long run, with productivity continually pushing costs and prices down, forcing profit margins to shrink.

While most economists today would look at an era of nearly free goods and services with a sense of foreboding, a few earlier economists expressed a guarded enthusiasm over the prospect. Keynes, the venerable twentieth-century economist whose economic theories still hold considerable weight, penned a small essay in 1930 entitled “Economic Possibilities for Our Grandchildren,” which appeared as millions of Americans were beginning to sense that the sudden economic downturn of 1929 was in fact the beginning of a long plunge to the bottom.

Keynes observed that new technologies were advancing productivity and reducing the cost of goods and services at an unprecedented rate. They were also dramatically reducing the amount of human labor needed to
produce goods and services. Keynes even introduced a new term, which he told his readers, you “will hear a great deal in the years to come—namely,
technological unemployment.
This means unemployment due to our discovery of means of economising the use of labour outrunning the pace at which we can find new uses for labour.” Keynes hastened to add that technological unemployment, while vexing in the short run, is a great boon in the long run because it means “
that mankind is solving its economic problem.”
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Keynes believed that “a point may soon be reached, much sooner perhaps than we are all of us aware of, when these [economic] needs are satisfied in the sense that we prefer to devote our further energies to non-economic purposes.”
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He looked expectantly to a future in which machines would produce an abundance of nearly free goods and services, liberating the human race from toil and hardships and freeing the human mind from a preoccupation with strictly pecuniary interests to focus more on the “arts for life” and the quest for transcendence.

Both Lange and Keynes foresaw, back in the 1930s, the schizophrenia that lies at the nucleus of the capitalist system: the inherent entrepreneurial dynamism of competitive markets that drives productivity up and marginal costs down. Economists have long understood that the most efficient economy is one in which consumers pay only for the marginal cost of the goods they purchase. But if consumers pay only for the marginal cost and those costs continue to race toward zero, businesses would not be able to ensure a return on their investment and sufficient profit to satisfy their shareholders. That being the case, market leaders would attempt to gain market dominance to ensure a monopoly hold so they could impose prices higher than the marginal cost of the products they’re selling, thus preventing the invisible hand from hurrying the market along to the most efficient economy of near zero marginal cost and the prospect of nearly free goods and services. This catch-22 is the inherent contradiction that underlies capitalist theory and practice.

Eighty years after Lange and Keynes made their observations, contemporary economists are once again peering into the contradictory workings of the capitalist system, unsure of how to make the market economy function without self-destructing in the wake of new technologies that are speeding society into a near zero marginal cost era.

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, revisited the capitalist dilemma in a joint paper delivered at the Federal Reserve Bank of Kansas City’s symposium, “Economic Policy for the Information Economy,” in August 2001. This time, there was much more at stake as the new information technologies and the incipient Internet communication revolution were threatening to take the capitalist system to a near zero marginal cost reality in the coming decades.

Summers and DeLong’s concerns focused on the emerging data-processing and communication technologies. They wrote that these “seismic innovations” were forcing a wholesale reconfiguration of commercial life, with potential impacts whose expanse rivaled the advent of electricity. The technological changes afoot, according to Summers and DeLong, were likely to dramatically push down marginal costs, which became the departure point for their discussion. They accepted that “the most basic condition for economic efficiency . . . [is] that price equal marginal cost.”
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They further conceded that “with information goods, the social and marginal cost of distribution is close to zero.”
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Now the paradox: Summers and DeLong 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 set-up] costs. If information goods are to be created and produced . . . [companies] must be able to anticipate selling their products at a profit to someone.
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Summers and DeLong opposed government subsidies to cover the upfront costs, arguing that the shortcomings of “administrative bureaucracy,” “group-think,” and “red-tape” “destroy the entrepreneurial energy of the market.”
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In lieu of government intervention, the two distinguished economists reluctantly suggested that perhaps the best way to protect innovation in an economy where “goods are produced under conditions of substantial increasing returns to scale” was to favor short-term natural monopolies.
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Summers and DeLong made the point that “temporary monopoly power and profits are the reward needed to spur private enterprise to engage in such innovation.”
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They both realized the bind this put private enterprise in, admitting that “natural monopoly does not meet the most basic conditions for economic efficiency: that price equal marginal cost.”
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Indeed, the modus operandi of a monopoly, as every economist knows, is to hold back would-be competitors from introducing new innovations that increase productivity, reduce marginal costs, and lower the price to customers. Nonetheless, Summers and DeLong concluded that in the “new economy” this might be the only way forward. In an incredible admission, the two acknowledged that “the right way to think about this complex set of issues is not clear, but it is clear that the competitive paradigm cannot be fully appropriate . . . but we do not yet know what the right replacement paradigm will be.”
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Summers and DeLong found themselves hopelessly trapped. Although economists and entrepreneurs never intended for the capitalist system to self-destruct (they expected it to reign forever), a careful look at its operating logic reveals the inevitability of a future of near zero marginal cost. A
near zero marginal cost society is the optimally efficient state for promoting the general welfare and represents the ultimate triumph of capitalism. Its moment of triumph, however, also marks its inescapable passage from the world stage. While capitalism is far from putting itself out of business, it’s apparent that as it brings us ever closer to a near zero marginal cost society, its once unchallenged prowess is diminishing, making way for an entirely new way of organizing economic life in an age characterized by abundance rather than scarcity.

Changing the Economic Paradigm

The most intriguing passage in Summers and DeLong’s paper on the contradictions and challenges facing capitalist theory and practice in the unfolding Information Age is their comment that they “do not yet know what the right replacement paradigm will be.” The fact that they were even alluding to the likelihood of a new replacement paradigm is suggestive of the anomalies that are building up and casting a dark shadow on the long-term viability of the existing economic regime.

We are, it appears, in the early stages of a game-changing transformation in economic paradigms. A new economic model is emerging in the twilight of the capitalist era that is better suited to organize a society in which more and more goods and services are nearly free.

The term
paradigm
shift
has been thrown around so much in recent years, in reference to virtually any kind of change, that it might be helpful to revisit the words of Thomas Kuhn, whose book
The Structure of Scientific Revolutions
made the word
paradigm
part of the general discourse. Kuhn described a paradigm as a system of beliefs and assumptions that operate together to establish an integrated and unified worldview that is so convincing and compelling that it is regarded as tantamount to reality itself. He used the term to refer to standard and nearly universally accepted models in science, like Newtonian physics and Darwinian evolution.
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A paradigm’s narrative power rests on its all-encompassing description of reality. Once accepted, it becomes difficult, if not impossible, to question its central assumptions, which appear to reflect the natural order of things. Alternative explanations of the world are rarely entertained, as they fly in the face of what is accepted as unambiguous truth. But this unquestioning acceptance, and refusal to envision alternative explanations, leads to a festering of inconsistencies that pile up until a tipping point is reached where the existing paradigm is torn apart and replaced with a new explanatory paradigm better able to marshal the anomalies, insights, and new developments into a comprehensive new narrative.

The capitalist paradigm, long accepted as the best mechanism for promoting the efficient organization of economic activity, is now under siege on two fronts.

On the first front, a new generation of interdisciplinary scholarship that has brought together previously distinct fields—including the ecological sciences, chemistry, biology, engineering, architecture, urban planning, and information technology—is challenging standard economic theory (which is wedded to the metaphors of Newtonian physics) with a new theoretical economics grounded in the laws of thermodynamics. Standard capitalist theory is virtually silent on the indissoluble relationship between economic activity and the ecological constraints imposed by the laws of energy. In classical and neoclassical economic theory, the dynamics that govern Earth’s biosphere are mere externalities to economic activity—small, adjustable factors of little real consequence to the working of the capitalist system as a whole.

Conventional economists fail to recognize that the laws of thermodynamics govern all economic activity. The first and second laws of thermodynamics state that “the total energy content of the universe is constant and the total entropy is continually increasing.”
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The first law, the conservation law, posits that energy can neither be created nor destroyed—that the amount of energy in the universe has remained the same since the beginning of time and will be until the end of time. While the energy remains fixed, it is continually changing form, but only in one direction, from available to unavailable. This is where the second law of thermodynamics comes into play. According to the second law, energy always flows from hot to cold, concentrated to dispersed, ordered to disordered. For example, if a chunk of coal is burned, the sum total of the energy remains constant, but is dispersed into the atmosphere in the form of carbon dioxide, sulfur dioxide, and other gases. While no energy is lost, the dispersed energy is no longer capable of performing useful work. Physicists refer to the no-longer-useable energy as entropy.

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 the production, storage, and distribution process, energy is used to transform nature’s resources into finished goods and services. Whatever energy is embedded in the product or service is at the expense of energy used and lost—the entropic bill—in moving the economic activity along the value chain. Eventually, the goods we produce are consumed, discarded, and recycled back into nature, again, with an increase in entropy. Engineers and chemists point out that in regard to economic activity there is never a net energy gain but always a loss in available energy in the process of converting nature’s resources into economic value. The only question is: When does the bill come due?

The entropic bill for the Industrial Age has arrived. The accumulation in carbon dioxide emissions in the atmosphere from burning massive amounts of carbon energy has given rise to climate change and the wholesale destruction of the Earth’s biosphere, throwing the existing economic model into question. The field of economics, by and large, has yet to
confront the fact that economic activity is conditioned by the laws of thermodynamics. The profession’s glaring misunderstanding of its own subject is what’s forcing a rethinking of the paradigm by academics coming from other disciplines across the natural and social sciences. I dealt with this in more detail in my previous book,
The Third Industrial Revolution
, in a chapter entitled “Retiring Adam Smith.”