Jeremy Rifkin on the Third Industrial Revolution and a Zero Marginal Cost Society

In the below video Jeremy Rifkin lays out a “Game plan for the future”, referring to the advent of a smart green digital economy as part of the Third Industrial Revolution. I have been trying to soak up all he has to say in order to integrate it into my own thinking and thus the few notes that I usually make for my own memory turned out to be almost  the complete transcript.

Rifkin argues that we are about to experience fundamental changes to our societies and economies, as a result of the digitalization of communication, energy, and transportation.

We need a new economic vision for the world and it better be compelling. We need a new game plan for this vision and it better be deliverable. And it needs to move equally as fast in the developing countries as in the industrial nations.

How did the great economic revolutions in history occur? Because if we know how they occur, we have a roadmap for the new journey we have to take in order to address our relationship to the world.

Three Converging Technologies

There have been at least 7 major economic paradigm shifts in history. From an anthropological point of view they are very interesting because they share a common denominator: at a moment in time three defining technologies emerged; and then they converged to create a ‘general purpose technology platform’. In other words: an infrastructure that fundamentally changes the way we manage, power and move economical activity across the value chains. they are:

  • New communication technologies to manage the economic activity,
  • New sources of energy to efficiently power the economic activity,
  • New modes of transportation logistics to move the economic activity

The First and the Second Industrial Revolution are good illustrations of this. England led us into the first Industrial Revolution with steam-powered printing. Next, they laid out a telegraph system. Those communication technologies converged with a new energy source: cheap coal. Then they came up with a technology to harvest that energy: the steam engine, which when put on wheels and rails gave rise to the railway system to kick-off the industrial revolution.

During the Second Industrial Revolution in the US, centralized communication and especially the telephone, and later radio and television converged with cheap Texan oil. This was powered by a German invention to harvest that energy: the internal combustion engine. This resulted in a long time growth which peaked in July 2008.

At that moment, according to Rifkin, the purchasing power of fossil fuel and nucleair power was shut down. And since the majority of products in our economy are made out of fossil fuel or either transported by it, this meant the economic earthquake. The collapse of the financial systems 60 days later was the aftershock, since no fictional economy can sustain when the real economy has shut down. Fertilizers, pesticides, construction material, pharmaceutical products, synthetic fiber, power, transport, heath, light,… it all depends on fossil or nuclear power.

Redefining Productivity

How do you grow an economy when your businesses are plugging into a Second Industrial Revolution platform that has matured in 1990 and which hasn’t moved since then?

When we think about the term productivity we tend to think in terms of ‘more output per input’ which translates to ‘more capital for better machines and better workers’. According to Rifkin this represents only 40% of what productivity really is. The rest of productivity occurs as a result of aggregate efficiency, i.e. the ratio of potential work to the actual useful work you get out of a conversion. For example: when a lion devours an antilope, only 10% to 20% of its total energy gets converged into energy that is useful for the lion. All the rest gets lost into the conversion.

The second industrial revolution in the US started in 1903 with a 3% aggregate efficiency. This means that for every conversion along the value chain (extracting, storing, transporting, producing, consuming, recycling) about 97% of the energy was lost. By 1990, the US got up to about 13%, Germany got to 18,5% and Japan up to 20% aggregate efficiency. Since then, nothing changed in that ratio. Labor reforms, market reforms, fiscal reforms or new kinds of incentives or even the best technologies will not help that aggregate efficiency to go up as long as we are operating on the platform of the Second Industrial Revolution. We will never get above the ceiling of 20% aggregate efficiency, which makes up the biggest part of productivity.

“We just think we need to create a million Steve Jobs and the job will be done.” Unfortunately it’s not that simple.

The Internet of Things

The digital technology of the communication internet has now matured and it is converging with a digitalized renewable energy internet and a digitalized automated GPS driverless road / rail / water / air internet. This will create three internets in one of communication, energy and transport, to manage, power and move economic activity across the value chains. These three internets ride upon a platform that is called the internet of things.

Big data is sent to communication, energy and transport so we can learn how to better manage, power and move economic activity across the value chains. Sensors in the factories, the agricultural fields, smart homes, smart vehicles, smart warehouses, etc and by 2030 we have ubiquitous interconnectivity. We are creating an external global brain, that can flow any data on everything going on to everyone at all times.

The internet of things is driving the third industrial revolution. It started with the digitalization of the factory floor with robotics and computers and it is still maturing. The whole human race can now go up on the internet of things platform with cheap mobile technology and have a transparent picture of all the data going around the world. There is equal access to the external global brain of big data. This is where the core of the third industrial revolution lies: we can democratize economic life because all of us can engage each other directly.

“No more middlemen, no more vertically integrated organizations separating us. We can start to connect the human race to think as one extended human family.”

But then what about network neutrality? How do we ensure that governments or corporations will not start to take advantage of this for political or commercial gain? And what about privacy, cyber-crime and cyber-terrorism? How do we ensure resiliency in the system because we are all increasingly depending on the internet of things. There is a paradox here, because when we enclose it, we will not be able to get the productivity out of it. We and the future generations will need to spend attention and money to address these issues. We cannot be blind for that.

The Sharing Economy

Here is what the internet of things platform allows us:

  • Anybody can access their own data that is flowing through the value chain and separate it from the other big data.
  • Next, we can take the data of our own value chain (our own chain of extracting, storing, transporting, producing, consuming, recycling) and use analytics to mine our big data on our own chain.
  • With those analytics we can create our own algorithms and apps to dramatically increase our aggregate efficiency at every conversion step of our value chain.

“This will dramatically increase your productivity and will dramatically reduce your ecological footprint because you are getting more out of less of the earth. And it reduces your marginal cost.”

This will result in a streamlined global market economy automated. Some marginal costs will go down to zero and that will give birth to the sharing economy.

Zero marginal cost means that capitalism is giving birth to the sharing economy.

“And like any parent-child relationship the parent has to figure out how to nurture their child, give it an identity and let it have a presence in the world. But parents also try to absorb their children into their identity as well. The child sometimes wants to be absorbed like most start-up internet companies with an exit plan to sell it off to the big guys.”

The sharing economy is world’s first new economic system to enter on the stage. Capitalism will still be on that stage to extent that it can find a relationship with the sharing economy. In that respect every internet user is a pro-sumer. Rifkin uses the example of the music industry, where people are producing their own music. The fixed cost of producing music with studio quality will be almost free; the marginal cost of sharing that music with world is near zero.

Ask the music industry, analog photography, television, newspapers and book publishing: they were being made redundant in no time. At the same time new industries are being created. Some of them create revenue that goes back to capitalist markets, and some of them are free and go beyond capitalist markets.

There is No Firewall

Here is an assumption we made about the sharing economy that proves to be wrong: that the sharing economy would be restricted to the communication internet. It is not. We are now seeing that in the internet of things is starting to operate at very low fixed cost and an almost zero marginal cost.

By 2040 all energy in the world will be renewable. The fixed cost for harvesting the energy from wind, sun and water is exponentially decreasing, much in the same way as the cost of a computerchip has been decreasing over the past decades.

Energy companies will be increasingly confronted with the same challenges as as the music industry. People are starting to create electricity cooperatives and are sending solar power back to the grid.

“Think about the ramifications: energy is about the power of a civilization. It’s being distributed now. These are the implications of the communication internet to the energy internet. And guess what: the marginal cost of this energy – once you paid the fixed cost – is near zero. The sun isn’t sending us a bill.”

Power companies will need to change their business model if they want to stay in business. They will need to become experts of zero-loss conversion and sell that knowledge to the market.

Three Shifts of Consciousness

He then goes on to explain in detail which evolutions are already visible in China and Germany and what digitalization would mean for the European agenda.

“We have to believe we can do it but it requires not just technology. It requires a change in consciousness.”

Rifkin observes three areas change that give him hope: the difference in how the generations perceive freedom, perceive power and perceive community.

1. Freedom

  • The former generations believed that freedom is the ability to be autonomous, independent and self-sufficient. Freedom was seen as an exclusivity.
  • But for a younger generation freedom is the ability to flourish by the relationships you create. Freedom gets defined by the new generations as inclusivity as opposed to autonomy.

2. Power: the revolution from vertical power to lateral power

  • The older generations perceive power as a top-down pyramid. Newer generations are beginning the question institutional power: is this government, business, school system, etc.  behaving centralized, patriarchal, top-down and proprietary?
  • Or is their behavior distributed, open, transparent, collaborative and laterally scaled?
    Newer generations believe in lateral power, i.e. the ability of networks to share your talents for the good of the network so that your own social capital is improved.

3. Community

  • To the older generations, every individual is a sovereign agent and we compete with every other individual of the market place in a scarce economy for resources to see who can possesses the most.
  • The younger generations are growing up while Skyping in their global classroom, sharing on Facebook in an extended fictional family across the globe, sharing anything from music to energy. They are starting to see themselves as part of the biosphere. The indivisible community of the planet. Our kids are learning about ecological footprint and they learn that everything we do interconnects and affects the well-being of every other species on the planet.

We are moving from a geo-political consciousness to a biosphere consciousness.

These are my notes. For sure I will be coming back to this in the future!