This essay is the third in a four-part series on the theme, "The Third Industrial Revolution." An introduction by Arianna Huffington is available here. Part one is available here. Part two is here. Part four is here. Stay tuned for responses from leading global figures and technologists.
Electrifying the Developing World
The distributed features of the new economic paradigm arising during the Third Industrial Revolution will enable the least developed regions -- that were largely excluded from the First and Second Industrial Revolutions -- to leapfrog the developed world. Currently, more than a billion people are without electricity, and many more have only marginal and unreliable access. These are the very countries where population is rising the fastest.
The lack of infrastructure is both a liability and a potential asset. It is often cheaper and quicker to erect virgin infrastructure than to reconfigure existing infrastructure. We are already witnessing a surge of activity in some of the poorer regions of the world with the introduction of solar, wind, geothermal, small hydro and biomass harvesting technologies and the installation of distributed renewable energy micro grids.
Electricity is now coming to remote areas in Africa, which never before had access to a centralized power grid. Not surprisingly, the introduction of cell phones has helped precipitate the development of a nascent Third Industrial Revolution infrastructure. Virtually overnight, millions of Africa's rural households have scraped together enough money -- from selling an animal or surplus crops -- to purchase a cell phone. The phones are used as much for carrying on commercial activity as for personal communications. In rural areas, far removed from urban banking facilities, people are increasingly relying on cell phones to facilitate small money transfers. The problem is that without access to electricity, cell phone users often have to travel on foot to get to a town with electricity in order to recharge their phones. A single solar panel affixed on the tin roof of a rural hut would provide enough electricity to not only charge the cell phone but also power electric lights.
Although the statistics are still spotty, it appears that families across Africa are installing solar panels, and analysts predict a quick scale up as millions of others follow suit into the Third Industrial Revolution. What's going on in Africa heralds a historic transformation as households leapfrog from the pre-electricity era directly into the Third Industrial Revolution age.
Besides solar, other green micro-generation energy technologies are quickly coming online, including small biogas chambers that make electricity and fuel from cow manure, tiny power plants that make electricity from rice husks and small hydroelectric dams that generate power from local streams.
Lateral power is beginning to transform the developing world. This process represents the democratization of energy in the world's poorest communities. The electrification process is likely to accelerate in the future, giving rise to exponential curves and a qualitative leap into the Third Industrial Revolution era in previously underdeveloped regions.
For example, the electrification of the developing world makes it possible to power 3-D-printers and for distributed manufacturing to proliferate. In poor urban outskirts, isolated towns and rural locales -- where infrastructure is scant, access to capital spotty at best and technical expertise, tools and machinery virtually nonexistent -- 3-D-printing provides a desperately needed opportunity for building a Third Industrial Revolution infrastructure. Today, the emerging Internet of Things infrastructure provides the means to lift hundreds of millions of human beings out of abject poverty and into a sustainable quality of life.
Bringing universal electricity to developing countries also fosters greater communication and connectivity between rural and urban communities. That connectivity is spawning the proliferation of a shared "Commons" among farmers and consumers. A younger generation of farmers is sharing harvests on an agricultural scale with urban consumers. Community-supported agriculture began inauspiciously in Europe and Japan in the 1960s and accelerated rapidly in the United States and other countries in the 1990s with the rise of the Internet. And now, as universal electricity and the Internet spread to developing nations, community-supported agriculture is beginning to transform the relationship between farmers and urban dwellers in developing regions as well. Urban consumers pledge a fixed amount of money to local farmers in advance of the growing season to pay for the cost of growing the crops. The consumers become, in effect, shareholders. In return, the consumers are provided with the bounty from the harvest delivered to their door or to nearby distribution centers throughout the growing season. If the farmers' crops are plentiful, the shareholders are rewarded with the additional yield. Likewise, if yields are down because of adverse weather or other conditions, the shareholders share in the losses with the delivery of less produce.
The sharing of risk between consumers and farmers creates a bond of mutual trust and fosters social capital. Moreover, eliminating all the middlemen in the conventional, vertically integrated agribusiness operations dramatically reduces the costs of the produce for the end user.
Many CSA operations use ecological agricultural practices and organic farming techniques, eliminating the high costs and environmental damage caused by the use of petrochemical fertilizers and pesticides. Energy and environmental costs are further reduced by eliminating plastic packaging and the long-haul transport of produce.
The Internet has been a great facilitator of CSA by making it easier for farmers and consumers to connect in peer-to-peer networks. Local CSA websites also allow farmers and customers to stay in constant contact, sharing up-to-date information on crop performance and delivery schedules. CSAs replace sellers and buyers in the conventional market with providers and users exchanging produce on a social Commons. In a sense, consumers become "prosumers" by crowd-financing the means of production that deliver the end products they will consume. There are thousands of CSA enterprises scattered around the world, and their numbers are growing as a younger generation becomes increasingly comfortable with the idea of exercising more of its commercial options in a social economy on the Commons. Community-supported agriculture -- CSA -- is likely to grow even more quickly in developing regions of the world where farmers often lack sufficient capital to adequately finance the next year's crop. Electrification and the convergence of the "Communication Internet" with a digitalized, "Renewable Energy Internet" and a digitalized smart "Transportation and Logistics Internet" is likely to speed the development of community-supported agriculture in the poorest regions of the world.
The United Nations Industrial Development Organization has made a commitment to help empower local populations to lay down a Third Industrial Revolution infrastructure that can bring green electricity to impoverished people around the world. In 2011, I joined Dr. Kandeh Yumkella, then-director general of UNIDO, at the organization's global conference in support of the TIR build-out in developing nations. Yumkella declared that, "we believe we are at the beginning of a third industrial revolution and I wanted all member countries of UNIDO to hear the message and ask them the key question: How does this apply to our economies? How can we be part of this revolution? And of course, how do we share knowledge, share capital and investments around the world to make this revolution really happen?"
The goal is to make electricity universally available by 2030. The electrification of every community on Earth will provide the impetus to lift the world's poor out of poverty and toward the zone of comfort that can sustain a decent quality of life for every human being.
Rethinking Economics in an Ecological Era
The transformation to an Internet of Things infrastructure and a Third Industrial Revolution paradigm is forcing a wholesale rethinking of economic theory and practice. The unleashing of extreme productivity wrought by the digitalization of communication, energy and transportation is leading to a reassessment of the very nature of productivity and a new understanding of ecological sustainability. 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. 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 lost 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 First and Second Industrial Revolutions 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.
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 12.5 percent of all of the economic growth, raising the question of what was responsible for the other 87.5 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."
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.
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/transportation 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. These technologies provided 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 end users.
The general purpose technology infrastructure of the Second Industrial Revolution provided the productive potential for a dramatic increase in growth in the 20th 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 Great Depression and World War II slowed the effort, but after the war, laying down the interstate highway system and completing 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 1990s at around 13 percent with the completion of the Second Industrial Revolution infrastructure. 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.
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 20th century.
Cisco forecasts that by 2022, the Internet of Things will generate $14.4 trillion in cost savings and revenue. A General Electric study published in November 2012 concludes that the efficiency gains and productivity advances induced by a smart industrial Internet could resound across virtually every economic sector by 2025, impacting "approximately one half of the global economy."
The Rise of the Sharing Economy
While the developing digital infrastructure is making the traditional capitalist market more productive and competitive, it is also spurring the meteoric growth of the Sharing Economy. In the Sharing Economy, social capital is as vital as finance capital, access is as important as ownership, sustainability supersedes consumerism, cooperation is as crucial as competition and "exchange value" in the capitalist marketplace is increasingly supplemented by "shareable value" on the Collaborative Commons. Millions of people are already transferring bits and pieces of their economic life to the Sharing Economy. Prosumers are not only producing and sharing their own information, news, knowledge, entertainment, green energy, transportation and 3-D-printed products in the Sharing Economy at near zero marginal cost. Many Americans are actively engaged in sharing homes, toys, tools and countless other items. For example, millions of apartment dwellers and home owners are sharing their living quarters with millions of travelers, at near zero marginal cost, using online services like Airbnb and CouchSurfing. In New York City alone, Airbnb's 416,000 guests who stayed in houses and apartments between 2012 and 2013 cost the New York hotel industry 1 million lost room nights.
All the various enterprises mentioned above are collaborative in nature, sharable in design and take advantage of a distributed, laterally scaled IoT architecture. Some of the commerce is shareable in the sense of gift giving, like couchsurfing. Others are mixed, combining gift giving and exchanges with some form of compensation. Still others are purely profit-seeking enterprises like eBay. If we think of a collaborative economy as both gift giving as well as redistribution and recycling with or without compensation, everyone is covered.
Recent surveys underscore the broad economic potential of the Sharing Economy. A recent study by Zogby Analytics found that 54 percent of millennials are attracted to the notion of sharing goods, services and experiences in Collaborative Commons. These two generations differ significantly from the baby boomers and World War II generation in favoring access over ownership. When asked to rank the advantages of a Sharing Economy, respondents to the survey listed saving money at the top of the list, followed by impact on the environment, lifestyle flexibility, the practicality of sharing and easy access to goods and services. As for the emotional benefits, respondents ranked generosity first, followed by a feeling of being a valued part of a community, being smart, being more responsible and being a part of a movement.
How likely is it that the Sharing Economy will play an ever larger role in the economic life of society in the coming decades? According to an opinion survey conducted by Latitude Research, "75 percent of respondents predicted their sharing of physical objects and spaces will increase in the next five years." Many industry analysts agree with these optimistic forecasts. In 2011, Time declared collaborative consumption to be one of its "10 Ideas That Will Change the World."
Jeremy Rifkin is the author of "The Zero Marginal Cost Society: The Internet of Things, the Collaborative Commons, and the Eclipse of Capitalism." Rifkin is an advisor to the European Union and to heads of state around the world, and is the president of the Foundation on Economic Trends in Washington, D.C. For more information, please visit The Zero Marginal Cost Society.